O/N RRPs

[salmotrutta]

Steve Hanke is wrong. O/N RRPs drain the money stock (but it isn't a subtraction on the FED's books). I.e., it is an accounting error. It is not any different than funds deposited in the TT&L accounts and since January 3, 2012, funds in these accounts must be transferred to the Fed by the close of business on the day they are received so the end-of-day balance is always zero (representing a subtraction).



Dr. Steve Hanke: "WSJ Aug 5th, 2021

"The notion that a trillion dollars in reverse repos has reduced the money supply by even one dollar is nonsensical. Reverse repos are a liability of the Fed and an asset of the banks and money-market mutual funds (MMMF) that loan funds to the Fed via reverse repos. Deposit liabilities of both banks and MMMFs are constituents of the money supply. These liabilities remain unaffected by the choice banks and MMMFs make about whether to place their assets in the Fed’s reverse-repo facility, Treasury bills or elsewhere. Contrary to the Gramm-Saving analysis, the Fed’s reverse-repo program has no effect on the money supply."



It makes a difference where the funds are held. Holding funds at the Reserve banks reduces the money stock in the commercial banking system/payment's system..

[salmotrutta]

So, the money stock has been reduced by 1.4 trillion dollars.  That's why R-gDp fell from 6.7% to 2.1% in the 3rd qtr. 2021.  That bodes ill for R-gDp in the 1st qtr. of 2022.

[salmotrutta]

Open market operations should be divided into 2 separate classes (#1) purchases from & sales to, the commercial banks; and (#2) purchases from, and sales to, others than banks:



(#1) Transactions between the Reserve banks and the commercial banks directly affect the volume of bank reserves (outside money) without bringing about any change in the money stock (inside money). The trading desk “credits the account of the clearing bank used by the primary dealer from whom the security is purchased”. This alteration in the assets of the commercial banks (the banks’ IBDDs), increases – by exactly the amount the PD’s government securities portfolio was decreased.



(#2) Purchases and sales between the Reserve banks and non-bank investors, GSEs, etc., directly affect both bank reserves and the money stock.

[salmotrutta]

O/N RRPs explain the drop in sales:
nypost.com/2021/11/30/2021-cyber-monday-black-friday-sales-dip-from-last-year/


If you back out O/N RRPs from the money stock, then R-gDp is taking such a hit that the FED must ease monetary policy:



01/1/2021 ,,,,, 0.645

02/1/2021 ,,,,, 0.659

03/1/2021 ,,,,, 0.697

04/1/2021 ,,,,, 0.671

05/1/2021 ,,,,, 0.646

06/1/2021 ,,,,, 0.518

07/1/2021 ,,,,, 0.475

08/1/2021 ,,,,, 0.252

09/1/2021 ,,,,, -0.014

10/1/2021 ,,,,, -0.042

11/1/2021 ,,,,, -0.040

[salmotrutta]

There was no economist more prescient than Leland Pritchard, Ph.D., Economics, Chicago 1933, M.S. Statistics, Syracuse.


Economists don’t know a debit from a credit. See e-mail:


Re: My comment: Savings are not a source of “financing” for the commercial bankers

Dan Thornton

Thu 3/9, 2:47 PMYou

See the graph below.

bit.ly/2n03HJ8

Daniel L. Thornton

D.L. Thornton Economics LLC


It is hard for the average person to believe that banks do not loan out savings or existing deposits – demand or time. But the DFIs always create money, somewhere in the system, by making loans to, or buying securities from, the non-bank public.

This results in a double-bind for the Fed (FOMC schizophrenia: Do I stop because inflation is increasing? Or do I go because R-gDp is falling?). If it pursues a rather restrictive monetary policy, e.g., QT, interest rates tend to rise.


This places a damper on the creation of new money but, paradoxically drives existing money (savings) out of circulation into frozen deposits (un-used and un-spent, lost to both consumption and investment). In a twinkling, the economy begins to suffer.

People can choose to hide their heads in the sand. It’s as Dr. Philip George says. “When interest rates go up, flows into savings and time deposits increase” (thereby destroying money velocity).


In Alfred Marshall’s “Cash Balances Approach” (the demand for money), K = “the length of the period over whose transactions purchasing power in the form of money is held”. K is related to Vt; it is the reciprocal.

Money is a paradox, by wanting more the public ends up with less, and by wanting less it ends up with more.

[salmotrutta]

QE, or LSAPs on Treasury and MBS bonds, ended up boosting long-term interest rates during its operations, then afterwards, interest rates fell. Contrary forces are at work. QE reduces the supply of loan-funds, duration (time preference and time to maturity) for cash (IBDDs). QE thus induces non-bank disintermediation, an outflow of funds or negative cash flow (where the size of the payment’s system remains unaffected, while the size of the un-backstopped NBFIs, or financial intermediaries, shrink).



If money market rates, the position of short-term yields under one year, fall relative to the administered remuneration rate, or the rate on interbank demand deposits (bank reserves), the supply of loan funds will decrease.



The Romulan cloaking device (payment of interest on IBDDs), upon introduction, vastly exceeded the level of short-term interest rates which was explicitly illegal per the FSRRA of 2006.



Whereas the 1966 Interest Rate Adjustment Act created a .50% interest rate differential in favor of the Savings and Loan Associations (the thrifts, the nonbanks), in order to reverse nonbank disintermediation (the 1966 Credit Crunch), the Emergency Economic Stabilization Act of 2008 provided a preferential interest rate differential in favor of the commercial banks, which decimated the shadow banks (where short-term liabilities are used to buy longer-term assets). It is proper that disintermediation is a term that has only applied to the nonbanks since 1933.



So, the continued reduction in benchmark Treasury rates will continue because QE destroys the velocity of circulation or destroys the savings-investment process.

[salmotrutta]

Link Jeffrey Snider:


"It has been high misunderstood for far too long in this Fed-centric era (cult) which identifies foreign selling of Treasuries with everything it is not. In other words, there has been a long and consistent history which conclusively shows foreign selling of not just Treasuries but also T-bills and other US$ assets, both by private foreign institutions as well as overseas central banks and governments, is brought up and forced upon for entirely some form of dollar problem or shortage."


The E-$ market has been in contraction, propping up the domestic $.

E-$ borrowing used to be more expensive for U.S. banks. But Powell eliminated reserve requirements on March 26, 2020, and Sheila Bair implemented assessment fees on foreign deposits, which changed the landscape of FBO regulations.

[salmotrutta]

The largest trade deficits have been associated with the largest U.S. $ declines.   So, what's going on now to prevent this?

[salmotrutta]

Maybe you never wondered why the FED's data on St. Louis' FRED doesn't balance? Aren't loans supposed to equal deposits (plus currency)? Or bank credit equal to total assets?

fred.stlouisfed.org/categories



Well, the DIDMCA of March 31st 1980 turned 38,000 nonbanks into banks, adding the S&Ls, the MSBs, and the CUs to the member DFIs. But the BOG didn't change their definitions on the asset side of the ledger. It did incorporate deposits on the liability side of the ledger (minus large CDs and MSB interbank deposits).

[salmotrutta]

Real interest rates (nominal minus inflation) are determined by the savings-investment imbalance. It's the division between money products and savings' products. An increase in savings products will increase the real rate of interest, e.g., the reduction in FDIC insurance from unlimited to $250,000 in Dec. 2012 (which produced the "Taper Tantrum").


It seems like one big experiment. Money has a “sweet spot”, but velocity has an interminable one (i.e., non-neutrality).

[salmotrutta]

From September 1, 2021, to December 29, 2021, the Federal Reserve added $544.5 billion to the amount of securities it sold under an agreement to repurchase after a short period of time.



The amount of securities the Federal Reserve purchased outright during this same period of time: $464.0 billion.



That is, the Fed sold $80.5 billion more securities during this four-month period of time than it purchased!


RRPs drain reserves (and certain broad classifications of the money stock, as 90% of the counterparties are nonbanks, e.g., GSEs, MMMFs). This draining is not acknowledged by the FED’s statisticians. It is surreptitious. On the one hand reserves are reduced, but not the money stock figures, e.g., just like large CDs over $100,000 are excluded.



But the O/N RRP administered rate, sets an effective floor on the fed funds rate (earning interest on excess cash). MMFs account for almost all ON RRP take-up.

www.federalreserve.gov/econresdata/feds/2015/files/2015010pap.pdf



Note that on March 17, 2021, the FOMC increased the counterparty limit to $80 billion. And 2 days later, interest rates peaked.



The draining of reserves reduced the growth of R-gDp in the 3rd qtr. of 2021 (from 6.7% to 2.3%). It supported the value of the US $. It capped oil prices.



During this same period (where the effective FFR stayed at 8%), SOFR stayed at 7%. OFR stayed at 5%, the IOR stayed at .15%. But the volume of O/N RRPs went to 2 trillion dollars.





As I said: “30 May 2021, 12:14 PM

“The "soak up" is self-reinforcing (self-regulating). Too much cash or too few securities (driving rates below zero at auctions), and financial institutions rush to the O/N RRP facility. The FED doesn't have to do anything -- and the excess liquidity is automatically drained by the private sector.”

[djAdvocate]

what does the abbreviation in the OP stand for?

[salmotrutta]

The FOMC has gradually tightened credit.

Increase in the money stock over previous 4 months;


02/1/2021 ,,,,, 1140.1

03/1/2021 ,,,,, 1335.0

04/1/2021 ,,,,, 1096.5

05/1/2021 ,,,,, 681.5

06/1/2021 ,,,,, 928.9

07/1/2021 ,,,,, 901.9

08/1/2021 ,,,,, 738.6

09/1/2021 ,,,,, 672.6

10/1/2021 ,,,,, 614.3

11/1/2021 ,,,,, 410.5

12/1/2021 ,,,,,

[salmotrutta]

O/N RRPs unrecognized subtractions from the broad money stock:

Apr ,,,,, 0069

May ,,,,, 0290

Jun ,,,,, 0673

Jul ,,,,,, 0848

Aug ,,,,, 1053

Sep ,,,,, 1211

Oct ,,,,, 1425

Nov ,,,,, 1445

Dec ,,,,, 1600

[salmotrutta]

Inflation is based upon monetary flows, volume times transactions' velocity, as Irving Fisher described.

02/1/2020 ,,,,, 0.029

03/1/2020 ,,,,, 0.214

04/1/2020 ,,,,, 0.397

05/1/2020 ,,,,, 0.455

06/1/2020 ,,,,, 0.497

07/1/2020 ,,,,, 0.532

08/1/2020 ,,,,, 0.562

09/1/2020 ,,,,, 0.611

10/1/2020 ,,,,, 0.683

11/1/2020 ,,,,, 0.790

12/1/2020 ,,,,, 1.261

01/1/2021 ,,,,, 1.313

02/1/2021 ,,,,, 1.406

03/1/2021 ,,,,, 1.506

04/1/2021 ,,,,, 1.597

05/1/2021 ,,,,, 1.649

06/1/2021 ,,,,, 1.785

07/1/2021 ,,,,, 1.908

08/1/2021 ,,,,, 1.932

09/1/2021 ,,,,, 1.880

10/1/2021 ,,,,, 1.970

11/1/2021 ,,,,, 1.932

12/1/2021 ,,,,, 2.089

01/1/2022 ,,,,, 2.210 Inflation peaks

02/1/2022 ,,,,, 1.792

03/1/2022 ,,,,, 1.540

04/1/2022 ,,,,, 1.493

[salmotrutta]

It's an error. Contrary to the accountants at the Board of Governors of the Federal Reserve System (in contradiction to the presupposed GAAP), the sale of securities by the FRB-NY’s trading desk decreases both the assets and liabilities of the Reserve Bank. It is not just an exchange in liabilities. The O/N RRPs destroy the volume of the broad money stock. PG. 305 in my 1963 Money and Banking book. PG 366, 382, & 398 in my 1958 Money and Banking book.



Case in point, the O/N RRP facility. Aug, 9 WSJ:

"In their Aug 6. letter in response to our op-ed “How the Fed Is Hedging Its Inflation Bet” (Aug. 2), John Greenwood and Steve Hanke argue that the Fed’s sale of a trillion dollars of reverse repos does not in and of itself reduce the deposit liabilities of banks and money-market mutual funds, and that the money supply is unaffected. By that logic, none of the monetary tools of the Federal Reserve Bank would affect the money supply."

gsiexchange.com/how-the-federal-reserve-reduces-the-money-supply/



"Of course, if the buyer of a reverse repo or a security sold by the Fed is a nonbank and pays for the purchase using its bank account, the money supply is directly affected."



"The Fed Indirectly Shrinks the Money Supply"

www.wsj.com/articles/fed-money-supply-inflation-reverse-repo-11628288902




"We are deep in the caverns of economic theory now. Careful there, the rocks are slippery with moss; be warned of the fathomless logical cavities, the metaphysical cul-de-sacs, and all the methodological stalactites and stalagmites ready to snare the unwary intellect. Be not surprised if you see nothing you recognize. This world is not meant for ordinary mortals; it’s for the merest few—men of occult knowledge and ethereal genius, mathematical logicians with no little contempt for the crude statistics of that vulpine species, the businessman."  -- Edward Meadows in Wild Bill's National Review

[salmotrutta]

Powell: "stressing supply side constraints have been "very persistent" and "durable."

LOL.  Dodging the bullet again.  Overall supply has increased, not decreased.  R-gDp (non-inflationary growth or supply) in the 3rd qtr. 2021 was 23,202.344T.  R-gDp in the 4th qtr. of 2019 was 21694.458T - up + 1507.886B.

[salmotrutta]

You have to first be able to define money. For example, M2 isn’t money per se, money that is being spent, i.e., “means-of-payment” money, “medium-of-exchange” money. It doesn’t even represent pent-up demand, a “standard-of-deferred-payments” money supply.



The connection between money as a stock and money as a flow, is the velocity of its circulation. The velocity of money refers to the frequency of economic transactions, of physical exchanges between counterparties, in an economy.



One man’s spending is another man’s income (where the “demand for money” is the reciprocal of velocity).



M2 is posited by people trying to prove a point without the evidence. It’s not even correlation without causation. It is a fundamentally flawed analysis.



In spite of the Ph.Ds. in economics trying to prove otherwise, nothing has change in > 100 years. Un-like what Alan Greenspan tried to communicate:



“CHAIRMAN GREENSPAN. I must say that I have not changed my view that inflation is fundamentally a monetary phenomenon. But I am becoming far more skeptical that we can define a proxy that actually captures what money is, either in terms of transaction balances or those elements in the economic decision-making process which represent money. We are struggling here. I think we have to be careful not to assume by definition that M1, M2, or M3 or anything is money. They are all proxies for the underlying conceptual variable that we all employ in our generic evaluation of the impact of money on the economy. Now, what this suggests to me is that money is hiding itself very well.”



AD = money times transactions’ velocity, not N-gDp as the Keynesian economists claim. “Money” = the measure of liquidity; the yardstick by which the liquidity of all other assets is measured.



Vi is a “residual calculation, or mathematically fabricated – not a real physical observable and measurable statistic.” Income velocity may be a “fudge factor,” but the transactions velocity of circulation is a tangible figure.



I.e., income velocity, Vi, is endogenously derived and therefore contrived (N-gDp divided by M) whereas Vt, the transactions’ velocity of circulation, is an “independent” exogenous force acting on prices.



Money demand is viewed as a function of its opportunity cost – the foregone interest income of holding lower-yielding returns on money balances (Keynes’ liquidity preference curve). As this cost of holding money falls (or “K” — the length of the period over whose transactions purchasing power in the form of money is held), in Alfred Marshalls’ cash balances approach, the demand for money rises (and velocity decreases).



As Dr. Philip George says: “The velocity of money is a function of interest rates”



As Dr. Philip George puts it: “Changes in velocity have nothing to do with the speed at which money moves from hand to hand but are entirely the result of movements between demand deposits and other kinds of deposits”.



It’s the transactions velocity (bank debits to deposit accounts – Vt) that’s statistically significant (i.e., financial transactions and non-GDP transactions are not random, and can be filtered).

[salmotrutta]

Demographics, technology, income inequality, globalization, over-indebtedness. Some are causes, some are effects. All indicators are pointing the same way – towards secular stagnation (chronically deficient aggregate demand).



The economy is being run in reverse. The savings->investment process is diametrically backwards. Savings, income not spent, are being impounded. Savings, funds held beyond the income period in which received, are being dissipated into financial investment (as opposed to real investment).



The misconception that metastasizes in an output gap, is that there is no difference between money and liquid assets. It is the Keynesian macro-economic persuasion that maintains a commercial bank is just another type of financial intermediary, serving as a conduit between savers and borrowers.



Not so. Bank lending is endogenous (depends upon monetary policy). Non-bank lending is exogenous (depends upon the savings practices of the public). Thus, the remuneration of IBDDs is a Romulan cloaking device.



Banks don’t lend deposits. Deposits are the result of lending. Banks pay for their earning assets with new money. Banks could continue to lend even if the nonbank public ceased to save altogether.



Non-banks on the other hand match assets with liabilities. Thus, any shift in the remuneration rate directly affects the nonbanks. The Sept. 2019 repo crisis is prima facie evidence.

[salmotrutta]

It’s a blatant error. Contrary to the accountants at the Board of Governors of the Federal Reserve System (in contradiction to the presupposed Generally Accepted Accounting Principles, GAAP, e.g., the cost principle, the matching principle, the time-period specific principle, the recognition principle), the sale of securities by the FRB-NY’s trading desk decreases both the assets and liabilities of the Reserve Bank. It is not just an “exchange in liabilities”. The asset reflects an exchange in ownership ( a debit on the left to the recipient of RRP’s remuneration).


Otherwise how would the funding facilities even work?


I.e., the FED is not “behind the curve”


O/N RRPs are an unrecognized subtraction from the broad money stock:

Apr ,,,,, 0069

May ,,,,, 0290

Jun ,,,,, 0673

Jul ,,,,, 0848

Aug ,,,,, 1053

Sep ,,,,, 1211

Oct ,,,,, 1425

Nov ,,,,, 1445

Dec ,,,,, 1600

Surreptitious tightening.

[salmotrutta]

As I said, the 1st seasonal inflection point aside:

You just don't get stock prices moving higher when money flows move lower:

07/1/2021 ,,,,, 0.82

08/1/2021 ,,,,, 0.64

09/1/2021 ,,,,, 0.35

10/1/2021 ,,,,, 0.38

11/1/2021 ,,,,, 0.37

12/1/2021 ,,,,, 0.30

01/1/2022 ,,,,, 0.30 peaks

02/1/2022 ,,,,, 0.27

03/1/2022 ,,,,, 0.21

04/1/2022 ,,,,, 0.20 bottoms

05/1/2022 ,,,,, 0.20

This time series doesn't need to move much in order to move stocks one way or the other.

Jan 16, 2022. 06:17 PMLink

[salmotrutta]

"The Fed's favorite inflation indicator - Core PCE Deflator - surged more than expected to +4.9% YoY, its highest since April 1983..."





The cash-drain factor, the ratio of currency to demand deposit accounts, has increased from .667 in January 2000 to 2.301 in December 2021. Ergo, more currency is being used to support higher prices. The 4th qtr. 2021 increase in R-gDp of 6.9% can only be explained by the surge in currency during the 4th qtr. (by the cashing of time deposits).

[salmotrutta]

In "Tight Money, Easy Money, and the New Economics”, August 1967, pg .135-137, by Leland J. Pritchard, Ph.D. Economics Chicago, 1933, M.S. Statistics, Syracuse, Dr. Pritchard elaborates.



He dissects the “credit school” and the “money school” and says: “With immaterial exceptions it may be said that as time deposit grow the primary money supply shrinks pari passu-unless offset by an expansion of bank credit.”…”Although increases in currency are always at the expense of demand deposits, either directly, or indirectly through the liquidation of time deposits, it cannot be said, as of time deposits, that increases in the public’s holdings of currency reflect prior commercial bank credit creation. It is more appropriate to say that expansions of currency are accompanied by concurrent expansions of Reserve bank credit”



“Unless Reserve authorities are desirous of following an easier or more restrictive monetary policy, any loss of bank reserves due to currency withdrawals from the banking system will be offset by an approximately equal volume of open market purchase of Governments for the portfolios of the Reserve banks”.



September 2020’s NSA M2 was reported as 14253.1. The figure was not exceeded until September 2021 @ 14,377.3. M2 has then exploded in the 4th qtr. until December 2021 @ 14,737.7. M2 grew by 516.6 in the 4th qtr. DDs have grown by 353.4, and currency by 30.7. Thus, the overall money stock grew by 900.7.



Currency was previously, prior to Covid-19, a fraction of DDs @ .907 in FEB 2020. Now currency is a multiple of DDs @ 2.291. I.e., the cashing of time deposits has greatly increased our “means-of-payment” money supply.

[salmotrutta]

The job gains are due to the O/N RRP volumes. Volumes plateaued while POMOs still create new money – savings deposits transmogrified into transaction deposits.


Powell has cemented the prospect of knowing less and less about money, the economy, and inflation.

[salmotrutta]

Powell has transitioned the U.S. banking system into a new regime, he has now joined Canada, the United Kingdom, Australia, New Zealand, Hong Kong and Sweden as a Central bank conducting monetary policy with just interest rates and not legal reserves. But interest is the price of credit, the price of money is the reciprocal of the price level.

The money stock can never be managed by any attempt to control the cost of credit. The creation and destruction of money is not self-regulatory, it is self-reinforcing, The only tool, credit control device, at the disposal of the monetary authority in a free capitalistic system through which the volume of money can be properly controlled is legal reserves.

Using a price mechanism, pegging policy rates, to ration Fed credit is non-sense (“a price mechanism is a system by which the allocation of resources and distribution of goods and services are made on the basis of relative market price”).

The effect of current open market operations on interest rates is indirect, varies widely over time, and in magnitude. What the net expansion of money will be, as a consequence of a given change in policy rates, nobody knows until long after the fact. The consequence is a delayed, remote, and approximate control over the lending and money-creating capacity of the banking system.

[salmotrutta]

Using M32 confuses theory and practice. The ratio of demand deposit turnover to savings deposit turnover is > 99:1. The majority of economic payment's, maybe unlike yours, are not from interest-bearing checking accounts.


Both Alan Greenspan and Jerome Powell correctly state that M2 has been disconnected from the economy for a long time.

That said, Powell has eliminated the withdrawal restrictions from savings accounts, turning savings accounts into transaction-based accounts. The last time Volcker did this in 1981, it severed the relationship between then M1a and M1b from the economy.


E.g., savings accounts, growth in M2, were responsible for the 6.9% growth of R-gDp in the economy in the 4th qtr. of 2021. But the rate-of-change in our means-of-payment money still controls the rate of inflation. Inflation peaked in January as my model predicted.

The FED has not yet tightened monetary policy. POMOs are still increasing M2, still fostering inflationary growth. The FED needs to stop buying bonds.