Below is our translation of an article from RIA Novosti with commentary by Vince Dhimos.
It is hard to imagine that a country teetering on the edge economically could even think of bullying other, very powerful countries with sanctions or even assassination of high officials. A while back, Russia ditched almost all its Treasuries (as mentioned below) to avoid the potential bite of sanctions. It knew that the US was capable, in a fit of rage, of prohibiting it from selling its Treasuries and then just keeping the cash. Stealing – sort of like “we’re keeping the oil.”
And, as also mentioned below, China has ditched significant amounts of Treasuries, and so have European central banks and mutual funds. Clearly – I mean clearly if you’re not a US government official – the world is losing its faith in US Treasuries and it would be a good time to drop the bullying role. But apparently US officials have forgotten how to be even a little humble. That is one reason the title of the article below says “it’s going to hurt.”
Here it comes. Good and hard.
"It’s going to hurt": the US did not manage the liquidity crisis
Jan 1, 2020
MOSCOW, Jan 10 - RIA Novosti, Maxim Rubchenko. In the US, the liquidity crisis has sharply worsened, with which the country's financial authorities have been struggling for four months. From September to December, the Fed poured 366 billion dollars into the economy, but that did not help: in the last week alone, another 99 billion had to be added.
There’s no more money
At a weekly loan auction (repo) held on Wednesday, bank applications significantly exceeded the limit of $35 billion. As a result, the Federal Reserve provided loans for 41 billion, and taking into account other auctions, the total volume of cash injections into the American economy for the week reached 99 billion.
This signals a new round of the liquidity crisis, which the authorities have been trying to cope with since September 16, when bank applications for short-term Fed loans suddenly almost doubled - from 27 billion to 53.2 billion. This led to an increase in lending rates from 2.29% to 4.75%.
The next day, banks filed loan applications for more than $80 billion - and the rate exceeded ten percent.
Another key indicator, the federal funds rate (at which banks provide short-term loans with excess reserves to other banks), for the first time exceeded the target range of 2.3-2.35% set by the Federal Reserve. Dollars in the interbank market had not been this expensive either in the midst of the 2008 crisis or when the "dot com bubble "burst in 2002.
To save the financial market from paralysis, the Federal Reserve Bank of New York went to buy securities - government bonds, bonds of federal agencies and mortgage obligations – from banks. In just two days (September 18 and 19), $128 billion was poured into the market.
But that was not enough, and the Fed announced the repurchase of short-term treasury bonds (for up to a year) in the amount of $60 billion per month. The market calmed down for a while.
However, on December 16, bank applications for loans again exceeded the limit, and the regulator again began to pump up the economy with money. In total, from September to December 20, the Fed, through repo auctions and the repurchase of short-term government bonds, pumped 366 billion dollars of additional liquidity into the national financial system – a record since the 2008 crisis.
Experts were sure: now the situation is normalizing. Nothing of the sort. Moreover, in the new year, cash injections increased: from 255.95 billion in the last week of December to 258.9 billion in the first week of January.
United by debt alone
According to analysts at the Swiss Bank for International Settlements (BIS), the main reason for the lack of liquidity in the United States is a sharp decline in the issuance of loans by major US banks.
"In recent months, the assets of primary lenders have concentrated on treasury bonds, which has limited their ability to provide financing in the short term on repo markets," the BIS report said. In fact, the largest US banks today are saving the national economy from default.
The fact is that against the background of a record public debt ($23.17 trillion as of January 23, 2020) and the Trump administration’s unpredictable trade policy, many investors are jettisoning US government bonds.
China, which until recently had the largest portfolio of US debt securities, sold them more than two hundred billion dollars’ worth last year, the Bank of Russia sold almost one hundred billion since the end of 2018. Other central banks, as well as private European and Asian investment funds, are actively reducing their Treasuries portfolios.
The US Treasury was faced with a drop in demand for securities, which are the only way to cover the budget deficit. Since the Fed is not entitled to direct issuance, the “quantitative easing” scheme tested in the crisis of 2008 was again launched to save the situation: the largest national banks acquire government bonds, and the Fed then redeems them for freshly printed dollars, while ensuring decent profit for partners.
As a result, large banks had no incentive to lend to small and medium-sized companies – which lost short-term loans. Now the Fed has to exceed repo auction limits, since the law does not prohibit printing money for this purpose.
Optimists and pessimists
Many American experts believe that the Fed, having launched a new phase of "quantitative easing" in parallel with additional injections of liquidity through repo auctions, has found a reliable remedy for the new financial crisis.
The Bank of America (BofA) report notes that while in October only seven percent of investors expected accelerated global growth in the New Year, then in December it was already 29%. At the same time, fears of a recession fell by 33 percentage points, and the vast majority of respondents (68%) today are confident that the global economy will avoid a recession in 2020.
BofA analysts emphasize that, believing in future growth, global investment funds are reducing investments in reliable instruments with guaranteed returns and increasing investment in stocks. No wonder the S&P stock index overstepped the boundaries of the technical corridor in which it has been since the end of 2018.
However, some experts warn that a bubble is forming in the market. “And the more the Fed pours in money, the more difficult it is to return to normal monetary policy without causing a stock market crash," said Scott Skyrm, chief analyst at the Curvature Securities repo investment market.
And it will be necessary to return to normal politics. Otherwise, the dollar will collapse and inflation will accelerate.
“Whether Fed Chairman Powell will be able to contain inflation and continue this policy until the November elections is the question,” Scott Skyrm points out. “If not, he will have to answer to a very angry president.”