A Game-Changing Crash . . . .

[jazz]

European bank stocks are now down 25% in the past 13 days.

That's a crash . . . .

EU banking system has always been fragile. When some US banks take it, then we can worry.

[agstar77]

Central banks have overplayed their hand with no room for emergencies. Should never have lowered rates so much after the Financial Crisis. The economy is not good enough to withstand tariff wars and coronavirus.

[Austrian Economics]

Central banks have overplayed their hand with no room for emergencies. Should never have lowered rates so much after the Financial Crisis. The economy is not good enough to withstand tariff wars and coronavirus.

The central banks have essentially no choice. The reason is that what we call "money" today originates as an irredeemable bond. The bond carries an interest payment. When we say that the government or any borrower pays off a bond, they are not really paying it off. They are just rolling the debt or simply shifting it to another borrower. One bond is "paid off" by creating another bond which is good for the previous bond, but the new bond itself begins accumulating interest charges. In this manner, debt in a fiat currency system must always grow exponentially. The process can be slowed down, but it can't be stopped or reversed.

As the debt grows, so does the interest burden. Since there's no way to stop this, all a central bank can do it lower short term interest rates to keep up with declining business demand for capital as their debt load grows as well. Eventually, many debtors will default but if interest rates fall enough, other businesses can step in and borrow to fill the gap. But they too will eventually fall victim to this perpetual cycle.

About 100 years ago when gold was money, if the rate of interest fell too much, savers would demand their gold from the banks and hoard it, for the simple reason that too low a rate of interest would not compensate them for risk. This put a solid floor under the rate of interest, since financial institutions did not desire the exit of all capital from their institutions.

Since gold has been barred from the financial system, savers now only have a choice between a zero maturity central bank note (the dollar) or a bond payable in the same dollars but also paying a (by now) microscopic bit of interest. Either way, you are a perpetual creditor to a central bank as long as you hold dollars in any form.

Governments in particular like falling interest rates and fiat currency because they can corral savers into funding ventures for next to no return, or even a negative return. Voters tend to like it because it allows them to indulge in a banquet of "free stuff" at the expense of others.

[Flatlander]

The central banks have essentially no choice. The reason is that what we call "money" today originates as an irredeemable bond. The bond carries an interest payment. When we say that the government or any borrower pays off a bond, they are not really paying it off. They are just rolling the debt or simply shifting it to another borrower. One bond is "paid off" by creating another bond which is good for the previous bond, but the new bond itself begins accumulating interest charges. In this manner, debt in a fiat currency system must always grow exponentially. The process can be slowed down, but it can't be stopped or reversed.

As the debt grows, so does the interest burden. Since there's no way to stop this, all a central bank can do it lower short term interest rates to keep up with declining business demand for capital as their debt load grows as well. Eventually, many debtors will default but if interest rates fall enough, other businesses can step in and borrow to fill the gap. But they too will eventually fall victim to this perpetual cycle.

About 100 years ago when gold was money, if the rate of interest fell too much, savers would demand their gold from the banks and hoard it, for the simple reason that too low a rate of interest would not compensate them for risk. This put a solid floor under the rate of interest, since financial institutions did not desire the exit of all capital from their institutions.

Since gold has been barred from the financial system, savers now only have a choice between a zero maturity central bank note (the dollar) or a bond payable in the same dollars but also paying a (by now) microscopic bit of interest. Either way, you are a perpetual creditor to a central bank as long as you hold dollars in any form.

Governments in particular like falling interest rates and fiat currency because they can corral savers into funding ventures for next to no return, or even a negative return. Voters tend to like it because it allows them to indulge in a banquet of "free stuff" at the expense of others.

Gold may know this is true. Look at ten year gold chart in CAD. All time high by far. That is also the case in most currencies except the USD. Barbarous relic. No yield. Not enough of it to go back to a gold standard. Etc.etc.etc...

[helmsdale]

Anyone got an explanation as to what's happening in the short term repo market the last 3 days?

It's been oversubscribed 3 days running...
-who's looking for the liquidity?
-what do they need it for?
-are private institutions getting the jitters and not trusting each others collateral?

[macdon02]

Anyone got an explanation as to what's happening in the short term repo market the last 3 days?

It's been oversubscribed 3 days running...
-who's looking for the liquidity?
-what do they need it for?
-are private institutions getting the jitters and not trusting each others collateral?

https://www.investopedia.com/terms/s/spra.asp


Seems BOC is prepping for a liquidity crisis. We will be hearing about these in the future.

[macdon02]

https://crusoeeconomics.com/2020/01/15/is-there-a-repo-crisis-brewing-in-canada/


Errol, Austrian, your thoughts?

[errolanderson]

EU banking system has always been fragile. When some US banks take it, then we can worry.

U.S. bank stock index now getting smoked along with the USD. Fed emergency rate cut now a crusher . . . .

[Austrian Economics]

https://crusoeeconomics.com/2020/01/15/is-there-a-repo-crisis-brewing-in-canada/


Errol, Austrian, your thoughts?

Trouble in the Repo market has been brewing in the U.S. since September. Back then the rate spiked to 10% suddenly, prompting the Fed to essentially ditch its Quantitative Tightening program. Since then, they've had to intervene quite frequently to add grease to the credit gears to prevent a lock up. It doesn't surprise me that the trouble may be spreading. Some leveraged player(s) is in danger of default. It's really hard to find any info as to who that might be. I assume central banks don't really want to make this information public.

[Austrian Economics]

I like the Zero Hedge website when it comes to issues like this. Liquidity issues are popping up all over as this article indicates. Much of it has to do with everyone wanting to be only on one side of a trade. Central banks are trying to be everywhere at once. Something has to give.

https://www.zerohedge.com/markets/just-how-bad-liquidity https://www.zerohedge.com/markets/just-how-bad-liquidity

[errolanderson]

I like the Zero Hedge website when it comes to issues like this. Liquidity issues are popping up all over as this article indicates. Much of it has to do with everyone wanting to be only on one side of a trade. Central banks are trying to be everywhere at once. Something has to give.

https://www.zerohedge.com/markets/just-how-bad-liquidity https://www.zerohedge.com/markets/just-how-bad-liquidity

U.S. credit markets are buckling . . . .

[jazz]

Errol, austrian, the S&P isnt the same beast it used to be. Its filled with lots of unicorn stocks now, hence the volitility and lack of liquidity. Some of these are highly leverages to china.

If you could carve off Apple, Google, FB and all those you get a much better view of the US economy and these sorts of events.

I purposely own a low volitilty verson of the S&P for this very reason.

[errolanderson]

The 'smell of default' is in-the-air . . . Long bonds exploding to record one (1) day gains today.

[Austrian Economics]

Errol, austrian, the S&P isnt the same beast it used to be. Its filled with lots of unicorn stocks now, hence the volitility and lack of liquidity. Some of these are highly leverages to china.

If you could carve off Apple, Google, FB and all those you get a much better view of the US economy and these sorts of events.

I purposely own a low volitilty verson of the S&P for this very reason.

The unicorn stocks are a function of interest rates falling all the way to zero. At zero interest, a business plan that can generate even a .1% return is suddenly viable. You would never see this in a sane credit market where savers had the power to withdraw their capital when the risk becomes too great.

Leverage works great in a bull market. Your gains appear to multiply effortlessly. But in a bear market, it's not so nice to see losses multiply as the unicorn machinery goes into reverse. It doesn't take long before a major player has to default.

[biglentil]

Rhodium doesnt give crap its continuing its ascent to the moon.