Interest rates to 0%, $700 billion in QE, and reserve requirements to 0%

[o_e_l_e_o]

Fiat is collapsing.

https://www.cnbc.com/2020/03/15/federal-reserve-cuts-rates-to-zero-and-launches-massive-700-billion-quantitative-easing-program.html

The first two parts of the topic subject are entirely expected. The Fed have cut interest rates for the second time in a month, now down to 0%, and they've launched another $700 billion in quantitative easing, despite the Fed's balance sheet still being massively over inflated from all the previously rounds of QE. What was perhaps not as expected was how soon they have done this. This pandemic is only just getting started, there is a long way things can fall yet, and the Fed are now rapidly running out of options.

Far more concerning, however, is the news that they have dropped banks' reserve requirements from 10% to 0%.

The Board has reduced reserve requirement ratios to zero percent effective on March 26, the beginning of the next reserve maintenance period. This action eliminates reserve requirements for thousands of depository institutions and will help to support lending to households and businesses.

When banks lend money to customers, they create new money out of nothing by creating matching credits and debits on their balance sheet. The reserve requirement limits how much they can do this, because they have to have a certain portion of this money, currently 10%, in their reserves. This new action removes that requirement altogether, giving banks unlimited rein to create as much new money as they like, at no cost to themselves.

Hyperinflation is coming. Fiat is collapsing.

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[Leonardo7]

Hello o_e_l_e_o, can you talk more about the implication of this article as to what extent it will have an effect on the economy? I was thinking institutions can now borrow from the reserved bank and paying 0% interest rate, which I expect the same institutions will help keep their lending rates to consumers at its lowest to cushion the effect of the devasting pandemic on the economy. From what you wrote, it seems they are now allowed to lend out money to consumers without regard to their savings in reserve. I will want you to explain this more with a simplified logic, thanks.

[Broly46]

They are giving bank zero rate but not passing down the benefit of zero rate to the end users, the people who take loan to betting on the stock market would need to pay a handsome interest on the amount they lend, it’s deceiving article but giving people false hope of free money, I’m seeing more crack head who go broke.

[o_e_l_e_o]

I was thinking institutions can now borrow from the reserved bank and paying 0% interest rate which I expect the same institutions will help keep their lending rates to consumers at its lowest

Yes. Commercial banks can now borrow from central banks at no interest. Consumers usually see the reduced interest rate reflected in their savings almost immediately, with banks reducing the amount of interest they pay their customers almost immediately, but it takes several months before the banks drop their loan repayment rates, mortgage rates, etc. to reflect this. Anything to squeeze more money from their customers.

From what you wrote, it seems they are now allowed to lend out money to consumers without regard to their savings in reserve. I will want you to explain this more with a simplified logic.

So when a bank gives out a loan, new money is created out of thin air. What a bank does is credit your account with $1,000 (for example), whilst also creating a debit you owe them for the same value of $1,000. The bottom line of the bank's balance sheet doesn't change. $1,000 out, $1,000 owed, bottom line remains 0, but $1,000 of new money has just entered circulation. This is where the majority of new money comes from - banks creating it out of nothing when people take out loans. This is how modern banking works, and has done for decades.

Now, banks also practice a system known as "fractional reserve". As the name suggests, banks must have a fraction of the value of their liabilities in reserve at any one time. This has been set at 10% since 1992, when it was lowered from 12%. This means that if a bank has $1 billion in reserves (for example), the most they could loan out would be $10 billion. However, from March 26th, the reserve requirement is 0%. This means banks can loan out as much money as they like. Bearing in mind what we've said above, in that every time a bank gives out a loan like this new money is created from nothing, this essentially is giving the banks free rein to print money.

[johnyj]

Market still crashes hard, everyone still want FED's cheap fiat, since average people simply can not get even a cent of those newly created money.

Those money will first arrive at banks, and banks will decide who can get those money at what cost, still no difference as before. Unless there is a clear government policy in deciding what kind of business will get what kind of help, those newly created money just enter the banks pocket without doing anything else

[joniboini]

They've turned on the pump machine now. I just hope hyperinflation won't 'kill' too many people and a lot of countries don't turn into another Venezuela case.

This is why I hate fiat. When you can create money out of nothing, your current saving worth less and less.

[Searing]

They've turned on the pump machine now. I just hope hyperinflation won't 'kill' too many people and a lot of countries don't turn into another Venezuela case.

This is why I hate fiat. When you can create money out of nothing, your current saving worth less and less.

If as the OP says in this thread above, if this, does NOT bring back BTC/Crypto as a 'store of value' when the less developed countries of the world lose

their sh*t on this even more so than the USA. Like in the past (2013) countries like Crypus banning withdrawals from banks and India limiting amounts.

Authoritarian countries' and the resulting heavy-handed leadership of such, are gonna lose their sh*t indeed! Mismanagement that will make Trump look like a leader!

er...that may be a step too far...but bad indeed, IMHO.

Let those countries start printing money and such and dealing with this. Again, this is where BTC/Crypto 'should' thrive as a useful tool for the

poor and disenfranchised that may need BTC/Crypto to even get basic needs (via their fiat/xfer to BTC/crypto asap) just as a tool to survive this mess worldwide.

BTC/Crypto historically could be shown, by its simple existence to have saved a lot of lives and with its use help a lot of people who without this option would (may have been)

completely screwed!

anyway, IMHO, not that it is worth much (at one time I was a fanboy for Butterfly Labs, so what do I know?)

Brad

[avikz]

Far more concerning, however, is the news that they have dropped banks' reserve requirements from 10% to 0%.

This is the main concern among all other news. QE happens from time to time in all countries to cope up with the inflation. So QE is not a concerning news - just the amount is higher this time!

Making the reserve requirement zero is actually a bad news. These reserve requirement is put in place to ensure the security of the common people's money. This limit is lifted means, banks can now lend 100% of their deposits and if a big percentage of their loan becomes NPA, you and I will be royally fucked! 

The interest rate regime is also showing a huge downturn. It seems like US is soon going to experience a negative interest rate like many countries in Europe to support the economy and Banks at large!

[o_e_l_e_o]

So QE is not a concerning news - just the amount is higher this time!

Sure, QE happens quite frequently (far more frequently than it should), but they haven't even come close to paying off all the QE from 12 years ago. Their balance sheet is still running at its highest ever levels, and they are going to pump it by another $700 billion. QE only works if you can reverse it and take the money back out the system during times of non-crisis, which they haven't done. Performing QE upon QE upon QE can only last so long before the whole system collapses.

This limit is lifted means, banks can now lend 100% of their deposits and if a big percentage of their loan becomes NPA, you and I will be royally fucked!

It's actually worse than this, as I explained above. Although yes, banks can now lend out 100% of their deposits, it also removes any limit on how much credit they can extend to their customers. They can lend out 100% of their deposits and they can lend out any amount more that they like on top of that.

[Leonardo7]

Now, banks also practice a system known as "fractional reserve". As the name suggests, banks must have a fraction of the value of their liabilities in reserve at any one time. This has been set at 10% since 1992, when it was lowered from 12%.

Thanks for simplifying this, this will spell doom for our economy and could lead to hyperinflation if this is allowed to continue for long. No wonder someone called the Federal Reserve banking system a fraud, that if a common on the street attempts this he will be jailed for 21years.

[o_e_l_e_o]

then what options do the Fed have is the big question for me.

More quantitative easing and negative interest rates, meaning that not only will your fiat holdings be rapidly devalued, but you'll also have to pay the bank a percentage of any money they are holding on your behalf. The Fed also announced yesterday yet more QE in the form of $500 billion more added to overnight repos, and that they will start buying stocks in addition to debt and bonds.

and could lead to hyperinflation if this is allowed to continue for long.

It's never really stopped since 2008. The Fed were only able to reverse a tiny proportion of their last QE package before announcing this one and ramping the money printer back up again. If they continue printing a trillion dollars out of thin air whenever they fancy it, hyperinflation is the inevitable outcome.

[o_e_l_e_o]

As if that wasn't bad enough...

https://www.bloomberg.com/news/articles/2020-03-23/fed-signals-unlimited-qe-adds-aid-for-companies-municipalities

In a surprise announcement Monday before markets opened in New York, the U.S. central bank said it will buy unlimited amounts of Treasury bonds and mortgage-backed securities to keep borrowing costs at rock-bottom levels

Unlimited amounts. Apparently a further $700 billion in quantitative easing wasn't enough, and now the Fed have committed to printing unlimited amounts of money.

“This is not a slush-fund,” U.S. Treasury Secretary Steven Mnuchin told Fox Business earlier on Monday. “It’s a mechanism we can use working with the Federal Reserve to provide another $4 trillion of liquidity into the market. That’s on top of the Fed’s balance sheet. This is a massive liquidity program.”

Another $4 trillion straight off the bat, on top of their already over expanded $4.5 trillion balance sheet. After the 2008 crash, the Fed added $3.5 trillion to their balance sheet over 8 years. Today, they've pledged to add more than that in a single action, with no limit on how much more they can add. Remember this is on top of essentially letting the banks print unlimited money - they've now given themselves the same power too.

These are absolutely ridiculous times we are moving in to, and the next few months are only going to get worse. And even with QE infinity, the markets still plummet.

[abhiseshakana]

America is playing an economist at war strategy. This means whether or not Trump or his supporters support the momentum of the coronavirus to maintain its hegemony and develop its strategic agenda.

Although the nature is different from the 2008 crisis, the ending will be the same or even more fantastic because the QE value is unlimited. We really have to get ready with this, America can print as much money as possible, which means the dollar reset value has already begun.

Economic shocks due to Covid-19 are more real than expected, the Fed cut interest rates (Fed Funds Rate) for the second time in two weeks. On March 16, 2020, the Fed cut its benchmark interest rate by 0 percent. The Fed also released a quantitative easing program. This is what triggers the US dollar (greenback) increasingly hunted. Reflecting from 2008, the As economy recovered after only seven years, because the bailout strategy was not on target.

Although the stimulus has been launched, investors continue to pay close attention to the effectiveness of policies in reducing the impact of economic damage due to Covid-19. Policy options, including the discourse on the introduction of a regional quarantine (lockdown), can become a wild ball in the financial markets. The social restrictions that have been implemented have the consequence of reduced community activities outside the home. One of the impacts is the threat of a decline in retail performance. The Fed's decision to reduce its benchmark interest rate will encourage capital inflow to other countries.

[coolbaughandrew]

Fiat money is in agony now. Fiduciary money is money without intrinsic value, it is a currency backed with our trust to the government only. So if we see a lot of people saying "I hate fiat" an so on, it means that fiat value goes to zero.

[o_e_l_e_o]

Although the nature is different from the 2008 crisis, the ending will be the same or even more fantastic because the QE value is unlimited.

This is going to be much worse than 2008, in my opinion. The shutdown has barely even begun. Despite Trump claiming that the country will "reopen" by Easter, all the medical and scientific experts in both the US and many other less severely affected countries worldwide are suggesting a minimum of 3 months, potentially even up to 6 months. If Trump reopens everything in two weeks, tens of thousands more will die, not just from coronavirus but from hospitals and healthcare being completely and utterly overrun, and many more will be facing bankruptcy from medical bills. That won't exactly jump start the economy in the way he seems to think it will.

Although the stimulus has been launched, investors continue to pay close attention to the effectiveness of policies in reducing the impact of economic damage due to Covid-19.

I think the Fed have gone too big too fast here. As I said above, we are looking at 3-6 months’ worth of lockdown. Within the first few weeks they cut interest rates twice to zero percent, committed to unlimited QE, and are giving out up to $1,200 in helicopter money to citizens. Where do they go over the next 3 months? Negative interest rates is pretty much all they have left.

[abhiseshakana]

This is going to be much worse than 2008, in my opinion. The shutdown has barely even begun. Despite Trump claiming that the country will "reopen" by Easter, all the medical and scientific experts in both the US and many other less severely affected countries worldwide are suggesting a minimum of 3 months, potentially even up to 6 months. If Trump reopens everything in two weeks, tens of thousands more will die, not just from coronavirus but from hospitals and healthcare being completely and utterly overrun, and many more will be facing bankruptcy from medical bills. That won't exactly jump start the economy in the way he seems to think it will.

I forgot to discuss that Trump is an economic man, he might think America will not die because of Corona but America will die if the economy does not spin. Trump is a free market adherent, that America is great because it adheres to a free market, which is synonymous with fierce competition.

So he saw covid-19 as economics. That this epidemic is natural selection, which survives means having high competitiveness while those who die will not burden the American economy because the majority who will die are poor people and homeless people who do not have health insurance and do not have access to health.

The tremendous stimulus package put forward by Trump was also largely given to airlines or hospitality. So that they continue to operate, and there are no layoffs. Trump's idea is a very capitalist proposal - and so consistent with free-market ideology.

One economic observer responded to the phenomenon 2 weeks ago where the Dow Jones stock index slid drastically due to the Berkshire Hathaway releasing its shares in various investments and saving its wealth in the form of fiat money. There are indications that the capitalists have received alerts that resetting will begin so that the capitalists have resigned and saved their assets as in the case of 1929.

I think the Fed have gone too big too fast here. As I said above, we are looking at 3-6 months’ worth of lockdown. Within the first few weeks they cut interest rates twice to zero percent, committed to unlimited QE, and are giving out up to $1,200 in helicopter money to citizens. Where do they go over the next 3 months? Negative interest rates is pretty much all they have left.

The existence of a corona case for the next 4 months, with the possibility of an unlimited QE policy, America will start printing money again by making new bonds, and the capitalists will buy the debt so that the balance between money and the underlying is 1 in 1 Negative interest is expected to be a stimulus to drive the economy, but if resetting occurs the impact will be enormous. and I consider the end of the trade war to be the beginning of a military war. If the economic boom is won by America, and this unlimited print of money is not only to overcome the corona impact but also to finance other American wars, the impact will be terrible.