Henosis

It's possible the next round of QE will not show up on the Fed's balance sheet Instead, it could be carried out by banks themselves Here's how a change to banks leverage rules could bail out the US government 🧵👇🏼 The US Government currently owes $34 trillion - not including interest. For every dollar they borrowed in the past, they have to borrow more dollars today to pay it back when it matures. And for every dollar they borrow today to pay back old maturing debt, they have to borrow even more in the future. Basically, the debt has to grow if they don't want the whole fiat system to collapse. But, the problem is that the economy does not have a limitless supply of dollars to loan the government. Sometimes, the dollars run out. If we rewind the clock to the last time the dollars ran out, it was 2019. The US government had spent the last few years borrowing and spending like crazy. On the backs of the Trump tax cuts and increases in government spending, the deficit exploded. By September of 2019, the economy did not have any dollars left to loan to the government. In fact, banks did not even have enough dollars to loan to each other. This caused the repo market to almost collapse in September of 2019. Banks went to each other in overnight markets to get cash from each other, and realized they were all trying to do the same thing. Nobody had any cash. They all had assets (treasuries) but no cash. So the overnight cost for cash exploded, and banks were at risk of collapse. This was a liquidity crisis. Without overnight funding, banks would face overnight collapse. Obviously the Fed wanted to avoid this, so they intervened. When the Fed intervened in the repo market, they said it "wasn't QE" because they were only buying short term government debt from banks in order to keep overnight cash cheap. But we all know the result is the same - print cash and give it to a bank in exchange for an asset. The Fed's balance sheet grew, and banks had the liquidity they needed again. This is the path they almost always take. When liquidity dries up, when the government needs cheap financing, or when a crisis threatens "moderate long term interest rates", the Federal Reserve steps in, printing enough new money to buy the necessary treasuries from the market. But given the fact that inflation is still so sticky, if the government were in need of a new round of QE again soon, it would be deeply unpopular for the Fed to abandon its fight against inflation, fire up the printer, and start QE again. Lucky for them, they may be able to accomplish stealth QE with a simple rule change for banks, and it wouldn't even have to show up on their own balance sheet. We'll come back to that in a moment. First we have to address the question of government borrowing. Is the government at risk of repeating the same thing that happened in September of 2019? Where they had borrowed all available cash out of the system, triggering a liquidity crisis? Yes. Right now, every time the government tries borrowing long term debt, the auctions don't go well. The difference between the rate they want to borrow at and what they end up paying is called a tail. Over the last few months, the sizes of tails on treasury auctions keep making new records. The one place the government is continuing to borrow from in order to avoid this mess is short term debt; T-Bills. The funding from this is coming from places like money market funds, who are pulling their cash out of the Fed's Reverse Repo Facility and buying T-Bills at auction instead. Right now there is only about $500 billion left in this facility. Within the next couple of months - at current government borrowing rates - this facility will be drained. Leaving the government forced to pay higher rates to attract lenders, until all the available money to lend has been fully borrowed. So what about this rule change? Current leverage rules limit how much a bank can buy and hold of any assets, including US treasuries. (Remember, when you buy a debt asset, that's just another way of saying you are loaning money). Banks buy a mix of assets to optimize return while paying attention to potential risk. The Federal Reserve could simply change this rule, so that the limits no longer apply to treasuries. They've done it before (temporarily) and they can do it again. This would allow banks to purchase a limitless amount of US treasuries, becoming a bottomless source of borrowing for the government. But what about profitability? Banks still would have to worry about that, right? Well, not really. Treasuries are considered "risk free" which means that you are guaranteed to get your money back if you hold it until maturity. Recently, that was a big "IF" for banks that were holding underwater treasuries while a bank run started. It didn't matter that the treasury was considered risk free if they had to sell it prior to maturity at a loss. But the Fed has facilities in place that give banks the ability to temporarily offload underwater treasuries to the Fed in exchange for cash if they need it. So without the need to worry about risk, and with a leverage rule change that exempts US treasuries, banks could become a source of borrowing for the government that has no end. Banks would loan money into existence to the US government, buying as many treasuries as they wanted, keeping all the upside and none of the risk. QE through the banks, without the Fed's balance sheet ever having to change. Without the Fed's credibility being challenged. And they can keep up their facade of fighting inflation, all the while enabling the very thing that will keep it roaring higher. The End.