wabuffo

Got the book. Really enjoying it so far. Good job! Bill

Any recommendations on literature that would help to understand this better? "Understanding Modern Money", by L. Randall Wray is a good start But find papers by the following authors as well: Scott Fullwiler, Mathew Forstater, Stephanie Bell, Peter Stella.

I would not focus too much on short-term price changes. The UK seems to be swinging wildly in terms of govt policy. The last worry about gilts in Oct-Nov 2022 didn’t last long but I don’t follow UK flows. Bill

Is the monetary system in the UK significantly different than in the US? Seems like the bond Vigilantes have been out in force there. It is not - the UK, Japan, Canada are all examples of sovereign currency issuers. The Euro is a bit different since it is a monetary union and individual countries have ceded their currency sovereignty. Individual European countries are more like states or provinces now. Bill

wasn’t the vigilantes a thing in Clinton era in the 1990s. That is well pass the gold standard. Doesn't matter - people still think there are bond vigilantes today. What matters is putting on your tool belt and trying to understand how the US monetary plumbing works. BTW - I don't consider myself an MMT-er. Some of those folks are more interested in policy that I often disagree with. This idea of tax-based money used to be pretty mainstream even a century ago. Instead I pick and choose from among different economic theories and merge them into a framework of what seems to practically work based on the evidence. Bill

Not to get off topic but I never understood the gold standard. Why not a more useful commodity, like oil or steel Too unstable. Gold was useful because its low annual production/above ground inventory made it stable. Unfortunately above ground supply grows too slowly. Bill

Do you think Buffett understands this too judging by his actions? He absolutely does. He has said that he thinks deficits are fine so long as the deficit-to-gdp ratio rises in line with economic growth. I think he believes the real problem is the trade deficit because he thinks that those US dollar assets leaving the country are claim checks that can only be spent in the US economy and will come back some day as inflation. But I could be wrong about his position. Bill

Can you please elaborate on this further? What would happen if there is not enough private sector demand to buy the US Treasuries offered at auction? The US used to be in a fixed exchange rate currency system (where the USD was fixed to gold). In those days & under that monetary regime, government borrowing functioned to protect central bank reserves and keep the government from defaulting on its legal conversion requirements. In other words, the currency of the US was gold & the dollar was subordinate to gold. Since holders of USDs back then had the option of conversion of their USD at the central bank, Treasury securities had to compete with that conversion option since if the market didn't like the rate, it could simply convert its currency to gold. In addition, not borrowing by the Treasury risked excess currency from its spending also being converted to gold. In those days, "bond vigilantes" existed and were simply the private sector buyers who could dictate the term structure of rates. But that's not the monetary system of today (despite Sheila Bair & Paul Tudor Jones mistakenly believing we are still in the old regime of yesteryear). The demand for the government's money is tax-driven. And therefore the power of the US Treasury to impose a tax liability ONLY payable in its own currency is sufficient to create a demand for the currency and give it value. In today's system, if the US Treasury decides not to issue securities, all rates will gradually fall to zero (which is the natural rate for a government that is a monopoly issuer of its currency). Thus there is ALWAYS demand for Treasury securities since the alternative is a zero rate. This is because Treasury security issuance in this regime isn't borrowing but instead acts as a reserve drain. If those reserves aren't removed, rates go to zero (or even negative). Let's use 2021 as a practical example. Due to a combination of factors, from January to October, the US Treasury spent down its reserves in its general account at the Fed by $1.5t but only issued $500b of net new securities due to its debt limit toggling back on. Meanwhile the Federal reserve was also buying $750b causing the private sector to actually be short by $250b. The result of net spending to the private sector of $1.5t and converting another $250b of private sector ownership of Treasury securities to cash caused reserves to surge. The Federal Reserve by March-April began to get alarmed that the growth of reserves was heading to over $5t. There were reports back then that banks would start to push some depositors out and that money market funds would start to charge an admin fee to cover their costs (ie, negative interest rate). The collapse of rates to below zero was about to happen & thus, if the US Treasury couldn't or wouldn't remove those reserves through "borrowing", the Federal Reserve would have to conduct its own "borrowing" to drain reserves. If it didn't, then the Fed would lose control of its target rate of interest. The Fed's "borrowing" was in the form of a huge reverse repo operation that reached $2.2t. So one arm of the govt (Treasury) issues securities to remove reserves - or - another arm of the govt (Federal Reserve) issues securities (reverse repo) to remove reserves. Either way, both have the same goal - to control a policy rate by draining reserves. Both of these assets end up on the balance sheet of US money market funds (T-Bill or reverse repo at NY Fed). But we think of the former as borrowing while the latter is a monetary operation - yet they are the same in result. Note also that the source of the funds to buy the securities or do the reverse repo comes from the deficit spending & thus is pre-funded and does not crowd out private sector wealth. Bottom line - in today's monetary regime, US Treasury securities are not really borrowing (in the conventional way we think of borrowing). They are a reserve drain to control rates and there is always demand for these securities because of the deficit spending that precedes them. The only constraint is possible inflation but that's another topic. The only thing I will say there is that the USD is the world's reserve currency and must supply not just domestic dollar needs but foreign demand for dollars. So perhaps the question isn't should the US run a deficit but what is the optimal size of that deficit as a % of GDP. And given the US is a $30t GDP economy, perhaps a 5-6% deficit is more optimal than a 1-2% one. But 5% of $30T is still a very large number and is "scary" <Sorry for turning a BRK Q3 thread into macro babble - stuff interests me, but I understand that for most people its probably dull & wonky> Bill

… I certainly don't see low rates being offered on long-term U.S. debt, as the amount of debt maturing is going to be far higher than simple demand US Treasury security issuance is always, ALWAYS, pre-funded by the deficit spending that precedes it. As a floating exchange rate sovereign issuer in its own currency, the purpose of US Treasury security issuance is to drain the reserves its deficit spending creates, otherwise rates fall to zero (or even go negative). And now that the Federal Reserve is allowed to pay interest on excess reserves, I’m not sure Treasury security issuance is even necessary (other than due to political constraints that do not permit the Treasury to overdraw its general account at the Fed.) Interest rates are a policy choice to offer safe interest earning assets to the private sector. The term structure of rates is not set by market forces. There are no bond vigilantes. There is no “crowding out”. Bill

Back of the envelope, 7/16 ownership was 54,200,142 HK:1211 shares and I estimate 9/30 ownership was about 22.66m shares. Wouldn't be surprised if that is zero now. I get similar numbers. In addition, DJCO has been a seller of its BYD position over the same time frame. My calculations are that it has sold 65-70% of its original stake since the end of 2020. Bill

CASH, TBBK - best in class BaaS banks. Heading to 3%+ ROAs & 30%+ ROEs which is unheard of in the US banking sector. Strong repurchasers of common shares, to boot! Bill

Here's the portion where the Second Circuit classifies member banks' capital as debt. I forgot to include it in the previous post. Bill

I haven't heard this interpretation of this case. Note that FRB = Federal Reserve Banks in this case. Here it is in clear language. Basically, the member banks' capital contributions are debt, and not, equity. Bill

This is a long way of saying that I still don't understand the purpose of this article other than informational, "Look how cool this is!" Its clickbait for the uninformed. BTW - as an aside, in 2019, a Federal Appeals Court ruled that member banks do not own equity in their respective district Reserve Bank. (See Wells Fargo vs United States, US Court of Appeals for the Second Circuit). The US Treasury owns 100% of the equity. Its a legacy of the Federal Reserve's creation in order to get banks to move from private payment clearing houses to the Fed's payment system - but now a pure relic. Bill

I suppose it is hard to justify to “own” a central bank whose primary mission is probably not aligned with its shareholders all the time. Who owns the "equity" of the Federal Reserve? Bill

lol - the right arm of the Federal govt (US Treasury) pays interest to the left arm of the Federal govt (Federal Reserve) who then pays it back to the right arm of the Federal govt. But sure - "profits". Bill

Does anyone remember a situation when Buffett started to sell going into a downturn? I don't he did anything special (do any mass sells) going into the dotcom bubble; GFC; Covid, etc. Is this the first time he started selling his top positions like this? I recall Buffett sold almost all of his equity positions except for Cap Cities, GEICO, WaPo going into 1987. There was a crash in 1987 but not an economic slowdown. He didn’t sell his big positions (Coke, Gillette) before the Nasdaq crash but he kind of did by buying Gen Re via the issuance of overvalued BRK stock (in effect trading an overvalued book of equity securities for a bond portfolio (Gen Re) in a tax-free way). Bill

Looks like he sold a ton of AAPL. Position is down to $84 billion from $174 billion in Q1. … and with AAPL’s share price higher in July than all of Q2, it’s likely that Buffett has continued to sell more. Cash position could be approaching $300b. Interesting stat, by my fingers-and-toes math, BRK owns 4.2% of all T-Bills issued by the US Federal government. In fact, Buffett owns more bills than even the Federal Reserve does. Wild. Yellen should send him a Christmas card this year. Bill

Yeah - that & I sometimes think as he donates his shares to charity, he keeps an eye on his voting control percentage too. Bill

It does seem like Buffett's buyback threshold on the A-shares is persistently higher than on the B-shares. Looks to me to an average of around 10% or so. There could be some non-economic reasons for that, but who knows for sure. Bill

All that to say that 'we' ended up with private participants becoming owners of zero-earning deposits looking to chase yields in related and other investing asset classes, contributing to lowering yields elsewhere and contributing to asset inflation (and also although hard to quantify to main street inflation through the wealth effect). This discussion brings a tear to my eye as I watch COBF participants become savvy monetary plumbers.... I would add that 2021 also brought the US Treasury into the equation because of the debt ceiling toggling back on on August 1st of that year. It had to get back to its TGA balance extant at the time of the suspension of the debt ceiling in 2019, which was $100b or so. The issue was that the US Treasury's TGA balance stood at ~$1.7t in Feb 2021. For the rest of 2021, the US Treasury spent down its TGA balance while keeping net new issuance of Treasury securities to an absolute minimum (ie creating deposits/reserves and basically not withdrawing them with securities for the rest of 2021 as the debt ceiling battle stretched into Dec with a minor bump up in Oct). Add in the Fed continuing with its monstrous QE balance sheet expansion, and interest rates were threatening to go negative by Apr-May of that year. Which is why the Fed out of necessity had to open the spigots on its reverse repo operation and let it grow to over $2t. Bill

I once got a loan from Toyota to buy a car. the loan was “immediately” issued through Wells Fargo. I doubt Toyota of Springfield originated the loan and immediately sold it to WFC. As a matter of fact, the Toyota of Springfield probably did originate the loan through Toyota's finance subsidiary -- Toyota Motor Credit Corporation (10-K here): https://www.sec.gov/ix?doc=/Archives/edgar/data/834071/000095017023026012/ck0000834071-20230331.htm Your loan is technically called a retail installment sales contract and is financed by TMCC on behalf of the dealership. It's why its called an indirect loan or finance receivable. Continuing through this process, Toyota Motor Credit Corporation then probably packages your loan in one of its Toyota Auto Receivables Trusts like this one: https://www.sec.gov/Archives/edgar/data/1131131/000092963817000824/a71121_424h.htm The servicer of this Trust is Wells Fargo who services these installment contracts and is the "face" to the borrower in terms of payment of principal and interest. Wells Fargo does not own the loan of course, they merely service it and administer the securitization trust. Its one long sequence of lend-recycle capital-lend-recycle-capital-lend where pieces of your auto loan are held by the asset-backed security holders of the Toyota Auto Receivables Trust. Financial innovation and risk management at its finest! Perhaps your situation was different but the process I'm laying out is pretty standard for the industry. Bill

I only listened to the beginning of the interview and then kinda gave up. The issue is that banks generate deposits when they originate a loan BUT NOT when they buy it from someone else. Part of the reason I quit the interview is that both subjects kept saying banks need to obtain deposits before they can lend. (which makes sense in this market of wholesale loans but not in the origination of loans) That's a red flag for me that perhaps they either misspoke (or I misheard them) or they may not grasp how the plumbing actually works. The subject of the interview sells whole loans from one bank to another. So in an environment like this, I think banks prioritize origination of loans vs buying them at wholesale. This is why for example, you are seeing some banks exiting indirect auto lending (bank buys the auto loan rather than originates it) even as overall auto lending/origination/securitization is pretty strong. We came from an environment where banks were overflowing with deposits and had the balance sheet capacity to buy loans during the pandemic. Perhaps I'm being nit-picky here. Is this a sign of lending contraction? Or maybe this interview might overstate the specific niche of this area of banking as representative of overall credit extension at the moment. Just my 2-cents and I could be wrong. Bill

I think some large tech companies with their consumer dominance (AAPL, GOOG, META, MSFT, AMZN) have the cash flows and networks to start offering services very much in line with banking...savings, loans, credit cards, mortgages, investments lol - which all have a federally-chartered bank behind the scenes actually holding the deposits, offering the payment cards, & providing access to the payment rails (V/MC & even Fedwire). Anyone can lend - but they have to borrow first. When federally-chartered banks lend, they create deposits from thin air (non-banks can't do that). Also when you need a payment to clear - you need a federally-chartered bank. Only they have access to settlement balances at the Fed and payment clearing capabilities at Fedwire. Disrupt that! Bill

My question is - Treasury issuing new bonds takes away from the banking sector but that money returns right back when the Treasury spends, so what really changes? Basically nothing. But lately the Tsy is spending w/o issuing Tsy securities (net of redemptions) - so it is currently adding to deposits (and reserves). That'll change obviously when a new debt ceiling level gets set in July-Sept. But in the meantime, half a trillion+ of spending is adding to deposits (and reserves). Of course, QE just adds to deposits (reserves) by the Fed's buying. Bill