An Odd Combination of Serenity and Panic
The United States, with untroubled ease, continued its approach toward catastrophe this week. The Federal Reserve cut the federal funds rate 25 basis points, thus furthering its program of mass money debasement. Yet, on the surface, all still remained in the superlative.
S&P 500 Index, weekly: serenely perched near all time highs, in permanently high plateau nirvana. [PT]
Stocks smiled down on investors from their perch upon what Irving Fischer once called “a permanently high plateau.” As of the market close on Thursday, the Dow Jones Industrial Average held above 27,000, the S&P 500 above 3,000, and the NASDAQ above 8,000. 401k accounts, to the delight of working stiffs of all ages, origins, and orientations, are swollen beyond expectations.
Below the surface, however, the overnight funding market was subject to much weeping and gnashing of teeth. Sometime between Monday night and Tuesday morning the overnight repurchase agreement (repo) rate hit 10 percent. Short-term liquidity markets essentially broke.
After several technical glitches, the Fed executed its first repo operation in a decade – $53 billion – to keep the interbank funding market flowing. Zero Hedge documented the chaos real time.
This was followed up with additional repo operations on Wednesday and Thursday – at $75 billion a pop, and both oversubscribed. Perhaps Fed repo operations will be a daily occurrence, at least until the Fed launches QE4.
US overnight repo rate – as Fed chair Jerome Powell remarked: “Funding pressures in money markets are elevated this week”. Evidently, nothing escapes his eagle eyes. [PT]
At the same time, the effective federal funds rate – the upper range limit of the federal funds rate – continues to push above the rate the Federal Reserve pays on excess reserves (IOER). In other words, the Fed’s primary tool for price fixing credit markets is not behaving according to plan. Greater Fed intervention will be needed to keep things in line.
The fate of Fed projections… this may explain why the Fed was apparently surprised by the recent developments in overnight funding markets. [PT]
Centrally Planned Credit Markets
No doubt, these are the sorts of pickles that central planners invariably find themselves in. At the heart of the matter is lack of cooperation. The planners push credit markets one way and the credit markets react in unanticipated and unexpected ways.
Remember, in centrally planned economies, supply and demand are not allowed to naturally adjust and equilibrate. This often results in supply shortages and strange phenomena like store shelves with potato peelers and no potatoes. Centrally planned credit markets are no different.
Through its interest rate price control policies the Fed creates an environment for liquidity mismatches (i.e. supply and demand disparities). Then the Fed must intervene with even greater price controls to arbiter them. This in turn compounds the mistakes; layering and levering them up to the extreme.
Somehow the clever fellows, as they devise plans upon plans from cushy chairs within the climate controlled Eccles Building, are unaware they are chasing the wild goose. For example, here is an excerpt from the Fed’s recent implementation note:
“Effective September 19, 2019, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1-3/4 to 2 percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 1.70 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.”
What to make of it?
First, the central planners are winging it. Second, there is no happy end to this madness. Third, there will be hell to pay – and you will get to pay for it.
Central planners, confidently forging ahead… [PT]
Fiat Money Cannibalization in America
While in office, former vice president Dick Cheney once commented that “deficits don’t matter”. To be fair, politics – not fiscal policy – was the context of Cheney’s remark. His implication was that ‘deficits don’t matter to voters.’ He was right then, and he is right now.
Most voters don’t give a rip about deficits. So, too, most members of Congress don’t care about deficits. If you recall, there was no real resistance to the recent suspension of the debt ceiling and federal spending increases. Voters demanded it. Congress obliged with little deliberation. The fact is all pretense of fiscal restraint at the national level disappeared with the Tea Party movement over the last decade.
The population at large has come to believe it can get something for nothing – including free food, free drugs, free retirement, and free money – via the ‘power of the purse’. People believe the government can spend without limits and indefinitely kick the debt can down the road. They believe there will be no consequences for this complete failure of discretion.
Dick Cheney… the mythical creature that “exists neither in the executive branch nor the legislative, yet simultaneously in both. He is neither man nor beast, yet has elements of the twain. He is at once everything and nothing, substance without form, shape without motion, time without reason…he is the Highlander” (according to John Oliver). In this image he seems to be telling someone off. His remark on the importance of deficits, or rather the lack thereof, is destined to haunt him forever. [PT]
Voters couldn’t be more wrong. Contrary to what Cheney said, deficits do matter. And voters should care about them.
The U.S. budget deficit has already topped $1 trillion for the first time since 2012, and there is still one month in the fiscal year to go. When the economy slips into reverse deficits could easily jump to $2 trillion. Interest rates could also slip and slide even lower, perhaps into negative, like in much of Europe and Japan.
Of course, the Fed will keep pushing the limits of what it can and cannot control in a futile attempt to hold things together. It will supply a continuous flood of liquidity to credit markets with no reservation. What choice does it have?
Failure of the debt based fiat money system is at stake. The Fed will do everything it can to keep it alive. It will keep at it, debasing the dollar around the clock, until the precise moment it cannibalizes itself.
Holding some gold – or silver – at this juncture is of supreme importance.
Sun, 09/22/2019 – 11:30
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Author: Tyler Durden