Responses to Blog #22: Bonds, Reserves and Savings

Sorry am traveling, so the Blog has had a bit of a vacation.Must be brief today:
Q1: What about Ellen Brown?

A: I like the idea of public banking. Not a topic for today.Do not completely agree with her view of Fed.

Q2: What encourages a bank to lend money?

A: Most important: a profit opportunity to lend to aborrower likely to service her debt. Hint: has nothing to do with reserves.

Q3: At what point does borrowing at discount window push updiscount rate?

A: Never. This is not about quantity, it is about price.Central bank sets the rate at the discount window, so rate rises only whencentral bank decides to increase it.

Q4: Why does Japan have low bond rates?

A: Because BofJapan wants low rates. Set the overnight rateat zero, keep it there for a generation, and just like magic markets price in azero cost of overnight funds! You could just as well have asked why the USA hadnear zero bond rates throughout WWII in spite of budget deficits that would causea Greek to blush.

Q5: Many say rest of world funds the US trade and budgetdeficits.

A: And they be wrong. Dazed and confused. Where did everydollar the Chinese have come from?

Q6: Convince Bill Gross and we win the lottery.

A: Right. Note how well PIMCO did before Paul left PIMCO,and how poorly it is doing now. Paul and his rabbit understood MMT (more orless).

Q7: Isn’t treasury mandated to sell bonds equal to itsdeficit and to have funds in its account at the central bank before cuttingchecks?

A: Yes, true of many treasuries around the world. Goodexample of a government willing to tie its hands behind its back. Topic forlater blog. It is a specific case, not the general case. But, yes important butwe will see it makes no difference.

Q8: Banks create deposits out of thin air?

A: Yes when they make loans.

Q9: Deposit multiplier story: banks lend their excessreserves and through the magic of a multiplier money is created by a multiple.

A: Pure textbook fantasy. No, doesn’t work that way.

Q10: What would happen if reserves were discretionary?

A: Central bank has given up interest ratetarget, lets checks bounce, and bank checks don’t clear at par, so paymentssystem breaks down.

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