While the talk is about the Coronavirus, many are now wondering why central banks are using tools for a financial crisis to fight off a virus.
If you follow my work, we were expecting some sort of event to occur for governments and central banks to save face. We knew interest rates were going to 0 (and negative) and QE was going to be reinstalled. However, QE was a one time desperate policy to prevent another 1930's like global depression. If we went back on it, it could trigger a confidence crisis since people would realize QE did not work and that we are going to be in a QE and low interest rate policy FOREVER. Many already know this to be the case. Interest rates cannot normalize given the debt that is out there...and son to be increasing dramatically.
We have seen rate cuts and emergency rate cuts by many central banks. Canada cut rates by 1% in less than 3 weeks. The Fed will be doing the same.
However, the most important think to note is the liquidity being provided to the system. 1.5 Trillion to be exact by the Fed, which will increase more.
We have been saying that the repo crisis beginning last year in Fall was something to watch. It meant central banks were beginning to lose control of the system. There was some bank, or banks, that was running out of liquidity and needed daily or weekly injections of money to survive.
This has led to confusion on whether this is QE since the Fed's balance sheet has been increasing (we are up to 4.2 Trillion...during the 2008 GFC, we took it up to 4.5 Trillion). The Fed is saying this is not QE. Again, it really is about wording here. QE was a way for central banks to keep long term interest rates low, and provided stimulus. They did this by buying long term bonds from the banks which meant the Fed got the bond, and then cash was added into the system by entering the banks asset sheet.
Repo is a way to keep short term interest rates low. The Fed is providing liquidity into the system and in return, the banks must provide collateral (they are saying it is high grade collateral ie US treasuries, but the banks could very well be giving the Fed their toxic assets).
With this 1.5 Trillion dollars, we are seeing the beginnings of a liquidity issue. The system was about to freeze up and interest rates were about to spike. This has a lot to do with the fact that corporations are feeling the pinch. Especially the OIL companies. Oil has gotten decimated and many of these US oil producers are not making money. In fact, they are having a hard time just to keep the lights on. When Oil fell in 2014, banks were forced to provide loans to these oil companies to avoid massive layoffs. So now these banks have provided loans to these oil companies, loans they never would have taken, and this is why when oil falls, the financial sector tends to fall with it. These oil companies are zombie companies. They will never pay back their debt, and will need more debt to survive.
Fast forward to today, and these oil companies need access to more debt to survive. Banks do not want to be loaning money right now in this environment, because most of them do not have the capital to do so, and rates would have to be high given the risk of the loans in this environment (knowing oil may remain low due to an impending recession meaning these oil companies will not be making money for a long time).
This 1.5 trillion injection was the Fed saying: look, we will give you (the banks) liquidity and will guarantee you do not fail by making bad loans. Please use this money to loan to corporations (oil, cruise ships, airlines) who need this money to survive and prevent massive layoffs. This large injection is needed to keep the interest rates (the price of money) low. This is why many are watching to short the junk corporate bonds, mainly JNK and HYG. Over 50% of junk bonds are of oil companies...
Once again, this is not free markets. Central banks, after leaving the Gold Standard (hard money system) now target interest rates as a way to devalue money to achieve policy goals (inflation and employment). Soft/fiat money is really a centrally planned system. If we were in free markets, the debt would be priced much higher.
The Fed is facing a liquidity crisis right now and are desperately attempting to prevent a credit freeze. They have even issued currency swap lines with many other central banks in the world, who are now injecting massive amounts of money from keeping they system from freezing. Remember, because the US Dollar is the reserve currency, they can print as much money as they want and not have to worry about their debts. There is always an artificial demand for the dollar (the French called this exorbitant privilege). Hence why I believe the Russians and Chinese were attempting to target US Dollar demand even through Oil with Iran (As the US Dollar gets stronger, most nations cannot use the Dollar to purchase Oil which means Iranian Oil looks attractive since the Iranians do not take Dollars for Oil and will happily take your currency for their Oil). This is why the Fed is the central bank really for the world as they can bail anyone out by printing Dollars.
So what does this mean going forward? We have a Fed meeting on the 18th. Where the Fed is expected to cut 75 basis points, but Fed futures is showing a probability of cutting down to 0. Expect QE to also be officially announced.
If we are going to see more debt being issued, AND governments doing large scale relief programs and bailouts as Steve Mnuchin said they would, interest rates will have to be low and stay low for a very long time (think forever) in order to service this debt. This is not a virus issue, but a debt issue.
I do expect a possible credit freeze is coming. Where all credit cards, debit cards and ATM machines stop working. Here in Canada, banks are already putting limits on how much cash you can withdraw daily. Once this occurs, government and central banks will be seen as saviours with their digital money solution. Who knows, they may even say the virus is transmitted through cash, so we must stop using cash.
My readers know I have been warning about digital money for a very long time. It is coming. It will make government much bigger and much powerful. This is once again all about debt. If governments are going to essentially run everything and bail everything out, they will need more taxes. A digital money system allows governments to track and tax all money. It will be specifically targeted towards small business' who have many tax loopholes, which will be removed and then small business essentially enter the tax realm of the employee. It will be used to track and tax money restaurants receive as tips, your private jobs you do for your neighbours and other people, and also to tax your sales on Craigslist or Ebay.
With digital money, you can also implement MMT, which is likely coming with this virus. Many sport arenas and other business' have been closed, and these people who work there are not going to receive money for a month or more. They either need access to more debt, OR these business' will have to provide a salary for them while they are not working. Government may very well step in and do this.
The socialist economists know that giving people more money, and then this money competing for the same number of goods and services just increases the price of things since we are not increasing PRODUCTIVITY. The solution to this is excessive taxation, as a way for government to then REMOVE this money supply from the system. What they will do is use the green infrastructure and green taxes as their excuse to increase taxes on the people. It also helps in boosting the economy with government creating jobs for infrastructure projects, to the Keynesians delight. People would not make a fuss about paying more taxes because they do not want to be labelled climate change/global warming deniers.
There are many other things that digital money can be used for such as only giving people money if they meet certain habits and social conditioning (eat well, exercise well etc) which means it will be governments and large tech corporations that will define what an ideal human is. Also, certain ideas and speech can be punished and banned, especially if it speaks out against authority. Your access to to your money can be turned off, and you would be asked to report to some government bureaucracy building for scolding and reinstating access to your money.
Corporations will also be able to use the data on your spending habits. Dr. Pippa Malmgreen on a Real Vision show gave a great example of this.
Imagine a husband and wife. The husband is in Las Vegas, and his electronic payments show that he is buying a dress for a woman that is a different size than that of his wife. The wife is at home and orders a Ben and Jerry's tub of ice cream through uber eats at night and is watching some self-help, positivity videos late at night. The algo's will be able to deduct that the chance of divorce is high, so banks should consider increasing interest rates to account for this risk. Also if the wife or husband are attempting to look for a new job, the algo's can tell the employer that their mental frame is not in the right place right now so it is best to NOT hire them.
So these are very crazy times right now, but my readers know that I have been warning about some sort of event being used to usher in a new system, but more importantly for governments and banks to maintain confidence. They have been saying the economy is strong, and their monetary policies have been working. Central banks are quickly going to become the BUYERS of last resort, and the Fed will get the green light to actively purchase stocks just like the Bank of Japan, the Swiss National Bank, and the European Central Bank (of course many already think this is happening with the Plunge Protection Team, but needs to be officially announced so the people know central banks will prop the markets).
So will stocks go up? Put it this way: there will be nowhere to go for real yield other than stocks. When bonds hit 0 or close to 0 and even negative (I am talking about US Treasuries here), it will not make sense to buy bonds for yield. Bonds will not be traded. Pension funds and Fixed Income funds will drastically need to change their approach, and I have argued that many pension funds are indeed in the stock markets, as it is the only place to make real yield. Again, central banks are morphing into the most powerful institutions in human history. They will be buying up everything.
This virus allows governments to push for bigger and more powerful governments, as government and central banks will look like saviours coming out of this. Remember, as President Obama's chief of staff Rahm Emmanuel once said, do not let a good crisis go to waste.
If you follow my work, we were expecting some sort of event to occur for governments and central banks to save face. We knew interest rates were going to 0 (and negative) and QE was going to be reinstalled. However, QE was a one time desperate policy to prevent another 1930's like global depression. If we went back on it, it could trigger a confidence crisis since people would realize QE did not work and that we are going to be in a QE and low interest rate policy FOREVER. Many already know this to be the case. Interest rates cannot normalize given the debt that is out there...and son to be increasing dramatically.
We have seen rate cuts and emergency rate cuts by many central banks. Canada cut rates by 1% in less than 3 weeks. The Fed will be doing the same.
However, the most important think to note is the liquidity being provided to the system. 1.5 Trillion to be exact by the Fed, which will increase more.
We have been saying that the repo crisis beginning last year in Fall was something to watch. It meant central banks were beginning to lose control of the system. There was some bank, or banks, that was running out of liquidity and needed daily or weekly injections of money to survive.
This has led to confusion on whether this is QE since the Fed's balance sheet has been increasing (we are up to 4.2 Trillion...during the 2008 GFC, we took it up to 4.5 Trillion). The Fed is saying this is not QE. Again, it really is about wording here. QE was a way for central banks to keep long term interest rates low, and provided stimulus. They did this by buying long term bonds from the banks which meant the Fed got the bond, and then cash was added into the system by entering the banks asset sheet.
Repo is a way to keep short term interest rates low. The Fed is providing liquidity into the system and in return, the banks must provide collateral (they are saying it is high grade collateral ie US treasuries, but the banks could very well be giving the Fed their toxic assets).
With this 1.5 Trillion dollars, we are seeing the beginnings of a liquidity issue. The system was about to freeze up and interest rates were about to spike. This has a lot to do with the fact that corporations are feeling the pinch. Especially the OIL companies. Oil has gotten decimated and many of these US oil producers are not making money. In fact, they are having a hard time just to keep the lights on. When Oil fell in 2014, banks were forced to provide loans to these oil companies to avoid massive layoffs. So now these banks have provided loans to these oil companies, loans they never would have taken, and this is why when oil falls, the financial sector tends to fall with it. These oil companies are zombie companies. They will never pay back their debt, and will need more debt to survive.
Fast forward to today, and these oil companies need access to more debt to survive. Banks do not want to be loaning money right now in this environment, because most of them do not have the capital to do so, and rates would have to be high given the risk of the loans in this environment (knowing oil may remain low due to an impending recession meaning these oil companies will not be making money for a long time).
This 1.5 trillion injection was the Fed saying: look, we will give you (the banks) liquidity and will guarantee you do not fail by making bad loans. Please use this money to loan to corporations (oil, cruise ships, airlines) who need this money to survive and prevent massive layoffs. This large injection is needed to keep the interest rates (the price of money) low. This is why many are watching to short the junk corporate bonds, mainly JNK and HYG. Over 50% of junk bonds are of oil companies...
Once again, this is not free markets. Central banks, after leaving the Gold Standard (hard money system) now target interest rates as a way to devalue money to achieve policy goals (inflation and employment). Soft/fiat money is really a centrally planned system. If we were in free markets, the debt would be priced much higher.
The Fed is facing a liquidity crisis right now and are desperately attempting to prevent a credit freeze. They have even issued currency swap lines with many other central banks in the world, who are now injecting massive amounts of money from keeping they system from freezing. Remember, because the US Dollar is the reserve currency, they can print as much money as they want and not have to worry about their debts. There is always an artificial demand for the dollar (the French called this exorbitant privilege). Hence why I believe the Russians and Chinese were attempting to target US Dollar demand even through Oil with Iran (As the US Dollar gets stronger, most nations cannot use the Dollar to purchase Oil which means Iranian Oil looks attractive since the Iranians do not take Dollars for Oil and will happily take your currency for their Oil). This is why the Fed is the central bank really for the world as they can bail anyone out by printing Dollars.
So what does this mean going forward? We have a Fed meeting on the 18th. Where the Fed is expected to cut 75 basis points, but Fed futures is showing a probability of cutting down to 0. Expect QE to also be officially announced.
If we are going to see more debt being issued, AND governments doing large scale relief programs and bailouts as Steve Mnuchin said they would, interest rates will have to be low and stay low for a very long time (think forever) in order to service this debt. This is not a virus issue, but a debt issue.
I do expect a possible credit freeze is coming. Where all credit cards, debit cards and ATM machines stop working. Here in Canada, banks are already putting limits on how much cash you can withdraw daily. Once this occurs, government and central banks will be seen as saviours with their digital money solution. Who knows, they may even say the virus is transmitted through cash, so we must stop using cash.
My readers know I have been warning about digital money for a very long time. It is coming. It will make government much bigger and much powerful. This is once again all about debt. If governments are going to essentially run everything and bail everything out, they will need more taxes. A digital money system allows governments to track and tax all money. It will be specifically targeted towards small business' who have many tax loopholes, which will be removed and then small business essentially enter the tax realm of the employee. It will be used to track and tax money restaurants receive as tips, your private jobs you do for your neighbours and other people, and also to tax your sales on Craigslist or Ebay.
With digital money, you can also implement MMT, which is likely coming with this virus. Many sport arenas and other business' have been closed, and these people who work there are not going to receive money for a month or more. They either need access to more debt, OR these business' will have to provide a salary for them while they are not working. Government may very well step in and do this.
The socialist economists know that giving people more money, and then this money competing for the same number of goods and services just increases the price of things since we are not increasing PRODUCTIVITY. The solution to this is excessive taxation, as a way for government to then REMOVE this money supply from the system. What they will do is use the green infrastructure and green taxes as their excuse to increase taxes on the people. It also helps in boosting the economy with government creating jobs for infrastructure projects, to the Keynesians delight. People would not make a fuss about paying more taxes because they do not want to be labelled climate change/global warming deniers.
There are many other things that digital money can be used for such as only giving people money if they meet certain habits and social conditioning (eat well, exercise well etc) which means it will be governments and large tech corporations that will define what an ideal human is. Also, certain ideas and speech can be punished and banned, especially if it speaks out against authority. Your access to to your money can be turned off, and you would be asked to report to some government bureaucracy building for scolding and reinstating access to your money.
Corporations will also be able to use the data on your spending habits. Dr. Pippa Malmgreen on a Real Vision show gave a great example of this.
Imagine a husband and wife. The husband is in Las Vegas, and his electronic payments show that he is buying a dress for a woman that is a different size than that of his wife. The wife is at home and orders a Ben and Jerry's tub of ice cream through uber eats at night and is watching some self-help, positivity videos late at night. The algo's will be able to deduct that the chance of divorce is high, so banks should consider increasing interest rates to account for this risk. Also if the wife or husband are attempting to look for a new job, the algo's can tell the employer that their mental frame is not in the right place right now so it is best to NOT hire them.
So these are very crazy times right now, but my readers know that I have been warning about some sort of event being used to usher in a new system, but more importantly for governments and banks to maintain confidence. They have been saying the economy is strong, and their monetary policies have been working. Central banks are quickly going to become the BUYERS of last resort, and the Fed will get the green light to actively purchase stocks just like the Bank of Japan, the Swiss National Bank, and the European Central Bank (of course many already think this is happening with the Plunge Protection Team, but needs to be officially announced so the people know central banks will prop the markets).
So will stocks go up? Put it this way: there will be nowhere to go for real yield other than stocks. When bonds hit 0 or close to 0 and even negative (I am talking about US Treasuries here), it will not make sense to buy bonds for yield. Bonds will not be traded. Pension funds and Fixed Income funds will drastically need to change their approach, and I have argued that many pension funds are indeed in the stock markets, as it is the only place to make real yield. Again, central banks are morphing into the most powerful institutions in human history. They will be buying up everything.
This virus allows governments to push for bigger and more powerful governments, as government and central banks will look like saviours coming out of this. Remember, as President Obama's chief of staff Rahm Emmanuel once said, do not let a good crisis go to waste.