Another great writeup, thank you Bear!! Theoretically, couldn't the fed help facilitate reducing MMF reliance on the RRP by either reducing the offering of treasuries eligible for the overnight rev repo agreement through their own policy, or reducing the total pool of treasuries on their balance sheet so there simply isn't a supply there to support the current RRP demand (maybe the Treasury is the buyer)? The later would have to be an open market operation I presume?
Great write up. Thanks for making a difficult topic easier to understand. My impression after reading through twice is that, in terms of “inflation control”, the Fed and Treasury are working against each other. Seems... inflationary. Is this correct?
Thank you for the wonderful article, Mr Bear. I just became a new subscriber :)
One question please: in this buyback program, the Treasury would be buying off the market a bunch of old T-bonds at a huge discount compared to par. Some of those T-bonds are trading at 60 cents to the dollar!
Granted, the newly issued T-bills must offer a higher yield than the old T-bonds, but the Treasury would be effectively exploiting current market prices to reduce its total debt burden while it's cheap. Great move!
loved the: In the end, some people end up with tokens, some with money.
The way these companies pump the coins amazes me. They use influencers, manufacture whole communities and even fashion models.
The interesting thing is that part of the people that buy into these schemes are ones you would think of as the "smart kids" - college educated, tech-savvy that have all the "right" ideas.
One person that convinced his girlfriend to invest along with himself in Terra was a cybersecurity expert... Great stuff.
As someone pointed out here and as can be read in other economic write-ups there's a theory that the genie of "neverending QE" has unleashed a very "real need" by the financial "economy" for liquitidy to "never end" - the system right now is bascially showing signs of going cold turkey from a liquidity rugpull as you describe.
Inflation is not doused and is a lagging indicator - if and when the QT should be showing effects based on technical rules is probably best viewed when looking back to Bernanke and some more technocratical Fed Chairmen who seemed to follow what was later coined the "Taylor Rule".
The rule itself is arithmetic trying to balance fed funds short rates vs. CPI and other factors - here is a great chart comparing real rates to the ruleset rate - data only going to 2020 unfortunately here (FRED):
And here's word from the man himself on what we are all witnessing in the current monetary policy environment, which has been on "neverending QE & money tap" since 2010.
Ben Bernanke - infamously famous for being amongst the FED Chairmen who pulled out the "full stop" in their arsenal and reacting hard and fast to inflation to try to stop it cold in its devastating tracks in the heydeys of a boom and bust cycle in the 80s was putting rates at above 18% at one point (!).
I think many here did not witness this period and how devastating the energy shock of the 70s was to fuel the later inflation curve.
HEre's some words from the man himself on what we are currently seeing in the monetery policy field - aka Biden's appointed Fed Head Jay Powell's and commitee are probably way behind the curve already:
What the FED is doing now is balancing precariously in-between dousing the financial market itself, who since 2009 has become in effect an addict expecting infinite money to be shoveled, to remain with your "Furnace" comparison of an earlier essay.
Since a lot of the QE has not directly funded the real economy, but paper economy, aka "Financial Markets", and in consequence "Banks", "MMF" and other market participants down the money chain, it stands to reason that the proverbial drug addict going cold turkey could hemmorhage through lending facilities indeed.
My personal belief is the Fed and ECB are either blinded by their own "speed", which they must think is too fast vs. the reality of inflation being runaway and driven in a big part initially by their QE taps running on full during what was supposed to be a slow-down. In 2020 politicians globally decided to close down whole countries on short notice and were responsible for destruction of supply chains. Central Banks already were on either close to zero funds rate regime (Fed) or a zero funds rate regime (ECB) - they then decided to not only continue but increase the free money lending into a drastic politically induced economic slowdown in the face of a pandemic (of then unknown proportions) - and they kept the policy unchanged even in the face of bubbly markets and overvaluations of real assets.
Here we are now, watching almost like the proverbial deer caught in the headlights. Will the car stop in time?
Finally a clear and concise explanation of the whole dynamics. Ty so much for clarifying it and explaining the risks and what could. This is an extremely helpful note
A side quirk of the scheme is that by swapping long-to-short duration Treasury will be reducing the face value of the Federal debt. Face value of debt is not a very relevant economic metric (debt service burden is much more important economically), but it has political significance. Total debt, debt-to-GDP are often in the news-cycle and the Administration will be able to brag about reducing them.
Then there is this thing called "debt ceiling", and with this operation the Administration will be able to expand the breathing room under it.
So I think this will have political benefits, which makes it more likely to be introduced.
One of the big factors keeping MMF in the RRP facility is that they don’t have to worry about their investments being underwater at any point as long as they put large amounts of cash in RRP over other market securities. The Fed hasn’t offered reliable guidance on where rates will really land, rightfully so since they really don’t know at this point, but without that guidance the portfolio managers see no reason to take any sort of excess risk.
The Fed needs to put the RRP rate lower than the rate markets can/will offer and allow the private markets to compete better.
I do not have any special knowledge, but at a first glance it looks like a very risky undertaking, as short term (as described above) but also mid (inflation) and long term (higher risk of refinancing/even shorter averagematurities/higher rates down the road for the treasury. And potential gains are rather uncertain, as you said. Why then wouldn't rather FED just slow the pace of QT and/or even pause some of the measures?
Another great writeup, thank you Bear!! Theoretically, couldn't the fed help facilitate reducing MMF reliance on the RRP by either reducing the offering of treasuries eligible for the overnight rev repo agreement through their own policy, or reducing the total pool of treasuries on their balance sheet so there simply isn't a supply there to support the current RRP demand (maybe the Treasury is the buyer)? The later would have to be an open market operation I presume?
Great write up. Thanks for making a difficult topic easier to understand. My impression after reading through twice is that, in terms of “inflation control”, the Fed and Treasury are working against each other. Seems... inflationary. Is this correct?
Thank you for the wonderful article, Mr Bear. I just became a new subscriber :)
One question please: in this buyback program, the Treasury would be buying off the market a bunch of old T-bonds at a huge discount compared to par. Some of those T-bonds are trading at 60 cents to the dollar!
Granted, the newly issued T-bills must offer a higher yield than the old T-bonds, but the Treasury would be effectively exploiting current market prices to reduce its total debt burden while it's cheap. Great move!
Thoughts?
Another fine piece. Ready for tomorrows ☺️
Great article, thanks :)
loved the: In the end, some people end up with tokens, some with money.
The way these companies pump the coins amazes me. They use influencers, manufacture whole communities and even fashion models.
The interesting thing is that part of the people that buy into these schemes are ones you would think of as the "smart kids" - college educated, tech-savvy that have all the "right" ideas.
One person that convinced his girlfriend to invest along with himself in Terra was a cybersecurity expert... Great stuff.
Another fantastic article. I'm learning so much about the markets and investing reading your wise words.
As someone pointed out here and as can be read in other economic write-ups there's a theory that the genie of "neverending QE" has unleashed a very "real need" by the financial "economy" for liquitidy to "never end" - the system right now is bascially showing signs of going cold turkey from a liquidity rugpull as you describe.
Inflation is not doused and is a lagging indicator - if and when the QT should be showing effects based on technical rules is probably best viewed when looking back to Bernanke and some more technocratical Fed Chairmen who seemed to follow what was later coined the "Taylor Rule".
The rule itself is arithmetic trying to balance fed funds short rates vs. CPI and other factors - here is a great chart comparing real rates to the ruleset rate - data only going to 2020 unfortunately here (FRED):
https://fredblog.stlouisfed.org/2014/04/the-taylor-rule/
And here's word from the man himself on what we are all witnessing in the current monetary policy environment, which has been on "neverending QE & money tap" since 2010.
https://www.project-syndicate.org/commentary/fed-interest-rate-policy-deviation-from-monetary-policy-rule-by-john-taylor-5-2021-08
Ben Bernanke - infamously famous for being amongst the FED Chairmen who pulled out the "full stop" in their arsenal and reacting hard and fast to inflation to try to stop it cold in its devastating tracks in the heydeys of a boom and bust cycle in the 80s was putting rates at above 18% at one point (!).
I think many here did not witness this period and how devastating the energy shock of the 70s was to fuel the later inflation curve.
HEre's some words from the man himself on what we are currently seeing in the monetery policy field - aka Biden's appointed Fed Head Jay Powell's and commitee are probably way behind the curve already:
https://www.cnbc.com/2022/05/16/bernanke-says-the-feds-slow-response-to-inflation-was-a-mistake.html
What the FED is doing now is balancing precariously in-between dousing the financial market itself, who since 2009 has become in effect an addict expecting infinite money to be shoveled, to remain with your "Furnace" comparison of an earlier essay.
Since a lot of the QE has not directly funded the real economy, but paper economy, aka "Financial Markets", and in consequence "Banks", "MMF" and other market participants down the money chain, it stands to reason that the proverbial drug addict going cold turkey could hemmorhage through lending facilities indeed.
My personal belief is the Fed and ECB are either blinded by their own "speed", which they must think is too fast vs. the reality of inflation being runaway and driven in a big part initially by their QE taps running on full during what was supposed to be a slow-down. In 2020 politicians globally decided to close down whole countries on short notice and were responsible for destruction of supply chains. Central Banks already were on either close to zero funds rate regime (Fed) or a zero funds rate regime (ECB) - they then decided to not only continue but increase the free money lending into a drastic politically induced economic slowdown in the face of a pandemic (of then unknown proportions) - and they kept the policy unchanged even in the face of bubbly markets and overvaluations of real assets.
Here we are now, watching almost like the proverbial deer caught in the headlights. Will the car stop in time?
Finally a clear and concise explanation of the whole dynamics. Ty so much for clarifying it and explaining the risks and what could. This is an extremely helpful note
A side quirk of the scheme is that by swapping long-to-short duration Treasury will be reducing the face value of the Federal debt. Face value of debt is not a very relevant economic metric (debt service burden is much more important economically), but it has political significance. Total debt, debt-to-GDP are often in the news-cycle and the Administration will be able to brag about reducing them.
Then there is this thing called "debt ceiling", and with this operation the Administration will be able to expand the breathing room under it.
So I think this will have political benefits, which makes it more likely to be introduced.
One of the big factors keeping MMF in the RRP facility is that they don’t have to worry about their investments being underwater at any point as long as they put large amounts of cash in RRP over other market securities. The Fed hasn’t offered reliable guidance on where rates will really land, rightfully so since they really don’t know at this point, but without that guidance the portfolio managers see no reason to take any sort of excess risk.
The Fed needs to put the RRP rate lower than the rate markets can/will offer and allow the private markets to compete better.
I do not have any special knowledge, but at a first glance it looks like a very risky undertaking, as short term (as described above) but also mid (inflation) and long term (higher risk of refinancing/even shorter averagematurities/higher rates down the road for the treasury. And potential gains are rather uncertain, as you said. Why then wouldn't rather FED just slow the pace of QT and/or even pause some of the measures?