A chronicle of repurchase agreements (RP) and other paradoxical property ownership contracts - www.omo.co.nz

Email : sent, Friday, 26 September 2003 14:18

Subject: Creat Creation, Ref: http://www.treasury.govt.nz/workingpapers/2003/twp03-19.pdf

To: Iris.Claus@treasury.govt.nz , Arthur.Grimes@vuw.ac.nz


Dear Iris Claus and Arthur Grimes,

I read the above referenced NZ Treasury Working Paper with interest. As an ex-bank dealer and current trader in bonds for my own account I have an acute interest in matters of debt creation and the price of these assets.

However, I wish to dispute the underlying premise of your dissertation - encapsulated by the following quote - 'The credit creation process is "the process by which, in exchange for paper claims, the savings of specific individuals or firms are made available for the use of other individuals or firms" (Bernanke, 1992-93, p. 50).'

This written but unpublished letter to the NZ Herald states my contrasting understanding of credit creation within the banking system;

"Brian Fallow (Herald -11/09/03) creates the perception that the householder is borrowing money, which the owners of the banks have received from foreign sources, or that the householder is borrowing money from a pool of funds that depositors have entrusted to the bank beforehand. This is wrong. When a bank gives a loan, the bank completes two bookkeeping entries. The bank credits the borrower's account with the amount of the loan and debits a general ledger loan account by an equal amount. What has happened is that the bank has created money out of nothing, and this is money. The amount of money available in the economy equals the money created exclusively through bank loans.

This NZD money sold to buy foreign currency to purchase imported goods beyond which our exports fetch is what has to be financed by inward capital flows. It is the accumulation of such deficits that Mr Steel refers to when he concludes that New Zealand has to pay an interest rate premium."  

A not so quick read of the recently published attached PhD paper (Property Rights.pdf) will serve to illustrate that the deposit base in a fiat currency system is primarily composed of borrowed credit not savings and can be leveraged infinitely within the BIS capital constraints and the banks' owners desire for risk.

To further explain the pyramid function see the attached letter (Repo Transaction Accounting), where I have asked the RBNZ to consider regulating the repo market - another source of deposits (borrowed money - an obligation to pay) where the borrower conveniently receives deposits without having to register an exchange of assets - in this case the government's obligation to pay which was previously financed out of nothing by the banks in exchange for these obligations (bonds).

These sources of deposits hardly amount to savings.


Yours faithfully  


Stephen L Hulme





©2004  Open Market Operations Limited.  All rights reserved.





OMO Matters

US Federal Reserve Reference Publications

"The market for repurchase agreements on US government securities is of vital importance to the New York Fed, and the whole Federal Reserve System, because it is where virtually all of our monetary policy operations are conducted."- Peter Fisher, Manager, System Open Market Account - 15 January 1997.

"Open market operations are not another weapon in the Fed's arsenal, but the only weapon in its arsenal." - Monetary Trends, St Louis Federal Reserve, August 2003.

Repurchase Agreements with Negative Interest Rates - FRBNY - A primer detailing how short sales of Treasury securities can lead to protracted RP fails and consequently negative rates to address capital requirement issues.

Reserve Bank of Australia repo eligible, basis swapped, foreign issued AUD debt - read here.

"Good News" Macroeconomics

OMO-Repo Misuse - Letters to Hon. Dr. Michael Cullen, N.Z. Minister of Finance.

Repo Transaction Accounting. Letter to Mr A Orr, RBNZ.

IMF Repo Accounting Examples, Full Article

Credit Creation, Letter to Iris Claus and Arthur Grimes.

NZ Debt Management Office Uridashi issue and associated EuroKiwi letters to Hon. Dr. Michael Cullen, N.Z. Minister of Finance.