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Why is there a dollar shortage in the real US economy
- Thread starter RiceRocket
- Start date
Even though the banks can lend out 14 times their capital, I have always been a little confused as to where they get the 14 times money from to lend out or invest.
1.) The can get it from deposits.
2.) CD's.
3.) Borrow from a wholesaler on a daily basis.
4.) Borrow from another country (the Japanese carry trade).
5.) Borrow from the FED (a new development that might be temporary).
The problem is if they are borrowing on a daily basis and rolling over each day, but lending for longer periods of time, they can get caught in a squeeze of higher short term interest rates while lending at a fixed rate for a longer period of time or not being able to borrow or roll over on a daily basis.
Is this correct?
1.) The can get it from deposits.
2.) CD's.
3.) Borrow from a wholesaler on a daily basis.
4.) Borrow from another country (the Japanese carry trade).
5.) Borrow from the FED (a new development that might be temporary).
The problem is if they are borrowing on a daily basis and rolling over each day, but lending for longer periods of time, they can get caught in a squeeze of higher short term interest rates while lending at a fixed rate for a longer period of time or not being able to borrow or roll over on a daily basis.
Is this correct?
Quote from achilles28:
Money is created from:
1) The FED
2) Commercial Banks.
The FED buys Government debt (creates money), and lends to Commercial Banks (creates money via debt).
Commercial Banks then explode that base money supply via debt creation (loans) to consumers and business. This is known as fractional reserve lending. Banking capital requirements just mean the dollar percentage banks must hold with the FED to support loans on their books.
For example, in the case of a Commercial Bank, if the reserve requirement is 7%, that bank must have 7% cash with the FED to cover outstanding loans. So if a new bank opens with 10 Million in capital, it can loan out (create), 142 Million in loans (new money). Incidentally, this is why the Banking system is a fraud. Create money from nothing and charge interest on it. It should be noted the real value at risk for any bank is their capital requirement expressed as a percentage of a loan. If Bank A only ponies up 7% and conjures the rest, it only risks 7% of whatever the loan value is. The rest is just fake money it creates. This is also why the banking system is extremely leveraged and where all leverage in finance, real estate, futures and other markets derives from. At a 7% capital requirement @ 3% interest rates, Bankers really make a 42% return on their actual money at risk. Thats why banks make a sh*tload of money, Quarter after quarter = legalized counterfeiters.
To recap - money supply comes from two places. The FED. And Commercial Banks (via fractional reserve loan creation). Debt = money.
M1 (Fed money supply) has doubled.
M3 (total money aggregates - includes loans made by commercial banks), has shrunk. Which is why we're seeing deflation in broad areas (real estate, consumption, employment).
D-DAY comes when Banks resume normal bank lending to consumers and business.
Then the Total Money Supply will Explode and we get Massive Inflation.
Bernacke has ordained it.
fed fund rate only benefits commercial banking immediately, retail banking still have great deal of difficulty to lend and spiking loan lost. From last quarter earning, GS and JPM were doing well, but BAC and C were still losing money. You can see the disconnection within banking sectors, therefore the picture is not rosy as economists have painted.
Inflation pressure for commercial banking,(bond and equity market are inflated), depression for regular working class(wages and working hours are shrinking). In other word, bond and equity are more liquidated, easier to get out than retail banking.
As a result, currency devaluation is way to go, then hike interest rate to elevate with it.
Inflation pressure for commercial banking,(bond and equity market are inflated), depression for regular working class(wages and working hours are shrinking). In other word, bond and equity are more liquidated, easier to get out than retail banking.
As a result, currency devaluation is way to go, then hike interest rate to elevate with it.
Quote from indexer:
Even though the banks can lend out 14 times their capital, I have always been a little confused as to where they get the 14 times money from to lend out or invest.
1.) The can get it from deposits.
2.) CD's.
3.) Borrow from a wholesaler on a daily basis.
4.) Borrow from another country (the Japanese carry trade).
5.) Borrow from the FED (a new development that might be temporary).
The problem is if they are borrowing on a daily basis and rolling over each day, but lending for longer periods of time, they can get caught in a squeeze of higher short term interest rates while lending at a fixed rate for a longer period of time or not being able to borrow or roll over on a daily basis.
Is this correct?
Yes. One of the things that happened, at at least one bank, was that suddenly it wound up with a disproportionate amount of its funding coming from very short-term paper. When the money markets froze up, it became tough to roll that paper over.
Quote from indexer:
Even though the banks can lend out 14 times their capital, I have always been a little confused as to where they get the 14 times money from to lend out or invest.
1.) The can get it from deposits.
2.) CD's.
3.) Borrow from a wholesaler on a daily basis.
4.) Borrow from another country (the Japanese carry trade).
5.) Borrow from the FED (a new development that might be temporary).
The problem is if they are borrowing on a daily basis and rolling over each day, but lending for longer periods of time, they can get caught in a squeeze of higher short term interest rates while lending at a fixed rate for a longer period of time or not being able to borrow or roll over on a daily basis.
Is this correct?
Yes, its correct in the sense that 1-5 are legit sources of *base* capital. Its from those sources (and others), Banks originate (create) loans in accordance with their capital requirement. For example, Bank A borrows 5 Million from JPM for a 30-day term. Bank A then deposits that 5 Million with the Fed and now can create loans up to 71 Million dollars with a 7% capital req.
Yes, the borrow-short lend-long play is where geared banks got caught from illiquid ST credit.
"The US dollar shortage in global banking and the international policy response"
http://www.bis.org/publ/work291.pdf?noframes=1
http://www.bis.org/publ/work291.pdf?noframes=1
The only real 'liquidity' present in US markets is market based liquidity. Corporate/junk bond issuance, IPOs, etc. This is hardly a strong bull point however, because its like saying 'the market should go up because the market is up', this type of liquidity is a state of mind and can come and go at the blink of an eye
Period periodically change their moods, if the only lending in town goes away the financial system is back at its creditless phase again
Period periodically change their moods, if the only lending in town goes away the financial system is back at its creditless phase again