Central Bank Omnipotence – Live with Jeff Snider

Published on
September 2nd, 2020
Duration
62 minutes

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Central Bank Omnipotence – Live with Jeff Snider

Live ·
Featuring Jeffrey Snider

Published on: September 2nd, 2020 • Duration: 62 minutes

Central banks are powerful entities -- of this, there is no doubt. As of late, however, they have gone from powerful to almost omnipotent. Markets hang on their every word, and even minuscule changes in rhetoric, implied or explicit, have monumental impacts on how participants position themselves. Since March, the “Fed's got your back” mantra has rocketed markets to new all-time highs. Now, there are two questions to be had. First, what role will central banks play moving forward as they go above and beyond their mandates? Second, will their macro framework and economic toolkit be enough to lift growth and change the path of inflation? In an attempt to understand how this all plays out, we’ve invited Jeff Snider, head of global research at Alhambra Investment Partners, to sit down with Ed Harrison in this segment of Real Vision Live.

Comments

Transcript

  • EM
    Eivind M.
    7 September 2020 @ 10:37
    I bought a year of plus membership solely to watch this interview. Worth it!
    • TO
      Truls O.
      9 September 2020 @ 19:11
      yeah, it was great!
    • JA
      Jordan A.
      10 September 2020 @ 18:25
      Same but it was for his previous interview.
  • BA
    Bruce A.
    7 September 2020 @ 01:41
    This conversation on QE 'as simply an asset swap of treasuries for CB reserves' misses the following critical point: QE that involves the purchase of USTs that were already in the system (not from a new US treasury auction), means the bank account of the person/party that sold the UST is credited, not with reserves but with spendable cash! JP Morgan or another bank authorised to act on behalf of the Fed to purchase in the secondary market, will have it's FED reserves credited and the Fed's Balance sheet will rise by same amount, but REAL MONEY THAT CAN BE SPENT was deposited in the sellers account. Why do all these RV discussions ignore the effect of increased 'cash in accounts' when USTs from the secondary market are sold to the FED? The existing pool of treasuries is by far the largest source of treasuries, although it is true that recently the US Treasury has been doing everything it can to create heaps more!
    • BA
      Bruce A.
      7 September 2020 @ 01:56
      Addendum: One practical effect of the swap of a UST from the secondary market for new cash in the sellers hand is that a higher yielding secure asset (UST) was traded for a very low yielding secure asset (cash). This new cash can end up becoming a 'hot potato' in the asset markets, looking for a higher yield place to rest (corp bond, mortgage backed security, equity etc). Although the removal of USTs does reduce the amount of collateral for use by private banks to raise funds in the repo market, the repo-rate spike in Sept 2019 and Mar 2020 was because of a glut of USTs combined with Basel III lending regulations AND a desire to raise/ hold cash. The problems in the financial plumbing from 2019/2020 were not because of QE and not because of a shortage of high quality collateral.
    • BA
      Bruce A.
      7 September 2020 @ 02:26
      Addendum 2 (last one I promise): Even if UST's were only purchased at new Treasury auctions or from the member bank existing asset pool (and were not purchased from private investors or pension funds etc): these purchases have allowed the US govt to issue ever larger amounts of USTs without driving up interest rates. To my mind this is all adding to market liquidity in a world awash with govt debt, not detracting from liquidity. Blame Basel III regulations and lack of lending/borrowing appetite for any short fall in private bank money creation.
    • JO
      Jack O.
      10 September 2020 @ 09:22
      Even with the extra reserves they are still capital/balance sheet constrained. Also, I think you are missing the fact the M2 is simply a poor, overly narrow measure of modern money supply. When the Fed buys a UST from a non-bank (through a commercial bank), it is true that they are given useable cash in exchange and that this increases M2. What is missing here is that the entities engaging with the Fed are almost always large institutions like Insurance companies and pension funds, not retail customers. For these non-banks, the UST's were already capable of serving as money and could be used as collateral in repo and other bilateral credit transactions to fund their BS . So while having cash reserves on their BS now instead of the UST's may make it look like the money supply has increased, it's really just because M2 is a poor measure of money.
  • BA
    Bruce A.
    9 September 2020 @ 08:03
    BNP Paribas analysis from July 2015 showed that during the US QE from 2008-2014, US banks act primarily as intermediaries for non-bank sales of Treasuries to the FED. This resulted in a large increase in bank customer deposit balances and thus a large increase in money supply (not just an increase in bank reserves at the FED). https://economic-research.bnpparibas.com/html/en-US/QE-bank-balance-sheets-American-experience-7/23/2015,25852
  • BA
    Bruce A.
    9 September 2020 @ 08:03
    BNP Paribas analysis from July 2015 showed that during the US QE from 2008-2014, US banks act primarily as intermediaries for non-bank sales of Treasuries to the FED. This resulted in a large increase in bank customer deposit balances and thus a large increase in money supply (not just an increase in bank reserves at the FED). https://economic-research.bnpparibas.com/html/en-US/QE-bank-balance-sheets-American-experience-7/23/2015,25852
  • BA
    Bruce A.
    7 September 2020 @ 02:20
    Jeff said: "I mean, after all, bank reserves are included in the monetary base. It's included right into M1 and M0, and so it looks like it should be money." However, Wikipedia and Investopedia say that while bank reserves are part of the monetary base (MB), they are not part of M1: Monetary Base (MB): is referred to as the monetary base or total currency. This is the base from which other forms of money (like checking deposits, listed below) are created and is traditionally the most liquid measure of the money supply. M1: Bank reserves are not included in M1. M2: Represents M1 and "close substitutes" for M1. https://en.wikipedia.org/wiki/Money_supply
  • JS
    Jon S.
    6 September 2020 @ 17:32
    God I am learning more about central banks and in attempts to learn in the last 4 years... amazing interview...
  • JS
    Jon S.
    6 September 2020 @ 17:09
    Minute 39:00 is the key to everything!
  • JH
    Joel H.
    6 September 2020 @ 12:52
    Excellent! Thank you guys
  • AW
    Angela W.
    4 September 2020 @ 22:10
    Jeff is clear stating that bank reserves are not money, and can not be spent. However can they be used as collateral for loans or not? Roger Hirst said on yesterday’s RVDB - that these banks loaning to the Shadow Banking System who are using leverage to push up asset prices. Is this what’s happening or not? Can anyone clarify please?
    • RC
      Romesh C.
      6 September 2020 @ 09:20
      Hi Angela, I don't think its correct to think about them as collateral for loans. Collateral against loans is theoretically something you would receive from the same counterparty to the loan (and sits on the liability side of the commercial bank's balance sheet rather than the asset side). The only benefit to the commercial bank from these reserves is that it helps their liquidity ratios (e.g. LCR), but that's pretty moot as the bonds they have sold to the central bank were counting towards LCR as well. So really these reserves don't serve much purpose, which is what the presenters are saying.
  • SW
    Scott W.
    5 September 2020 @ 00:32
    Why do the banks sell treasuries for reserves parked at the fed that are of little to no use.
    • RC
      Romesh C.
      6 September 2020 @ 08:52
      For a day 1 profit on sale presumably,
  • DC
    Dave C.
    6 September 2020 @ 01:53
    No audio download
  • DS
    David S.
    5 September 2020 @ 19:18
    Mr. Roger Hirst, 9/3/2020 Daily Briefing: Well, those commercial banks can do a number of things. They could lend, but if they don't want to lend because they're too scared, and we don't want to borrow because we can't, we're maxed out, or there's nothing to borrow for, what are they going to do with it? Well, they'll probably lend it to their mates in the shadow banking system, which is the high frequency traders. And they'll start using it as collateral themselves, and leverage into the equity market." Dr. Lacy Hunt in his interview rightfully states that it is the commercial banks responsibly to make prudent loans. The problem in a depression is there are very few prudent loans a commercial bank can make. Commercial bank loans to the shadow banking system is one way the increase in the bank reserves gets into the market. I am sure there are others. The result is P/E inflation as we have been discussing for a long time. Pension Funds and regular investors should take advantage of the market now by hedging or reducing exposure. DLS
  • mw
    michael w.
    4 September 2020 @ 05:25
    Well don't low rates encourage borrowing? Which creates jobs and industry. Now if people cant get anywhere with those jobs and industry, that's where the problem lies. The "growth" doesn't go to the people, but funneled to the elite. The problem lies with congress and how our laws are structured.
    • ar
      andrew r.
      4 September 2020 @ 16:39
      Not actually, Michael. Artificially low rates deceive entrepreneurs into making unsustainable investments (typically longer-term) that end up having to be liquidated. It ultimately destroys capital, despite a short-term boom.
    • PW
      Paul W.
      5 September 2020 @ 16:46
      Low rates discourage lending. Low interest rates compress banks' net interest margins. This is a simplification, but if a bank's net interest margin is only 1%, then 1% of losses wipe out profits. Higher NIMs mean banks can absorb higher losses and still make profits. Lower interest rates cause banks to tighten lending standards. This means that larger more creditworthy businesses can borrow cheaply, and smaller more risky businesses cannot.
  • AT
    Aleem T.
    4 September 2020 @ 07:25
    Excellent Interview.. Idea for RV - Try get Brent Johnson to interview Dr Lacy Hunt and really drill down into the mechanics of why MMT/MP3 ( i.e. Helicopter Money/Grants/UBI/Money given to households and businesses by the Government and financed by the Fed buying Treasuries from commercial banks) is not inflationary and what this means for risk assets.
    • MB
      Matthew B.
      4 September 2020 @ 22:28
      MMT doesn't simply mean printing unlimited amounts of money and hang the consequences. Rather, MMT starts with a detailed description of how the money system actually works, and shows that it is almost the opposite of what most of us think. Ask yourself this: if the state can 'print money', why does it need to borrow? And why does it need to levy taxes? The answer is complex and messy, partly because today's monetary system is what is left of a system put in place at the end of WW2 which was then, but is no longer, based on gold. If you want to learn more check out my blog. Link is below. https://themoneyprogramme.blogspot.com/
  • SL
    Stuart L.
    4 September 2020 @ 22:23
    A few comments. One, I was surprised that Jeff was not knowledgeable of the work of Lacy Hunt. I wonder why, given Lacy Hunt's reputation. Two, a great book on the workings of the financial system is "Where Does Money Come From", published by the New Economics Foundation in the UK. It was written by 4 authors, one of which is Richard Werner. It is in paperback and is about 175 pages. It is a guide to the UK monetary and financial system, which basically is the same as the US system. The book is available on Amazon. I highly recommend it. My final comment relates to why economic growth will be a challenge going forward. Our monetary and financial system is essentially based upon money being loaned into existence. When bank makes a loan to a customer, it deposits the loan proceeds into the customer's bank account. The customer is contractually obligated to repay the principal of the loan plus interest. Where does the interest come from? I suspect it must be created somewhere else in the banking system. I conclude the bank loans and the real economy (i.e. GPD) must continually grow in order for debt and interest to be repaid. This is not possible forever in a finite world with limited "inexpensive/affordable" resources. I believe we are approaching the finite limits of our planet. Our financial system and real economy cannot function without infinite growth as without continuous growth, the world economy and financial system will be unable to repay principal and interest on the massive debt in the system.
  • MS
    Michael S.
    4 September 2020 @ 18:58
    If commercial banks having reserves enable them to lend more, why wouldn't they? I get they wouldn't lend to main street during a pandemic, but why not their buddies at hedge funds or the like?
    • MB
      Matthew B.
      4 September 2020 @ 22:10
      Having reserves doesn't enable banks to lend more. Banks don't lend out their reserves. Reserves are a means of settling transactions between banks. This is a tremendously confusing topic, not least because almost no one understands it but everyone seems to have an (ill-informed) opinion about it. I have tried to explain it on my blog. Link below. https://themoneyprogramme.blogspot.com/
  • DS
    David S.
    4 September 2020 @ 08:58
    Mr. Snider is always on top of his game. I am comfortable that he is correct on topic. There still seems to be some missing pieces from the Fed’s linkage to major advances in the stock market. If it were purely jawboning, are all the major market makers in on the conspiracy? I do not think so. Many of them would do anything to take down any and all competitors. I can wait for the answer. I am old so let's not take too long. DLS
    • ar
      andrew r.
      4 September 2020 @ 16:37
      David, I wonder if the stock market/Fed balance sheet correlation is just the common knowledge game, a la Ben Hunt?
    • DS
      David S.
      4 September 2020 @ 19:16
      andrew r. - It is an anomaly. Liquidity hits the markets somehow when the Fed says it will increase the money supply. I do not think it is inflation expectations as the Fed is impudent at that. No one can predict the future, but the Fed certainly misses the mark often. I think it is linked to the major trading banks, the Repo market, and others - they are the ones on the front lines. It may just be jawboning - don’t fight the Fed like the price of a house cannot go down. Someday we will know. An insider at a big trading bank will write a book. DLS
  • MD
    Matt D.
    4 September 2020 @ 17:42
    Great interview Ed and Jeff. Thanks! Perhaps an unusual question but how will a crypto currency impact the Eurodollar system. I understand that it is a complex system (Eurodollar) v a "single" central bank (well central banks) - yet a central bank can bring in a crypto - the Eurodollar system will have to then adopt - and then take "control" back?
    • MS
      Michael S.
      4 September 2020 @ 18:56
      Some background for those unfamiliar: Eurodollars, in the sense of a crypto currency token dollar "outside" of the USA are labeled stablecoins. They are exploding in terms of issuance in 2020. There are regulated and unregulated stablecoins for a variety of currencies and other assets like gold.
  • ar
    andrew r.
    4 September 2020 @ 16:40
    Another great Snider episode. Steve and Brent got a nice confirmation of their ideas on QE from Jeff as well ...
  • vt
    vadim t.
    4 September 2020 @ 10:37
    Amazing how nobody doesn't even try to ask any tough question to Jeffrey or confront him in any way outside of "yeah, what do you think about..." Every interview is the same interview, same monolog.
    • mw
      michael w.
      4 September 2020 @ 15:39
      Jeff and Emil take audience questions on their Eurodollar University show I believe.
    • ar
      andrew r.
      4 September 2020 @ 16:36
      Tough questions, such as ... ?
  • NK
    Nancy K.
    4 September 2020 @ 15:32
    The audio file is ) bytes !
    • MU
      Michael U.
      4 September 2020 @ 15:54
      Same problem hete
  • TD
    Tej D.
    4 September 2020 @ 05:13
    Jeff - You should write the book on the monetary system. I would definitely be first in line to buy
  • TS
    Tim S.
    4 September 2020 @ 03:31
    Love Jeff, so direct and wicked smaht.
  • DY
    Damian Y.
    4 September 2020 @ 02:26
    Great interview, I'm a big fan of Jeff and his work, he's one of the few people that understands monetary policy. Thanks RV.
  • AT
    ALAN T.
    4 September 2020 @ 01:56
    Excellent interview. I follow all of Jeff's work; opened up a new financial dimension for me.