The CB owns 100% of the debt of the country. When you lend the entire country money with an interest rate, the entire country is indebted to you. So easy a caveman can do it.
How does the fed add liquidity to the economy?
- Thread starter RGLD
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The CB owns 100% of the debt of the country. When you lend the entire country money with an interest rate, the entire country is indebted to you. So easy a caveman can do it.
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morganist
Have you completely missed the subject of risk elimination with the betas and alpha models, with CAPM, APT, the weighted cost of capital. That subject and world of corporate banking, when the cost of financing, risk of financing, risk of investing and return to risk outcomes is analysed? The treasury bond is the element of the model and calculations that is considered the risk free rate of investing. The other element of the risk free rate of investing is AAA rate corporate bonds. Have you not studied or been involved in this subject matter? It appears not.
I take it you have not studied or been involved in corporate banking.
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morganist
This is not completely true. Thje central banks are involved in a whole industry of providing low cost borrowing in the repo market and Open Market Operations, which is where it makes its money. The commercial banks can also make money from this industry, which is a large part of modern banking.
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morganist
See, I find this image pretty unsettling:
We know the fed is pumping money into the market, but my question is HOW MUCH are they doing it? Are they making up for 50% of the volume? That sounds absurd, but imagine the fed being the only buyer in the market that matters now. The dollar is getting destroyed as a result.
Even more unsettling, is the fed the only buyer in the fixed income market now? Who else would buy with negative real rates? We'd end up with a Japanese situation where the CB owns 70% of the national debt.
There are other wasy to stimulate economic growht outside of central bank operations. There is a lot that can be achieved through pension reform.
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morganist
Central banks tend to make money from their Open Market Operations and the repo market. This is how they make their money and it is valuable to the economy that they do it.
Central banks can't provide that because they don't have real wealth. Without that, there's nothing to lend; only to siphon from others and redistribute.
1. Commercial banks put their money on the line that's backed by real assets. Bona-fide savings occur if private entities put more goods and services into the economy than they take out. Such savings can genuinely be lended out. Proper risk premia are to be charged by commercial banks that prevent misallocation of resources.
2. The Fed's newly printed money isn't backed by anything. Its balance sheet always increases. Lending it anyway and lending more printed digits than before is inflation. It destroys the purchasing power of the dollar. Appropriate risk premia aren't charged and the Fed enables misallocation, the bubble economy and moral hazard.
You made that up, didn't you.
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morganist
Looks like Piezoe has completely missed out on the subject of risk elimination, portfolio diversification and corporate banking. Below is a link to the Corporate Finance Institute that explains how treasuries are used in corporate banking.
https://corporatefinanceinstitute.com/resources/knowledge/finance/risk-free-rate/
Actually government issued, fiat money, like the U.S. dollar for example, is backed by at least three things: productivity, taxes and faith. ( taxes give money value in the sense that it is the only currency the government will accept toward payment of taxes. You will need to pay your taxes if you want to stay out of jail.)