Monday, April 3, 2017

Looking at the real short end of the curve

I have this chart from Williamson. Selgin says that the excess reserves are mostly one month money, a requirement of regulations.  I would expand that there is a lot of one month money around because of regulations or tax surprises, or variance in government payments.

So, we accept that there is something called one month money and we expect to see a loan to deposit system to balance one month surprises between collective deposits and loans.

We have the treasury one month bill rate (red) and the IOR effective rate (blue). The argument above says we can cancel time and assume these interest payments are asynchronous, adjustable about four times the rate of the quarterly numbers, good enough.

What about volumes? The excess reserves are 2 trillion the one month bill and about 500 billion, from the Treasury stats page.  So, if this is our short term basket, then the fed is pouring out about a net 15 billion dollar a year loss in this 'line of business'.  I say 'line of business' because the term points will be loosely coupled, so up the fixed curve, take the net losses and gains in fed trades and sort of add them up to get bit error and price variation combined. The two are not separated until the Fed set the interest charges.

Where does the fed make this bit error and price variance loss?

At the long end where it hold a pile of long term notes, they earn interest and there are no  counter balancing deposits.  This weirdness is the same weirdness as having one bank borrow it all and 30 banks bet deposits only. In any event, there in cancellation. But at the cancellation is only closely known, so only the majority of it covered by loan to deposit swaps, the fed should take some actuarial gain and losses to make the market.

But, here is the fun part, the net bit error is still not retained, it is bundled into the profit payments to Treasury, where visit is canceled over the year with ad hoc insurance pay outs, what we call bail outs.  But  the currency risk gets adjusted in the legislature, in central banking.  That is why there is really no  actuarial earnings and losses account at the fed, the only residual it keeps is direct costs, mostly labor.

So, Selgin's point, taken in its entirety, the banks do not want to give up the long to short flow.  Banks got a deal on Treasury covering currency risk.  But the accumulated losses means Congress won't cover it anymore. We stuck, time to deal.

To get yhe total bit error look at the total treasuries held, as a time series as I do.

Now I am looking a a sequence of loans and deposits (their accumulation actually) I want to see the variance between the two, that gives me an idea of the variance of the price variation, not bit error. About 200 billion,or 1% of nominal GDP, good enough.

But the blue line is not responding, and this thing is going into a very long pricing sequence before the blue and red line agree, When they agree,then I assume a smart contract has completed, the Senators invented the anti-gravity machine, we are happy.  But, the effort is taking hundreds of years.  That debt is actually the accumulated currency insurance payouts due, whoops. Have no fear, the real anti-gravity machine is the sandbox.

No comments: