With virtually everyone calling on the Fed to do even more easing in the face of the global virus pandemic and collapsing oil prices, one former Dallas Fed analyst (Danielle Di Martino Booth) says the Fed can't let rates fall too far without potentially endangering systemic stability. She writes about it in this article appearing in Bloomberg. Below is an excerpt from her article.
-----------------------------------------------------------------------------------------------"The Federal Reserve has a lot to worry about these days. And while it's not often mentioned, at the top of the list should be preventing rates on longer term U.S. Treasuries, the world’s risk-free benchmark securities, from falling to zero."
. . . .
"But if yields on benchmark 10-year Treasury notes go to zero -- a no longer ludicrous suggestion after Russia walked out of the OPEC+ meeting without a deal -- then all of those key roles get upended. Especially hard hit will be banks, insurers and pension systems worldwide."
My added comments: Once again we encourage readers to closely monitor current events. We have explained here many times over the years that we have a highly interconnected global financial system. Central banks have been using easy monetary policy for years trying to stave off a major deflation event and promote a 2% inflation rate. Critics have repeatedly warned that these policies, while perhaps maintaining order in the short term, could be setting the system up for a new major crisis if some kind on trigger came along and "popped the financial bubbles" that have resulted from all this money creation. It seems pretty clear the stock market bubble is currently popping, having now gone into bear market territory.
Now we are clearly in the midst of events where this becomes a realistic potential threat to systemic stability. As markets crash and are highly volatile, all kinds of computer algorithms and derivatives instruments that assume this won't happen may be impacted. We don't really have any idea what institutions could be in serious financial trouble. If one or more systemically critical institutions fails, who knows what counter parties they may have that could also be in trouble. We can assume the Fed will move heaven and earth to keep all that under control. However, can even the Fed handle things if the crisis spreads too far too fast? We simply don't know the answers and can just hope no major crisis emerges or can be contained if one does emerge. Jim Rickards offers this comment on the Fed response (click here to see his comment).
If these events still have not convinced you that everyone should have an emergency backup plan in mind to deal with another major financial crisis, the I don't see how this blog can be of any help to you. No one can predict the future with certainty and unexpected "black swan" type events can arise at any time as we are now seeing very clearly. Relying on "the government to fix things" is beyond naive. Hopefully, they will do the best they can, but relying solely on them (politicians and public officials) can be a horrific mistake.
Sometimes events can overwhelm governments or other large institutions that normally can stabilize things. The prudent and responsible thing to do is to try to become as self reliant as possible and have some kind of plan in mind to deal with an unexpected emergency. No one is immune from the potential impact of an event like we are seeing unfold now. Being able to sustain yourself for a period of time while the system is under stress should be a top priority for everyone to consider. These current events simply illustrate why that is important and why we have talked about having a backup plan in mind for years on this blog.
Added note: Whenever we see monetary officials clearly struggling to deal with stress in the system, it's time to keep an open mind as to what may unfold ahead of us. We can expect that these officials will tell us everything is stable and that they have things fully under control. After all, it's part of their job to discourage panic in the general public, especially during events like we have right now. They have done a good job of preserving stability over the last several years, but clearly we have significant new challenges emerging now.
I found this article in alternative media that attempts to make the case that this time monetary officials will fail and that our existing monetary system will actually come to end in the months ahead now that public confidence is starting to waver.
I think it's appropriate to offer this article for readers to consider, not as a prediction as to what will happen, but rather as an alternative view that we can follow over time. If the bullet point projections in this article start to actually happen, then perhaps it would be worth considering allocating more available funds (for those that have them) out of the system and into hard assets.
The article lays out several events to watch for over the coming months. So, readers can follow events and see if this scenario gains credibility or not over time. Below are a couple of extracted bullet points from this article:
"Few analysts have yet to understand the enormous consequences of the coronavirus for missed payments and accumulating current debt, which is and will rapidly drain liquidity from wholesale money markets."
. . . .
"To sum up, the following developments are likely in the coming months in approximate order, with some running concurrently:
Base money will be increased substantially to offset a contraction in bank credit and to give banks extra liquidity to compensate for becoming deficit agents as supply chains dislocate and retail sales of non-essentials goods and services collapse. We have already seen daily repos by the Fed increasing from about $40bn in recent weeks to between $130bn to $200bn currently."
. . . .
"A declining dollar will increase portfolio liquidation pressures on foreigners, leading to indiscriminate offerings of US Treasuries, agency debt and equities. The Fed will have to take on not only the financing of an increasing budget deficit, but also absorb foreign sales of dollar-denominated securities if it is to retain control of prices.
At this stage it will become increasingly obvious to domestic bank deposit holders that the dollar’s purchasing power is being destroyed by the Fed’s escalating asset support commitments. In effect, the Fed will be the only significant buyer of financial assets, paid for through quantitative easing on a far greater scale than that which followed the Lehman crisis."
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