Below is our translation of an article from RIA Novosti with commentary and notes [in brackets] by Vince Dhimos.
The US has managed to plug a financial "hole" with 86 billion a day. So far
Even the permanently optimistic American financial press is gradually concluding that the US budget deficit is starting to create difficulties that the Federal Reserve can hardly handle. The financial system of our overseas partners can be compared to an unstable reactor, and their central bank is trying to make sure that the explosion does not happen, and it’s becoming more and more difficult to keep this “reactor” under control. The flagship of the American business press The Wall Street Journal reports: "The Federal Reserve’s control over rates is tested for strength by the growing United States government budget deficit. Debt issuance by the US Treasury is expected to contribute to the instability of the money market."
In this case, it is worth making a translation from the cautious language of specialized journalists into spoken Russian. The American habit of living beyond our means has become so widespread that even the use of the printing press to close financial holes is no longer enough to protect the financial system from toxic effects. By and large, a significant part of the welfare of the fading world hegemon [the US] after 2008 is based on a constant increase in public debt and budget deficits, combined with maintaining very low interest rates for the economy as a whole. In this sense, the US economy can be compared to a bicycle, which has one pedal at low rates and another at increasing budget deficits, which are financed by the growth of public debt. If interest rates on loans suddenly rise or if the budget deficit cannot grow further, then the economy first slows down and then begins to fall. [Let’s hold it right there for now. So you ask: just why has the debt bubble, irresponsibly created by the Fed to please its billionaire pals, forced the government to overspend? Here is a brief explanation from an Awara analysis of 2018: “[spending] must not only be high enough to maintain the bubble at the previous level but also high enough to generate a semblance of growth.”
Now the market is afraid that the budget deficit has reached a level that will disrupt this pattern. The practice of 2018 clearly showed that the American financial markets (and the economy as a whole) with the increase in dollar rates (that is, the cost of lending in the economy) are starting to fall apart right before our eyes.
The Wall Street Journal clearly indicates that it is the deficit of money in the American treasury that is to blame for the problems, and emphasizes that the solutions found are temporary: "The budget deficit, which is projected to grow over the years, will lead to a deterioration in the basic elements of the US financial system, which makes it difficult for Federal Reserve to manage interest rates, which (in their turn - Author’s note) affect how much consumers and businesses pay for loans. In September, the Fed was forced to intervene in money markets to suppress a short but alarming jump in short-term interest rates The central bank says it is ready to deal with any financial problems that may arise before the end of the year in the so-called repurchase agreement market, or repo market, worth $ 2.2 trillion, but a long-term solution has not yet been developed."
Although the so-called repo market is not very well known to the general public, it is in fact indispensable for the functioning of the modern financial system. Banks depend on it for short-term lending, with government bonds used as collateral. In turn, as American journalists rightly point out, the smooth operation of this segment of the financial market, hidden from the general public, "ensures a reliable supply of credit funds to the economy." The irony of fate is that American senators and congressmen, when they proposed a package of “hellish sanctions” against Russia, probably expected to ease the “repo market” in our country - at least, finance minister Stephen Mnuchin described exactly in his letter to Congress such consequences of the introduction of "hellish sanctions." No one has imposed sanctions on the States, but the situation in this key segment of the financial market looks very bad - it is not for nothing that the Federal Reserve has to plug up holes to the tune of $86 billion a day. To describe the situation in the simplest and crudest terms, there is a catastrophic shortage on the market of people wishing to borrow money secured by American government bonds (which, at least in theory) are a risk-free asset and by rights should be snapped up by potential lenders.
The need for cheap lending may so far be covered by the Federal Reserve, which actually acts as a "lender of last resort," but this is a temporary solution. The Wall Street Journal quotes the opinion of Mark McQueen, a bond portfolio manager at Sage Advisory, as saying: "The Fed cannot defend a trillion dollar deficit (budget – author’s note) Year after year. This is beyond their capabilities." [To better understand the repo market, here is some help: https://www.wsj.com/video/the-repo-market-explained/AB15EF0E-9407-41C7-921B-98F6B9789DC2.html ; https://www.youtube.com/watch?v=8SE2W5b8dp8 ; https://www.youtube.com/watch?v=34Hl253H4xw]
The desperate and clearly unplanned actions of the American authorities are starting to resemble the emergency measures that were taken in the crisis of 2008, only this time the actual word “crisis” is not uttered by any official to avoid making it a self-fulfilling prophecy. It cannot be ruled out that unforeseen stress, which began in the financial market in September and is not ending despite all the efforts of the American monetary authorities, is a sign of systemic problems in the economy and one of the symptoms of an impending recession.
CNN reports that at least one major international bank expects a recession in the US economy next year:
"The Fed believes that it has everything under control," wrote Philip Marey, senior strategist at Rabobank for the US market, in a note to clients. But the same forecasting model that led Rabobank to correctly determine the end of the recent Fed interest rate hike cycle now signals that the central bank will need to “lower rates to zero by the end of 2020,” Marey said.” The three rate cuts (this year – author’s note) will not be enough to prevent the economy from falling into a recession,” he wrote.
At the same time, the Bloomberg agency, referring, for example, to the testimony of Fed Chairman Jerome Powell to Congress, notes that if the US economy slows down, all these measures will not be enough: in that casel the Fed will not be able to reduce interest rates sufficiently to significantly mitigate (not to mention prevent) a serious economic downturn. <...> Theoretically, this gap (between the capabilities of the Federal Reserve and the needs of the economy – author’s note) can be filled by fiscal stimulus, that is, by the government either reducing taxes or increasing spending. In practice, this will be almost impossible.”
In 2016, Donald Trump said that the US economy is a big ugly financial bubble. Now he cannot allow this bubble to burst before the 2020 elections, and probably all kinds of short-term Fed decisions will be enough to achieve this goal. But after the election, at any moment, a situation may well arise in which real miracles are required from the President and the Treasury Department for the bubble to continue to exist.
Perhaps it is the recognition of these risks that makes Trump rush so frantically in the economic war with China and in forcing the European Union to finance the American military-industrial complex and NATO - he knows that he does not have much time left to save American hegemony.
SIGNS THAT THE US DEBT-FUELED ECONOMY MIGHT ACTUALLY COLLAPSE
From April 2018
“An enormous bubble has been created – and it will go on inflating as the new debt must not only be high enough to maintain the bubble at the previous level but also high enough to generate a semblance of growth.”