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What are reserves?

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TheMotorcycleBoy
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Re: What are reserves?

#397678

Postby TheMotorcycleBoy » March 21st, 2021, 4:08 pm

Now it's possible to link up the CB, the High Street Bank and the Entrepreneur with the IOUs existing between each entity:

Image

Matt

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Re: What are reserves?

#397679

Postby TheMotorcycleBoy » March 21st, 2021, 4:13 pm

And finally the entrepreneurs pays his $300 tax bill, the $300 moves all the way back to the CB and it cancels bits from the IOUs as it travels.The Government/Treasury/CentralBank decide that there's already loads of money circulating in the Economy, so the Tax is used when it gets of the CBs coffers to actually reduce the money supply.

Image

I've checked, and in all cases the sums on the Assets and Liabilities sides always sum to zero (i.e. cancel out) so I assume as they balance, there's a remote chance that I have things right. I'd appreciate anyone saying whether I'm vaguely on the right track here.

thanks Matt

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Re: What are reserves?

#397726

Postby TheMotorcycleBoy » March 21st, 2021, 7:16 pm

Snorvey wrote:Why would interest on a bond owned by the Bank of England be paid to a private investor?

I think the point GS made, means that many holders of UK gilts are foreign investors, hence its a fallacy to think that the interest remains to respent at UK PLC.

Matt

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Re: What are reserves?

#397768

Postby GoSeigen » March 21st, 2021, 9:59 pm

Snorvey wrote:Why would interest on a bond owned by the Bank of England be paid to a private investor?


Interest on the issued money will be paid, not on the bonds. I didn't mention bonds, I said "The interest on the issued money will have to be paid to private investors".

The BoE had to buy gilts. To fund that they issued the same amount in reserve balances (money) which of course are a liability of the BoE and therefore the government. The holders of the reserve balances are ultimately private individuals, the clients of the banks. When they are no longer happy to hold those balances at zero percent interest they will demand a higher rate. And the BoE will have no option but to pay that higher rate. The BoE knows this. I know it. Maybe even the Govt knows it. But certain BBC correspondents seem blissfully unaware of the fact. Perhaps they have been spending too much time on MMT websites!

Matt: your interpretation was awry, hopefully the above makes it clear.

GS

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Re: What are reserves?

#397775

Postby GoSeigen » March 21st, 2021, 10:07 pm

TheMotorcycleBoy wrote:I've checked, and in all cases the sums on the Assets and Liabilities sides always sum to zero (i.e. cancel out) so I assume as they balance, there's a remote chance that I have things right. I'd appreciate anyone saying whether I'm vaguely on the right track here.



No idea, but isn't it easier just to look at a Bank balance sheet and the BoE and Asset Purchase Facility (APF) balance sheets? Then you see exactly what's going on. Also read my posts on the subject from a year or two back. Maybe they make more sense now.

https://www.bankofengland.co.uk/annual-report/2020

GS

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Re: What are reserves?

#397817

Postby TheMotorcycleBoy » March 22nd, 2021, 5:22 am

Thanks for both of your replies, GS.

GoSeigen wrote:No idea, but isn't it easier just to look at a Bank balance sheet and the BoE and Asset Purchase Facility (APF) balance sheets? Then you see exactly what's going on. Also read my posts on the subject from a year or two back. Maybe they make more sense now.

https://www.bankofengland.co.uk/annual-report/2020

GS

My reservations with diving in with the above is that I'm happier in starting off my understanding of any subject by taking very simple examples and analogies first and understanding them.

I need to know more about the background first which is why I approach things this way. The process of swapping the IOUs initially makes a lot of sense to me. Will aim to take a glimpse at the above AR later on, if I remember.

Matt

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Re: What are reserves?

#397832

Postby GoSeigen » March 22nd, 2021, 8:27 am

TheMotorcycleBoy wrote:So working from first principles, i.e. starting with a very primitive society, where either clay tablets or simple coins are created initially as a "currency", presumably in a fixed quantity, and where the citizens pay a tax to the central body every year, what exactly are reserves?


To answer the OP, I don't think reserves have any particular meaning in a UK banking context. Would you mind referring to a banking document where the term is confusing you, rather than a quote from a bulletin board poster? Then I'll see if I can explain.

EDIT: The above not exactly true, here is what the BoE says about reserves accounts:

The majority of deposits repayable on demand comprises reserves accounts held at the Bank. Reserves accounts are sterling current accounts for banks and building societies. They are the most liquid asset a bank or building society can hold and are the ultimate means of settlement between banks and building societies.
The rate paid by the Bank on reserves account balances is also the means by which the Bank keeps market interest rates in line with Bank Rate. All reserves balances are remunerated at Bank Rate.


Does that make sense?

GS

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Re: What are reserves?

#397886

Postby Bubblesofearth » March 22nd, 2021, 10:46 am

GoSeigen wrote: The holders of the reserve balances are ultimately private individuals, the clients of the banks. When they are no longer happy to hold those balances at zero percent interest they will demand a higher rate. And the BoE will have no option but to pay that higher rate.

GS


Demand a higher rate or what? If I demand my bank pay me a higher rate and they don't then what are my options? The other banks offer no more so do I buy other assets instead? And as far as the banks are concerned, so what, the money eventually ends up back with them anyway.

Only if interest rates rise in an attempt to control inflation will I get a higher rate on my money. But that's not me stamping my foot and demanding it.

BoE

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Re: What are reserves?

#397890

Postby TheMotorcycleBoy » March 22nd, 2021, 11:01 am

Bubblesofearth wrote:
GoSeigen wrote: The holders of the reserve balances are ultimately private individuals, the clients of the banks. When they are no longer happy to hold those balances at zero percent interest they will demand a higher rate. And the BoE will have no option but to pay that higher rate.

GS


Demand a higher rate or what?

They sell the gilts, that's what.

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Re: What are reserves?

#397899

Postby TheMotorcycleBoy » March 22nd, 2021, 11:16 am

GoSeigen wrote:
TheMotorcycleBoy wrote:So working from first principles, i.e. starting with a very primitive society, where either clay tablets or simple coins are created initially as a "currency", presumably in a fixed quantity, and where the citizens pay a tax to the central body every year, what exactly are reserves?


To answer the OP, I don't think reserves have any particular meaning in a UK banking context. Would you mind referring to a banking document where the term is confusing you, rather than a quote from a bulletin board poster? Then I'll see if I can explain.

Hi GS,

My whole reason for creating this was *for me* to attempt to make sense of NeilWs frequent usage of that term, from an earlier thread when I was determined, admittedly from a rather greenhorn perspective, to difference between the Feds use of bonds or QE. Or in the UK case gilts or sterling.

Here we go:
viewtopic.php?p=391719#p391719
viewtopic.php?p=391796#p391796
viewtopic.php?p=392060#p392060
viewtopic.php?p=392104#p392104

The definition (of the noun) is a supply of something which already existed. That is, it's been reserved. That's why I need to get to the bottom of money, gilts, sterling, reserves, else things (e.g. my full understanding of QE/MMT) will decline into a case of smoke and mirrors. I'm not poopooing in at all. But I need to understand the first principles.....otherwise the Emperor will appear naked.

EDIT: The above not exactly true, here is what the BoE says about reserves accounts:

The majority of deposits repayable on demand comprises reserves accounts held at the Bank. Reserves accounts are sterling current accounts for banks and building societies. They are the most liquid asset a bank or building society can hold and are the ultimate means of settlement between banks and building societies.
The rate paid by the Bank on reserves account balances is also the means by which the Bank keeps market interest rates in line with Bank Rate. All reserves balances are remunerated at Bank Rate.


Does that make sense?

GS

I'll check this out in a day or two....I've got to get back to work now.

Matt

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Re: What are reserves?

#397903

Postby GoSeigen » March 22nd, 2021, 11:25 am

Bubblesofearth wrote:
GoSeigen wrote: The holders of the reserve balances are ultimately private individuals, the clients of the banks. When they are no longer happy to hold those balances at zero percent interest they will demand a higher rate. And the BoE will have no option but to pay that higher rate.

GS


Demand a higher rate or what?


You whack up the price of everything you're selling. i.e. If you're going to accept cash with a silly rate of interest, then you want more of it in exchange for the valuable goods or assets you're selling. This phenomenon is known as inflation.

EDIT: LOL, BoE in the old days the Bank of England used to raise rates when the market demanded it. I guess that is very passé these days...

GS

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Re: What are reserves?

#397908

Postby dealtn » March 22nd, 2021, 11:37 am

TheMotorcycleBoy wrote:
Bubblesofearth wrote:
GoSeigen wrote: The holders of the reserve balances are ultimately private individuals, the clients of the banks. When they are no longer happy to hold those balances at zero percent interest they will demand a higher rate. And the BoE will have no option but to pay that higher rate.

GS


Demand a higher rate or what?

They sell the gilts, that's what.


They don't have Gilts to sell. He is talking about private individuals (effectively) with cash held at commercial banks.

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Re: What are reserves?

#398021

Postby Bubblesofearth » March 22nd, 2021, 4:55 pm

GoSeigen wrote:
You whack up the price of everything you're selling. i.e. If you're going to accept cash with a silly rate of interest, then you want more of it in exchange for the valuable goods or assets you're selling. This phenomenon is known as inflation.


GS


Personally I'm not selling any goods or services. I'm retired.

Other people can only put up the price of what they are selling if the demand is there. It's not been there for the last 13 years and inflation has remained muted whilst bank interest has remained around zero.

BoE

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Re: What are reserves?

#398024

Postby dealtn » March 22nd, 2021, 5:00 pm

Bubblesofearth wrote:
Other people can only put up the price of what they are selling if the demand is there. It's not been there for the last 13 years and inflation has remained muted ...


RPI Index Jan 2008 209.8
RPI Index Jan 2021 294.6

That 13 years of muted is 40% loss of purchasing power.

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Re: What are reserves?

#398033

Postby GoSeigen » March 22nd, 2021, 5:15 pm

Bubblesofearth wrote:
GoSeigen wrote:
You whack up the price of everything you're selling. i.e. If you're going to accept cash with a silly rate of interest, then you want more of it in exchange for the valuable goods or assets you're selling. This phenomenon is known as inflation.


GS


Personally I'm not selling any goods or services. I'm retired.

Other people can only put up the price of what they are selling if the demand is there. It's not been there for the last 13 years and inflation has remained muted whilst bank interest has remained around zero.

BoE


You're alright Jack, but you're not the only person in the UK.

No-one said anything about timing. I'm merely disputing the idea that there is no cost to the government or BoE for its borrowing, or, as some people say, that "money is made out of thin air".


GS

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Re: What are reserves?

#398041

Postby Bubblesofearth » March 22nd, 2021, 5:27 pm

dealtn wrote:RPI Index Jan 2008 209.8
RPI Index Jan 2021 294.6

That 13 years of muted is 40% loss of purchasing power.


That's quite muted by UK standards :D

Joking aside I'm not sure that recent period of inflation can be explained by near zero interest on money. We've had much higher inflation in the past when bank deposits attracted higher rates.

You could even use the reverse argument to say we should have deflation. I'm not getting any interest on my money therefore I'm going to insist on paying less for goods to compensate.

BoE

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Re: What are reserves?

#398044

Postby dealtn » March 22nd, 2021, 5:32 pm

Bubblesofearth wrote:We've had much higher inflation in the past when bank deposits attracted higher rates.



I'm not arguing otherwise.

It still strikes me as strange that many dismiss the erosive effects of inflation, as if it is close to zero, when even low inflation - close to the BOE target for instance - can still add up to a meaningful amount over relatively short periods of time.

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Re: What are reserves?

#398047

Postby Bubblesofearth » March 22nd, 2021, 5:49 pm

dealtn wrote:
It still strikes me as strange that many dismiss the erosive effects of inflation, as if it is close to zero, when even low inflation - close to the BOE target for instance - can still add up to a meaningful amount over relatively short periods of time.


True, a good example of compound growth not being intuitive. And it's effects are especially meaningful during the period of financial repression that we've been living in since the GFC.

BoE


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