Originally Posted by jyl
The reverse repo (RRP) thing is interesting.
As I understand it, this is banks and other large financial institutions trying to get excess cash off their books, by exchanging cash for Treasuries. For a bank, $1 of customer deposits is classified as a liability. Normally they turn around and lend that $1 to a borrower, and that loan is classified as an asset. But right now they have more cash deposits than they have loans to make. So they exchange that $1 of cash for $1 of Treasuries. Owning a Treasury bond is like making a loan to the US govt, it is classified as an asset for the bank. And they make a percent or so of interest on the Treasury bond, as opposed to nothing on the cash. These are overnight actions, i.e. the exchange lasts a day. It all takes place electronically, just numbers moving from one of the bank’s accounts at the Fed to another of the bank’s accounts at the Fed.
I am not sure that I consider RRP actions to be particularly important, in themselves. RRP activity reached these levels around 2016-ish as well, and didn’t signify anything horrible. It does indicate that banks have more deposits than they have loan opportunities, at the moment, but that could change in a day - these are just overnight moves.
The bigger picture is that the economy is awash with cash, or liquidity as they say. That’s not unique to the US. China is dealing with the same thing, as is Europe.
The bigger picture is also that the economy is awash with debt. That is also not unique to the US. China’s debt, on a whole economy basis, is soaring and actually they are facing a huge bad debt problem because their economy isn’t as good at allocating credit to productive and creditworthy uses
as the US economy is.
And, at least in the banking sector, the cash is outpacing the debt - hence RRP.
From an individual person’s perspective, debt is often bad. To an economy, debt is a key driver of growth. It moves money from unproductive uses - piling up in vaults doing nothing - to productive uses - starting companies, growing businesses, building wealth. Without debt, there are no loans and no interest. Sometimes it goes bad (2008, etc) but between those episodes, it is good.
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