What was the preceding phase, where the Fed created new reserves that were not subtracted from anyone's balance sheet?
I was thinking it's like Asset Intermediation, but that appears twice and if A is reserves in one, B had to be reserves in the other?
As for novation, why must the Fed deduct reserves? Can the Fed issue new CBDC accounts and pay inflation as interest on them to set monetary policy by encouraging savings on an individual level? (Analogous to paying banks interest on reserves so they don't undercut the Fed Funds rate?)
Asset intermediation would be, for example, when the Fed creates reserves and uses them to buy securities from banks. Then in the table of generic quadruple-entry transactions, the Fed's is the balance sheet that expands on both sides, while the banking system's balance sheet doesn't expand, but only changes composition.
As for CBDCs, I'm not sure about your use of the word "inflation," but yes the central bank can create new liabilities that do not come from the destruction of reserves. My example comes from people wondering if banks will lose funding if depositors migrate to CBDCs.
Yes. If the Fed injects reserves into the commercial banking system by buying up non-reserve assets, that constitutes "asset intermediation," just like you said. The two "versions" are just mirror images of each other. In the first row, third column, the left balance sheet is the Fed and A is reserves. In the third row, first column, the right balance sheet is the Fed and B is reserves.
As for why the Fed must deduct reserves when people move their deposits into CBDC, it can be helpful to think about how bank payments work in general. When we make payments through the banking system, it is *as if* we withdrew our money from the first bank and then deposited it in the second bank. If you had actually withdrawn your money as cash, that would have drawn down the commercial bank's reserves.
A payment between two bank accounts of banks at the same level is a "transfer of portfolio." It's an assignment of the reserve asset paired with a novation of the deposit liability. If the payee bank doesn't receive reserve assets to match its new deposit liabilities, they will not accept the new deposits. Instead, they'll ask you to withdraw the cash from your other bank and then manually deposit it at their bank.
It's similar if you move your deposits to the central bank. Instead of holding deposits at the commercial bank, which are IOUs for deposits at the central bank, you're choosing to directly hold deposits at the central bank. That's why it's a "liability disintermediation."
Imagine that the central bank accepted deposit transfers without a corresponding movement of reserves. They still have an obligation to transfer reserves when making payments to other banks. This would create some weird effects. For example, if I moved deposits from my commercial bank to the Fed and back, the commercial bank would end up with more reserves. If I moved one dollar back and forth a billion times, that would add $1 billion of reserves to my bank.
If the Fed issued new accounts CBDC and added "free money" to them, that would be a different balance sheet operation. And it wouldn't preclude people moving deposits between commercial banks CBDC accounts, which are like deposit accounts at the central bank.
Okay, how about if reserves can only move to cbdc and not back?
If banks are worried about losing reserves, maybe the Fed could buy your bank deposit for reserves? Or simply perform more asset intermediation with Treasuries, MBS, corporate index funds, even retail deposit accounts: + Individual Account, + Reserves, +CBDC?
Then even if you move CBDC back to a private bank, it stays CBDC?
If private banks want to compete for your business, can they buy inflation swaps to inflation-proof your individual retail deposit account?
Second, does private central clearing complicate your simple "transfer of portfolio" model, since interbank payments might get "stuck" in a Central Clearing Party deposit, without reserves actually transferring for a while? So my bank clears your bank's payment but on a CCP ledger, not necessarily immediately involving reserve transfer?
Hmm. I'm not sure I fully understand these questions.
If you can use reserves to buy CBDC at par, but you can't use CBDC to buy reserves at par, it's not going to work. How are you planning to keep the price of CBDC at par with reserves if nobody's promising to convert them into reserves?
I'm also not sure what you mean by the Fed buying my bank deposits. I have deposits in a commercial bank. And the Fed does what, exactly?
If they wanted to, the Fed could certainly issue reserves to buy assets from the banks (asset intermediation). This would allow the commercial banking system to shrink its balance sheets down as everybody withdrew their deposits.
Conceptually, we can think in terms of the following two steps:
1. The Fed issues reserves to buy all the assets from the commercial banks.
2. Everybody withdraws all their deposits from the banks.
The Fed gave the banks enough reserves to pay out all their deposits. But, as a result, the commercial banking sector no longer exists. Instead, the Fed has taken all lending onto its own balance sheet.
In terms of balance sheets, reserves, cash, and CBDC are the same thing. And commercial bank deposits are IOUs for these other instruments.
I'm not sure what point you're making about inflation swaps. If commercial banks want to compete for your deposits, they're going to have to pay higher rates than the risk-free rate you can get from holding direct liabilities of the Fed.
I think your point about private clearinghouses is that if you net out payments, then reserves don't actually flow? That's exactly right. But the net result is still the same as it would have been if the reserves had actually moved.
Hmm. I'm not sure I understand why you're asking this question. Are you suggesting that the Fed go off the dollar?
I think that's a separate question from the question of what happens when people no longer have to deal with cash if they want to use the Fed *dollar* liabilities as their money.
What happens when the Fed does the equivalent of giving everyone a free checking account?
What was the preceding phase, where the Fed created new reserves that were not subtracted from anyone's balance sheet?
I was thinking it's like Asset Intermediation, but that appears twice and if A is reserves in one, B had to be reserves in the other?
As for novation, why must the Fed deduct reserves? Can the Fed issue new CBDC accounts and pay inflation as interest on them to set monetary policy by encouraging savings on an individual level? (Analogous to paying banks interest on reserves so they don't undercut the Fed Funds rate?)
Asset intermediation would be, for example, when the Fed creates reserves and uses them to buy securities from banks. Then in the table of generic quadruple-entry transactions, the Fed's is the balance sheet that expands on both sides, while the banking system's balance sheet doesn't expand, but only changes composition.
As for CBDCs, I'm not sure about your use of the word "inflation," but yes the central bank can create new liabilities that do not come from the destruction of reserves. My example comes from people wondering if banks will lose funding if depositors migrate to CBDCs.
Yes. If the Fed injects reserves into the commercial banking system by buying up non-reserve assets, that constitutes "asset intermediation," just like you said. The two "versions" are just mirror images of each other. In the first row, third column, the left balance sheet is the Fed and A is reserves. In the third row, first column, the right balance sheet is the Fed and B is reserves.
As for why the Fed must deduct reserves when people move their deposits into CBDC, it can be helpful to think about how bank payments work in general. When we make payments through the banking system, it is *as if* we withdrew our money from the first bank and then deposited it in the second bank. If you had actually withdrawn your money as cash, that would have drawn down the commercial bank's reserves.
A payment between two bank accounts of banks at the same level is a "transfer of portfolio." It's an assignment of the reserve asset paired with a novation of the deposit liability. If the payee bank doesn't receive reserve assets to match its new deposit liabilities, they will not accept the new deposits. Instead, they'll ask you to withdraw the cash from your other bank and then manually deposit it at their bank.
It's similar if you move your deposits to the central bank. Instead of holding deposits at the commercial bank, which are IOUs for deposits at the central bank, you're choosing to directly hold deposits at the central bank. That's why it's a "liability disintermediation."
Imagine that the central bank accepted deposit transfers without a corresponding movement of reserves. They still have an obligation to transfer reserves when making payments to other banks. This would create some weird effects. For example, if I moved deposits from my commercial bank to the Fed and back, the commercial bank would end up with more reserves. If I moved one dollar back and forth a billion times, that would add $1 billion of reserves to my bank.
If the Fed issued new accounts CBDC and added "free money" to them, that would be a different balance sheet operation. And it wouldn't preclude people moving deposits between commercial banks CBDC accounts, which are like deposit accounts at the central bank.
Okay, how about if reserves can only move to cbdc and not back?
If banks are worried about losing reserves, maybe the Fed could buy your bank deposit for reserves? Or simply perform more asset intermediation with Treasuries, MBS, corporate index funds, even retail deposit accounts: + Individual Account, + Reserves, +CBDC?
Then even if you move CBDC back to a private bank, it stays CBDC?
If private banks want to compete for your business, can they buy inflation swaps to inflation-proof your individual retail deposit account?
Second, does private central clearing complicate your simple "transfer of portfolio" model, since interbank payments might get "stuck" in a Central Clearing Party deposit, without reserves actually transferring for a while? So my bank clears your bank's payment but on a CCP ledger, not necessarily immediately involving reserve transfer?
Hmm. I'm not sure I fully understand these questions.
If you can use reserves to buy CBDC at par, but you can't use CBDC to buy reserves at par, it's not going to work. How are you planning to keep the price of CBDC at par with reserves if nobody's promising to convert them into reserves?
I'm also not sure what you mean by the Fed buying my bank deposits. I have deposits in a commercial bank. And the Fed does what, exactly?
If they wanted to, the Fed could certainly issue reserves to buy assets from the banks (asset intermediation). This would allow the commercial banking system to shrink its balance sheets down as everybody withdrew their deposits.
Conceptually, we can think in terms of the following two steps:
1. The Fed issues reserves to buy all the assets from the commercial banks.
2. Everybody withdraws all their deposits from the banks.
The Fed gave the banks enough reserves to pay out all their deposits. But, as a result, the commercial banking sector no longer exists. Instead, the Fed has taken all lending onto its own balance sheet.
In terms of balance sheets, reserves, cash, and CBDC are the same thing. And commercial bank deposits are IOUs for these other instruments.
I'm not sure what point you're making about inflation swaps. If commercial banks want to compete for your deposits, they're going to have to pay higher rates than the risk-free rate you can get from holding direct liabilities of the Fed.
I think your point about private clearinghouses is that if you net out payments, then reserves don't actually flow? That's exactly right. But the net result is still the same as it would have been if the reserves had actually moved.
《How are you planning to keep the price of CBDC at par with reserves if nobody's promising to convert them into reserves?》
Did the Fed destroy gold when it went off the gold standard? Are gold traders still around?
Hmm. I'm not sure I understand why you're asking this question. Are you suggesting that the Fed go off the dollar?
I think that's a separate question from the question of what happens when people no longer have to deal with cash if they want to use the Fed *dollar* liabilities as their money.
What happens when the Fed does the equivalent of giving everyone a free checking account?