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4 hours ago, Jimbo said:WHERE WILL THE LIQUIDITY COME FROM???
Now that the RRP is mostly history.
I presume the liquidity to plug the budget deficit will mostly come from bank deposits???
Or will it come from the bank reserves at the FED.
There is still 3 trillion of these.
Are they next in line to be drawn down????
Great question.
Santa Claus, obviously.
But seriously, the RRP slush fund hasn’t been a material factor since it dropped under $400 billion some months back. The important thing to remember is that financial systems normally generate their own liquidity independently of the central bank via lending.
This bull market has been all about that. Rising asset prices create their own liquidity. It’s a product of animal spirits, the will and the ability to create credit out of thin air. Just like you do when you use your credit card to buy stuff. Now, you can pay off your balance every month or not. But whether you do or not, the instant you use that card you create money. And if on balance, everyone using their credit card lines of credit does not pay it down to zero at the end of the month, then systemic credit increases. The money in the system goes up, and if production of goods doesn’t keep pace, prices of the goods we buy go up.
It’s the same for asset prices and financial system credit lines.
I’m working on a Liquidity Trader Money Trends weekly update to be posted later today. Here are a few charts from this report to come.
This chart illustrates the rise in banking system deposits despite the Fed steadily shrinking its balance sheet. It illustrates the principle of the banking system generating more money than the Fed is subtracting. A lot more. To be clear, “Liquidity” is just a fancy word for “Money.”
This chart shows bank loans on one scale and deposits on the other. It illustrates the fundamental principle that loans create deposits.
Here’s another principle. When the Treasury issues debt, and the Fed isn’t buying or funding 90% of it like it did in the 12 year regimen of QE, then dealers, investors, and foreign central banks must buy all of it. There’s not enough free cash for them to buy it outright, so what do they do? They use the new paper as collateral and repo it, in the hopes of skimming the excess over the cost of carry. In many cases they use futures to hedge the market risk, but that’s another story. The fundamental point is that when the Treasury borrows, market participants print the money to lend via the magic of repo. THAT’S WHERE THE MONEY COMES FROM.
A byproduct of that is that with all the money creation from repo, stock prices inflate. That’s because the system is creating more money than it is creating of shares of stock.
In fact, companies are constantly removing stock from the market with buybacks. They use those to fund the options that they issue to the CEO and other execs. That’s another mode of pumping cash into deposits. It’s not the only source. Investors can take profits too. Some of it shows up in bank deposits, and some shows up in money market funds. Over the past two years, MMF balances have risen by about $2.2 trillion, all via the magic of conversion of Treasury debt to cash money in the system via the magic of repo, and government spending.
The bottom line is that they system always has the ability to create as much money as it needs to inflate both consumer prices and asset prices. It’s not about the way, it’s about the will. As long as the will exists. And it usually does.
But sometimes, those who run the system, the dealers, and the whales who play with them lose confidence when they become overextended and underhedged. Then the system can run in reverse and become self perpetuating until a deity intervenes. Sometimes the deity is named Alan, sometimes sometimes Janet, sometimes Jerry. When the players run from a deflating system, they supplicate themselves to these deities, who ultimately save them from themselves.
First comes the loss of confidence, then the crash, then the supplication, then the rescue, and the system rises from the ashes.
And so on.
I wish you are great holiday week. I’ll take these days off and leave this thread open for anyone with any observations.
Stay tuned for the Liquidity Trader Money Trends update with more charts and observations, where I tie it all together and tell you what to expect and look for in the weeks and months ahead. Subscribe now!
