Repo Market $500B Injection

[jazz]

Little long but told from a farmers perspective linking a lot things in the economy and trying to uncover what this is and what it means.

[errolanderson]

Little long but told from a farmers perspective linking a lot things in the economy and trying to uncover what this is and what it means.

Thanks for posting Jazz . . .

From all the contributors on this subject in Agriville, all of these points have been addressed, one way or another recently. This 40 minute talk is well done and straight to-the-point, no bullshit and capsulizes the deck-of-cards our global economy really is hanging onto.

Would encourage Agrivillers to have a listen. Don’t listen to mainstream, conventional financial planning that worked during a totally different era of financial markets. Make your own decision. Control your debt where possible. Cash has value. Because, when the ship goes down, mainstream financial advice won’t be throwing any life rafts.

[macdon02]

Mainstream financial news is paid advertising, nothing more. The threat is real and it's the availability of credit. Thank you Errol for bringing attention to this initially. I have ideas on the motives behind the trade agreement last weekend, mostly the default of Chinese SOE's and Deutsch bank, google it, its obvious. The timing, it's anyone's guess but it's a combination of regulation from '08 and the inability of CB's to let the cards drop. We will wake up one morning and our rates will be double and assets a percent of what they were the day before. No credit, no demand. We are much the same as China. When i mention regulation, it's due to the Fed paying .25% through the overnight. This was put in place back in '08 when QE 1 took effect, also the author isn't looking at this globally. Only domestically. The quarter of 1% the fed put in place is significantly higher then the alternative at the ECB or Japan Central Bank, so in order to catch yield, every bank in the world is driven to the US. They pay the highest and they are the most secure, unless you think Venezuela or Turkey is an alternative. As a result of QE1 every bank in the world opened a US branch to collect the higher rate then the rate issued at "home". The regulation mentioned in the video refers to saving on hand versus debt issued, this isn't an issue, US banks are above this level. The risk resides in Europe and the banks don't know how much exposure the others have to that region, specifically Deutsch and who holds the other side of their derivatives.

[macdon02]

It's not what you don't know that'll kill you, it's what you know as an absolute fact.

[AlbertaFarmer5]

Lots of smart fellows over at New Ag Talk discussing this issue, almost daily.
Poster named FalcoFog claims this is business as usual, just returning to the old way of doing things, and over compensated, now just getting back into balance. What are you guy's ( gals) thoughts on his explanation?

They are just using repo instead of balance sheet expansion to expand reserves and set overnight rates. For 60 years the FED used open market operations to set rates and everyone loved it, now they essentially have been doing this for a few months and everyone thinks it is nefarious.

No there is no trouble at all, this whole repo episode that has been going on for 3 months is regulatory in nature, and this is most likely to continue for some time. December 15 is a tax payment date and more reserves will be required in the system.

The overnight reserves being temporarily put in the system using repo are offset by the treasuries or other asset used as collateral taken out of the system temporarily.

Reserves can only be owned and are only of any use to banks for regulatory purposes. All of these "news" articles about the Fed pumping cash into the system are fake news and should be ignored. Those "news" articles are clickbait financial doomer infotainmnet propaganda targeted at the zero edge crowd.

Since the financial crisis the banks have been massively regulated by the FED using the floor system to set overnight rates. This requires the banks to hold massive reserves as assets and they have to have corresponding amounts of cash as a liability. The FED has been setting overnight rates by paying interest on excess reserves that only banks are able to hold. This has been a great burden on the banks because for regulatory reasons they have to be holding so many reserves.

If they went back to a corridor system for setting rates there would be no problem. Here is a link to an interactive chart that shows before the 2008 crisis banks often held less than 1 or 2 billion in excess reserves: https://fred.stlouisfed.org/series/EXCSRESNS

Then when the floor system took over the amount of excess reserves went as high as 2500 billion, now it sits at about 1400 billion as of November. So clearly reserves have dropped in the system by $1 trillion in the past few years by design the only problem is they dropped the amount of reserves to far. The FED will be using repo and balance sheet expansion to raise the amount of reserves and continue to use the floor system for setting rates.

[AlbertaFarmer5]

More from the same poster further back:

There is not any FED largesse taking place, I've explained several times why and will again for you long. When the FED issues reserves into the system they are taking the exact same dollar amount of treasuries or other collateral out of the system. Repo does not cause any expansion of the money supply. The Feds balance sheet equals zero right now like it did ten years ago and like it will ten years from now. Repo is an asset swap.

Repo is a nothing burger and I will explain to you how everybody knows this. Equities are the junior partner in the capital structure. If high yield bonds thought for one second there was any problem yields would go up and spreads would blow out. The junk bond market is so flighty that you often get false signals if they think something may be wrong with the financial system or the economy. They are currently so confident that there is not even a false signal right now.

They are not pumping more money into the system. It has to do with the hierarchy of money. The banks have been over regulated since the financial crises and they need to hold large amounts of reserves to meet regulatory standards.

Reserves are considered a higher form of money than a bank deposit, just like the cash you keep in your wallet. The bank deposits in your bank are further down the hierarchy of money than reserves. Reserves are at the top of the hierarchy. On the same level of reserves are treasury securities. What is happening is banks are exchanging treasuries for reserves to meet short term regulatory standards imposed on them by the government.

What is happening is a short term asset swap. The reason there is a shortage of reserves right now is because to many reserves have been converted into treasuries and the overnight repos temporarily convert the treasuries back into reserves. The Fed has said they will issue new reserves to raise the amount of reserves in the system.

This system we have is anachronism left over from the gold standard. Back then only reserves were able to be exchanged for gold. The government sold treasury securities to lower the amount of reserves that were in existence and this lowered the amount of gold the government need to hold to sustain their gold to dollar peg.

Since the financial crisis ten years ago the Fed has been using interest on all of the newly created excess reserves to set the overnight Fed Funds rate. This new way of setting the FFR is called the floor system, the old way used open market operations and was called the corridor system.

Back before the financial crisis reserves were high powered money because there was no interest paid on them so the payments system of our country operated with as few reserves as possible. Then the Fed decided to execute monetary policy by paying interest on reserves, at this moment reserves stopped being considered high powered money. Now the only high power money in the United States is actual cash in your wallet and coin.

The Fed wants to pay as little interest as possible on these excess reserves. To do this they were lowering the amount of reserves in the system and they went to far in lowering the amount of reserves. From now until forever the Fed will be slowly expanding reserves to account for the growing economy and financial needs of the United States.

The way the Fed will do this is by buying treasuries in the open market and creating new reserves to pay for them. This is very similar to what people wrongly call QE. The reason this will not be QE is because the Fed isn't buying the treasuries to lower the interest rates by bidding up the price of the treasuries, they are buying treasuries for the sole purpose of creating enough reserves to execute monetary policy seamlessly.

By buying treasuries and issuing reserves to pay for them there is no expansion of the money supply, this is why it was impossible for the old QE programs to cause inflation. No new money is being added to the system. They are taking one form of money out of the system and adding another form of money.

Fiscal policy and government deficit spending is the only thing that adds more reserves to the system. Then reserves are drained from the system by selling treasuries which can only be paid for with reserves. The Fed is just taking treasuries and reconverting them back into reserves.

When commercial banks create money from thin air using the power of loaning money into existence that kind of money is lower on the hierarchy of money. Those bank deposits are a promise to pay reserves. Loans create deposits but deposits are below reserves on the hierarchy.

[TOM4CWB]

More from the same poster further back:

Kind of like the hydraulic reservoir system on our tractors. 2008 changes to financial regulations required much 'higher financial reserves' or more 'hydraulic capacity' be available to feed our economy without sucking air if reserves are too low... 2008 changes require much more reserves be available... banks and consumers both... the increased reserve capacity must come from somewhere... if not from increased productivity.... then central banks must add these reserves to maintain adequate working fluid levels.

Climate Change increased many costs and we have resulting productivity losses... fluidity must be added back from somewhere...
Hence Central Banks need to top up the financial reservoirs... or we loose our prime and suck air!!! Grin

[jazz]

Lots of smart fellows over at New Ag Talk discussing this issue, almost daily.
Poster named FalcoFog claims this is business as usual, just returning to the old way of doing things, and over compensated, now just getting back into balance. What are you guy's ( gals) thoughts on his explanation?

I don't know. That guy should check his facts. The only time the fed ever directly injected liquidity into the system was after 2008 with QE. Every other recession was fought with interest rate policy.

Banks horse trade for cash every night in that repo window. The fed is supposed to only guide the process and set rates. There is some institution or even country in that window that no bank will lend to because they are uncertain they will get tit back. And only the fed who can socialize the risk over millions of people can step in. Its a backdoor bail out of some kind and its getting expensive. QE took years to happen, this is just 3 months. Something wrong.

[errolanderson]

The Federal Reserve has now injected 4 Trillion USD into the repo market. Apparently, 326 billion USD in buying up short term treasuries. The Fed balance sheet is now exploding, printing money daily maintaining artificial buying support under stock markets, with no resources at all backing it up . . . .

[agstar77]

Recession in U.S. by third quarter of 2020, according to many business people. The Fed has done all it can to keep the economy humming for Trump, but it may not be enough.

[ajl]

So are we looking at higher interest rates a year from now or negative rates? Looks like if there were no central bank interference, the market is saying that short term rates should be much higher than they are now. This off course would mean no operating loans in 2020, which would really get land deflation going. Land for rent is now advertised in this area, That has not happened for 10 years or more.

[furrowtickler]

So are we looking at higher interest rates a year from now or negative rates? Looks like if there were no central bank interference, the market is saying that short term rates should be much higher than they are now. This off course would mean no operating loans in 2020, which would really get land deflation going. Land for rent is now advertised in this area, That has not happened for 10 years or more.

Land north of here can’t get rented out , well for the overly lofty rents that were around , first time in over a decade as well.

[AlbertaFarmer5]

So are we looking at higher interest rates a year from now or negative rates? Looks like if there were no central bank interference, the market is saying that short term rates should be much higher than they are now. This off course would mean no operating loans in 2020, which would really get land deflation going. Land for rent is now advertised in this area, That has not happened for 10 years or more.

When we get an answer to that, we will know if the central banks are in control(negative), or have lost control( or never had it to start with, just following along).

[jazz]

There was some metric this month that we crossed that was a sure sign of a recession, maybe errol can enlighten us. Something about interest rates falling during an inverted yeild curve is a 100% recession a year to 18 months after.

That should get trump through 2020 but Canada will get hit sooner I bet. Our rates will be going down 2 to 3 times next year and you will see those job loss numbers accelerate.