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Fed Started off 2020 by Adding $56.72 Billion to Banking System

By Glenford Robinson

The Federal Reserve once again added more cash to the banking System by adding $56.72 Billion. This addition of cash to the financial system by the Fed has been going on for quite a while now. Will there ever be an end to this continued injection of cash? How come money keeps leaking out of the US economy and not coming back? The past additions of billions of dollars to the financial system have incredibly disappeared, which has compelled the Fed to once again add more cash to the financial system. So, where has this money disappeared to? These billions of U.S. dollars must be stashed somewhere out there; but where? No one knows. Think about your bank account as the central bank that supplies liquidity to four banks owned by four different members of your family.

The business activities of your four-bank economy accumulate a little over $2 million dollars on a quarterly basis. The names of your four banks are the Royal Savings Bank of My Mother, the Sovereign bank of my Father, the Need Money Now Bank of My Brother, and the Over Spending Bank of My Sister. All four banks in your personal banking system or economy borrows money from each other. So, on occasions, Bank Dad will borrow money from Bank Mom because Bank Dad sometimes runs low on cash after he pays all the bills, and Bank Mom always seem to have a little something put aside for a rainy day.

The Need Money Now Bank of My Brother (Bank Bro) always seem to be out of cash, as a result of all his baby mamas constantly asking him for childcare money; so, he is always borrowing money from both Bank Mom and Bank Dad. In fact, Bank Bro would never ask for a loan from the Over Spending Bank of My Sister because her bank is always low on cash from the constant over spending on the latest fashion.

Now as a result of the constant flow of cash out of your four-bank economy as a result of lending to nonpaying borrowers, with very little coming back, there is now less money available to circulate in your banking system. So, when Bank Bro tried to borrow money from Bank Mom, Bank Mom, offered him a rate of 8% and when Bank Bro tries to Borrow Money from Bank Dad, Bank Dad offered him a rate of 8%, and when Bank Bro tried borrowing money from the Over Spending Bank of My Sister, her bank offered him a whopping 10% APR. Bank Bro now has no choice, but to accept the outrageously high overnight rate of 8% offered by both Bank Mom and Bank Dad. It got to a point where Bank Bro just couldn’t afford to payback the loans at such high 8% interest rates, so he defaulted on his loans to Bank Mom and Bank Dad. He has no other choice now, but to accept the high outrageous 10% APR from the Over Spending Bank of My Sister. Yep, you said it! Bank Bro defaulted on that 10% APR loan too. So, Bank Bro tried his luck again by trying to borrow money from Bank Mom and Bank Dad, but this time both banks refused to give him a loan, so he again tried to get a loan from the Over Spending Bank of My Sister, but this time she refuses to give him a loan because she was depending on his monthly payments, so she could go and buy a few name brand things, such as a hand bag and a few name brand jeans and shoes. Her Bank now ran into problems because of lack of capital, so her bank tried getting a loan from the Bank of Mom and the Bank of Dad, but both banks refused to give her bank a loan.

Now, there is a problem within your banking system and economy—nobody wants to lend out money because they are afraid that they won’t get their money back. So, what do you do? You can’t afford for your banks to close their doors because that would be worse for you, financially. So, you inject more money into your banking system as repo loans. So, now your banking system is running on borrowed money. This is the current situation that our economy finds itself in today. Therefore, the stock market could be rising sky high, but it is because of borrowed money. At some point, this borrowed money will have to be paid back. The Federal Reserve tried taking back its money a little less than a year ago when it raised interest rates from 2.25% to 2.50%, then the economy immediately tanked, with everybody expecting the economy to head into a recession. This caused the Federal Reserve to quickly spring into action and cut interest rates three times since then, and have continued to add liquidity to financial markets ever since.  Wow! That was scary!  Interest rate now sits at 1.75%. It was 2.50% when things began to bubble. It’s a good thing the Federal Reserve acted quickly and prevented the bubble from bursting.

Let’s continue where we left off with your family banking system. You had set the overnight borrowing rate at which your banks should lend each other money, and this rate was 1.55% – 1.75%. Your aim was always to maintain this overnight borrowing rate at 1.55% – 1.75% because you don’t want any of your family members to come running to you for money because you are sick and tired of them doing so. Therefore, you set them up as banks so they can financially sustain themselves without you having to always give them money when they come begging. So, the fact that the overnight borrowing rate of your banking system ballooned to 10%, you jumped into damage control mode because you knew that such high interest rate posed a disastrous threat to your banking system and economy. The consequence could be stock market crash and financial system collapse.

So, you empowered your family members to create and maintain their own banks, but the fact that some of your banks over lends and over spends, you are forced to inject another $2 million in your banking system to prevent any of your family member banks from closing because if this happens, it would be detrimental to you, financially because all the financial burdens that the closing banks would’ve normally handle would now be on your shoulders. How devastating a feeling would that be for you? Very devastating. And in economic terms with you being the Federal Reserve, this is exactly what the Federal Reserve is trying to avoid. This is why the Federal Reserve has consistently pump cash into the financial system to ward off bank closings and outright financial system collapse.

Yes, Sir and Madam! Take this to the bank because the thought of economic collapse is very scary, both metaphorically and literally. Did you remember when the Government had to bailout General Motors and AIG, the insurance giant that almost went bankrupt? Remember that? Yes, this is what our Federal Reserve is trying to avoid.

In fact, with all its drawbacks, fiat currency still remains the only tool available to tackle the problem of liquidity replenishment and maintenance. The Federal Reserve must always be given the authority to magically pull money out of thin air to sustain the financial system, when there is a shortage of money. Some people have said that Bitcoin as standard central bank currency could solve our fiat currency inflation, but I disagree. Totally!

Don’t get me wrong? I love my Bitcoin and my crypto currency, but we got to keep everything into its proper context. Granted, apples and oranges are both fruits, but they are completely different in visual appearance and taste. One cannot replace the other merely because they are both fruits and has a sweet taste. What I am getting at is that not because Bitcoin and other crypto currencies have an amazing purpose and use to modern society, they should be expected to replace fiat currency. First of all, in the context of Bitcoin and its protocol and blockchain, there is only 21 million Bitcoins that were ever permitted to be available for spending according to the Bitcoin algorithm. So, how can one expect Bitcoin to replace fiat currency, so that central banks such as the Federal Reserve can use it to maintain an economy as large as the U.S. economy?

So, don’t let people tell you nonsense that Bitcoin will replace fiat currency. It won’t, and it cannot, as much as I would’ve liked it to be able to, but I too realized that cryptocurrency such as Bitcoin won’t be able to replace fiat currency outright, simply because of the liquidity issue. I just want my followers to be properly informed of this fact, so they won’t be misled.  

Reason number one: there were only 21 million Bitcoins created, which means there is a cap on the amount of Bitcoin that will ever be available in circulation. So, this causes Bitcoin to be deflationary in nature as opposed to fiat currency that is inflationary. The deflationary nature of Bitcoin means that its value will always appreciate over time, more so when less quantity is available in circulation at a given time, as opposed to fiat currency that is inflationary and will depreciate over time, more so when greater quantity is available in circulation at a given time, such as during times of low interest rates and economic growth and expansion. People would want to hold on to their Bitcoins during a Financial crisis, thereby further reducing the amount of Bitcoin in circulation and appreciating its value even more. This situation would not bode well for any economy. Something similar to this scenario was the underlying factor that fueled the great depression of 1929-1933.

This is why the Federal Reserve will always remove some of the money in circulation by selling treasuries and mortgage securities to eligible banks in the banking system via the repo market. And when the circulation of fiat currency is low in the financial system, the Federal Reserve does the opposite by buying Treasury and Mortgage Securities from eligible banks to inject cash into the financial system in the form of repurchase agreements or repo loans. Reason number two, Bitcoin is very expensive to transact. The transaction cost of buying and selling Bitcoin goes up as the value of Bitcoin goes up. So, it would cost central banks too much money in the form of transaction cost simply to use Bitcoin as a way of adding liquidity to financial markets. A deflationary cryptocurrency central bank financial system would not work either because we as consumers consume too much, meaning that we spend way more than we make. This is called over-leveraging, or over spending by using borrowed money, which could even lead to personal bankruptcy. In a financial system context, this could lead to a break down of the financial system like what happened in 2008, leading to the stock market crash.

The fact that the Federal Reserve has continued to add more money to the Financial System, should tell us that something doesn’t seem normal. So, despite the stock market hitting record highs, an underlying problem still exists. It seems logical to think that if the Fed wasn’t adding liquidity to the Financial System, the economy would’ve already entered into a recession or possibly crash. Therefore, the Fed continued addition of cash to the financial system is literally holding up the financial system. It is like putting band-aid on a serious wound. I just hope I am wrong. I would hate to be right on this one. What’s currently happening with our financial system is downright scary.

Almost a year ago before interest rates went up to 2.50%, it was perceived by the Fed that the economy was expanding too fast. So, they raised interest rates from 2.25% to 2.50%, but as soon as they did that, the economy began to slow down dramatically, which caused the Fed to quickly jump into action and began cutting interest rate again to where it is now.  This scenario simply screams out economic fragility to the third degree. Our economy seemed very fragile, indeed. So, all this money that is being loan to our financial system by the Fed via the repo market, may not be paid back, further pushing our country more into a financial deficit.

The financial system could be in bad shape and being mask by repo loans. Banks are afraid to lend each other money because they are afraid that they may not get their money back. So, the Fed is buying Treasury and Mortgage securities from these banks to force them to lend money to other banks and to consumers. The Fed could therefore be buying up Treasury securities in the form of Treasury bills, causing them to increase in prices, which could cause a decrease in yield rates of these bills. A Treasury yield rate of zero forces banks to lend money to other banks and to the public. The price of a bond is inversely proportional to its yield rate. For example, when the price of a bond increase as a result of scarcity, the rate of its yield decreases, so there is no incentive for banks to issue these bonds that returns zero yields. This situation could be one of the reasons why the federal reserve continues to pump money into the financial system, through the repo market.

Wealthy investors have begun to convert large portions of their portfolio allocation to cash. They feel by converting to cash they will be able to avoid selling their assets when the economy tanks. Therefore, super wealthy market participants expect an economic downturn at any moment. This could be one of the reasons why the financial system continues to suffer from low liquidity, causing the Federal Reserve to   constantly add cash to the financial system. Now, let’s get into some macroeconomics. First on the menu is the pending home sales report

The Pending Home Sales Report came in as expected, meeting expectations at 1.2%, missing last month’s reading of -1.3%. The fact that the current reading matched expectation tells us that the housing market performed normally at that time of year. The National Association of Realtors (NAR) Pending Home Sales Report measures changes in the total number of homes under contract to be sold but still awaiting closing transactions, excluding new construction. A higher than expected reading should be perceived as positive for the U.S. economy and bullish for the USD, while a lower than expected reading should be perceived as negative for the economy and bearish for the USD. The NAR released the Pending Home Sales Report for November on Monday, December 30th, 2019 at 10 AM, New York Time.

Consumer confidence came in a little less than previous readings, coming at 126.5, missing market expectation of 128.2 and a previous reading of 126.8. These readings simply show that consumers remain cautious about the economy, and their confidence level shows that. They haven’t totally lost confidence in the economy, but they don’t feel too great either. This consumer perception could be coming from the US-China trade negotiations. So, consumer optimism is on the lower end of the scale, while not outright pessimistic. In other words, consumers are not overly optimistic or overly pessimistic about the economy. They are somewhat in the middle. The Conference Board (CB) Consumer Confidence Report measures the level of consumer confidence in the economy. The Report serves as a leading indicator as it can predict consumer spending activities, which plays a large role in overall economic activity. Higher readings suggest higher consumer optimism, while lower readings suggest higher consumer pessimism. A higher than expected reading should be perceived as positive for the U.S. economy and bullish for the USD, while a lower than expected reading should be perceived as negative for the U.S. economy and bearish for the USD. The Conference Board released the Consumer Confidence Report for December on Tuesday, December 31st, 2019 at 10AM, New York Time.

On Friday, January 3rd 2020 at 10AM, New York Time, the ISM Manufacturing PMI for December missed market expectation of 49.0 with a reading of 47.2, coming in less than the previous month’s reading of 48.1. A reading less than 50 indicates a reduction in manufacturing activities, while a reading greater than 50 indicates an increase in manufacturing activities. The Institute of Supply Management (ISM) is an economic research entity used by the Government to measure the level of manufacturing activity taking place in the economy. The ISM sends out surveys to purchasing managers of companies to assess inventory levels of manufactured products. The ISM creates the Manufacturing Purchasing Managers Index (PMI) in this fashion.

If inventory levels are low and production levels are high, then manufacturing activities are healthy and positive, which is good for the economy and bullish for the USD. On the other hand, if inventory levels are high and production levels low, manufacturing activities are low, which is negative for the economy and bearish for the USD. Therefore, A higher than expected reading should be perceived as positive for the economy and bullish for the USD, while a lower than expected reading should be perceived as negative for the U.S. economy and bearish for the USD. So, the fact that the ISM Manufacturing PMI for December missed market expectation by 1.8 points and previous reading by 0.9 points, respectively, tells us that manufactured product inventories are a little on the high side, which is not surprising giving that the economy has been struggling for the past few quarters as a result of an underperforming manufacturing sector.

This raises a very interesting question. The Manufacturing Sector has been underperforming for the past few quarters, yet still, the stock market has continued to rise for the past few quarters, in fact for the past ten years, beginning after the crash of 2008. So, what has held up the economy and the stock market for the past few quarters, keeping it in this extended expansion phase for the past ten years? Yep, you said it, the Federal Reserve through repo loans. Loans? Yes! Loans! So, our economy continues to grow on borrowed money? What will happened when this borrowed money has to be paid back? Now, we can see why big money investors begun converting some of their portfolio holdings into cash, in the anticipation of an economic downturn and all-out stock market crash of epic proportion.

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