Per this analysis, we will hit $1.4 trillion next year at current rates. That makes it number 2 behind SS at a projected $1.7 trillion. To stabilize, we need 5y yields less than or equal to 3.1%.

This is the real hockey stick chart. The slope from 1990 until 2020 looks really good right now.

Easy.
Stop paying interest on Bank reserves. Banks will shift to buying treasuries to hold reserves, this drastically increasing demand and driving down rates.

Without fed intervention or rate manipulation

I firmly believe this is the real reason behind the push for lower rates. We bulked up in massive debt loads with the low rates and replacing that debt at the new rates is astronomically more expensive. Unfortunately I think bond buyers have caught on and lower short term rates won't shrink the longer term debt as the investor spread will simply eat any saving from the lower base rate.

How weird. That extreme climb happened the exact time that Biden was in office.

So weird

I have seen this proposed a couple of times on here. Do you know why the fed began paying interest on reserves? Genuinely asking. Quick google search shows it was to help them have control over rates, but I'm not sure if that is the whole story. Would think it also encourages banks somewhat to be more risk averse (thus safer), making money on and retaining larger reserves for their balance sheet.

I work at a bank, and we do take into account what we can make at the reserve on our money when it comes to doing deals. Extreme example just to show what I mean is if someone wants us to loan them money at 4.5% with a deal that has risk, we would just say no we'd rather park the money at the fed and make 4.4% essentially risk free.

Not sure what the unintended consequences would be of stopping to pay on the reserves. Yes, banks could buy treasuries with them, which would tie up liquidity, which can be bad (see SVB). If treasury rates do go down, then banks could buy longer maturities to try to get more yield, creating more risk.

Or they could try to lend out more money to make up for the loss of income - maybe this leads to riskier lending profiles.

I'm really not sure. I just know that whenever the government starts changing the rules, it seems like unintended (bad) consequences follow.

annie88 said:

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How weird. That extreme climb happened the exact time that Biden was in office.

So weird

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The blame is irrelevant now. This is where we are so we have to deal with it. When Reagan took over from Carter, he fixed it.

Supposedly some economists presented a paper at Jackson Hole saying our national debt could reach 250% of GDP without putting upward pressure on interest rates.

This is when you know we are getting closer to a bubble popping when supposedly smart people say stuff in public that is absolutely stupid and yet it gets rave reviews from others.

Quote:

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(Bloomberg) -- US government debt could reach 250% of gross domestic product without putting upward pressure on interest rates, according to a paper presented at the Federal Reserve's Jackson Hole conference.

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https://finance.yahoo.com/news/us-debt-gdp-250-won-150000298.html

MemphisAg1 said:

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Supposedly some economists presented a paper at Jackson Hole saying our national debt could reach 250% of GDP without putting upward pressure on interest rates.

This is when you know we are getting closer to a bubble popping when supposedly smart people say stuff in public that is absolutely stupid and yet it gets rave reviews from others.

Quote:

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(Bloomberg) -- US government debt could reach 250% of gross domestic product without putting upward pressure on interest rates, according to a paper presented at the Federal Reserve's Jackson Hole conference.

---

https://finance.yahoo.com/news/us-debt-gdp-250-won-150000298.html

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Agreed. They are buying time and kicking the can down the road.

Anybody with even a little understanding of economics knows that this can not continue or support 250% of Debt to GDP.

Quote:

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I'm really not sure. I just know that whenever the government starts changing the rules, it seems like unintended (bad) consequences follow.

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I'd say you're being kind.

Honestly, I'm going to LOVE this thread when I finish Sunday chores and very much look forward to some good posts. It's an issue that has to be addressed. To a degree, Trump and Biden got caught in the Obama excessive low rate zone, which lasted way too long, but it was just a matter of time.

I don't know all of the details, I'll be upfront about that.

They didn't pay much, if any at all, until the banking collapse in 2008. I think more than anything we're looking at the unintended consequences of one jerk reaction to fix a problem at the time that has since been made easy worse by those rates increasing and the amount of reserves held increasing dramatically during the Biden administration.

Edit... That's my understanding at least.

10 Years old article, but covers most of it.
https://spontaneousfinance.com/2015/04/05/the-real-reason-the-federal-reserve-started-paying-interest-on-reserves-guest-post-by-justin-merrill/

They approved the payment on reserve in 2006, but it wasn't to be implemented until 2011. The financial collapse sped the timeline up.

Kenneth_2003 said:

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Easy.
Stop paying interest on Bank reserves. Banks will shift to buying treasuries to hold reserves, this drastically increasing demand and driving down rates.

Without fed intervention or rate manipulation

---

They can't do that as it opens banks to market risk when they already have overexposure to unrealized losses with treasuries they hold from prior to 2022.

This FED created bank liquidity is what has kept the pump alive and kicked the can. This all started with BTFP in 2023.

Also, even if they did decide to end it, banks would be forced to create loans again. And there's no demand for loans. The economy would quickly crumble with all the warts bubbling to the surface.

Heineken-Ashi said:

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Kenneth_2003 said:

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Easy.
Stop paying interest on Bank reserves. Banks will shift to buying treasuries to hold reserves, this drastically increasing demand and driving down rates.

Without fed intervention or rate manipulation

---

They can't do that as it opens banks to market risk when they already have overexposure to unrealized losses with treasuries they hold from prior to 2022.

This FED created bank liquidity is what has kept the pump alive and kicked the can. This all started with BTFP in 2023.

Also, even if they did decide to end it, banks would be forced to create loans again. And there's no demand for loans. The economy would quickly crumble with all the warts bubbling to the surface.

---

If they are getting 4 now and start getting 0, then anything better than 0 is a win, especially if it's low risk, i.e. us treasuries. They would move money there, driving down yields. They don't need to loan it.

Thanks for sharing. Interesting article for sure.

Sounds like the Fed was worried about their liquidity, and instead of selling more treasuries, they used interest on reserves as a way for banks to park their cash and effectively loan it to the Fed, to then potentially send out elsewhere.

I started in the banking business when I graduated from A&M in January of 2009 - so I honestly have never known another system.

One thing is for sure - if they stopped paying the interest on the reserves, it would be another shock to the banks who are still trying to get their profit margins back in line with where they were prior to the rate hikes. Lots of banks still have funds locked up in bonds at low rates, and cheap fixed rate loans that have finally started churning off the books.

Would be interesting to see how banks would look at deposits if this were enacted. It is easy to pay higher rates on deposits if you can turn around and send it to the Fed and earn 4.4%. If that # drops to 0%, then I would guess any bank that doesn't need deposits would drop their rates they pay out significantly. We have already seen loan rates get pretty aggressive this year on deals we are competing on, as there is a lot of money chasing the same deals (I'm primarily CRE).

Guess you could theoretically see lower loan rates on this if your excess reserves are making 0%.

Will be an interesting topic to bring up at the office tomorrow.

Logos Stick said:

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Heineken-Ashi said:

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Kenneth_2003 said:

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Easy.
Stop paying interest on Bank reserves. Banks will shift to buying treasuries to hold reserves, this drastically increasing demand and driving down rates.

Without fed intervention or rate manipulation

---

They can't do that as it opens banks to market risk when they already have overexposure to unrealized losses with treasuries they hold from prior to 2022.

This FED created bank liquidity is what has kept the pump alive and kicked the can. This all started with BTFP in 2023.

Also, even if they did decide to end it, banks would be forced to create loans again. And there's no demand for loans. The economy would quickly crumble with all the warts bubbling to the surface.

---

If they are getting 4 now and start getting 0, then anything better than 0 is a win, especially if it's low risk, i.e. us treasuries. They would move money there, driving down yields. They don't need to loan it.

---

Some would move there. But treasuries are a huge jump in risk over FED free money, which is truly risk free. They would need to diversify to spread risk, and there's no borrowers right now for banks to lend to. And when the free 4+% stops coming in on HEAVY balances, the plumbing in the system starts to show stress.

Logos Stick said:

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annie88 said:

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How weird. That extreme climb happened the exact time that Biden was in office.

So weird

---

The blame is irrelevant now. This is where we are so we have to deal with it. When Reagan took over from Carter, he fixed it.

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Right.
We are still effed.

Heineken-Ashi said:

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Logos Stick said:

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Heineken-Ashi said:

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Kenneth_2003 said:

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Easy.
Stop paying interest on Bank reserves. Banks will shift to buying treasuries to hold reserves, this drastically increasing demand and driving down rates.

Without fed intervention or rate manipulation

---

They can't do that as it opens banks to market risk when they already have overexposure to unrealized losses with treasuries they hold from prior to 2022.

This FED created bank liquidity is what has kept the pump alive and kicked the can. This all started with BTFP in 2023.

Also, even if they did decide to end it, banks would be forced to create loans again. And there's no demand for loans. The economy would quickly crumble with all the warts bubbling to the surface.

---

If they are getting 4 now and start getting 0, then anything better than 0 is a win, especially if it's low risk, i.e. us treasuries. They would move money there, driving down yields. They don't need to loan it.

---

Some would move there. But treasuries are a huge jump in risk over FED free money, which is truly risk free. They would need to diversify to spread risk, and there's no borrowers right now for banks to lend to. And when the free 4+% stops coming in on HEAVY balances, the plumbing in the system starts to show stress.

---

I'm not discounting the important role of banks to the economy, but why is it the responsibility of the Fed, and by default the US Government, to buy them and keep them almost and alive? Additionally why is the Fed therefore pumping interest dollars to foreign banks similarly holding deposits with them?

Further if they are forced into treasuries and therefore driving down yield, that would then have a domino effect on interest rates as a whole.

You're implying borrowers aren't there because rates are too high. Well if banks are searching for other places to park money, then I'm increased supply of money needing to be loaned would drive rates down.

Logos Stick said:

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annie88 said:

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How weird. That extreme climb happened the exact time that Biden was in office.

So weird

---

The blame is irrelevant now. This is where we are so we have to deal with it. When Reagan took over from Carter, he fixed it.

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I wouldn't say it's irrelevant. That guy was a piece of **** President, or whoever was running the country and Trump has spent nine months cleaning up most of his bull**** but OK fine, let's fix it.

Kenneth_2003 said:

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Heineken-Ashi said:

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Logos Stick said:

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Heineken-Ashi said:

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Kenneth_2003 said:

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Easy.
Stop paying interest on Bank reserves. Banks will shift to buying treasuries to hold reserves, this drastically increasing demand and driving down rates.

Without fed intervention or rate manipulation

---

They can't do that as it opens banks to market risk when they already have overexposure to unrealized losses with treasuries they hold from prior to 2022.

This FED created bank liquidity is what has kept the pump alive and kicked the can. This all started with BTFP in 2023.

Also, even if they did decide to end it, banks would be forced to create loans again. And there's no demand for loans. The economy would quickly crumble with all the warts bubbling to the surface.

---

If they are getting 4 now and start getting 0, then anything better than 0 is a win, especially if it's low risk, i.e. us treasuries. They would move money there, driving down yields. They don't need to loan it.

---

Some would move there. But treasuries are a huge jump in risk over FED free money, which is truly risk free. They would need to diversify to spread risk, and there's no borrowers right now for banks to lend to. And when the free 4+% stops coming in on HEAVY balances, the plumbing in the system starts to show stress.

---

I'm not discounting the important role of banks to the economy, but why is it the responsibility of the Fed, and by default the US Government, to buy them and keep them almost and alive? Additionally why is the Fed therefore pumping interest dollars to foreign banks similarly holding deposits with them?

Further if they are forced into treasuries and therefore driving down yield, that would then have a domino effect on interest rates as a whole.

You're implying borrowers aren't there because rates are too high. Well if banks are searching for other places to park money, then I'm increased supply of money needing to be loaned would drive rates down.

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I'm not coming from a point of view of what is right, good, or necessary. My posts are nothing more than reporting the reality of the situation.

Every point of systematic stress since 2008 led to a band aid and can kick. In 2008 it was bank bailouts and QE, devaluing the currency and pushing the responsibility of avoiding calamity to the taxpayers. In 2020, it was the same exact thing on steroids. In 2023, the banking system was on the verge of massive runs and pending collapse. They couldn't QE any further with the emergence of extreme inflation. So they pulled another new, "never before used", magic lever by opening BTFP.. allowing banks to park cash at the FED and earn MORE on that money than they paid on money they borrowed from the FED. Free money. Literally. Then the public caught on to BTFP and they "closed the loophole" that they apparently didn't know existed (lol). Since then, BTFP has continued essentially, just at slightly lower rates and closer to market rate. Banks are sitting on hundreds of billions, maybe even trillions, of unrealized losses between treasury mismatch, CRE, and loans to shadow banks. Not to mention the massive credit bubble.

If banks are forced to go to the market with their money again, even the treasury market, their books will be exposed and they will opened back up to immediate risk.

And with reverse repo drained, there's nothing to tap for instant liquidity that won't immediately shock the global system.

Kenneth, think of it this way..

Let's simplify and say a bank has $1,000 in total deposits. 50% of it purchased 10 year bonds in 2020 with rates less than 1%.

If they needed that money today, they would have to sell those bonds at a massive loss.

Since then, let's say they've been parking the other 50% at the FED earning 4%, continuing to recycle that money and the interest it creates.

Closing that option for them, means they either have to loan that money out to a market that doesn't want loans at current rates, or invest it into treasuries. Let's say they do what you say and they buy treasuries, pushing the yield down from 4.25% to 3%.

Now they have all of their money tied up in treasuries, half of which is still significantly underwater. The only hope would be to run out the clock until 2030 to get their money back on their 2020 purchase. And after the banks cycle this money into treasuries, who is going to maintain the purchasing?

This would push banks almost all in on a single risk point. And if something happened to cause bond yield to RISE, all of that money would be underwater instead of just the half invested in 2020.

Banks will not expose themselves to more risk than they already have, which is why they've ignored the bond market since 2022. They are already overexposed to CRE and the general lending market. They won't overexpose there either. They are already overexposed to "non-depository institutions" AKA shadow banks. That money is fully invested in risk assets with very little wiggle room for stress.

The FED is the only thing that has allowed banks to not be exposed yet for the massive hole they are in. And they have one goal.. run out the clock.

PCC_80 said:

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MemphisAg1 said:

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Supposedly some economists presented a paper at Jackson Hole saying our national debt could reach 250% of GDP without putting upward pressure on interest rates.

This is when you know we are getting closer to a bubble popping when supposedly smart people say stuff in public that is absolutely stupid and yet it gets rave reviews from others.

Quote:

---

(Bloomberg) -- US government debt could reach 250% of gross domestic product without putting upward pressure on interest rates, according to a paper presented at the Federal Reserve's Jackson Hole conference.

---

https://finance.yahoo.com/news/us-debt-gdp-250-won-150000298.html

---

Agreed. They are buying time and kicking the can down the road.

Anybody with even a little understanding of economics knows that this can not continue or support 250% of Debt to GDP.

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Not suggesting Japan is the measuring stick we should use here; but their debt to gdp ratio is 230+%... And still one of the largest economies in the world.

ok - not sure if anyone still cares about this, but did some digging at the office on the Fed paying interest on reserves.

Basic gist is this

Before the fed paid interest on reserves, most banks would lend each other excess liquidity overnight based on the fed funds rate. Each facility was negotiated differently but the idea was that you tied it to the fed funds rate +/- a margin agreed to by both parties.

A lot of banks had agreements that when you lent the money to them, they could then turn around and lend it to another bank, which kept money/liquidity flowing through the banking system as needed.

According to my co-worker the music stopped on that when WAMU failed in 2008 as a lot of banks had money lent to them using this fed funds/overnight lending - which was the common way to park excess liquidity in other banks and make money. A lot of this money ended up at WAMU through a lineage of multiple banks. ie Bank A sends Bank B money in overnight lending. Bank B ends up sending it to WAMU. Apparently this was commonplace back then. Sounds pretty crazy to me now, but I guess hindsight is 20/20.

Once the overnight/fed fund lending dried up in between banks - since everyone was scared of another WAMU event happening, the exchange of liquidity between banks dried up. This is a big part of the national banking system as banks have to constantly manage their liquidity.

Government solution was to start paying interest to banks and get them to start exchanging liquidity again.

I did ask him what would we do if the Fed came out tomorrow and said no more interest on reserves parked at the Fed. He said we would probably explore setting up a fed funds line to other banks (but without the ability to then move it on to a third party bank). He said we might look at buying treasuries but they would be extremely short term (days / months) since everyone is still spooked about being locked in on long term instruments since so many banks are underwater on those still.

So i guess that could potentially drive down short term treasury rates, but doesn't sound like any banks would be eager to jump into longer term facilities.

Every bank is different but this is based on a mid sized community bank in DFW.