Wednesday, November 6, 2019 17:49
“’Liquidity’ Is a Drug”
by David Stockman
“Ain’t I clean,
for the man
Superfly, here I stand.”
- Curtis Mayfield, “Pusherman” (1972)
“The official headline unemployment rate is at a 50-year low of 3.5%. The trailing-12-month Consumer Price Index less food and energy posted at 2.35% in September, which is about as close to the Federal Reserve’s 2.00% target as you please. Those two stats are supposedly the very marks of Keynesian economic nirvana. Meanwhile, the S&P 500 Index just reached another new all-time high. But our monetary central planners are pumping cash as if its September 2008 all over again.
Indeed, two weeks ago the New York Federal Reserve boosted its “temporary open-market operations,” or TOMO, to $160 billion of cash injections. Some say it means that the Fedheads know something… and that that something is not good.
None of them know anything, whether about what’s coming down Main Street or what’s happening with Wall Street’s plumbing. These fools do indeed believe they can shout back the financial, economic, and political tides. They’re convinced they can cause interest rates to obey their commands by purchasing as much government paper as it takes to balance supply and demand at the precise money-market yield embedded in their current policy target.
Never mind that this flood of cash snatched from thin air amounts to massive monetization of the public debt. And it’s also likely as permanent as it is massive. That’s because those TOMO announcements made clear that the Fed intends a monetary “Proud Mary,” to keep on rollin’ these TOMOs over and over on a river of permanent liquidity…
In any event, the implied annualized run rates of the currently announced TOMOs and the $60 billion per month of T-bill-focused “permanent open-market operations,” or POMOs, add up to more than $1 trillion. Of course, this isn’t “quantitative easing,” or “QE.” It’s not even “monetary policy,” according to the Fed. In fact, our monetary central planners claim there’s nothing to see here except some technicians at work nudging and smoothing the money markets to keep them on an even keel.
So, how do you explain the POMO chart for October 23, 2019? The dollar value of T-bills offered by the Street, represented by the pink bars, reached yet another high, the aforementioned $44.2 trillion. That’s 5.7 times the Fed’s actual offer.
Obviously, there’s more going on here than technical “smoothing.” Yet our robotic monetary central planners have their heads down and are charging the line, utterly oblivious to a fundamental financial truth known for centuries: that there’s no free lunch.
Also, when you finance the government’s debts at the printing press chronically, massively, and insouciantly, you’re sowing the seeds of your own ruin. And that’s not just because it ensures that politicians will eventually bury the state under unsustainable debt. In the here and now, massive monetization also unleashes speculative juices in financial markets because it invites get-rich-quick front-running. That is, the buying early of whatever the lumbering central bankers have announced or telegraphed they will be buying next…
In the case at hand, the Fed has effectively told Wall Street they’ll not brook with any dissenting rates across the entire multi-trillion-dollar range of money-market and repo-sector transactions – even at month-end and quarter-end. That’s when beat-the-regulators window dressing inherently roils the markets and causes repo and other financing rates to rise as regulated institutions and publicly reporting companies look for safe places to temporarily park their financial hot potatoes.
But that data up there is from October 23, a calendar point at which no windows have historically been dressed. What’s happening is not at all technical, nor is it temporary. With each passing POMO offer of “Not QE4,” the oversubscribed rate has climbed steadily higher, rising from 4.3 times to 4.8 times to 5.5 times to 5.7 times… And what it means is that the gamblers down on Wall Street have found still another way to play the Fed.”
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