wabuffo

But I have a question: Under current law, the Fed is not permitted to simply directly credit the Treasury's account, correct? KJP - I am far from an expert in this area or in the history of the interactions between the Fed and the US Treasury, ....buuut....I did stay at a Holiday Inn Express last night! The short answer is that the Fed can't do this anymore. Congress has mandated that the Fed can only conduct open market operations involving US Treasury securities. I should've added that as political constraint #3. It is strange because people always perceive the "stronger" entity being the Fed with the weaker one being the US Treasury. But it's actually the other way around. For one, the Fed is "owned" by the US Treasury. I mean, literally, the equity account of the Fed is owned by the US Treasury. Second, it is the US Treasury that owns the mint that prints the bank notes and coins. If a bank asks the Fed for a delivery of banknotes, the Fed can't do this itself and has to call the US Treasury. The Fed just handles the accounting (removes a reserve balance from that bank to pay for the currency being sent to said bank). How about that, eh? Jerome Powell doesn't even own the printing press, the US Treasury does! So much for money printer go brrrrrr meme! Finally in extreme situations, its the US Treasury that will directly issue "cash bills" to the Fed in return for a reserve deposit in the TGA (despite constraint #3 above). We saw this during the beginning of the GFC in September 2008. Here was the press release from the US Treasury (and not the Fed): https://home.treasury.gov/news/press-releases/hp1144 Note this is exactly what would drive Lacy Hunt into his bunker full of canned foods and shotguns. The Fed is "lending" reserves to the US Treasury in exchange for T-bills! Aye caramba! But it's the Fed that was in trouble here. The crisis was causing it to swap so much of its Treasury securities out to banks who desperately needed collateral, that it feared running out (ah the days of a Federal Reserve with a tiny balance sheet!). Now at first, the reserve funds given to the US Treasury were 'segregated' to a separate Treasury reserve account to give a fig leaf of cover that this was a temporary measure. But eventually the fig leaf was removed and the "funds" commingled. But notice who creates the "assets" out of thin air. It"s the US Treasury - and I think that's what everyone doesn't understand. In fact, we saw this again during the pandemic. The US Treasury added more "equity" to the Fed's balance sheet so that the Fed could do some of its special "lending programs". So there are two important conclusions here: 1) As I always say - the Fed can only swap financial assets, it is only the US Treasury that can create new financial assets out of thin air. It is the 800-lb gorilla, the Fed is just that small man behind the curtain. Pay no attention to him. 2) There is no Rubicon to cross. The US Treasury is not practically or physically limited. It is only politically limited by Congress. But as we've seen in the above example, since Congress controls the power of the purse, it can and will change the rules when it needs to. Thus if one is worried about deficit spending leading to inflation, then worry away 24-7 and don't concoct bizarre scenarios of how the Fed can release the US Treasury to cross a river in Italy. In fact, Lacy Hunt needs to get more imaginative, since the best one I heard was the truly bizarre scenario of minting a trillion dollar platinum coin*. BTW - I am truly impressed that y'all continue to be interested by this boring stuff! Thanks for engaging and letting me ramble. wabuffo *this was an actual scenario floated by some legal experts from the left during one of the many US debt ceiling cliffs years ago. Since, as we've seen, the US Treasury mints all the currency (and this is not limited by the debt ceiling), the Fed could ask for a trillion dollar platinum coin to be minted. The US Treasury would then trade it to the Fed (who I guess would put in Fort Knox?) and the Fed would credit the US Treasury's general account with $1 trillion in shiny new reserves. See - a loophole where the US Treasury funds itself without issuing debt in contravention of the debt ceiling. Such silliness... https://en.wikipedia.org/wiki/Trillion-dollar_coin

So does all of this mean we're still (probably) going to have low interest rates over the short-intermediate term? I don't know about timing - but the next chapter will happen when the debt ceiling is lifted. There's a chance that the US Treasury's acct at the Fed goes to zero (now down to $239b) before Congress does anything. I really thought it would've been resolved by now. wabuffo

Treasury deficit spent -> created reserves at banks -> treasury didn't issue tsy securities in conjunction with the deficit spend so banks had nothing to do with reserves -> excess reserves at banks created potential for negative rates -> fed stepped in with reverse repo to prevent this. Just think of the Fed as a bank. The US Treasury has an account there, so does every Federally-chartered bank. Then just do the debits and credits into & out of those Fed "bank" accounts and you already understand this better than almost everyone on CNBC. I'm confused on how it was in the TGA acct in the first place? Is that $1.6t just created because congress said so? Was their tsy security issuance in the past to raise that money? Well yes - Congress has the power of the purse. So the US Treasury can't spend on anything unless it has Congressional authorization to do so. But in 2019, the debt ceiling was temporarily suspended for two years. So as the pandemic broke, the US Treasury took advantage and issued a bazillion dollars of US Treasury securities. This was fortunate - because in the very early days of the pandemic, the whole world was rushing to the safety of the safest asset in the world - so demand was very high. It's important to note that the US Treasury faces political constraints - not economic or practical constraints. These political constraints confuse everyone into thinking that the US Treasury is like you or me. 1) Political constraint #1: US Treasury can't overdraw its TGA (ie, maintain a negative balance) at any time. 2) Political constraint #2: US Treasury can't have more US Treasury securities outstanding than the level mandated by Congress ("the Debt Ceiling") But in reality none of these are real constraints. For example, the Fed used to allow the banks to overdraw their reserve accounts during "daylight hours" as payment clearing between banks happened. IOW, JP Morgan could start the day with $5b in its reserve account, drop down to as low as negative $100b at mid-day as it cleared payments from its customers' accts and end up back at $5b by the end of the day as it received payments into its customers's accts. Hope this helps. It took me years to figure this all out but eventually the penny drops.... wabuffo

After that, they need to issue treasuries again at the same rate than the deficit, which is a ~$250B monthly rate. Yellen has said that when the debt ceiling is raised, she intends to more or less immediately go back up to a $750b target balance on the Treasury's general acct (TGA) at the Fed. That is going to mean a big slug of new Treasury security issuance (in addition to the $250b or so per month to maintain the TGA level). All we need is for the Fed to slow down/stop its Treasury security buying and that will significantly affect the growth of US Treasury security inventory in the private sector's hands. For comparison purposes (Tsy debt held by the public - Tsy debt held by the Fed = Net Tsy Debt held by the private sector): 8/25/21: $22.249t - $5.346t = $16.903t 3/10/21: $21.786t - $4.889t = $16.927t IOW, there has been ZERO growth in private sector inventory of Treasury securities since early March (mainly due to the liquidation of the US Treasury general acct but also due to Fed open market buying). But - there has been $1.6t in deficit spending in that exact same time period creating bank reserves (from flows from the TGA acct to the commercial banking sectors accts at the Fed) with no net Tsy issuance to soak those reserves up. This shows the urgent necessity of the Fed kick-starting its reverse repo in mid March 2021 which went from zero to $1.1t. Add in $500b growth in bank reserves since that time and that reconciles with the $1.6t in deficit spending as offsets. The reverse repo probably kept interest rates from collapsing completely and dragging the US into negative interest rate territory. BTW - this little real world exercise kind of proves two key things that are actually the opposite of what the economics profession teaches as conventional wisdom: 1) Large amounts of Treasury deficit spending causes lower interest rates - not higher interest rates as economists profess. That's because without security issuance, the private sector accumulates too much in reserves with no need for them. 2) Treasury borrowing is a reserve drain which functions to support interest rate targets and as such is not borrowing as we normally think of it. Treasury security issuance ("borrowing"), instead, is an interest rate maintenance mechanism. wabuffo

Am I alone in thinking Season 2 of Ted Lasso is a massive disappointment? The crux of Season 1 was that everyone was in conflict - either conspiring against Ted or conspiring/fighting against each other. But the moral was that Ted was underestimated and his optimism won out. Where's the conflict in Season 2? Everyone is happy and together. Boring. I thought they had set up the sports psychologist as the new X-factor to create friction and conflict - but so far, nothing. Perhaps its coming, perhaps not. So far its just saccharine-y fan service. (X-mas feel good, Roy Kent comes back as coach.... ya-da ya-da). I guess they caught lightning in a bottle with the first season and can't repeat it. One hit wonder. wabuffo

Does this have a cap, or will it go up for any indefinite amount? If this has a cap, then will we have negative rates? Does not really have a cap b/c it's within the Fed's power to expand the number of participants as well as expand the limit per participant. (right now there's like 100 potential participants and each has an $80b limit - so do the math; we are far from the current max capacity) US can't have negative rates because of this 5bp reverse-repo regime by the NY Fed. Remember my bathtub analogy - the reverse repo is the bathtub overflow drain. If there was no overflow drain - then, yes, one could see negative rates. But right now there's basically a 5bp "floor" to short-term rates. The falling rates should level off soon and start to slowly go back up when two things happen: 1) the debt ceiling is raised - maybe mid-Sept? but not before some high drama in Congress and the US Treasury hitting zero balance in its TGA at the Fed. 2) the Fed will stop its buying of Treasuries soon - also maybe Sept. This does not mean it reduces its holdings - it will just roll over its redemptions with new purchases and keep its ownership level flat. wabuffo

or this one, Spek?

The current run-rate is closer to 3.7% despite the trailing twelve month numbers looking like 5%. We haven't seen him repeat a $9 Billion repurchase quarter since Q3 and Q4 of 2020. I suppose he will increase the buying if the price declines and we don't really know what price he might decrease the repurchase rate. Whether its 3.7% or 5% - my point is that a) the large capital base, b) Buffett's advanced age, mean that repurchases will be a constant every quarter. Of course, valuation matters, but I think we are now at a major inflection point. Its kind of the opposite of the past, when Buffett wouldn't buy back stock in 2000, 2008-09, 2011, 2015-16 even though valuation was compelling because.......reasons? I think all of us have been trained reflexively by past experience with BRK to expect buybacks to dwindle because deep down we always knew Buffett's heart wasn't in it to give up paint from his studio as he still hadn't finished painting his canvas. That's why as the market becomes convinced (and it may take some more quarters to do the convincing) that repurchases are here to stay, then the stock will gradually re-rate to include the buybacks in the return expectation on BRK stock. We'll see I guess, but I think BRK may be coming out of its ho-hum phase that has lasted way too long while Buffett got sidetracked by PCP, KraftHeinz, IBM, the airlines, etc when he should've been using all that wasted capital in repurchasing BRK. wabuffo

Buyback has averaged $6B in Q and is at a FY run-rate at $25B+ The Old Man bought a further ~$1.8b in July. On a rolling 12 month basis (end of July '20 - end of July '21) it looks like he retired 5.34% of the common equity opening balance. I think we have to start treating this as more or less a permanent return of capital and need to start adjusting higher our expectations of total return (6% organic growth + 5% repurchases). I don't think the current share prices of the A's and B's fully reflect this as yet. wabuffo

Brief Update: - no debt ceiling deal was reached by Congress and they are now going on August recess. - Debt ceiling snapped back in place yesterday. We don't have the Daily US Treasury Statement from Friday yet (it comes out today at 4pm). I don't think Yellen hit her goal (either the original goal to get to the level the TGA was back in Aug 1, 2019 or her revised goal of $450b). I think it will end up just slightly under $500b based on Thursday's balance. - the US Treasury is now limited to $28.4t gross debt outstanding (note this includes intra-govt debt ("social security lockbox"). - so, US Treasury must now keep to this target (ie debt issuance = debt redemption) while continuing to run the TGA down in the absence of a deal. Depending on spending requirements (Sept is a corporate tax receipt month) - Yellen can probably go until Sept (maybe early Oct) before TGA balance goes to zero. - this basically extends the treasury yield compression (and yields are compressing today!). They will continue to likely compress until a deal is reached. Yellen has some tricks she can pull (reduce the intra-govt portion while raising the public portion of the debt ceiling) but not a whole lot of wiggle room. - of course, this can all end on a moment's notice if a deal to raise the debt limit is reached. It's all so counter-intuitive... any other country threatening to default on its sovereign debt and the yields on its securities would rise. The US threatens to default and yields on its securities plummet. LOL. wabuffo

No - I don't think the TGA balance will continue to run down. I think the TGA balance will become subordinate to managing to the debt limit, spending, receipts. As to interest rates - I think the trend will be higher but I wouldn't use the word "spike". There's a lot of liquidity in the system that new Treasury issuance will have to sop up. The rate at which that happens will depend on the debt ceiling amount and how much future spending Congress passes through the rest of year. If debt ceiling is raised really high and the Democrats pass both of their "infrastructure plan" - rates could rise at a quicker pace than if the debt ceiling is only raised a limited amount and nothing passes in Congress - then rates would rise rather slowly or go sideways until the Fed stops its QE. There are so many variables in the macro economy that its tough to make calls with certainty. But the TGA drawdown was a one-time special cause that one could see was having a disparate impact on rates. wabuffo

Does this mean treasury will keep running this balance down to $150 bn next month? In that case, rate spike is likely postponed after August 1st? No, I don't think so. I think the governor on the US Treasury general account becomes (a) the debt limit and (b) zero balance. IMHO, they will spend and tax and then try to settle the difference by issuing bonds to keep their balance level or as high as they can without issuing so much new, net debt that they bump up against the debt ceiling. wabuffo

As of July 27th it says "Federal Reserve Account" closing balance today is projected to be 564 Bn. Is this number supposed to run down to 150 bn by July 31st? That seems like a long way to go isn't it? I think so. But the Treasury estimated it would only get to $450b by the end of this month in a recent forecast. Perhaps Yellen has some leeway by claiming that daily receipts and expenditures are hard to predict. Who knows? Like all of us, I am a bit of a tourist here in Fedland! wabuffo

I think the FT article is mixing up what I consider to be two separate issues: 1) the debt ceiling snap-back on August 1st 2) excess reserves in the system - leading to overflows into O/N RRP. In the absence of an agreement in Congress toggles back in the on-position after being in the off-position since August 1, 2019. It would bring two requirements for the US Treasury would be my understanding: - it would be limited to whatever debt it has already issued as of July 31st, 2021 - it must be back to the level of TGA balance it was on August 1st, 2019. If I read those two rules literally - it would be limited to total gross debt of $28.5t (as of yesterday's daily statement) and around $180b balance in its TGA account. I don't know how much wiggle room, Tsy Sec'y Yellen would be allowed vs those two requirements. The O/N RRP is strictly a function of all the excess reserves in the system. It's back to my bathtub overflow drain metaphor. The TGA drawdown might've accelerated that a bit - but the need for the O/N RRP would be there with or without the debt ceiling drama. Of course, I could be wrong about it all. wabuffo

Do you think this new repo would impact your prediction about the interest rate rise in August? The current facility is an ad-hoc "temporary" facility for reverse repo. This announcement just makes it a standing (ie not ad-hoc), permanent reverse repo facility. In terms of day-to-day, nothing's going to change - even the limit is the same. The reverse repo is helping the Fed prevent short-term rates from going negative - especially at Money Market Funds that have access to the Fed's reverse repo facility. But I don't think it changes anything in terms of the TGA balance decline. It is really hard to understand what this is. Think of reverse repo being like the overflow drain at the top the tub. Last March, the Fed (and the US Treasury) put a stopper in the main drain of the tub and then started to fill the tub with "water" as a response to the pandemic. (liquidity, get it? LOL!) They decided we (the private sector) needed more "water". In fact, gallons of it (litres for you Europeans ). But they keep filling and filling. That's where the reverse repo facility comes into play. It is the overflow drain. A couple of months ago, the "water" level in our tub got to the point where the participants went to the overflow drain to keep the tub from overflowing with "water". As the Fed and the US Treasury continue to pour more "water" into the tub, every day more and more "water" goes out the overflow drain (via the reverse repo facility). Negative rates are basically our tub overflowing with "water" and spilling all over the bathroom. wabuffo

Home stretch run this week. TGA must come down - did come down last week (and even redeemed more Treasury securities than new issues). Checks long-term US Treasury yields.....good, good....all going according to plan! https://www.cnbc.com/bonds/ wabuffo

I was curious if he bought anymore Alibaba, but I didn't see a change. It will be interesting to see if Munger continues to sell BYD. Won't know til the 10-Q comes out and even then we will have to calculate it from the change in portfolio value. wabuffo

the TLT calls were an 8-bagger. wabuffo

Bought more AIM.TO at $4.52 CAD

Bill, What are you thoughts on this? This seems related to the (same?) thing you've been talking about lately but perhaps I'm wrong. PS, Zoltan has probably forgotten more about the US monetary system than I could possibly ever know and understand. So first of all you don't mess with the Zoltan! The way I understand his argument is that he is picking on specifically the Fed's decision to expand the overnight reverse repo and to pay (in his opinion) too rich an interest rate on it (5bp). He thinks this will cause a giant rotation between MMFs, corporate treasurers and banks that due to the large flows involved could cause a problem somewhere in some corner of the monetary system. He describes this move as the Fed "sterlizing" the massive growth in bank reserves/TGA drawdown due to the pandemic. His thesis is that MMFs are going to shed T-Bills as they mature and plow into the o/n reverse repo facility because they can get 5bp and barbell their maturity profile. This will, in turn, take deposits out of the banking sector as corporate cash holders go into T-Bills (better yields than banks or MMFs offer). The result will be trillions of deposits moving out of the banking sector and reserves circulating back to the Fed via the o/n reverse repo. I'm not sure why this rotation poses risks - but Zoltan thinks it might, at the margin. wabuffo

Hey wabuffo - thanks for all your educational posts on this. gfp -- I'm really happy my ramblings are adding some value here.... wabuffo

CB - I always respond to your posts because they are thoughtful and we both are striving to learn more about this stuff. wabuffo

and a mere 2% in the late 1970s. When interest rates hit 18%! because so much of their wealth consists of unrealized gains in stocks... Eureka! Raise interest rates back up to 18% to solve the problem of unrealized gains in stocks!

Let's see if the following concept helps. In typical times, most or all of the Treasury spending (to the private sector) is matched by taxation revenue (from the private sector). The rest applies to deficit spending. When the Treasury spends money it does not have, it behaves like a bank (sort of) that act as an intermediate between a private actor that lends its cash (instead of consuming, investing or whatever) to another private actor (to consume, invest or whatever) through the Treasury. So the Treasury acting like a bank (sort of) can effectively be involved in money creation, through some kind of loan-deposit cycle, with a difference that the Treasury holds the expanded balance sheet in an inter-temporal way. i would say the Fed has exploited this temporal loophole while the MMT crowd simply want to never have to deal with it. The Rubicon hasn't been crossed but.. Huh? wabuffo

Apart from the usual money creation from loan growth at banking institutions (...), the government has put its shoulder to the wheel but government issues are not pure money printing, at least for now, as the cash injected into the system has been offset by government bonds held (ultimately) by someone. So, the unusual increase in the money (cash) supply has been offset by an equivalent increase in the total pool of bond securities... This is a close description - but not quite right, I think. New deposits in the US commercial banking system come from two sources: a) bank credit -- a new bank loan simultaneously creates a deposit. (new deposit asset + new loan liability but no increase in aggregate private sector net worth) b) US Treasury deficit spending -- spending creates a new deposit asset and an increase in aggregate private sector net worth. Thus, only US Treasury deficit spending creates net new financial assets for the private sector. Bank lending, OTOH, does not create net financial assets because of the matching asset and liability being simultaneously created. Since everybody already owns everything - the flows of new assets can only originate from US Treasury spending which has been massive since the pandemic. It is slowing down now as we wait to see what comes out of Congress for the remainder of the year. Everything else is an asset swap where a buyer enters and a seller leaves.... but everybody continues to own everything! wabuffo