QE Policy Is Going To Destroy Economies, One Way Or Another

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After the GFC in 2008, banks had excess reserves, reaching over $2.5 trillion. To prevent the trillions entering Main Street, the Fed began paying interest on excess reserves (IOER). Given the level of excess reserves, the Fed could no longer use open market operations to manipulate the Fed Funds rate. The Fed thought it could control the Fed Funds rate by manipulating IOER.

As we have stated previously the Fed Funds Rate should never go below IOER because if it did, banks would withdraw their loans to other banks and deposit the funds at the Fed instead. Conversely if the Fed Funds Rate goes above IOER, banks could withdraw reserves and lend them to other banks.

However in the spring of 2019, the Fed Funds Rate rose above IOER, so the obvious question then is why did the banks not withdraw reserves and lend them to other banks? It was a clear signal that the banking system had liquidity issues.

Fast forward to September 16th 2019 and the overnight repo rate rose to 10%, so why didn’t they lend? It appeared that excess bank reserves were woefully short of what they should be. So in essence the banking system was in desperate need of cash and willing to pay huge premiums for the privilege, which again reflects a lack of liquidity

In many senses, September 16th was a watershed moment. The banks suddenly were in unchartered territory and something had to be done because there was a sudden spike in demand for financing and the banks had to be the ones to meet those requirements. Was a bank or other financial institution in trouble? Something very significant was being hidden.

Furthermore how does this feed into bank liability exposure and how much of this apparent illiquidity is due to foreign money which is being removed? What is also not being mentioned is that the Fed has been pumping the banks with liquidity to keep them buoyant. The second that stopped, the wheels fell off immediately.

We only have to look at the size of the TBTF bank balance sheets which are more than double their size in 2008. What about sub-prime loans plus OTC derivatives not even on their balance sheets and which staggeringly do not account for those with counterparty risk.

Counterparty risks were a major contributory factor to the 2008 GFC. Despite all the incorrect assertions that this was solely a sovereign debt problem the reality is the banks have merely compounded the problems they had in 2008 and it is now on steroids.

Banks don’t have enough reserves, which likely suggested that foreign investors were withdrawing their USD deposits. This should come as no surprise, because that is precisely what happened back in 2008. It also suggested that the FX swaps markets were imploding which are being used by the same banks to prop up the USD. It also confirms that the UST supply was growing exponentially.

Something was broken, it was systemic and it cannot be fixed. However they will continue to try and paper over the chasms with QE which is now a very different beast, because the credit cycle is now in its death throes. As we have said before people are maxed out on debt, the banks are over leveraged and corporations are drowning in debt also.

In essence the economy is now cratering and this means that QE will have to become a consumption vehicle which means QE will finally enter Main Street. The Fed can therefore keep pumping QE which will cause rampant inflation or if they don’t implement QE, it will drive interest rates northwards and that will destroy the markets and the economy.

Nations and corporations which are already drowning in unmanageable debt levels as well as banks with liabilities they can’t manage are somehow expected to spend capital on infrastructure and R&D. Central banks will print money to effectively pay for huge tax cuts and public investment which will fail. It amounts to helicopter money but it will never be called that because they will then have to admit we are in Weimar territory and hyperinflation beckons. It is of course the final nail in the coffin lid of the FIAT monetary experiment.

4 Comments

  1. Paul, the quicker this goes t-ts up the better, it just amazes me the rabbits they pull out of the hat, one guy I follow all the time is Maneco 64, he speaks sincerely and with passion in his voice.
    I have read a lot of reports regarding corona virus being a bio weapon, I think they are right, makes a lot of sense, I would not put anythink against the the establishment, just hope that China pays them back, bringing a gold back currency.

  2. Paul,
    We know that the Cabal invented the Beatles which taught people to not touch when they danced and it worked. Now the millenials have learned to come together and they needed a new reason: thus, Corrona Virus with NO Touching but staying 6 feet apart. Theybare at it again but thus time the youngsters will persist.

  3. Paul, I enjoyed the post, and thought it was right on. The Covid-19 problem seems to have left most with the idea that the financial problem was caused by the virus when it in fact began in September, or actually, long before that, as we know. I agree with the previous post that the sooner their attempts fail the better. I take no pleasure in this but all along I was hoping it would come, the sooner the better as all attempts to stall it off just makes maters worse. My hunch is that the virus was weaponized but by who? So, the dollar will now be confetti and that will be the next problem.

  4. PAUL ; This piece spot on as always . Essentially concur with everyone’s thoughts .
    especially Terry’s – who appears to have exactly the same feelings as my own .
    I too am champing at the bit to see an end to this fiat based ponzi scheme and a speedy return to sound money – but dread the societal implications of what may come to pass when the masses wake up to the truth – SIMON

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