" When a goal matters enough to a person, that person will find a way to accomplish what at first seemed impossible!"

- Nido Qubein -

14. BREXIT

Even though markets have hit all time highs and Britain is doing quite well, the Brexit has far-reaching impacts on the British economy but they are hard to detect because the Bank of England has supported its economy tremendously. 

Before we start with the last entries of this blog series about money and banking, I want to show you, how you can use the concepts to understand what is going on in the real world. I have drafted that article 4 months ago but I have updated it and we are still not what happens. The decision about the Brexit made me sad. In my opinion, the European Union is about peace, freedom, stability and solidarity. Unfortunately, many different people voted for a change without really thinking about all the long term effects. England benefits a lot from being in the European Union, enjoying the passporting rights (I will explain what they mean later) and they are making a lot of money being the financial heart of Europe. Even though the Brexit happened half a year ago it is still in the process and I am going to explain what a Brexit most likely mean for the British (financial) economy.

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13. Rates and the Treynor Model

“Fed Raises Interest Rates for Third Time Since Financial Crisis”

 

Now we can bring everything together. How the Fedthe banksthe dealersinterest rates and assets prices are all linked together and what happens in a crisis. The central bank is supposed to keep the balance of elasticity and discipline in the monetary system and to control the flow of credit and to provide internal stability.

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12. Why dealers provide liquidity?

“He thinks the Fed should extend its responsibilities beyond the lender of last resort for banks in need, and become the dealer of last resort, meaning it should provide short-term liquidity for the 23 primary dealers that help implement monetary policy. “

When we think of dealers, we probably think of shady guys selling drugs. Here we are talking about legal financial dealers providing liquidity for the monetary system. Imagine a bank runs into liquidity problems but it owns securities like treasury bills, which will mature in a year. The bank can sell these securities to a dealer to make cash. (Note: When we talked about the central bank being the lender of last resort we were talking about borrowing money to ensure liquidity and using an asset as security. Now we are going one step further and talk about selling a security to get cash).

 

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Discounts, discounts, discounts

“Borrowing at the discount window is essentially a repurchase agreement — pledging collateral in exchange for cash.”

 

This blog article is not on sale, but I am going to explain the "discount mechanism". We are continuing to work with the dealer concept. The dealer was the person that takes the risk on his balance sheet to make transactions possible and receiving a risk premium for that.

I am buying the drinks for my party from the supermarket. Due to the fact that I can not pay for them right now, I make a deal with the supermarket to pay them in 90 days. After 20 days the supermarket realizes that it suddenly needs a lot of money to restock its warehouse. Unfortunately, it only has a “contract” from me that says I am paying him 500 $ in 90 days. It does not have 500$ in cash to buy new drinks from the wholesaler right now and the wholesaler does not accept the contract that the supermarket and I made as a mean of payment. Watson, we have a problem! ;)

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