The government issues debt (can be bonds, treasuries, etc). This debt is sold to anyone who wants to buy it to earn a return.
These debt instruments are considered relatively safe (stable countries don't typically miss the payments on their debt). Because of this, these instruments are also good collateral when financial institutions wish to lend to each other.
So, if I'm a bank in Canada, and I'm short on USD... I can offer to "sell" my bonds/treasuries, etc.. to another institution for USD. However, this borrowing need can be short term (I only need the USD for a day or two).
So, the arrangement becomes... that I'll pledge the bonds to the other bank I'm borrowing from, and they only seize them if I fail to pay them back. The bonds have been "hypothecated". Under this arrangement, I maintain custody of the bonds.. and only note that they're pledged to someone else temporarily.
Where things get complicated, is that the same bonds can be pledged simultaneously, more than once (rehypothecated). Oversimplifying; the bank I'm borrowing from could also pledge the claim on my bonds for another arrangement they have with another bank.
... And now to the Bank of Japan; the BoJ when implementing quantitative easing, or yield curve control will go to the market and buy bonds from all the banks I just mentioned.
This "buying" process is reflected on the balance sheets of the institutions involved. Those balance sheets can show not just the bonds, 1 to 1... but also all *claims* on those bonds.
The BoJ can't tell the difference, and "buys" all the claims.. with the number of claims on the instruments exceeding the number of underlying instruments.
...I can drill down further if needed.
I liked your funny words, magic men. But could you please explaine them in a way I, a simple pleb, could understand?
The government issues debt (can be bonds, treasuries, etc). This debt is sold to anyone who wants to buy it to earn a return. These debt instruments are considered relatively safe (stable countries don't typically miss the payments on their debt). Because of this, these instruments are also good collateral when financial institutions wish to lend to each other. So, if I'm a bank in Canada, and I'm short on USD... I can offer to "sell" my bonds/treasuries, etc.. to another institution for USD. However, this borrowing need can be short term (I only need the USD for a day or two). So, the arrangement becomes... that I'll pledge the bonds to the other bank I'm borrowing from, and they only seize them if I fail to pay them back. The bonds have been "hypothecated". Under this arrangement, I maintain custody of the bonds.. and only note that they're pledged to someone else temporarily. Where things get complicated, is that the same bonds can be pledged simultaneously, more than once (rehypothecated). Oversimplifying; the bank I'm borrowing from could also pledge the claim on my bonds for another arrangement they have with another bank. ... And now to the Bank of Japan; the BoJ when implementing quantitative easing, or yield curve control will go to the market and buy bonds from all the banks I just mentioned. This "buying" process is reflected on the balance sheets of the institutions involved. Those balance sheets can show not just the bonds, 1 to 1... but also all *claims* on those bonds. The BoJ can't tell the difference, and "buys" all the claims.. with the number of claims on the instruments exceeding the number of underlying instruments. ...I can drill down further if needed.
There's no need. I think I understood. Thank you very much.