classical economics
for analysis,  forecasting
and policy design

Fed $Rushes Toward Zero

FED $  RUSHES TOWARD ZERO
Repos Finance Big Banks’ Risks

Wayne Jett © January 20, 2020

     During the last quarter of 2019, the Federal Reserve increased its monetary base by $223.8 billion! Compare this with about $45 billion increase in monetary base during the highest year between 2002 and 2008. Recall the 2008 crisis in mortgage based securities was blamed on the Fed’s too-rapid increase in the monetary base and the resultant granting of mortgages to less-than-qualified borrowers. If you were persuaded by that reasoning, what should you think (and do) now that the Fed during the most recent quarter has increased the annual rate of money creation to $895 billion – roughly 20 times the highest annual increase in the five years preceding 2008?

Who Is Getting The Money?

     While you mull that concern, add this issue to the mix. In the pre-2008 period, observers seemed pretty certain about where the new money was flowing: into mortgages on housing and commercial real estate. Where did the extra $200 billion go during the 4th quarter of 2019? The answer, if we learn with certainty, likely will make most observers pine for the good ol’ days of 2007.

     Since only Fed insiders know relevant facts, and their expressed views are usually ambiguous, we proceed by making inquiries and observations which seem reasonable. The vehicle by which the Fed added over $220 billion during the last quarter of 2019 appears to have been overnight or short-term repurchase agreements. Who were the counter-parties; i.e., who got that financing?

     Repo agreements are funding arrangements suited to a very limited number or class of borrowers. A repo normally assigns a first-priority security interest in specifically named, high quality assets with readily marketable value fully securing the total amount of funds advanced by the lender to the borrower for the short stated term of the loan. What kind of business firm has assets of that nature in quantities of the scale on which the Fed deals?

     The general answer is financial firms or, more specifically, mega banks of the nature occupying Wall Street and their satellite hedge fund clients. Why are such firms interested in repo funding arrangements? Because they engage in speculative investments in the nature of pattern deals with locked-in profits, which they replicate many times using “lots and lots and lots of leverage.” 

     Who is more likely to be favored by the Fed than Wall Street’s mega-banks, who have effective majority ownership and control of the Fed? No one, of course! Thus, we have now the super low cost, mega-volume financing through repurchase agreements, and the un-named borrowers surely must be the mega-banks and/or their clients.

Mega-Bank Risk Exposes Public and Nation

     The fact that these mega-sums of new currency are being created by the Fed and loaned into the economy should not be taken lightly as merely another Fed move into a new normalcy. Hyper expansion of monetary base is something a central bank does not do when aiming to achieve a long, stable life span for its currency.

     On the other hand, if a central bank’s fiat currency is nearing the end of its life span, this is typical of what can be anticipated. Before a fiat currency dies, its owners typically act secretly to acquire the maximum amount of hard assets with real value in exchange for the currency. To accomplish this, the central bank issues extreme amounts of the currency to firms favored by its owners. (Why not? No public audit is permitted!)

Fiat Currency: Creature of the Globalist Cabal

     Germany experienced hyper-inflation in the 1920s after being saddled with war reparations debts at the end of World War I. France had hyper-inflation after using fiat currencies twice, both early and late, in the 18th Century. The prices paid by affected societies in all such events have been very heavy.  

     Americans presently are dealing with end-stage struggles with fiat currency imposed on the nation 107 years ago by a globalist cabal which aimed, from the outset, to take “full power” over our society at the earliest date consistent with ultimate success. This explains, in part, the immense political and social upheaval that has engulfed numerous nations, including especially America, since 2016. Political puppets of the cabal, often called the Establishment, presently are attempting to remove President Trump from office by impeachment in order to defeat his counter-offensive against them.        
           
     The monetary policy challenge faced by President Trump is not merely to steady the value of the Fed “note” still called the dollar for the period of the Trump presidency. The challenge is to steady the dollar’s value for a preparatory period while a sound monetary system is readied to be put into place. The new monetary system likely will be announced and become active at the same moment, so uncertainty in markets will be brief as possible. Ideally, the new monetary system will provide currency exchangeable for gold at a guaranteed price.

Measuring Currency Value In Gold

     What price of gold is to be specified in the currency? For production purposes, the gold price must be adequate to pay for discovery and production of gold with reasonable profit margin for the producers. For political and social reasons relating to domestic and international tranquility, some experienced observers state the gold price will necessarily be set at a price adequate to balance the assets and liabilities of the indebted sovereignty. For President Trump’s purposes, that sovereignty appears to be the U. S. Treasury.

     Winding up the Federal Reserve would certainly entail returning reserves deposited by private banks, plus many issues beyond the scope of this brief comment. May we and others soon have reason to address those issues.