How the Fed lost control of the money supply, and gave it to the Treasury, thanks to the GFC
explicating Martin Armstrong
When the Treasury issues debt now, it is issuing reservable interest-bearing money. How did this happen? Martin Armstrong has made this point, but it is not well understood. When the Treasury issues debt, it injects reserves into the banking system. So you can bet there will be inflation, especially after the economy rebounds from whatever dip we have in 2025, and the deficits explode.
Here’s GPT-4o’s explanation:
The change in U.S. regulations allowing banks to hold U.S. Treasury securities as reserves occurred as part of a broader set of reforms following the 2008 financial crisis. The key development was the introduction of the Liquidity Coverage Ratio (LCR) under the Basel III international regulatory framework, which was adopted in the United States in 2014.
Key Points:
Liquidity Coverage Ratio (LCR):
LCR requires banks to hold a sufficient amount of High-Quality Liquid Assets (HQLAs) to cover net cash outflows over a 30-day stress period.
U.S. Treasury securities were classified as Level 1 HQLAs, the highest-quality assets, meaning they could be held without limit to satisfy the LCR.
Federal Reserve's Definition of Reserves:
Traditionally, "reserves" referred to cash held at the Federal Reserve.
While Treasuries are not classified as reserves in the strict sense of being deposited at the Fed, they effectively serve a similar role under the LCR by bolstering liquidity buffers.
Implementation:
The final rule implementing the LCR in the U.S. was adopted in September 2014 and required compliance by large banks by 2015–2017, depending on their size.
Practical Impact:
This change incentivized banks to hold Treasuries as a safe and liquid asset class. It aligned with the Federal Reserve's goals of ensuring liquidity in the banking system and promoting the U.S. Treasury market as a cornerstone of global financial stability.