Here is a chart that shows the US money supply and S&P, with some events noted.
You can see that, when the covid crash occurred, the money supply expanded dramatically.
Most people will attribute this to stimulus checks, there is also a calculation change there which is highlighted in grey. But FRED also highlights in an article that the fractional reserve policy is dropped to 0% so that banks can loan out anything on their books without be required to maintain any of it. No need to keep any cash in the vault.
www.federalreserve.g...olicy/reservereq.htm
medium.com/navigatin...ig-deal-c501432e9be6
I don't understand how this event passed by without anyone noticing.
The fed rate hike cycle started after inflation set in. All of the money printing, QE, free money since 2008 that's kept the train running full steam after the banking crisis finally encountered a confluence that sparked the inflation that somehow never appeared prior. The rapid expansion of money supply from 15kBn to 22kBn in 2 years obviously would have some effect! The narrative was that supply chain issues from covid sparked inflation. But the Fed hikes are to control demand side dynamics(eg reduce spending/buying by making loans expensive.)
A debt crisis was unfolding in China and continues to with Evergrande starting to default on loans around September/October 2023 (eg now), but the US bumped into its a news-breaking liquidity crisis around March 2023 when SBV had a bank run, one of the fastest in history due to fast communication and digital withdrawals. Nobody was lining up at the bank - people in social networks were telling each other to pull money out of the bank NOW.
The Federal reserve was partially blamed. The another issue uncovered was that debt was maintained in high risk investments - the value of which had contracted and so there wasn't money there anymore.
It turns out that the problem was a lot broader though. There were two responses from the Fed to back-stop a complete system-wide liquidity crisis that could topple the banking and financial systems globally:
1. Create liquidity swaps for banks.
If a bank-run occurred on American soil, the fed was ready to loan out cash to American banks to prevent a liquidity crisis. How much did banks borrow? $300Bn in one week. Half to the failing banks SBV and Signature, and the other half went to other un-named banks that never hit the news. www.pbs.org/newshour...nks-in-the-past-week
That's about the size of the debt that Evergrande is unable to pay. So we have now $600Bn USD in debt crisis over our heads.
Lehman needed $600Bn but that was 2008 dollars. That's $858Bn today. But we're getting there!
2. Create swaps between central banks.
More USD credit swap lines were created between central banks to allow them to quickly loan from each other in the case of a cascading liquidity crisis. The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank announced together that they had set up these lines to hold up the banking system if a big run started.
www.bankofcanada.ca/...us-dollar-liquidity/
But there is more! The US government's debt is also brushing up against potential defaults nearly continuously in 2023 threatening government shutdown. The US Government's credit rating was actually downgraded S&P and Moody's from AAA (highest rating) to AA+ due to government infighting and default threat. How big is the US debt? Well, here is the figure to put it into perspective: the interest on US debt is higher than the spend on military in the US. And the US spends more on military than any other country in the world - $766Bn in 2022. The INTEREST ON DEBT is higher than that with the US paying $807.84 to service its debt, just the interest!
So, how do they fund it? With more debt. Bonds are loans to the government that they pay back with interest. But the bond markets are subject to supply+demand factors, so if demand for bonds drops, the yield goes up. The 10y bond yields spiked to a 17-year high last week. The bond market has been really turbulent lately. Foreign countries are dumping US debt and trying to move off the USD for trade (eg BRICS+ is looking at a new currency to use for trade.)
Mohammad El-Erian remarked in Financial Times that "The US bond market is losing its strategic footing, whether in economics, policy, or technical aspects."
www.ft.com/content/4...4d-a53b-5f9404613d4a
So the government is selling debt, and the yields are going up, meaning that to sell that debt they have to pay more for it. There was a 30y auction in the past week or two that also went poorly and correlated to S&P/Nasdaq dropping +1% I shorted it! :)
It's looking pretty precarious out there!
Stay safe!
You can see that, when the covid crash occurred, the money supply expanded dramatically.
Most people will attribute this to stimulus checks, there is also a calculation change there which is highlighted in grey. But FRED also highlights in an article that the fractional reserve policy is dropped to 0% so that banks can loan out anything on their books without be required to maintain any of it. No need to keep any cash in the vault.
www.federalreserve.g...olicy/reservereq.htm
medium.com/navigatin...ig-deal-c501432e9be6
I don't understand how this event passed by without anyone noticing.
The fed rate hike cycle started after inflation set in. All of the money printing, QE, free money since 2008 that's kept the train running full steam after the banking crisis finally encountered a confluence that sparked the inflation that somehow never appeared prior. The rapid expansion of money supply from 15kBn to 22kBn in 2 years obviously would have some effect! The narrative was that supply chain issues from covid sparked inflation. But the Fed hikes are to control demand side dynamics(eg reduce spending/buying by making loans expensive.)
A debt crisis was unfolding in China and continues to with Evergrande starting to default on loans around September/October 2023 (eg now), but the US bumped into its a news-breaking liquidity crisis around March 2023 when SBV had a bank run, one of the fastest in history due to fast communication and digital withdrawals. Nobody was lining up at the bank - people in social networks were telling each other to pull money out of the bank NOW.
The Federal reserve was partially blamed. The another issue uncovered was that debt was maintained in high risk investments - the value of which had contracted and so there wasn't money there anymore.
It turns out that the problem was a lot broader though. There were two responses from the Fed to back-stop a complete system-wide liquidity crisis that could topple the banking and financial systems globally:
1. Create liquidity swaps for banks.
If a bank-run occurred on American soil, the fed was ready to loan out cash to American banks to prevent a liquidity crisis. How much did banks borrow? $300Bn in one week. Half to the failing banks SBV and Signature, and the other half went to other un-named banks that never hit the news. www.pbs.org/newshour...nks-in-the-past-week
That's about the size of the debt that Evergrande is unable to pay. So we have now $600Bn USD in debt crisis over our heads.
Lehman needed $600Bn but that was 2008 dollars. That's $858Bn today. But we're getting there!
2. Create swaps between central banks.
More USD credit swap lines were created between central banks to allow them to quickly loan from each other in the case of a cascading liquidity crisis. The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank announced together that they had set up these lines to hold up the banking system if a big run started.
www.bankofcanada.ca/...us-dollar-liquidity/
But there is more! The US government's debt is also brushing up against potential defaults nearly continuously in 2023 threatening government shutdown. The US Government's credit rating was actually downgraded S&P and Moody's from AAA (highest rating) to AA+ due to government infighting and default threat. How big is the US debt? Well, here is the figure to put it into perspective: the interest on US debt is higher than the spend on military in the US. And the US spends more on military than any other country in the world - $766Bn in 2022. The INTEREST ON DEBT is higher than that with the US paying $807.84 to service its debt, just the interest!
So, how do they fund it? With more debt. Bonds are loans to the government that they pay back with interest. But the bond markets are subject to supply+demand factors, so if demand for bonds drops, the yield goes up. The 10y bond yields spiked to a 17-year high last week. The bond market has been really turbulent lately. Foreign countries are dumping US debt and trying to move off the USD for trade (eg BRICS+ is looking at a new currency to use for trade.)
Mohammad El-Erian remarked in Financial Times that "The US bond market is losing its strategic footing, whether in economics, policy, or technical aspects."
www.ft.com/content/4...4d-a53b-5f9404613d4a
So the government is selling debt, and the yields are going up, meaning that to sell that debt they have to pay more for it. There was a 30y auction in the past week or two that also went poorly and correlated to S&P/Nasdaq dropping +1% I shorted it! :)
It's looking pretty precarious out there!
Stay safe!