This is a bit dated (written before last week’s bond market sell-off), but has anyone read Victor Sperandeo’s piece on how commercial banks (CB) can buy potentially unlimited amount of treasury bonds? I wasn’t sure what to make of this.
Now, remember The Gamboni and the house rules, which are different from normal poker rules. The mystery is solved when one understands the rules of the game.
Here are the questions you need to ask if you want to learn the house rules:
What are the reserve requirements for U.S. government debt owned by a CB?
What are the mark-to-market rules for government debt owned by a CB?
Where does a CB get the funds to buy government debt?
What are the Basel III capital requirements for government debt owned by a CB?
Believe it or not, the answers to these questions are:
They are not marked to market.
It creates the money out of thin air.