Very helpful post. However, I have one point of confusion:
On your diagram of a repo transaction/collateral chain “Credit Creation in the Financial Economy”, the MMF ends up selling their T-Bill. Is this T-Bill sold just to fund their reverse repo (is it that simple)? Or is there another reason for that? My confusion is because as part of the reverse repo asset, they are in fact receiving collateral (could be another T-Bill).
I guess theoretically the collateral chain has to end somewhere and is it fair to say the shorter the collateral chain, the quicker the deleveraging mechanism through asset prices (if more T-Bills have to be sold to fund repos, then the value of collateral - and this leverage- decreases)?
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Very helpful post. However, I have one point of confusion:
On your diagram of a repo transaction/collateral chain “Credit Creation in the Financial Economy”, the MMF ends up selling their T-Bill. Is this T-Bill sold just to fund their reverse repo (is it that simple)? Or is there another reason for that? My confusion is because as part of the reverse repo asset, they are in fact receiving collateral (could be another T-Bill).
I guess theoretically the collateral chain has to end somewhere and is it fair to say the shorter the collateral chain, the quicker the deleveraging mechanism through asset prices (if more T-Bills have to be sold to fund repos, then the value of collateral - and this leverage- decreases)?
Could you explain how repo creates credit?