| FalcoFog - 3/28/2020 09:25
Treasuries and Reserves share the top spot on the hierarchy of money and bank deposits are just below them.
Think of reserves as US dollars in checkbook form, and Treasuries as US dollars in savings accounts form. Treasuries are just as good as reserves but a little better because you usually get a little higher interest. And when treasury coupons are paid they are paid in reserves and when their term is over they turn into reserves.
This is why the US Treasury Market is one of the largest and most liquid markets in the world and why they are just as good or better than reserves.
Only for banking regulations in a few instances would an entity want reserves over treasuries. Now that the US has moved reserve requirements to zero it is less imperative to hold one over the other.
Edit: Its not that the treasuries have a claim on a limited amount of reserves, treasuries turn into reserves at maturity.
So this may be a dumb question but if treasuries turn into reserves at maturity, at what point does the greenback become part of the money supply as it reflects/inflects inflation? I don't even know if only M1 is figured into inflation or if that is based on M2..... or is inflation really just a relative psychological impression on the people as to the value of the dollar, but controlled by interest rates and the like?
I'm all over the place but wanted to get all of that out of my head. The important question with regards to this is how do expiring treasury notes impact inflation as they become reserves and how does the Federal Reserve hold that back? Would the answer be that higher interest rates would draw reserve money back into renewed treasuries and therefore be removed from reserves again?
Edited by kst1 3/28/2020 11:25
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Here is a mind bender from George Gannon! Critical thinking fix
