In such matter it is always mandatory to look at what people in the trade have to say. The eventual reader is thus send back to this important article which should be read carefully:
« Inflation Flying in Hotter than Ever! », by Knave Dave, Wednesday, May 26, 2021 – 17:14, https://www.zerohedge.com/news/2021-05-26/inflation-flying-hotter-ever
For a quick definition of RRP see « How Reverse Repurchase Agreements Work », https://www.investopedia.com/terms/r/reverserepurchaseagreement.asp
Here are some quotes:
« A Reverse Repocalypse in the Making? Behind the scenes of this monetary deluge, the Fed’s essential response to the overnight reverse repo crisis keeps soaring higher, meaning the Fed is having to suck more and more money out of bank reserves. This is the reverse of the repo-crisis problem back in 2019 where bank reserves were starving, and the Fed was having to add more and more money overnight to hold interest down on interbank loans.
(…)
“On March 17, a little over two months ago, there was no volume at the Fed’s RRP window. Nothing. Today, it was almost $400 billion! How do you go from zero to $400 billion in two months? Not only was today’s activity at the RRP one of the largest ever, it was also THE largest non-quarter-end, non-year-end print. There’s an incredible amount of cash in the Repo market right now! Clearly, the Fed took too much collateral out of the market – or – added too much cash. The market is distorted from too much QE and hopefully QE tapering will be announced in June.“
(…)
If the Fed wants to maintain its 0-0.25% fundamental interest rate and avoid negative interest that the banks are pushing into being, it has to soak up the slop, or banks will go lower just to avoid an even worse hit from inflation. this is the kind of thing I was talking about when I wrote recently that the Fed is going to increasingly find its hand is being forced.
(…)
The repo expert sees this coming month as the pressing deadline for the Fed to announce tapering! If the Fed doesn’t act by then, this inflationary whirlwind could build into a fiery tornado. »
Quick comment:
From my perspective, the bottom line seems to be this: J. Powell’s attempt at reset was unfortunately undercut by Trump fiscal stimulus adding tax expenditures on destructive tax expenditures. In such a context the last March Repos event sends one back to the attempt by big banks to influence the FED in order to protect their investment strategy since a strict Zero Lower Bound FED’s choice would imply a dramatic shifting of emphasis towards equities. The last reverse repos event seems only a attempt by the FED to help the big banks recoup some of the losses induced by the recent bitcoin’s fall. These very practical measures that are merely following events take a huge saliency just because of the incredible bubbling character of hegemonic speculative finance.
While reading this, please note that perceptions or narratives do not coincide with reality. However, a trader cannot ignore the perceptions – and the Fisherian and Marginalist narratives and tools that inform them – simply because the trading game is largely conducted on these data. At the same time, they cannot ignore reality since it always end up prevailing. When perception stray too far away from reality, contradictory facts accumulate and eventually force a reappraisal – for instance, most came to notice that contrary to the textbooks the series of QE did not induce inflation. In other cases, reality reasserts itself brutally – for instance when bubbles do explode.
The quoted article provide a very good picture of the narrative. Let us try to investigate the reality behind it. As time goes by, the historical unfolding will allow me to look back at my comment to verify its solidity and/or its weakness.
In a recent essay I wrote: « Added on Mai 24 2021: We already said elsewhere that the Repos largely due to the fact that banks are now so vulnerable that they do not lend to one another on the inter-bank market. Hence the FED is obliged to intervene and will be obliged to do so increasingly as new speculative assets are added just to allow rotations. Lately, the fall of bitcoin probably explains the new rise. This adds to the chronic credit crunch. » in http://rivincitasociale.altervista.org/inflation-a-new-absurd-ecologist-bourgeois-cycle-is-announced-with-a-hike-in-prices-going-hand-in-hand-with-wage-deflation-but-this-is-given-as-inflation-12-may-2021/
From my perspective, I only needed to point at the different uses made of the repurchase agreement by the Central Bank, a difference of nature now more than of degree compared to the past. But, of course, a more complete analysis will force one to differentiate between repos and reverse repos. However, for the FED they are the two faces of the same coin.
From my perspective, inflation.s and higher prices are not the same thing. When higher prices are not due to a monetary phenomena there isn’t much the Central Bank can do, contrary to the Monetarists’ illusion which pretends to substitute the Central Bank intervention for both economic and budgetary tools. In these cases Monetarists’ actions only make things worse.
However, the CPE, the CPI and the CPP will mechanically be impacted by non-monetary higher prices, simply because these Fisherian tools are poor by construction. This is in part shown by the « inflation » – also in the singular – given by shadowstats. Moreover, marginalism does not have a scientific grasp of productivity and on its impact on relative prices, hence the way these indexes are managed is very problematic. (1)
Never the less, such as they are, these Indexes are official and they are integrated in the operational tools, including in the trading algorithms. It reminds me of the purely subjective analysis offered by rating agencies which must however be taken into account by institutional – and other – investors, not to speak of the problems caused by outdated parametric conditions, for instance the basically unchanged 1968 parameters by Merton, Black and Scholes which led to the LTCM LP rightly famous downfall. Not surprising, these market concepts and tools do influence private players’ behavior and the FED will thus feel the pressure. The « ecological » transition will add to the problem.
This is the reason why I have suggested the urgent formation of a Committee to analyse this matter. It will eventually come to the understanding that non-monetary price hikes should not properly be dealt with by the Central bank. This would educate the market players and hopefully remedy some effects of their economic blindness. Otherwise, capitalist Central Banks will have to continue the pernicious monetarist practice consisting in dealing with epiphenomenal contradictions with various opportunistic mediations calculated to serve and permanently bailout the market players lost in their a-economic folly. The search for monetary stability will then produce the opposite.
Either with the Repos or with the Reverse Repos, the FED is now attempting to stabilise the markets. But in both cases the amounts involved are enormous, making of these FED’s windows a totally new kind of intervention. The same now applies to the Interest On Excess Reserves (IOER) as the author of the quoted article underlines.
The point however is how to we interpret this. Here is what he says:
« Why would the Fed keep adding money into the system to soak up treasuries and finance the government just to suck it back out the other end? Oh, wait. That question answers itself.
Why would banks not want to keep excess money. Who can ever have more money than they want? Well, it’s not that banks want less money. It’s that they don’t want to hold locked in reserves during times of high inflation. Banks that are expecting high inflation are more concerned with preserving capital than building on it and do not want to hold excess money in reserves that will inflate away in value unless the Fed pays them more money (in IOER) to keep those reserves there. When all the banks have excess reserves, they can’t find other banks who want to exchange their cash for something that compensates better for inflation.
(…)
« The repo expert sees this coming month as the pressing deadline for the Fed to announce tapering! If the Fed doesn’t act by then, this inflationary whirlwind could build into a fiery tornado. »
Given what was said above if one rules out monetary inflation, then one needs to focus on the structure of hegemonic speculative capital and on its evolution, taking into account eventual shocks that can come either from failed rotations or more ominously from financial weaknesses or failures in the system itself – with the fear of the unleashing of CDS chains.
I would tend to think that the immediate cause of the current reverse repos getting hot is simply to be linked to the bitcoin recent fall and other crypto-moneys – not to be confused with Central Bank Digital Currencies, such as the Chinese CBDC which will need to develop its own ways of structurally differentiate between money and credit to maintain the necessary control over the economy and over structural inflation and other inflationary phenomena.
This fall was sudden and drastic and the algorithms automatically went on defensive mode. The initial 48 big players – numbered according to Zerohedge – in the first round of this drama were awashed with money and nowhere to invest it. In such cases, they always go to their supportive Mother for help. The same happened in March but in the reverse, with a dysfunctional inter-bank market which the FED had to palliate. As one might recall, the March 17 Repos event happened in the dual context of the big banks positioning to take advantage of the new investments opportunity accruing to well-to-do households following the increase of their saving due to the Federal Covid-crisis financial support; at the same time, they were resisting any drastic change in the FED policy.
The under-laying structure is by now well-known. Hegemonic speculative finance cannibalizes real economy – with it speculative interest legally posing as a legitimate rate of profit and thus becoming unsustainable. It is now worse than it was at the time of H. Ford vs Morgan. This undermines employment, hence social contributions and the fiscal revenues of the State. This deconstruction of the Welfare State and of its virtuous capital circuits (2) now unfolds in a context in which the public debt is monetised on the global financial market and in which the 1933 New Dealers’ Glass Steagall Act which had preventively segregated the 4 pillars of banking and finance – deposit bank, commercial bank, insurance and credit union – has been abrogated in 1999, leading to an all-out speculative and unstable World deprived of any self-regulating mechanism. This is because the FED’s liquidity is now de facto substituting to the prudential ratio of the fractional reserve banking system. (3) .
The big banks are trying to influence the FED while the Fed strives for systemic stability but in a context over-determined by:
1 ) A structural credit crunch at time inducing repos of various sizes to palliate the chronic disfunctioning of the inter-bank market.
2 ) The increased possibilities of drastic events on fake rotations – such as those on Bitcoin and Ethereum. In fact these rotation vehicles seem to play a role as dangerous as the CDOs before the subprime crisis. However, lucrative investment opportunities for speculative capital are so scarce that such rotations have become vital to supplement buybacks or the keeping of zombie companies going just to preserve the appearances of the balance-sheets and avoid increased NPL. Some countries are pulling out of bitcoin mining and other cryptos but they have become a vital tools providing rotations. Hence, we can foresee more up and down on the market as these rotations and their oscillations are largely managed by algorithms – in effect often talking to each others at the speed of light.
3 ) Finally from the FED side we have the financing of public debt, hence a tendency to go Zero Lower Bound or negative according to Blanchard and Summers’s planned debt elimination through low or negative rates. This however would force a huge structural re-adjustment from banks and other players, i.e. equities vs. bonds.
To come back to the main argument. The current reverse repos event is probably simply due to the bitcoin recent fall, not to non-existing monetary inflation.
Are the main banks and financial players against low or negative interests? They have no choice, being so vulnerable. The question becomes :What new rotations can they invent?
But perhaps as explained in my Tous ensemble (1998) at a time when old public infrastructures need urgent repairs and new ones need to be built, new investment avenues could be devised to finance them and in the process to consolidate part of the banks’ balance-sheet. A nice swaps of public debt against equities could be devised, trasmutating high-yield public debt into equities in public-private consortiums specifically mandated to repair and build the needed infrastructures. These equities would bear a modest interest say from 0.5 to a maximum of 1% but this would be guaranteed by the Federal State over a 5 or 10-Year period. The New Dealers did not hesitate to intervene directly in the economy, most notably with the Public Works which changed the USA for the best. Everyone would win. New full-time jobs equally mean more social contributions and more fiscal revenues. Meanwhile, the Federal government would also gain a comfortable budgetary margin thanks to this positive swaps, and this would further help finance its social and public programs. At the same time it would help to secularly reduce the public debt without ruining small savings with the Zero Lower Bound dubious strategy.
We all need to continue following these evolutions very carefully and without a priori.
Paul De Marco.
Notes:
1 ) On the purchasing power of the money versus the standard of living see this: http://rivincitasociale.altervista.org/purchasing-power-standard-of-life-socially-necessary-working-time-and-global-net-income-of-the-households-2-31-dec-2018/
On the badly calculated GDP see: http://rivincitasociale.altervista.org/gdp-marginalist-narration-tool-against-the-welfare-of-peoples-and-the-prosperity-of-nation-states-may-24-2020/
2 ) On capital circuits see : http://rivincitasociale.altervista.org/another-ineptitude-marxs-circuits-of-capital-and-realization-authored-by-g-dumenil-and-d-levy-dec-22-2019-january-27-2020/
On the dismantling of the Welfare State see: http://rivincitasociale.altervista.org/the-dismantling-of-the-social-state-or-of-the-anglo-saxon-welfare-state-and-monetarist-neoliberal-policies-seen-from-the-angle-of-the-labor-contract-october-4-2016-april-9-2020/
3 ) See « Credit without collateral » and « The Treasury and the FED » in the International Political Economy of my old Jurassic site www.la-commune-paraclet.com