Global monetary system is on life support
Worries growing over the Fed’s efforts to fix funding issues that is all likely to get much worse.
Since the Global Financial Crisis, central banks have been printing easy money in exchange for long term government bonds to stimulate the demand stagnated global economy. The global monetary system is like a complex plumbing system with many pipes, pressure gauges and taps to circulates money and balance debts. The pipe diameters and gauges had been designed by the international monetary system to provide the rules for payments, exchange rates, and movement of capital.
Too much debt in the US and the world
When too much money is pumped into the system, and too much debt is flowing out of the system, it causes imbalance. For example, Argentina is heading towards default on $115 billion on foreign currency bonds and over $44 billion more to the International Monetary Fund. Other countries similar to Argentina that can not pay their debt will follow the same fate..
The US debt to US public and foreign countries ballooned
The US Debt is over $22.6 trillion as of end of Sept 2019 and its supposed be secure because it is backed by trusted US government bonds.
“America’s debt is the largest sovereign debt in the world for a single country. It runs neck and neck with that of the European Union, which is a unified trade body of 28 member countries. The national debt is greater than what America produces in a whole year. This high debt-to-gross domestic product ratio tells investors that the country might have problems repaying the loans. “
The U.S. debt to China is $1.11 trillion as of May 2019. That’s 27% of the $4.1 trillion in Treasury bills, notes, and bonds held by foreign countries. The rest of the $22 trillion national debt is owned by either the American people or by the U.S.
Unpredictable US Treasury Yield causes ripple in repo
Ever since the drop of the yields globally, the imbalance created by the demand for the US bonds had created a choppy market. When markets start to get choppy, commodity traders are forced to unwind their long positions on government bonds, triggering a feedback loop of further selling among other VaR-sensitive traders. The overall effect is a sharp climb in bond yields that may lack a prominent driver.
In September, the financial system ran out of cash and revealed the US Treasuries are not truly “risk-free” assets. Some institutions needed money offered a supposed risk-free US treasury, and the repo rate spiked way above the average lending rate demanding 10% interest rather than 2%.
Worries are growing over the Fed’s efforts to fix funding issues that are all likely to get much worse. The New York Fed just announced it is increasing its temporary overnight repo operations to $120 billion a day from the current $75 billion. In addition to the repo increase, term repo operations are rising to $45 billion, from $35 billion.
Even socialist politicians are alarmed
The Fed and treasury are not providing any detailed explanation other than this is an underfunding issue. Senator Elizabeth Warren is pressing Treasury Secretary Steven Mnuchin for answers on recent events in the overnight lending, or repo, markets.
The monetary system can’t handle it
One possible explanation is that there is too much debt in the system, and the “new easy money” injected in turn adds more debt to the system that is not designed to handle it. It is a matter of the time before the pipeline of monetary system overflow and explodes in a financial crisis like no other.