Repo Men

There used to be a time when the mass media covered the Federal Reserve as if it was Hollywood or a professional sports league. Whenever the Fed acted or the Fed chairman made a statement, it was big news. That has not been the case for a long time, mostly due to the mortgage meltdown. Worshiping the money men was no longer good copy after they came close to blowing up the world. Halfway through the Trump tenure, the media barely mentions the Fed or Fed policy.

Still, the central banks remain the most important government institutions on earth and this is particularly true of the Federal Reserve. They control the global economy, because they control the supply of money and credit. This is why the massive intervention into the credit markets by the Federal Reserve recently should be front page news. Something very big is happening and no one seems to know why, but the Fed is responding to it with $500 billion in new money.

Now, they are not just printing up cash and throwing it out the window. Instead, they are intervening in the repo market to head-off a market crash. For those who don’t know, the repo market is not where repossessed items are sold. The word “repo” is slang for repurchase agreement¹. A repurchase agreement is a short-term funding mechanism where one party needing cash, sells an asset to a party for cash, with an agreement to repurchase the asset at an agreed upon price.

A repurchase agreement functions in effect as a short-term, collateral-backed, interest-bearing loan. Much of what happens in the world of investment banks is reliant on the repo market. In order for these entitles to function, there has to be enough cash available in the system for these transactions to occur. Otherwise, borrowing rates go up, which means the cost of doing business goes up. Taken to the extreme, no cash available means the credit markets lock up.

Since the financial system is like a watch with gears interlocking with gears, one gear seizing up has the potential to seize up all the other gears. A frozen repo market could result in a cash crunch for banks, which locks up business and retail lending. That locks up the Main Street economy and we’re looking at bread lines. The economy, as we understand it, relies on a steady supply of money and credit freely flowing through the system according to the rules established by central banks.

As an aside, if the repo market probably sounds a lot like a pawnshop to you. A pawn shop offers short-term, collateral based loans. You take the family silver into the pawnshop and they give you cash. You agree to come back with the cash, plus interest, to get the family silver out of hock. If you blow the cash on a sure thing and are unable to pay the pawnshop, they take ownership of your item and sell it for cash. So yes, the financial system is built on the logic of the pawnshop.

Now, this move by the Fed is very curious. Clearly, something has caused this problem in the repo market, but no one seems to know the cause. It’s serious enough that the Fed’s balance sheet, currently at $4.1 trillion, will surpass its all-time high of $4.5 trillion. For several years now the Fed has made clear its intent to shrink its balance sheet. Therefore, this problem is serious enough to cause the Federal Reserve to change course and blow up its balance sheet.

The question is, what’s going on?

One possible answer is bad rule making over the last decade that has rewarded banks for hoarding cash. Instead of lending to one another, they are sitting on cash reserves. The risk-reward is better than short term lending. This could be due to a combination of market factors created by Fed policy and regulations on banks regarding their cash reserves. In other words, the government has created a distorted short-term lending market, through regulation and Fed policy that discourages short-term lending.

Another, more worrisome cause is that central banks have built a low-interest rate trap for themselves that they cannot escape. In lowering rates and intervening so aggressively in the market to stave off collapse a decade ago, they have created a system that cannot exist without low rates and aggressive intervention. Efforts to restore rates to historic norms or attempts to shrink the balance sheets of central banks threatens the very existence of the global financial system.

In such a scenario, the system controlled by the central banks becomes increasing complex with every intervention. Currently, the Fed does not know why the repo market is broken. They are simply reacting to the short-term effects. Their actions, however, will be part of the problem to be solved, a problem they don’t fully grasp. By the time they do understand the issue, they may have been forced to make additional interventions that further change the complexity of the problem.

Of course, a world of permanently low interest rates and unlimited intervention by the central bank is not a world controlled by the central bank. Rather, the central bank is now controlled by the system it created. The main weapons the central bank has used in the past to address systemic failure are no longer available. Taken to its logical conclusion, the financial system is a run-a-way train. The Feds do what they can to keep it on the tracks, but eventually, the inevitable happens.

In the long run, the story of credit money may be that it is simply a complex way to pull forward the benefits of economic activity, for the benefit of a few. Eventually, all of the pain avoidance with low interest rates and central bank intervention consume all of the economy to pull forward. Those accrued costs are reversed out all at once and system collapse in the result. The resulting political fallout then topples over the liberal democratic order and we enter an entirely new age.

That may sound overly apocalyptic, but consider how political institutions must weather a crisis. The people must not only want to preserve those institutions, they must trust the people running them. A great systemic collapse of the economic order would need a lot of trust in the political order to avoid revolts. At no time in the West has the current political order be less trusted. It needs the good economy to survive. That sound a lot like a house of cards waiting for the wrong decision.

¹Short primer on repurchase agreements.

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168 thoughts on “Repo Men

  1. Declining Marginal Returns – Eventually the cost of maintaining a complex system overcomes the benefit and poof.

  2. When the checks quit coming this whole house of cards falls down. If it had been allowed to happen in 2008 then none of these moronic politicians we see on TV would be in office. Our elite class would have been purged of idiots and we would probably have recovered by now, instead of looking at an even bigger crisis. The world doesn’t realize it but it’s still 2008.

  3. I just picked up a piece of fiction John Derb mentions In his podcast. Lionel Shriver lays out a scenario for economic disaster. “The Mandibles”. Entertaining.

    • Thanks for the recommendation.

      Is it from a recent Derb program? I’d like to look up his thoughts in the transcript.

  4. House of cards. I hope you get out of Lagos before it collapses, or at least that you have a bug out place. It’s going to be real ugly, I am afraid to say.

  5. The banks are indeed in a money trap. Interest rates basically tell you what it’s worth to pull a future purchase into the present.
    But if central banks are able to leverage interest rates unnaturally down, which I believe has happen dating back to certainly the Bush 2 years and arguably Clinton, then much future purchases has been pulled into the present. At some point there will be such a large void of future purchases that even negative interest rates won’t be able to encourage borrowing… IMO that’s what we will see as the last stand to save the markets, full on negative rates and don’t forget about the bail ins…
    At that point in time you better have all your cash withdrawn and converted to goods and some precious metals, especially some that you can aim, because all the electronic digits that supposedly represent wealth will be easily confiscated or just vanished, like Jeffery Epstein who much like a Christmas ornament did not hang himself.

  6. Part of the concern I have regarding some of our folks’ fascination with MMT: if you ever managed to acquire power and engaged in the same behavior as the current Elite, the people had better see you as a God, or your neck better be impossible to get a noose around, cause the economics just won’t work out for you.

  7. Globalization drives all wages and prices to to the global mean. China ans Viet Nam see rising wages and prices and Economic boom times, but advanced economies see deflation and depression.

    We are reaping the benefits of globalization, and the central banks have lost control. They will not get it back until/unless we adopt mercantilist policies that severally limit imports and force manufacturing back to the US.

    • There’s a really simple answer to this, Tax all business income @ x%- choose your number start at say 30 and tweak. Only allow deductions for expenses incurred in the States, stringent proof needed, default is not made here (and your record of US expenses better match someone else’s record of US income)
      Sure you can make everything in Vietnam, hire Indian call center.workers, etc, But it will cost you (and those fancy business trips won’t be deductible either,
      Mandatory 30 years for evasion.

        • Tariffs are demonizable as a direct tax on consumers: which they are. This is sold as a tax on increasingly hated Corporations, It’s not at all complicated: the tracking of transactions by a tax id number is ubiquitous. The popular appeal of banging some bankster or big pharma guy up cannot be overstated.

  8. I pretty much gave up reading the financial sites. I could mouth the words, but never really understood the ‘headlines.

    Several dives this week made me give up all over again. I Do. Not. Have. the time.

    The Zman says, “respect your readers.”
    Nothing illustrates that point better than today’s post. Talk about delivering real value.

    Kudos to the Zman, kudos to the commenters.

    • Most of the rest is “mark-to-market”, which means it is deemed only as valuable as the last transaction. No bids? Not always a problem, but generally a big problem if it collateralizes credit.

  9. Z Man said: “Their actions, however, will be part of the problem to be solved, a problem they don’t fully grasp. By the time they do understand the issue, they may have been forced to make additional interventions that further change the complexity of the problem.”

    Collapse is inevitable and “optimism is cowardice.” 😀
    Here’s a youtube vid about the technical reasons why civilisations fall apart.

  10. What’re the odds that the Soros Machine is manipulating this situation to:
    (1) Make money for his evil projects.
    (2) Blow up the system at a time when Trump can be blame for it.

    I’m guessing 5:1 that he is.

  11. The repo market is having problems because of a set of very recent rules changes that have been made to spur bank lending. This includes the move to SOFR to settle short term interest rates instead of LIBOR and a few other changes including IOER rate decreases.

    Because of the changes to the rules to encourage lending, banks have incentives not to have cash reserves. However, big banks are moving out of loans and towards buying bonds which require funding through the repo market. Once forced to sit on liquidity, banks are now encouraged by rule changes to use that liquidity. That liquidity is going towards the purchase of bonds and other assets.

    At the same time, the amount of money that is supposed to be held to cover the collateral For those bonds is high due to the post 2008 liquidity requirements.

    So, the problem is that bank liquidity funding needs in the repo market have increased simultaneously as the incentives to hold liquidity (in cash which was lent to the repo market) that the banks rely upon have decreased. So, banks seeking liquidity are seeing problems finding it because now all banks have less liquidity.

    So, if you are still following, banks have been given a new set of dumb rules to help out from the problems caused by the set of old, dumb rules. The Fed has stepped in, but the problems run deeper. If those new bank bond investments sour, like the loans did, collateral calls will be made which the banks don’t have. They’ll have to borrow from the Fed again.

    When do those collateral calls happen? If the asset values go down. When does that happen? During a recession. So, if we get a recession (when), this will become a very serious issue.

    And guess who gets to bail out the banks again?

  12. I will say this, the goldbugs are always wrong. Not that I don’t respect their point of view, it’s simply outdated. There has NEVER, EVER been ONE INSTANCE whereby a reserve currency, which the dollar is, has entered a hyperinflationary period. So I cannot say what will happen, but if history is any guide, we’re not going to see weimar/zimbabwe inflation in the USA. Frankly, USA is the best game in town. All these emerging markets issued debt in dollars (to save on interest) and now are desperate for dollars. Just an FYI. Two years ago a Brazilian company’s CEO said they were acquiring US companies just to get access to more $$.

    • If you and my Dad are right, and the dollar is destined to always hold its value or decline gradually, we have reached the glorious end of history. All our problems now and forever more will be solved by printing dollars to pay for them. Oh Glory Be!

  13. The economy is a giant rat-maze but the rats aren’t running through it any more because there’s free cheese in their cages and no cheese in the maze.

    The big cheese used to be the chance to marry a young woman, father children, and be a respected member of the community. Women have their own money now, so they’re free to choose sex partners on looks and charisma alone. With only old, fat, bitter, tatted-up hoes with screaming feral bastards in tow willing to date them, why shouldn’t working-class men fake a disability and check out of the economy?

  14. I don’t thin the Zman sounds ‘overly apocalyptic’, just appropriately apocalyptic. I hadn’t thought about the way that a good economy can compensate for poor governance and vice versa before. That was a helpful insight.

  15. Perhaps this explains why so many Republican Congressmen have decided to leave politics and not seek reelection. The Deep State would like nothing better than to Deep Six a Trump reelection by crashing the economy next October. Either way, we desperately need to restore some real hardship to our environment, force people off the couch in front of the TV, and fight to stay alive again. Just don’t be in a city when the chaos starts.

  16. Zman and all,

    Way to go pointing this out!! I went to 2/3 cash in retirement account until I see how this shakes out. Literally last week had lunch with a high-up banker and he said they are definitely monitoring the situation. No one knows for sure what’s going on. Rumor is there is a major contagion risk in a TBTF Euro bank (signs point to Deutsche). It’s all so interconnected. NY Fed apparently knows, but how this shakes out is anyone’s guess. I wouldn’t go short, but I’d be liquid for a bit and not heavy into markets.

    • If only we had a special race of people who had unusual insight into matters financial, who could find a way out of this mess………

    • If you can afford to stay liquid without losing too much value or return, it’s obviously a great position to be in when the bottom falls out of asset prices. That said, I’ve lost a chunk of money betting against the market since about 2014 or so. If I had listened less to the perma-bears at Zero Hedge and more to the shills, I’d be ahead right now. Hindsight’s always a bitch in money matters.

  17. The financial markets are a preview of how complex systems will break down in an era of catabolic collapse.

    Modern finance-grifting is a system so complex that even its architects no longer understand it, like some open-source project run mad. Couple that with our ascendant idiocracy and you have a feedback loop of growing problems and shrinking problem-solvers.

    The Fed mavens are basically cargo-cultists now, going through the motions their fathers and grandfathers did and mouthing the same ritual words in the hope that the Big Machine responds the same way it did in th e past.

    They no longer understand how it really works or why. They just know that granddad pushed the “mo money” button when SHTF in the past, so they might as well mash that button as welll.

    Eventually this will have the same results as letting monkeys press the pretty-colored buttons in a nuclear plant.

    Those wise enough to live outside the blast radius who’ve prepared for the aftermath could regain a lot of lost ground if events break their way.

    • The algorithmic trading programs optimize results based on past experience. When the real world exceeds the operating parameters of the algos (triggering the “sell everything” response) and “breaks” the market, that’s when things get spicy.

  18. Macro economics makes my head hurt, especially from the world of finance…sigh… I wish it weren’t so…

  19. This is what I pay attention to all day. One of the big problems going on right now is that government deficits are expanding so rapidly they’re crowding out the liquidity in the market. Another problem is that negative interest rates overseas are distorting the whole market. The Fed is now buying around 70% of new debt issuance (monetization). This would have been highly taboo even 20 years ago. Today all taboos are broken. Part of it is a generational change. All those old guys who lived, even as children, through the war and depression are gone. No one in charge now knows the sting of poverty and desperation, and hence don’t have the natural conservatism and discipline to run what they’re running.

    I highly recommend this Jeff Gundlach interview, almost an hour, which explains what’s going on. Superbly done, the interviewer allows him to finish and doesn’t make herself the show.

  20. The financial/economic problems we’re going through reminds me of an older post here, the one about people not understanding how older technology or systems were discovered or built; and can’t recreate them or explain how or why they work. This feels similar to me, in that the financial wizards have forgotten how an economy actually works, the fundamental rules lost to time and incompetence, and that’s why they can never seem to figure out how to fix things or extract themselves out of the corners they’ve put themselves in. Maybe economic problems have gotten so intertwined and complex that no one today is capable of unwinding them?
    Either that, or they know something(s) that we don’t and this repo market situation is ten times worse than they let on; which isn’t impossible.

    • I don’t think the problems are complex at all at the high level. It all gets boiled down to “Sooner or later, you run out of other peoples’ money.”

  21. The federal reserve is not a government institution. It is a privately held bank with shareholders that include the Rothschild and Warburg banking dynasties.
    It is not beholden to elected officials, and is not obligated to operate in the interest of the nation or its people.
    Do not be fooled by the name. It isn’t a reserve, and there is nothing federal about it.

    • The purpose of the Fed is to prop up the big banks, not the country. Given the powers simply given to the Fed, and obviously willing to be exercised by the Fed, the banks are safe. The rest of us, not so much.

    • Don’t be fooled by the label “Non-Governmental Organization”. Any person or organization that receives money from the government (e.g. the local Lutheran church and Section 8 landlords flooding your town with African refugees) or is granted any sort of monopoly by the government (e.g. a “private” bank licensed to create money out of nothing) is de facto part of the government.

    • 80 F.2d 68 (1982)

      John E. LEWIS and Roseanne M. Lewis, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.

      United States Court of Appeals, Ninth Circuit.
      Submitted February 26, 1982.
      Decided June 22, 1982.
      Plaintiff, who was injured by vehicle owned and operated by a federal reserve bank, brought action alleging jurisdiction under the Federal Tort Claims Act. The United States District Court for the Central District of California, David W. Williams, J., dismissed holding that federal reserve bank was not a federal agency within meaning of Act and that the court therefore lacked subject-matter jurisdiction. Appeal was taken. {{{The Court of Appeals, Poole, Circuit Judge, held that federal reserve banks are not federal instrumentalities for purposes of the Act, but are independent, privately owned and locally controlled corporations}}}

    • …police and local initiatives have taken strong safety measures to try and dispel fear surrounding this area…

      Think for a minute about how that is worded. The police are trying to “dispel fear” not “make the park safer.”

      I’m reminded of The Gift of Fear.

    • This is from an article linked to your link.
      A second 911 caller told police one of the suspects ran off wearing a green jacket.
      Earlier in the day, police had encountered a known robbery suspect who was also wearing a green jacket.

      The above is the only physical description of the suspects that I can find anywhere. Of course.

  22. What cannot continue will not continue. And the debt driven insanity that as been at the heart of both the American and world economy for decades CANNOT CONTINUE. We have successfully ‘kicked the can’ of unsustainable debt down the road for far longer than was believed possible but eventually that ‘can’ of debt becomes so enormous that kicking iit doesn’t move it…..the result is a broken foot. We are pretty damn near broken foot time. And when the kick fails to nudge the can and instead breaks the foot all hell is going to break loose.

    • Perhaps the specter of excessive debt plays out differently this time. Instead of inflation, deflation, and debt repudiation, the Fed simply vacuums up an increasing percentage of the public weal in the name of maintaining the markets? That’s why you see ever-rising markets, even as the real world, outside of capitol city, gets ever more impoverished, and wages stagnate even as unemployment falls. We have learned how to engineer away market crashes, but the alternative trade-off is the economy-wide stripping of real assets and public wealth, in the name of supporting the markets. The denouement is not a market crash, it is a French Revolution of sorts, when the little people figure out what has been going on, just as the politicians in capitol city and the state capitals embark on a general repudiation of law and order. It all meets up in fire and fury, but, hey, new highs on the markets!

  23. “It needs the good economy to survive.”

    Money is important and a necessary evil in this fallen world. However, it cannot be the highest value if civilization is to persist. The money-worshippers have turned my country into a giant multicultural marketplace from sea to shining sea. The sole slender thread of legitimacy to their continued rule is that they at least run the marketplace in a competent fashion, and they have failed at even that. We are morally, spiritually, and financially bankrupt and it is time for them to go somewhere else.

    This is one reason the cuckservative Republicans in the 40’s-60’s ignored our growing internal communist problem but found the energy to destroy the institutional right wing. The old right-wing was civilizational and had it continued would have offered resistance to rule by corporate financialists.

    Healthy societies where ruling elites have legitimacy operate by the Golden Rule: those with the gold make the rules. They hold bags of money in front of people to get them to do what they want. Police do policing, doctors do doctoring, bankers do banking, etc. Societies with illegitimate ruling elites operate by Gun Rules: those with the guns make the rules. Hence, the monomaniacal efforts to disarm real America.

    I’m reminded of the efforts by the ruling elites in Weimar Germany to buy off the Nazis. They gave them money thinking that this would control them. It did not work because their rule was not considered legitimate by the vast majority of Germans. Then, as now in our country, disagreements between left and right are over what to replace the system with, not whether the system needs to be replaced.

    • Horace wrote, ” in our country, disagreements between left and right are over what to replace the system with, not whether the system needs to be replaced.”

      Yes! This explains so much of crazy stuff we are seeing.

  24. The Fed has to keep the sugar-high going until at least November 3rd.

    Trump will fight back rather than let them do to him what they did to Bush the Elder, and usual suspect bankers know this.

  25. 7. The Turks, operating out of Central Asia, not only managed to ruin T’ang China (see An Lu-Shan Rebellion) but also ruined Byzantine Greece/Roma, managing to overrun Anatolia and Constantinople, and ruining things for many centuries of Serbians, Hungarians and Viennese.

    8. Timur the Lame managed to kill tens of millions of people in Central Asia and single-handedly destroyed the blooming civilizations along the Silk Road and Northern India. He’s a big reason that Central Asia (budding great places like Tashkent) are much less Indo-European than they used to be. Didn’t steal much, but set back human development by who knows how many centuries. Far, far worse than Hitler, but nobody mentions him because he didn’t kill any Jews. He fancied himself the “Sword of Islam.” So, I guess… thanks a lot, Islam.

    8a). Oh, the Mongols. Right, almost forgot. Didn’t accomplish anything other than killing lots of people, wrecking civilization, and burning the great libraries of Baghdad, thus keeping the Moslems in check. But sure, yes, let’s not forget the Mongols.

    9. Sea pirates from Hispania, Frankreich and Brittannia discovered that the world’s richest, most prime real estate was only guarded by a small handful of Stone Age retards, so they killed off all the retards and stole what turned out to be the Americas. Cha-Ching!

    10. Jews realized that now the Americas, the richest prize in all human history, were only ruled by a bunch of short-sighted dim-witted goyim, so after letting the goys do all the work of developing and building the place, the Jews utilized financialization, nepotistic/racist strategic takeover of all institutions and choke points, plotting and scheming, and general Semitic sleight-of-hand to steal the United States, and thus half the world, which is now controlled by them.

    Which leaves us at Z’s current chapter about central banks and the Federal Reserve, which is politeness-talk for rule by Jews.

    Meanwhile Chapter 11 is waiting to be written, wherein the Han Chinese are noticing all these developments, have plotting and scheming skills of their own, and are not hindered at all by Holocaust guilt-trips…

  26. Official reason is that the Fed offloaded a lot of treasuries to Primary Dealer banks the past 2 years, in effort to decrease its balance sheet, and now the PDs are taking short-term loans for cash using the treasuries as collateral.

    It’s a shell game, but with different flavor than “QE.”

    Money printing proceeds apace. Go the FRED site and look at M2. They don’t show most recent weeks, but the chart only goes one way. Up.

    • That makes a lot of sense. We see this in other areas, like care dealers. It’s called channel stuffing. Basically what the Fed discovered is they can’t shrink their balance sheet, because there is no market for it. That means investment bank activity is either slowing or is flat.

      That assumes the official answer is reflective of reality, which is not a guarantee.

      • The Fed filling its balance sheet with securities keeps the markets afloat, and who owns the lion’s share of the securities in those markets? The 1%ers do not want a bad market. If the Fed’s actions suck the economic vitality out of the bottom 90% but the markets hold up, what do the 1%ers care?

  27. It’s likely much more simple than most people think. Stocks are up, so banks and others don’t want to buy any more of them, and they are holding cash in the form of Treasuries, so they can benefit from falling rates. One big bank, last fall (JP Morgan), decided to go the other way and lighten up on Treasuries, there were few buyers, and the system hiccuped. Everyone else is sitting on cash in the form of Treasuries now, but there are no potential new buyers for those bonds, rates are not going down, and neither are stocks or the economy. The trap is that everyone might want to dump their Treasuries at once, and there will be no buyers. The Fed is willing to “pawn shop” them, probably indefinitely, if the banks feel the need to lighten up and cash out, to the announced tune of $500 billion, but basically to “whatever it takes”. The Fed is not depending on the rest of the system, like they initially did in 2008, but instead is using essentially the same tactic, but in anticipation, to keep the market crash cat in the bag, instead of after the fact, when the cat is already out of the bag.

    Market liquidity is the issue now, on all sorts of things. For fine art, collectible cars, private equity, and real estate, there is no back-up, so things will and are getting squirrelly. For stocks, bonds, and cash, the Fed backs them all up in “pawn shop” style, so things are smooth and quiet. The end game is not that the stock, bond, and cash markets crash, it’s that all the wealth ends up in the hands of the pawn shop. Pawn shops suck the wealth out of the community and deposit it into the pockets of a few.

  28. All I know from over two decades in banking and financial services is that the whole thing is a giant house of cards that almost no one understands and it wouldn’t take much for the whole thing to collapse.

      • Or, in our business, there are simply inherent risks you don’t understand nor have adequately bounded in your analysis. Most of these things come apart from extrapolating past performance into the present and not accounting for what might have changed. This happens, over and over and over….

        • I think (correct me if I’m wrong) that’s because your business tries to analyze human behavior, which is often unpredictable because influenced by emotion. So long as people aren’t completely reduced to NPCs there’s no way to reason it out 100%. But people have tried, and they’ve given us this impossibly complex financial system that amounts to trusting the experts. And that opens the door to all sorts of scams, in spite of any good intentions.

        • Human behavior can’t be reasoned out 100% because it’s often driven by emotions. The attempt to do so, or to at least mitigate risk, has given us this impossibly complex financial system, which amounts to trusting the experts, which is itself partly emotional. That opens the door to scammers in spite of good intentions.

    • Ditto here. Back around 2000 old firm hired a bunch of CDS guys that wanted to “rent” the balance sheet for their business. “Risk free” they claimed. All us old school guys couldn’t figure out how they were being paid such significant sums for what was represented as a “risk free” insurance contract. Thankfully a new CEO came in and asked the same question–and found the explanations unfulfilling. Ordered the business shut down and the contracts unwound, regardless of cost. That was 2005. Smart guy.

      • Were you around when Steinberg (Reliance Insurance) went belly up?
        An article in Forbes explained that there was some young guy who was buying up Worker’s Compensation policies, bundling them, re-insuring them through Reliance … skimming off most of the premiums while transfering most of the risk up the chain to Reliance. When claims had to be paid, there wasn’t enough cash in the till.
        Saul blamed his brother who was running the company at the time (while he was trying to recover from a stroke.)

        What’s your take on what happened?

        • Reliance had many more problems than that. Too many to discuss here. But fundamentally the Steinbergs ran it as a piggy bank and basically were reserving at the low end of the loss picks in the underwriting companies and dividending every last penny of retained earnings up to the holding company and then to themselves. The nifty scam was cranking out debt at the HolCo level, with the buyers ignoring the fact that regulators can step in and shut off the dividend flow from the sub companies that were paying the coupon. Complicated story–but Saul was a scammer.

  29. The entire “recovery” from the 2008 banking crisis was nothing less than moral hazard writ large. We’ve been pushing that boulder up the hill ever since. When it comes crashing down on the other side of the hill, it will crush everything in its path. It could happen next week or next decade. But it will happen.

  30. The chart at the Zero Hedge site you linked to showed the Fed Balance Sheet rising to the $4.5 trillion at which it stood from Q1 2015 to Q4 2017; three years, followed by two years at a lower level. If it doesn’t go higher, then it’s no big deal. Will it go higher? If I could predict that, I’d be a billionaire. In addition, both gold and interest rates remain fairly steady for the U.S. I don’t like the Fed, but for now they seem to be opting for steady policies that preclude a panic.

  31. Credit is a mortgage on future generations. That is why Western birth rates have collapsed. Literally investing human capital in material gains here and now. Terribly selfish.

      • To put too fine a point on it, and maybe stating the obvious, but we’re literally spending future generations to have more crap for ourselves today. All the abortions, all the couples putting off a family because they ‘aren’t ready.’ When you see sprawling suburbs, fancy cars, fancy clothing, craft beer, phones— you’re not looking at the miracle of markets. You’re looking at lives that could’ve been but were transmuted into lifeless objects by the alchemy of debt and obligation and selfishness. Of course it’s all going to collapse. Without life you get death, and the devil gets his due! So that’s the radical thought for the day.

    • This is a very important point. Younger white people can’t afford children because of (1) the ruinous government spending policies and that mindset passed on to consumers, as well as (2) the devaluation of the dollar, so they’re not going to reproduce. The ongoing Fed and federal government practices, as well as encouragement of this Third World invasion, have doomed the West

      • Here an idea that will get some downvotes, most likely. Go for a confiscatory estate tax. Make the kids wake up to getting a marketable skill now, rather than waiting until middle age to score the inheritance. If parents knew their kids were not going to get the big inheritance, they might be encouraged to take care of them in other ways, like encouraging them to gain their own real skills and savings as young adults. Just spitballing…

        • Not a down vote because it’s a creative idea. But what happens to the tax income? After the government grifters take their cut, they turn around and hand it back to the kids they took it from to buy their votes. A shell game with a big vig for the Bidens/Clintions/Boehners/Ryans of the world. No thanks.

        • Where the tax is going is the dealbreaker on that idea…Now if we had our own country then it could be discussed…

        • Few would pay the tax; they’d figure out ways to gift money to their children tax-free and die broke. Estate taxes are toxic to family businesses because every time someone dies, the business or large pieces of it must be sold, usually to a corporation that doesn’t suffer the handicap of unpredictable visits from the Grim Reaper.

          Estate taxes are a great way to ruin families and create a wasteland of deracinated, atomized individuals. If families matter, they must be treated as immortal, atomic entities, as corporations are.

          • Here’s an idea, brought to you by the LGBT folks. Marry one of your children. Your estate then is jointly owned with no taxes. Not legal yet, but in our “no rules allowed” marriage future, this is worth a spin. Who are we to judge?

        • I understand your reasoning, Dutch. But what about family farms and family businesses where the kids have worked as hard as the parents and grandparents to grow and maintain them? A large estate tax is criminally unfair to them and is just wrong on principle.

          • The Amish help their kids get started, and then they sell the farm to the youngest son for whatever amount they gave to the other kids. A lot of the farms have a cottage that mom & dad retire to. They get to garden and spend time with the grandkids. No inheritance (or inheritance tax) involved. It works because they spend their lives being productive and saving money. Pretty nifty.

  32. Martin Armstrong has been covering the Repo crisis for a while:

    ” The Fed did not lower rates BECAUSE they cannot. This Repo Crisis is all about them trying to PREVENT short-term rates from rising. They have stated that the economy is strong. This is not QE to stimulate the economy as it was 2007-2009. This is a liquidity crisis BECAUSE banks no longer trust banks and everyone is running scared to lend money for nobody knows who has exposure in Europe goes belly-up.

    This is NOT QE, and it does not have the same economic consequence. The Fed has been buying T-Bills desperately trying to PREVENT short-term rates from rising because banks no longer trust banks – PERIOD!

    The old days of trading are gone. Yes, the younger generation behind the desks lacks the understanding of how markets really trade in the middle of a crash. This new generation of computer programs shut down when volatility rises. This will indeed increase the risk going forward for the typical committee overseeing the traders knows often even less than they do for they are too occupied with complying with regulations that they have no idea of the risks that lie ahead. This is an absolute crazy problem we face. ”

    ” Perhaps I should have named this report “The Mother of all Financial Crises.” The Repo Crisis is just part II in the lead-up to Big Bang that nobody seems to grasp is already unfolding. This is the Sovereign Debt Crisis on steroids. Whatever they could have done wrong, they have done with absolute precision. The projected losses for institutions I have laid out will range from 40% to 60% of assets. This time, whoever is caught holding will not be bailed out this time around. This is the combination of the 1998 Liquidity Crisis and the 2007-2009 Financial Crisis. So hang on to whatever you can grab ahold of. You will need it for this one. ”

    Welcome to the shitstorm!

    • I copied your post and sent it to the people that matter to me. The brevity is very important, otherwise normies just won’t read.

  33. From an investor standpoint, the full impact of crazy low interest rates haven’t been felt yet but they threaten the entire pension system as well as putting retirees in serious trouble. Falling bond yields and the consequent rising stock valuations juiced bond and stock returns the past decade.

    The problem is that you’ve driven real, i.e. above inflation, yields on bonds to effectively zero. Stocks are priced to earn between 2% and 4% real annual over the next decade or so, assuming no reversal of valuations. Therefore a 50-50 portfolio is poised to earn ~1.5% annual real or 3.5% nominal. Pension funds are expecting ~7.5% nominal to pay their obligations. Most retirees expect the same. That won’t happen. Plan accordingly

    • Yep. This is already happening. The ruling class stole the savings of 100 million ordinary savers to pay for their games and the workers still don’t know what’s up. My pension is going kaput in under two years. The Z primer is simple enough, and accurate, but people are designed to be herded.

  34. History of the world in several thefts…

    1. The Hellenic Greeks stole the Eastern Mediterranean (Anatolia, Syria, Judaea, Aegyptia), but because they had superior Hellenic culture and vitality, the theft was okay and things worked out fine.

    2. The Romans stole the East from the Hellenes, plus they also stole Gallia, Brittannia, Hispania/Lusitania/Galicia and Belgia from the Celts — but again, since the Romans had superior culture and vitality, the theft worked out okay.

    3. Meanwhile in the far East, the Han people of the Wei River valley in Northern China were busy stealing pretty much all of Southern Asia, but since etc etc we know how this story goes.

    4. Cascading waves of Germanic psychopaths operating out of Central Asia stole all of Roma, Italia, Latium, Scythia, Thracia, Illyria, Germania, Gallia, Serbia, Hispania, and North Africa, and turned it into what we now call Europa. They had plenty of vitality but not much culture, but since the conquered peoples already had oodles of culture, things worked out okay in the long run.

    5. More cascading waves of Arabic psychopaths, operating out of the Arabian peninsula, waving around their ludicrous Koran, as well as very good horses and Damascus steel, stole all of the Levant as well as Aegyptia, Africa, Persia, Babylonia, and Hispania. They too had zero culture other than the babblings and ravings of their imbecile fake prophet, but the Greeks and Syrians had plenty of culture, so things worked out okay.

    6. The Germanic psychopaths, who now called themselves the Franks, had nothing left to steal so they began to cultivate themselves and mysteriously turned themselves into the most sophisticated people who ever lived — except perhaps for the Sung Chinese, maybe. These Franks tried to steal the Levant during an interlude called the Crusades, but it didnt work out so well.

    to be continued…

  35. Just two quick observations as I’m not an economist by any stretch but certainly have opinions.

    1) Zerohedge is a questionable source at best. They’ve been predicting the ‘coming crash’ since at least the Obama Years. It is an overly anxious chicken little website. I go there because they cover a wide range of topics but there is a sort of Alex Jones style odd paranoia also that doesn’t reflect objective reality for the most part.

    2) –However–, that being said. We are indeed sitting on a house of cards and have been for a long long time. The music WILL stop someday and most everyone won’t have a chair when it does. In fact, moreso than the ‘race war’ and other goofy scenarios I hear from some DisRight people, the most likely scenario for meltdown is this one because we have unsustainable debt and borrowing.

    The thing is, the system is so incredibly complex and arcane now that even economists cannot accurately predict much because of that. Not to mention we already have two tried & true methods that appear to work. One as this article states, create money out of thin air. So as the economy starts to appear to be on course for cratering let’s just make more money! And two, in the most dire straits like the Crash of 2008 there is the other option which worked then, and will work again. Fleece the taxpayer. Who is going to complain? We are grooming an entire nation of subservient robots and stupids right now. Phone addicted zombies don’t rise up and can’t be bothered with the government robbing them of wealth because it would cut into their screen time. This has been the plan all along. A people so stupified and passive that you can reach in their pocket at will and they either won’t notice or simply won’t care. As white males continue to die off or be subjugated, the only people who would have risen up, then these banana republic games just keep getting easier & easier.

    • The music WILL stop someday and most everyone won’t have a chair when it does. In fact, moreso than the ‘race war’ and other goofy scenarios I hear from some DisRight people, the most likely scenario for meltdown is this one because we have unsustainable debt and borrowing.

      The “Race War” starts four days after the economic collapse.

      • A race war won’t last long. The givers won’t be in a mood to turn away from the usual unpleasantness to give away what they don’t have and the takers will experience a reaction that they have not seen in their lifetimes–an actual normal reaction.

    • Sadly I think the fleece the taxpayer option might work out well for the elite due to the way the economy seems to have bifurcated into 2 levels. At the top level is the big ticket stuff like houses, business ownership, and real estate in general. At the bottom is the vast amount of ridiculously powerful and capable home and personal electronics. The top level stuff is so far beyond the average modern peon that he never thinks he can get it anyway. The bottom level stuff is so cheap that even if his taxes go way up it just means a 55″ 4K instead of a 65″.

      This fits well with the overall third world pattern too. Everyone has a smartphone and a cheap little motorcycle but still lives in a shack built on a trash heap. It’s much easier to make the world-as-perceived better with modern VR and computing than to improve the world-as-it-is. The elite will of course prefer real luxury and lavish accommodations but will be happy to tell the rest of us to enjoy our Matrix.

  36. The Fed is in a jam for the next recession. The Fed keeps trying to raise rates and lower its balance sheet to prepare for the next downturn and keeps getting thwarted. With rates so low, lowering them in a recession could be like pushing on a string, i.e. ineffective.

    The next step is fiscal policy, i.e. govt spending through massively increase deficits. That could work if the bond market is willing to buy those govt bonds are super low rates because you’re transferring money from one group – investors – to the govt which then gives it to the people. You don’t change the money/credit supply, just move it around. The problem arises if investors don’t want to buy those bonds.

    That’s where MMT steps in. If investors don’t want the bonds, the Fed steps in and buys the bonds directly from the gov’t – not other investors. This is money/credit creation on a major scale. That’s where things could get out of hand.

    • Yes, but MMT seems to be working fine in Japan. No blood on the streets of Tokyo, no business owners jumping from high rises in Kyoto. It’s almost as though the conductors of the train realize that if it comes off the tracks, they get it first and hardest, so those fires are going to keep getting stoked, no matter how absurd it gets. And unless you control the fed and the treasury, all you can do is watch the stoking.

      • True. MMT doesn’t have to spell disaster, but in the wrong hands, it can be a mess.

        Also, remember, Japan’s gross debt-to-GDP is crazy high but their net debt to GDP is pretty average so they may not be the MMT poster child that people think. Besides, Japan is just weird in many ways, including economics. It’s hard to compare them to us.

  37. Basically a continual check kiting scheme.

    Most of our GDP and “wealth” is financial engineering virtual (un)reality where both the creditor and the debtor think they have the $10k because the creditor has it as an accounts receivable or something similar – an “asset”, and the debtor has (or had, think margin loans) the cash. So it looks like $20k. Stretch the chain where the debtor also “invests” so becomes something like a creditor – e.g. if they own stock – so that $10k is loaned over a very long chain, usually to someone who blows it and then tries to pay it back slowly or just declares bankruptcy.

    Also the strange events might have to do with the velocity of money, something the Bain Capitalists are into – they buy a small town factory that used to reinvest in the community, so the same dollars would circulate a lot in the local area. Instead they are sucked up by Wall Street to sit there or find something else to go full vampire squid on. If the banks are sitting on the cash, the velocity crashes.

    GDP = PQ = MV : Price*Quantity = MoneySupply*Velocity.

    • The dollar is worth 3-4 cents in 1913 terms. That should be all anyone needs to know. But our education system kept everyone in the dark about the Fed, and here we are. We owe Ron Paul a great debt for trying to relieve Americans of our ignorance about our financial masters.

      Trump needs to start easing into explaining all this, instead of solely trumpeting about how good the economy is. Earlier in this decade, he acknowledged that the stock market is not a barometer of how well the foundational economy is doing (he has a more sophisticated understanding of Austrian economics than he lets on), but now he has succumbed to the vanity of parading the illusion of thriving 401ks around. I sure hope that next term he abandons that, and starts talking plain talk about the Fed and its mischief.

      • Vikings, here’s the thing. If you’re in Papua New Guinea and the locals think the rains keep coming because they don’t touch the village ancestral tree, you aren’t going to do well by cutting down the tree and calmly explaining weather systems to them: you’re going to end up in a boiling pot. “Just rationally explain it to them” for those confronted with angry, desperate mobs is great advice for those you would like to see dead.

        • A good communicator can explain it in very simple terms before the people become angry, desperate mobs. It’s just a matter of someone wanting to do it.

  38. All right, what’s the plan? Do we get our money out of the market especially 401k mutual funds?

      • I swear crypto did more proper work inflating the price of video cards and RAM than it ever did positioning itself as a workable currency.

        • As a holder of pms, cash, and crypto, IMO if the power dies we are going to have bigger problems than accessing our digital bank dollars and crypto.

    • Diversify. Own TIPs for bonds. Make sure that part of your stock portfolio is invested internationally in the local currency. Pay off your mortgage or make sure to have a 30-fixed mortgage. Own a bit of gold but don’t be weird about it. Farmland is always great. Use various strategies as well. Buy and hold is great and should be your main strategy but you might consider using a Dual Momentum (check out Gary Antonacci’s book) strategy for some of your stock allocation.

      Above all, expect low returns all around.

    • There is no where to hide. About the best advice I’ve seen is to have a marketable skill, which I do not have myself.

      • At the very least, have a library on hand that tells you how to do stuff (Bushcraft, etc.). I have been hoarding camp tools for a while now.

    • David_Wright, “What’s the plan” is the correct question. If we have the right question, we are a long way to the answer.

      I recommend Chis Martenson’s THE CRASH COURSE which can be found (free!) at this URL:

      Four and a half hours for the whole thing. It is broken down into 26 bite-size pieces.

      He points out the differences between money vs. the goods and services it will buy. It is the goods and services that are the desired end and cash money including gold and silver is the 1st derivative we use to get those goods and services. Bank and money market accounts would be the 2nd derivatives. Stocks and bonds are 3rd derivatives. Retirement accounts that hold stocks and bonds are 4th derivatives. Cryptocurrency — who knows?

      If worse comes to worse, of course, physical possession of beans, bandaids and bullets will determine who goes forward into the new day and who goes to slowly starve beneath the highway overpass.

      I will be interested in seeing who ends up with real wealth after the next big crash. How surprised the rich kids at Lehman Bros. were when they went in to work as millionaires and came home from work the same day as bankrupts.

    • Yes. You will need a small supply of cash for,the shor period fiat is good, then months of silver and gold coins for after.
      Hopefully we will have a system working in 6 months, if all hell hasn’t been loosed. For that we all know what we need….

  39. There’s some rose-colored retconning of the Great Depression, with a sort of sanitized Grapes of Wrath romanticism to it that’s been passed down through the ages, but the truth is, I think, that the people were sturdier and healthier back then (spiritually and physically, even when literally malnourished). Charles Bukowski used to talk about how gamblers and touts in the Great Depression seemed more optimistic than the desperate types he saw at the racetracks in the early 1990s. That’s ultimately why I’ve been holding off on thinking of what a Depression would do to us, or rather, what it would reveal about what we’ve become in America. People don’t even have the fortitude to walk through a grocery store now (see: all those mobility scooters in grocery stores and big box retail chains). How the hell are they going to stand in bread lines?

    • The world of the 1930’s Great Depression wasn’t that of tightly integrated, global “just-in-time” supply chains that production depends on today. Productivity fell 30% in the 1930’s, if that happened today people would starve to death en masse around the world.

    • I agree. Most of today’s people, Boomers to Gen Z are incapable of dealing with hardship. Manual labor is unthinkable to most of them and going hungry even for eight hour is torture. If the government were to recreate the WPA today the only people joining up would be Mexicans. I write this as someone who as an adult has had to at times earn their living doing manual labor.

  40. Whatever comes, we simply must get ourselves a better ruling class. Smarter, more moral, more empathetic toward Legacy America. What we have now is stupid, venal, antipathetic, degenerate, and short-sighted.

    • As personified by a former affirmative-action Presidential candidate who destroyed two tech companies and said yesterday that “it is vital that President Trump is impeached.” See Carly Fiorina, a “conservative feminist” and the proposed running mate of “conservative firebrand,” Ted Cruz.

      We are so screwed.

      • never forget that that a wipe cruz tried to give us Hillary for all he was worth. the first few times trump supporters were attacked by antifa and la raza , at Chicago and san deaigo , Ted said ” they should be more careful who thay support. ” I will spend my money and work as a volunteer to get buttegeig ofr whoever the democrat is into office it the maple rat is the GOP nominee .

    • Rooster, agreed. But the voting public that put them in office are stupid, venal, … So what came first—chicken or egg?

      • The democratic chicken came first and laid the egg of universal suffrage which begot all the other chickens that broke the country. I exaggerate, minutely.

  41. The Great Depression happened in a well-ordered and basically peaceful, overwhelmingly white society. Hard to imagine what would happen if/ when GD2.

    • And people could play harmonicas and start bonfires back then. Let’s say Globo-Homo gets its candidate in in 2020 and there’s a Depression. Presumably there will be “Buttigiegvilles” under the bridges and people will do what? Warm themselves by the light of their 5G phones while listening to brain-damaged rapper ringtone tunes, I guess. And Lenny from “Mice and Men” probably has a couple standard deviations of IQ over most of our “recent arrivals.”

      • In many ways we are already in a depression. Real UE is much higher than even the most pessimistic U number. But the worst effects of the depression is staved off with free gibs. What is really to be feared the way the great depression was, is the government being unable to keep the gibs going.

          • What’s more, that chart is driven by white males. Other groups didn’t have as big a fall and moved back upward more quickly.

            The white participation rate has fallen nearly 5 percentage points in the past 20 years. A huge portion of that is white males with a high school degree or less. They make up about half of white men, which, of course, make up half of whites, so that 5 percentage points is heavily made up of about 25% of whites.

            Let’s say that 3.5 of the 5 percentage points comes from white males with a high school degree or less. 3.5 of 25 is basically 15%. That means that an additional 15% of lower educated white males have dropped out of the labor market over the past two decades over and above those who didn’t participate before, which is probably pretty high.

            Working class white males have been devastated by the changing economy and immigration. On top of that, they are hated by the elite and the media. Over the past 50 years, working class whites have been systematically decimated.

            It’s no wonder they’re dropping out and killing themselves. What do they have to look forward to. Crappy jobs. Their neighborhoods becoming Hispanic. Every TV show making fun of them. Teachers and politicians blaming them for every ill in the world.

            This is a group that’s ripe to either disappear or rebel.

          • That ledger will be balanced as more and more young, very intelligent white guys eschew college for trade schools. They will be the ones making the money and starting the businesses, and they will be the ones to laugh at the cultural nonsense. Their very independence in throwing off the college yolk, and disdaining the brainwashing, will make them rock star rebels, as the young men without swagger and moxie labor in the cubicles in dead-end jobs — without worthwhile girlfriends, by the way. .

            My biggest hope is that these young men rescue young male children from the de rigeuer Ritalin, and rescue all children from hormone blockers and drag queen story hour by slaying the cultural estrogen dragon of inclusiveness. .

          • This. I’m in my 20s, and run a business working a trade. I make loads more than most people my age. Ironically, I’m looked down on by my peers for working a blue collar job, but that’s a small price to pay for financial independence.

          • Make sure that trade doesn’t depend on a good housing market or growth in general otherwise you’re going to be hurting when the depression hits…

          • A young man in my family is headed down that same path. Good for you, Croyd, and good for him. You will have the last laugh, as will he.

          • Your peers should be like-minded men who value the life you do. Not the soy boys and cucks and fakes who happen to be your age.

          • read a very interesting article that stated the idea that the lack of new small business start ups was because of college loan debt. The theory was that there is only a small window of time where one has the energy, drive and ability to start a business. It occurs from say 25 to 40 or so. After that you have too many commitments to risk starting a small business. So if you don’t have your student loans paid off till you’re 35 then you’ve just about missed the window of opportunity. In other words student loan debt is killing the country, but not in the way we think.

          • Changing demographics of the US has made these types of aggregate graphs extremely challenging to decipher. Yes, the labor force participation rate of white males is collapsing fast, but the population reaching retirement age is heavily skewed toward the white male demographic. Meanwhile, the percentage of white males in the population at large, and therefore in the workforce calculation, shrinks dramatically as you move down through the age brackets. Both of these would skew the data.

            The data needs to be disaggregated by age brackets to extract any meaningful information about labor participation rates for white males of working age. I can’t tell from the aggregate data whether the participation rate is dropping because old white guys are retiring, or because young white guys are not working, or both.

          • That’s why they need to get into the trades especially mine because the work load is enormous and a lot of guys are retiring so the money is great right now and you can start building a family because of job security…

          • Not trying to dox you or anything but can you tell us what your trade is? I’m one of those IT guys who is too non-Indian to get back into that. I’ve been thinking about learning to be a gunsmith. Seems like it could be a good skill to know at least.

          • gunsmithing is hard to make money at. most modern guns are well made and don’t break often. also , new rifles of outstanding quality are relatively cheap . try plumbing maybe .

          • Whatcha working in Lineman? My co-host and I have been big advocates of the trades and I’ve been wanting to talk to tradesmen in other professions about what their situations look like.

          • Last I checked he was a Power Lineman, basically the guys who work for the power company and fix and maintain the distribution system. Not to dox myself but looking into this in a year or two in Michigan but am in a different area currently.

            Love the show Walrus, you and ole Roscoe can be nuttier than a squirrel turd ;p.

          • Citizen, I see this daily as a criminal defense attorney in rural Oklahoma. Most of these young white men are not bad guys. They are respectful to me and want to have a normal life.

            The only opportunity they have is the oil field. It is hard, dangerous work, but they do it when it is available. So it pissed me off when I hear that young white men aren’t willing to get there hands dirty.

            Unfortunately, the oil patch has been in bad shape recently and the jobs aren’t there.

            It wasn’t that long ago that a young man without much education could make a decent living around here as a farm or ranch hand. Those jobs all go to Mexicans now, as they will work for 1/3 as much.

            There is a true loss of hope for young, rural white guys who are not cut out for office work.

          • Anthrope,

            Where I grew up, a working class guy could have a small house, a family and even a little vacation here and there. They were part of the community. Their kids went to decent schools. (I know because I went to school with them.) They played softball with their buddies. Hell, they’d play golf at the muni with the small town docs and lawyers and they’d all have drinks afterward.

            The anger I feel as I see what’s happened to community after community of working class whites is beyond words.

          • I’m a criminal defense attorney in rural Oklahoma, too, Mis(ter). As you know, the scores of young man addicted to meth now would have been laborers making a decent living and raising a family in the ’60s.

    • I don’t think the cash is disappearing. It’s just not moving. Banks have lots of cash, but they are not lending to each other. Instead they are keeping their cash at the Fed. One possible reason is the quality of collateral. A shortage of treasuries or a perceived weakness in other types of bonds could be the problem. In other words, there be a weakness in the collateral that has not been made public.

      Now, if the banks are not really hoarding and their cash reserves are merely adequate, then maybe there is an effort to soak u cash by the Chinese and/or Russians, by dumping treasuries. We would never know this, but we have been in a cold war with both now for some time.

      • One other thing I’d heard is that the Fed is basically becoming the Treasury market, that the Government has issued (and continues to issue) so many treasuries that there isn’t a market for them.

        This isn’t my strong suit so I’ve walked it through to myself like this: If I approach Chase with treasuries as collateral for a loan, Chase needs to to know that they’ll be able to sell those at close to par as possible (ideally ‘at’) to recoup the loan if I can’t pay.

        The issue is, if all the other big banks have too many treasuries too, then there might not be a buyer at that rate so they’d have to take a hit as they’d have to cut the price on the treasuries I lent them in order to move them. Even worse, if they have to do that then I have a good reason to not pay them back as the treasuries I lent them are now worth substantially less than the cash that they gave me (this is exacerbated by the low interest environment; if a bond is trading at 8% and it moves up to 8.1% the delta is much different from a bond trading at 1% going up to 1.1%).

        Solution: Chase keeps the cash and makes me go to the Fed to get rid of my garbage treasuries.

        It’s one theory anyway. The Fed’s tendency in this case is to black-box it as much as possible, but yes there is a very real possibility that they do not know for certain themselves.

    • Counting and keeping track of “cash” is also becoming harder and harder because most “cash” now exists in digital formats. It’s easier to move around, it can be in both hardware and software, it can be held in unconventional ways, etc. You can literal put “cash” on a memory drive and bury it in a treasure chest along with the rest of your pirate booty.

    • This an example of Gresham’s law at work. Bad money drives good money out of the market, mostly because hoarding. The most accessible, tangible example of Gresham’s law in modern experience of the everyday Joe Dirt is the gradual disappearance of real silver coinage after the Fed began minting coinage with low-value metals, circa 1965. Even Joe Dirt is smart enough to understand that the Fed is lying and the pre-1965 quarter made of silver is more valuable than the post-1965 quarter made of inexpensive metals. I had a small stash of silver coins, but I lost them in an unfortunate boating accident.

      On the domestic front credit money is the bad money that is driving hard currency out of the market. Stated otherwise, some people are hoarding currency because they are no longer confident that credit money will be available in the future. Those people are called “smart” or “prepared” depending upon your outlook.

      The bigger factor is on the international front. US Dollars are disppearing overseas, where they are being hoarded by the population to hedge against collapsing local currencies. In this context the local currency is the bad money and the US Dollar is the good money.

      I’ve been commenting about the international aspect of this for a few years on this blog. The Dollar collapse is not coming in the lifetime of anyone reading this blog. There are simply too many third-world countries that will be forced to adopt the Dollar as their currency, either explictly by the government or in a de-facto manner by the population. Most countries will fail on their own, but if they don’t the CIA will help.

      • I vote for cash hoarding. About 40 years or so ago, during the height of the drug war, a serous proposal was made in Congress to copy a process used in war time—withdraw/change the currency—such that all those hundreds you had in a box were worthless if not exchanged for new currency. Of course, the purpose was to identify folks in the illegal market (drug sales for example) or bankrupt them.

        At the time, I remember laughing as I said to myself, the biggest thieves with cash lying around were the politicians themselves. I was right, and the bill went nowhere. 😉

  42. “….the repo market probably sounds a lot like a pawnshop to you.”
    And here I was, trying my best to not be anti-Semitic today.

    • A fun experiment is to take a dollar and put it in a jar whenever you say, think, or witness something antisemitic (for example, my Crappad autocorrected “antisemitic” to “antiseptic”). The Jewey Jar.

      • I’d need to take out loans to keep this up though. That would lead to more antisemitism leading to more loans… A positive feedback loop would ensue until the jar collapsed into a black hole and destroyed the earth.

    • It would have been fascinating to have a candid, private conversation with Paul Volker before he passed away last week. The WASPy titans of finance in the world in which Volker came of age fought for decades to keep bankers of a certain tribe out of the halls of power, but ulitmately failed.

      (((Arthur Burns))) presided over the Fed when Nixon closed the gold window, spurring the mass inflation of the Nixon/Carter era. Volker stood in the gap and staked his reputation on stabilizing the Dollar to buttress the real economy, only to see his life’s work destroyed by (((Greenspan))), helicopter (((Bernanke))), then (((Yellen))). Thirty years of (((leadership))) has destroyed the institution.

      The hapless Jerome Powell looks like a deer in the headlights, but he is really an animal caught in a trap. The Fed has no choice now but to continue dropping interest rates, expanding its balance sheet, and expanding the money supply.

    • Only tangentially related, but there’s a movie coming out where Adam Sandler plays some sort of A. Wyatt Mann caricature of the slimiest, most degenerate chosenite imaginable.

      If they hadn’t made it themselves you’d swear it was produced by Goebbels himself.

      • It’s called “Uncut Gems”, and it comes out on Christmas Day (to give the “Chosen People” something to do that day, I imagine). Everything about it seems meant to appeal to their Tribe, cause seeing it will remind them of their scummy, screwup cousin who they love to hang around, but always hits them up for cash.

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