Question

American banks are loading up on the U.S. government debt, as sign they remain cautious on the economy even with the jobless rate at a six-year low and corporations at their healthiest in a generation.

Commercial lenders increased their holdings of Treasuries and debt from federal agencies in September by $54 billion … data from the Federal Reserve show…. Bank of America Corp. and Citigroup are among the lenders adding government bonds this year as loan growth fails to keep up with record deposits….

Lenders accumulated so much cash that deposits exceeded loans by the most on record last month. That gap has widened by more than $300 billion in the past year.

Bank of America, the second-biggest U.S. bank, has more than quadrupled its available-for-sale holdings of Treasuries and federal agency debt this year to $38.7 billion as of June 30, the latest company filings complied by Bloomberg show. The Charlotte, North Carolina-based lender now holds more of the securities than at any time since 2012.

Citigroup, the New York-based lender that received a $45 billion bailout during the credit crisis, had $103.8 billion of the bonds at the end of June. That’s a 19 percent increase from December and the highest since 2011, the data show….

1. US banks are using their cash to purchase more and more Treasuries and government agency debt. What impact will this have on the yields Treasury securities pay? What broader impact might that have on financial markets and the overall US economy?

2. If US banks are using their cash to purchase more and more Treasuries and government agency debt, what impact does that have on the growth rate of money supply? What broader effects might this have on the US and global economies?

Answer 1

1. US banks are using their cash to purchase more and more Treasuries and government agency debt. This will lead to a decrease in the money supply in the economy which will lead to an increase in interest rates and also yields that Treasury securities pay.

The broader impact that might have on financial markets and the overall US economy would be that overall output in the economy will decrease.

2. There will be a decrease in money supply in the economy which states that the growth rate of the money supply will decrease as well and would most probably be negative. Money growth have a positive relation to inflation as well. So, when money growth decreases in the economy so will the inflation.