Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With Fincrew.my - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Why BITCOIN NEW ALL TIME HIGH Changes EVERYTHING! - 22nd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21
UK Covid-19 Booster Jabs Moderna, Pfizer Are They Worth the Risk of Side effects, Illness? - 22nd Nov 21
US Dollar vs Yields vs Stock Market Trends - 20th Nov 21
Inflation Risk: Milton Friedman Would Buy Gold Right Now - 20th Nov 21
How to Determine if It’s Time for You to Outsource Your Packaging Requirements to a Contract Packer - 20th Nov 21
2 easy ways to play Facebook’s Metaverse Spending Spree - 20th Nov 21
Stock Market Margin Debt WARNING! - 19th Nov 21
Gold Mid-Tier Stocks Q3’21 Fundamentals - 19th Nov 21
Protect Your Wealth From PERMANENT Transitory Inflation - 19th Nov 21
Investors Expect High Inflation. Golden Inquisition Ahead? - 19th Nov 21
Will the Senate Confirm a Marxist to Oversee the U.S. Currency System? - 19th Nov 21
When Even Stock Market Bears Act Bullishly (What It May Mean) - 19th Nov 21
Chinese People do NOT Eat Dogs Newspeak - 18th Nov 21
CHINOBLE! Evergrande Reality Exposes China Fiction! - 18th Nov 21
Kondratieff Full-Season Stock Market Sector Rotation - 18th Nov 21
What Stock Market Trends Will Drive Through To 2022? - 18th Nov 21
How to Jump Start Your Motherboard Without a Power Button With Just a Screwdriver - 18th Nov 21
Bitcoin & Ethereum 2021 Trend - 18th Nov 21
FREE TRADE How to Get 2 FREE SHARES Fractional Investing Platform and ISA Specs - 18th Nov 21
Inflation Ain’t Transitory – But the Fed’s Credibility Is - 18th Nov 21
The real reason Facebook just went “all in” on the metaverse - 18th Nov 21
Biden Signs a Bill to Revive Infrastructure… and Gold! - 18th Nov 21
Silver vs US Dollar - 17th Nov 21
Silver Supply and Demand Balance - 17th Nov 21
Sentiment Speaks: This Stock Market Makes Absolutely No Sense - 17th Nov 21
Biden Spending to Build Back Stagflation - 17th Nov 21
Meshing Cryptocurrency Wealth Generation With Global Fiat Money Demise - 17th Nov 21
Dow Stock Market Trend Forecast Into Mid 2022 - 16th Nov 21
Stock Market Minor Cycle Correcting - 16th Nov 21
The INFLATION MEGA-TREND - Ripples of Deflation on an Ocean of Inflation! - 16th Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Liquidity, Money Supply, and Insolvency

Stock-Markets / Financial Crisis 2019 Jan 13, 2019 - 04:43 PM GMT

By: Andy_Sutton

Stock-Markets

Liquidity is becoming of central importance once again. It is frequently mentioned in mainstream media articles, interviews, and ‘educational’ programs.  It was a central point of discussion during the financial market blowout in 2008.

The killing off of a little-known (until it was dead!) data series earlier this year by the not-so-USFed has gotten the beehive buzzing once again about a liquidity crisis – or the possible aversion of one in the short term. It has also gotten things buzzing about the longer term as well.


What Happened

Late in 2017, the St. Louis Fed stopped publishing interbank loan data. Period. Just prior to that, the amount of interbank loans on a weekly basis dropped to zero:

In typical fashion, however, the fine folks at the central bank have ‘cleaned up’ the series – and the chart, but not totally. See below:

Ironically, if you search for ‘Interbank Loans’ and you pull up the aggregate chart for all US banks, you will see that the data ends on 12/1/2017, but the data for ‘Small, Domestically Chartered’ Banks ends 1/3/2018, leaving the extremely small blip above.

Is this another M3 deal where a rather important data series was killed off to ‘save the taxpayers money’ (the excuse given for the cessation of M3) or did something fundamentally change in the way banks secure temporary liquidity? Here’s what we think: If you look at the chart, you can see that interbank loans were dropping pretty steadily. One can interpret that as a return to normalcy of sorts after the financial catastrophe in 2008. That interpretation probably isn’t that far off. There were a couple of periods where loans spiked – late 2012 and early 2017 in particular. These roughly coincide with the Eurozone debt crisis playing out and some of the goings on across the Atlantic. Then all the rumors about DeutscheBank started. We are of the opinion that the not-so-USFed launched a pre-emptive strike on another credit lockup by changing the way that its member banks (owners by definition) met their temporary liquidity needs.

It has often been said that the ‘fed’ is the lender of last resort. We believe the US central bank became the lender of all resort. That it decided that all interbank loans would go through it rather than banks going to each other. This is an important distinction because, while banks are certainly good at colluding, they are also very much interested in self-preservation. If there’s a rumor that some bank X was in trouble, they’d turn off the phones when bank X comes calling about a loan. Think of the cold shoulder Lehman’s Dick Fuld got in September 2008 when he spent an entire weekend calling everyone but Elvis with regards to securing a venture saving loan. He didn’t get one. Not even from the not-so-USFed. We are very sure there was much more to this than was or will ever be told.

If this is the case, why wipe out the data series and trigger a bunch of questions? Why not just continue the series and plop in the numbers the central bank lends out and leave it at that? Or just make it up like is done with so many other economic and financial statistics these days?

The Bigger Question

Regardless of why this was handled the way it has been – and we readily admit neither us nor anyone else will probably ever know why it was done this way – it begs a bigger question, which has started to emerge in the minds of many around the globe: Is it possible for the not-so-USFed to go broke? 

These questions are being asked for some very good reasons. A look at the USGovt debt is the first. $22T. The debt of the US population is another – the total amount varies depending on what sources you use, but according to usdebtclock.org, total consumer debt is almost $19.5T. Throw in the notional value of that quaking house of cards known as derivatives and that’s a whopping $602T, again, according to usdebtclock.org. We could keep going, but we think you get the point. This massive mountain is serviced by an M2 money supply that is reportedly just shy of $14.4T. It takes a bit of understanding to get to the fact that money supply is transactional only; it is not involved in the storage of wealth. A quick example. Tom buys 100 shares of company X from Joe. Tom transfers the payment through the Automated Clearinghouse (ACH). Joe then takes the payment and buys groceries. Tom now has 100 shares of stock and Joe has groceries, but the money is in the hands of the grocer. Ergo the money supply is lubricant for the economy, transactional in nature. We don’t need hyperinflation just because the national debt is $22T.  Or because a pile of financial derivatives with a ‘notional’ value of over $600T exists.

But what about that pile of derivatives? Certainly, it is unrealistic to conjure up a scenario where they all trigger at once. Many of the derivatives are stacked against each other. It’s a binary situation. This or that, not this AND that. Let’s say, just for kicks that 5% of that pile would trigger and money would have to be paid out. Now you’ve got a problem. The $14T worth of US M2 is spread throughout the economy as we described above. Some of it is cash and that lives in bank vaults, people’s safety deposit boxes and, contrary to the times, even in their wallets. Some of it is probably buried underground. Remember, the dollar is not just currency, it is also a unit of account. Things can be worth so many dollars. The net worth of everything in the US is far, far in excess of the money supply. Money is transactional. It zips around the economy. We economists even measure the velocity at which it zips around. It is very non-cleverly called ‘velocity of circulation’.

IF a $30T transaction would have to take place because 5% of the derivatives pile triggered, it simply couldn’t. Non-monetary assets would have to be thrown into the mix to settle it because there aren’t enough dollars for a transaction that big. Or, alternatively, additional dollars would have to be created for the purpose of making that transaction possible. This is the sort of thing that keeps central bankers awake in a runaway environment like the world locked into now.

Everyone assumes that the not-so-USFed can backstop any eventuality. It is a weighty assumption present in many economic models and scenarios where different outcomes are ‘gamed’ by modelers in an attempt to quantitatively assess risk.  The ‘fed’ stands out as the lender of last resort. This assumption is made because the dollar is the world’s reserve currency (stay with us here), everyone needs dollars and as such, it wouldn’t be that big of a deal if the ‘fed’ had to suddenly ramp up the money supply for a single enormous transaction or even a wave of smaller, but equally inexecutable transactions. Below we point out a slight oddity. The bulk of monetary inflation is created when new loans are taken out. Given the propensity of Americans and their government at all levels to borrow fresh money on a regular basis, monetary growth has settled to a tepid 5% give or take a few basis points. We’ll get to this point in our next column.

It is a very dangerous assumption. Built into it is the assumption that the world – not just people in the US – doesn’t mind being robbed of purchasing power as more money is created. It also carries the assumption that the rest of the world wants to exist in an unholy and clearly imbalanced financial relationship with a predatory monetary ‘authority’. Based on the number and frequency of deals being cut to sidestep the dollar, it is safe to conclude that at least some of the world’s population is no longer comfortable with the prior arrangement.

Lastly, there is perception. It is the only reason people will accept intrinsically worthless paper tickets (or equally worthless digital facsimiles thereof) in exchange for goods and services produced with scarce land, labor, and capital. Nobody really thinks about it. Watch a bank robbery in a movie sometime. What happens? You have a few people convinced that it is worth spending the rest of their life in jail for a bunch of paper? Why would anyone do that? Because they perceive it to have value. They know they can trade it for a bunch of stuff that really does have value. Back to our movie, some brave individual will often try to take on the robbers – usually unsuccessfully – in an attempt to stop the robbery. Why would anyone in their right mind be willing to die for a bunch of worthless paper? Same answer as before – they perceive the paper to be of value and thus the cause is a noble one.

In the end, it’s a completely tilted economic arrangement. The holders of the dollar assume all risk; the issuing ‘authority’ assumes none of the risk. The not-so-USFed is a glorified paper mill. It has paper and digital ‘assets’. Some have value, some are completely illiquid (Think of Maiden Lane, LLC 1,2, and 3). At the end of the day the question isn’t whether or not the ‘fed’ can go broke – it already IS broke. It continues to exist based on several factors: 1) the cost of unwinding dollar-denominated arrangements, 2) the difficulty in setting up a new system when there is full awareness that attempts to do so will likely result in sanctions, smear campaigns, and even military action, and 3) people tend to think in the short-term while making decisions that impact the long-term. The path of least resistance is to continue to tolerate the broken system even if all actors are aware that it is predatory, thereby ensnaring countless future actors and transactions in the same broken system.

As mentioned above, some countries are starting to buck this trend though. And that is the dangerous part. Every deal that cuts out the dollar makes the news. Never in the US of course, but elsewhere in the world. Alliances are being made based on a growing resentment of the forced USDollar hegemony that the world has experienced. Keep in mind, every country that has a fractional reserve fiat monetary system is in the same boat as the United States. The big difference is the dollar, despite all the recent scurrying for the exits, is still the reserve currency. That will change, however, and then people will finally realize that the real question that needed asking was not if the ‘fed’ could go broke, but could the ‘fed’ become irrelevant? As we enter 2019, the answer to that questions appears to be a resounding ‘YES’.

Graham Mehl is a pseudonym. He is not an ‘insider’. He is required to use a pseudonym by the policies of his firm when releasing written work for public consumption. Although not an insider, he is astonishingly bright, having received an MBA with highest honors from the Wharton Business School at the University of Pennsylvania. He has also worked as an analyst for hedge funds and one G7 level central bank.

Andy Sutton is a research and freelance Economist. He received international honors for his work in economics at the graduate level and currently teaches high school business. Among his current research work is identifying the line in the sand where economies crumble due to extraneous debt through the use of economic modelling. His focus is also educating young people about the science of Economics using an evidence-based approach.

By Andy Sutton

http://www.andysutton.com

Andy Sutton is the former Chief Market Strategist for Sutton & Associates. While no longer involved in the investment community, Andy continues to perform his own research and acts as a freelance writer, publishing occasional ‘My Two Cents’ articles. Andy also maintains a blog called ‘Extemporania’ at http://www.andysutton.com/blog.

Andy Sutton Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in