I just finished reading Doug Noland’s summary of the Federal Reserve’s Q3 2019 Z1: creditbubblebulletin.blogspot.com . Here are my thoughts: total credit outstanding grew another $3.2T over the past year to $74.6T (348% of GDP); this is 4X the rate of GDP. Even J. Powell says this is not..
..sustainable; Austrian economists call it a credit bubble, but this bubble is still expanding. Since foreigners stopped acquiring U.S. debt, U.S. financial markets and banking system need to finance this expansion or it reverses & pops. Banks, brokers, money markets, & hedge..
..funds securities holdings surged over the past year. Ominously repo liabilities grew $932B over the past year, which means borrowing money to finance this credit expansion has accelerated as it did in 2007. In Q3 banks repo assets actually declined $23B as they are now..
..financing the Treasury security expansion first. In free market capitalism, this would have been enough to cause repo rates to spike and force deleveraging in the hedge fund & brokerage community & the corporate credit bubble would have popped. The markets needed another source
..of repo asset expansion. The New York Fed has now offered $500B of repo balance sheet expansion through year end and $600B annualized of Treasury security financing through T-Bill purchases at least into Q2/2020.Imagine if the Fed lent money to money losing dot-com companies..
.. in 2001 or individuals who could not pay their mortgages in 2008; the bubbles would have lasted longer; the financial outcomes would have been different. This is what the Fed is doing they are offering money through the repo market to the shadow banking system for money ..
..losing unicorns, over leveraged private equity firms, under water subprime auto lenders to continue to remain in business. Anyone who thinks the Fed can magically remove their support in the New Year does not understand credit cycles. The Fed is now targeting total system..
..credit expansion & is allowing money supply to float. M2 has grown at a 13% annual rate since the Fed resumed balance sheet expansion. At some point in time the record amount of capital in bond & money market funds will realize they are losing money to inflation & as..
..they reallocate their capital, money velocity will accelerate and inflation will follow.
