Repocalypse: The Little Crisis that Roared
That didn’t take long. I just published an article showing how the Fed had responded with a quarter of a trillion dollars to save the economy from what it claimed was a mere blip. Since then, the recession-causing Repocalypse I’ve warned of has roared around the world, forcing the Fed to amplify its response again.
The Fed just cannot outrun the little monster they created. It is growing as quickly as they increase their running speed. In the article I just alluded to, I also stated,
I showed this graph of how far they had already gone in trying to pump the failing system back up:
Then I noted that, in spite of such historically rapid and massive Fed intervention, the economy was still sinking toward — if not deeper into — recession.
Here is another way of presenting the same data:
The red bars show how much was injected into the Fed’s balance sheet under QE, then how much was withdrawn from the Fed’s balance sheet under QT, and now how much has been re-injected under QE4ever. Tell me that the Fed’s current intervention is not every bit as large in scale and faster in timing than any previous round of QE!
And now they’ve increased it again! As it turns out, I was so busy putting together that article, that I missed the news that the Fed had just done what I said I thought it might have to do … yet again. It upped the amperage on its repo operations one more time:
These new repos are only supposed to aggregate to an additional $55 billion, but there we go again with the Fed having to add more and more to a program that it continues to say it has under control. It is again stretching the term length of repos to new terms because shorter-term repos to banks are endlessly rolling over.
This is extraordinary in the truest sense of the word. We’ve never seen anything like it in the repo market. News of the Fed’s constant failure to fully appreciate and address the scale of the funding shortage that began in September keeps pouring in so fast that I am scrambling just to keep up with it as I research and write my articles.
How the repo crisis has multiplied like a virus through the financial system
Here is how the Fed’s overnight repos, generally just an end-of quarter one-day phenomenon (and for almost a decade not even necessary), continue to roll over:
And here is how the two-week term repos (a new invention by the Fed in manipulating money markets) have continued relentlessly to roll along:
As I look at that, I have to think the Fed, which originally thought it would solve the problem with a single overnight repo operation, maybe two or three at the most, must now be in panic mode as it has gone from inventing fourteen-day term repos to now 48-day term repos to supplement a program that is still not resolving the crisis.
Bank of America sees it as a problem that could be metastasizing into financial collapse:
It’s a good thing this isn’t QE4ever or even QE at all (according to Fed Chair Jerome Powell). It is just the new norm in overnight bank funding. Just the new norm. The Fed has stated one other reason (than the one mentioned by BofA in the excerpt above) for saying this is not QE: it no longer comes with forward guidance about how much the Fed will buy and when. How it can get away with claiming that when its schedule is published well in advance is beyond me:
How much more obvious does forward guidance need to be? And who cares if the Fed gives forward’s guidance? At this point the banks are so used to how QE works that they could intuitively guess at what the Fed will do. Some say JPMorgan manipulated what the Fed is now doing by helping create this crisis with its own massive balance-sheet rotation.
Here, by the way, is a great recent article by Chris Martenson about how QE has been working, explaining how the Fed is, for a fact, illegally monetizing the US debt, even as the Fed claims it is not:
I’ve written about that in the past, but there is no need for me to go back and try to recap what I’ve said when Martenson does so well there. The Federal Reserve is breaking the law, and congress couldn’t care less. It didn’t even bother to ask Powell at last week’s congressional hearing how it is that the Fed claims it is not monetizing the debt. (At least, not that I’ve heard reported.)
The Fed is not only monetizing the debt directly at this point, but as Martenson says, it is even fully engaged in Modern Monetary Theory without admitting it and without any overt choice by government to go that route. Yet, the financial world sleeps as the train goes by — a congressional circus train for public entertainment about the orange clown named Donald. No, not Ronald MacDONALD. Just Donald. Congress plays with politics while Rome burns.
With such slight of hand, the entire monetary regime of the United States has shifted in two months time into something never seen in US history — a central bank directly financing the US federal debt with ever larger rounds of new money, “printed” (an anachronism in that it is done, of course, with the click of computer keys in this age) and deposited in the government’s bank account THE VERY SAME DAY that government treasuries are actually issued!
And no one cares. (Well a few readers here (and there), but not many.)
The monumental scale of the Repocalypse
As stated in the following video, the Fed has now moved from lender of last resort for banks to the everything of last resort for banks, the government, the stock market, the bond market, money markets, etc. The entire US economy has become utterly Fed dependent. Here is how the Repocalypse moved insidiously from a nothing-of-significance to an almost covert almost-everything-has-changed-but-almost-no-one-is-talking-about-it:
To clarify one point at the start of the video, yes, the Fed with its endlessly repeated overnight repos and weekly repos has already done $3 trillion in total operations. However, that is misleading in impact in that almost all of that just refinanced the repos that happened earlier. When you keep rolling over an overnight repo every night for two months, it sounds like you pumped in about fifty times more money than you actually did. In fact, all you’ve done is create one night’s worth of new money and then endlessly refinance the original repo every day for fifty business days. The overnight repos don’t aggregate at all.
Likewise, when you do that every third day or so with two-week term repos, they aggregate over the course of those two weeks, so you wind up with three of four of them accumulated by the end of two weeks. After that, however, each new term repo is essentially just rolling over one of the term repos that happened in the two weeks prior because those earlier term repos are now rolling off the books as you add each new one.
That’s why I used the chart at the top of this article to show what the actual aggregate (to the Fed’s balance sheet) of all these actions along with the latest permanent $60 billion a month has been — about a quarter of a trillion dollars. Still, a quarter of a trillion dollars is a massive monetary injection as great as any QE we ever saw during the Fed’s so-called “recovery” period.
Yes, some QE came in bigger single doses, but averaged over the period between one dose and the next, none of them were any greater than what is happening now. QE 1 added about a trillion dollars in almost one burst, but then that was it for almost two years. QE 2 added another 3/4 of a trillion, but that was it for another two years. Then QE3 added $80 billion a month (for almost another two trillion over the course of another two years).
If you average each of those out as a monthly figure over the years that they covered, they are all less than what has just been injected each month over the last two months, which is the best you can do to compare because we have no idea how long the present operations will continue. The Fed states until April, but the Fed has understated by a very large degree how long every operation it has done will continue since it began these emergency operations in September.
The Fed obviously has no idea how long they will be necessary, so why would anyone continue to take their word on it. They also said QT would be continuing right through the present day on autopilot at this time last year. So, why does anyone take their word on anything anymore. They also said there was no recession in site and no housing crisis on the horizon right in the middle of the Great Recession, and said there was no recession in sight just before the dot-com bust. Why does anyone continue to accord them any deference or credibility at all?
To reiterate what I said a couple of articles back about the scale of this thing and what the Fed understands about it (this time enumerated for clarity):
During those previous rounds, I’ve stated from time to time each new plan would probably not be enough; and, now, because all of that is still not enough, the Fed has added another $55 billion!
How much will it take for the general public to wake up and realize that the September repo crisis was so enormous that the Fed is still struggling to bring under control? Therefore, I think it merits being called, as some are calling it, “The Repocalypse.” In fact, we still don’t know how big it is, and to keep us from figuring out who is in the biggest trouble, the Fed has said it will refuse to reveal what banks are getting this extreme aid for two years! (They don’t want to cause a run on banks, you know.) I’ve said this will mount up to at least, $500 billion in new monetary injection, based on the Fed’s stated schedule … and probably more. We’re already halfway there!)
How many times have my own readers heard me warn in years past that, for new rounds of QE to keep working, it is going to take higher and wilder doses of it to achieve the same effect? Isn’t that what we are now witnessing?
As noted in the video above, the Fed’s asset sheet has just slammed from going in reverse (shrinking) at an annualized rate of about 9% into full forward thrust (growing again) at an annualized rate of 23%! The shift point, of course, was September’s repo crisis. That should give you a sound idea of how significant and severe the repo crisis was and is by how much QE it is taking to jar us back out this crisis, hopefully before it becomes a problem across the entire economy. That is an astounding regime change. And almost no one seems to care.
Everyone is riding along silently in the family car as it flies off a cliff, saying “Dad has this under control.”
The speed with which the Fed reversed and the degree to which almost no one cares has been a little surprising to me, though it shouldn’t have been, given what I’ve seen of economic denial in the years I’ve been writing this blog. The entire US populace, including all the economists and market analysts and politicians have readily and smoothly gone along with the Fed’s claim that it is not doing QE, and acquiesced to their stance that this is just a minor technical blip the Fed is correcting in order to maintain monetary policy. Not many are asking why routine monetary policy now requires daily massive interventions by the Fed.
A large part of my claim that we’d go into recession this year because the Fed would not react effectively enough to avoid the recession that would be caused by its tightening was rooted in the belief that the Fed’s astounding return to QE would finally break through people’s denial enough that they’d start raising objections like, “Wait a minute here! You told us that QE was temporary. You told us you could normalize your balance sheet again and that doing so would be ‘as boring as watching paint dry.’ You told us that QE was not monetizing the national debt precisely because you would normalize your balance sheet again so that it would all go away and become nothing but a temporary measure that was necessary for economic stimulus, not necessary for funding the US debt. Now, all of that has proven to be total bunk, and you’ve had to rush back to QE more quickly than you ever thought possible. In fact, you never thought you would have to return to QE at all. Not much more than a year or so ago, Janet Yellen told us we’d never have another financial crisis in her lifetime, and here you are repeating everything you did in the worst part of the Great Financial Crisis. You guys have no credibility left at all!”
I thought some argument like that might emerge. In that case, the lack of public trust would prove a HUGE problem for the Fed because even the Fed has long openly admitted trust is its only real stock in trade. Without that the fiat dollar has no value at all.
Yet, here we are, with everyone humming “Dixie Land” or something of the kind and the Fed marching along without much criticism, and the attitude almost everywhere (so far) is, “Well, we’ll just see where this goes. The Fed says it will all be fine. I see no reason not to believe them, do you?”
Maybe history is a reason!
I wrote about how little anyone appears to care about this major Fed regime change in a comment on my last article, and I wrote it before even becoming aware of how the Fed just increased its repos/stimulus measures for the seventh time in less than twice as many weeks:
As I concluded in my last article,
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