Capital Flows
“Foreign central banks’ holdings of US Treasuries at the Fed custody facility are dropping fast (almost $40bn in just one week).”
Why the Dumping?
It’s not really dumping in the classic sense. Foreign central banks seek to shore up their currencies.
China’s SOEs in On the Act
Japan and China are both in on the act, the latter perhaps more than anyone knows.
China’s SOE reserves are not in official estimates of China’s US treasury holdings. What many considered “dumping” of official assets was really hidden in SOEs.
Huge Structural Shift Creates Feedback Loops
- The Fed now wants a stronger dollar to stop inflation.
- Previously the Fed wanted a weak dollar to stimulate inflation.
- And previously, foreign central banks wanted weak currencies to support exports to the US consumers, the buyers of last resort.
- Now foreign central banks are screaming “uncle”.
Nations that import food and energy are getting hurt even more than the US on the inflation front.
Even though the dollar is getting stronger, the Fed is attacking export mercantilism of Japan, China, and Germany by recession-inducing rate hikes to kill consumer demand.
Fed Portfolio Losses
Meanwhile, the Fed is now underwater on it’s huge pile of QE holdings. John Hussman sums up the situation nicely.
Mark to Market Accounting
“With $8.8 trillion in bonds averaging ~8-year maturity, year-to-date market losses of ~15%, and just $48 billion in capital, the Federal Reserve would definitely be insolvent if it needed to mark to market.”
Questions of Legality
https://twitter.com/pinebrookcap/status/1576770815994912768
Dollar Scarcity?
Richard Russell discussed dollar scarcity in 1964.
Curiously, a literal explosion in dollars results in a “scarcity”. But countries that borrowed dollars are having a terrible time paying back those loans.
Free Money Via QE
Let’s also discuss free money via QE. The Fed forced money down banks throats and it now pays interest on those reserves parked at the Fed.
The Fed reports this data monthly, last updated September 27.
Reserve Balances
Reserve Balance Rate
Free Money Calculation
The Fed gives taxpayer money to banks at an annualized rate of 3.15%.
3.15% of $3.3 trillion is $103,950,000,000. The Fed is shrinking its balance sheet but with every rate hike bumps up the interest it pays on reserves.
Reverse Repos
Simultaneously, the Fed is doing $2.425 trillion daily in overnight reverse repos. These are allegedly “temporary” but the amount keeps growing over time.
I think we need a new definition of temporary.
Until the Fed Breaks Something
Many people, including me, have stated the Fed will keep hiking until it breaks something.
Actually, it should be clear the current central bank governance system is broken beyond repair.
It’s Our Dollar But Your Problem, 2022 Style
To understand what’s going on with the dollar, interest rates, and credit gone wild, we need to review history.
This monetary madness all stems from Nixon ending convertibility of gold.
Please consider It’s Our Dollar But Your Problem, 2022 Style
At this point it is unclear what will replace the current broken setup, but please don’t suggest Bitcoin because the odds of that are roughly zero.
This post originated at MishTalk.Com.
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Mish
Western Europe for sure. Now that Nordstream 1 and 2 have both been sabotaged, they have to import expensive LNG all the way from US – which of course, has been an innocent party in all this 😉
As of August, 60% of Americans were living paycheck to paycheck, according to a recent LendingClub report — a number that hasn’t budged much since inflation hit 40-year highs. A year ago, the number of adults who felt stretched too thin was closer to 55%.
outside the banks unless they hoard currency or convert to another National
currency), but the banks can outbid the nonbanks for loan funds resulting in
disintermediation (a term that only applies to the nonbanks since the Banking
Act of 1933). The deregulation of interest rates, Reg. Q ceilings, was a ruse.
bank”, a nonbank is simply a customer of some commercial bank (a customer that
activates pooled savings).” Transferring
deposits from the commercial banks to the nonbanks simply results in a shift in
the ownership of bank deposits held in the payment’s System.
saver-holders, to spend/invest either directly or indirectly outside of the
payment’s System. One way that is accomplished, providing an outlet for
savings, is by the purchase of Treasury and agency securities in the open
market, the secondary securities market (where savings are factually matched
with investments).
dedicated to – Vice President Shearson/American Express wasn’t fooled:
WSJ: “In a letter of March 15, 1981, Willis Alexander
of the American Bankers Association claims that: ‘Depository Institutions have
lost an estimated $100b in potential consumer deposits alone to the unregulated
money market mutual funds.’
As any unbiased banker should know, all the money taken in
by the money funds goes right back into the banks, in the form of CDs or
bankers’ acceptances or other money market instruments; there is no net loss of
deposits to the banking system. Complete deregulation of interest rates would
simply allow a further escalation of rates by the banks, all of which compete
against each other for the same total of deposits.”
In the context of their
lending operations, it is only possible to reduce bank assets, and deposits, by
retiring bank-held loans, e.g., for the saver-holder to use his funds for the
payment of a bank loan, interest on a bank loan for the payment of a bank
service, or for the purchase from their banks of any type of commercial bank
security obligation, e.g., banks stocks, debentures, etc.