Mad money: the fed prepared the collapse of the dollar by the New year

Бешеные деньги: ФРС заготовила обвал доллара к Новому году

© 2019 AFP / Getty Images/Drew AngererIn mid-January, the dollar could dramatically cheaper due to the fact that the Federal reserve system of the United States in the last month injected into the us economy almost $ 500 billion. Analysts believe that the fed intervention in the financial system of the country has reached “epic” proportions because of the growing threat of the crisis in the banking sector, comparable to what happened in 2008.

The lack of money

Last fall in the U.S. suddenly burst into a liquidity crisis: September 16 applications of banks on short-term loans the fed has suddenly almost doubled from 27 billion to 53.2 billion. This has led to an increase in interest rates from 2.29% to 4.75%. The next day, the banks filed loan applications for more than $ 80 billion. Short-term rates soared to ten percent.While the fed funds rate (at which banks provide short-term loan excess reserves to other banks) for the first time exceeded the target range of the fed — 2,3% and reached the level of 2.35%.So expensive dollars in the interbank market didn’t sell in the midst of the 2008 crisis, nor the collapse of the “dotcom bubble” in 2002. to rescue the financial market from paralysis, the Federal reserve Bank of new York for the first time since the global financial crisis started to buy banks ‘ securities (U.S. government bonds, bonds of Federal agencies and mortgage obligations), providing a influx of cash into the economy. Only two days (18 and 19 September) the financial authorities have poured into the market 128 billion.In October, the fed’s Jerome Paul said that the regulator will increase the purchase of short-term securities, calling it “technical measures” necessary to strengthen the financial system. Since October 15, the fed buys short-term market Treasury bills (up to one year) 60 billion per month.In fact, the fed launched a new quantitative easing program, which is confirmed by the regulator — until the end of December to fill in the interbank market, a record amount of liquidity. As follows from the document published by the Federal reserve Bank of new York, from 16 December to 14 January, nine of term REPO auctions (the first at $ 50 billion, the rest for 35 billion).Thus, the fed per month pumped into the financial system of the country almost half a trillion dollars. “The sharp increase in cash infusions mezhbankovsky on the market is required in order to avoid the repetition of the jump rates short-term lending at the end of the year,” explained Powell.

Reserves are reduced

Analysts have come to the conclusion that the September collapse in the market of short-term financing was caused, in particular, the unwillingness of the four largest banks to provide loans. In recent months, the assets of the primary lenders focus in Treasury bonds, which reduced “their ability to provide funding in the short term REPO”, according to a study by the Bank for international settlements (BIS).What banks have been hit by the market, the report is not specified, but, according to one of the portfolio managers, the Financial Times, the leading market makers, including JP Morgan.Contributed and hedge funds, increasing demand for secured funding. They are increasingly using REPO contracts for the implementation of arbitration agreements, analysts said the BIS.However, there are other, deeper causes of the crisis. For example — a steady decline in Bank reserves in the last five years, especially accelerated since the enactment in August of legislation to extend the deadline for reaching the debt ceiling.

From 14 August to 17 September, the Treasury has spent more than $ 120 billion of reserves, reducing the cash reserves of the largest banks and, consequently, their ability to place funds on short-term market funding.The situation is exacerbated by trillion-dollar budget deficit, which is mainly due to the sale of state bonds. But willing to buy treasuries less.According to official data, the U.S. national debt reaches 22.5 trillion (106% of GDP). Doubting the solvency of Washington’s largest lenders gradually released “the most reliable and liquid instruments in the world” — Treasury bonds.

The fed will finish off the dollar

As suggested by portfolio Fund managers, in this situation the crisis in the market of short-term financing will only get worse. And soon Jerome Powell will officially announce the new round of quantitative easing.And although the fed insists that the situation on the market of short-term financing will not have a negative impact on the economy, economists doubt it. If this segment is really “broken”, as evidenced by the dependence of the banking sector from the daily infusions of liquidity, the probability of contagion in all markets.But the Governor’s actions threaten serious consequences. The inflow of unsecured money will fuel inflation and trigger a global weakening of the dollar.And with the sharp drop in the U.S. currency may face in January is a serious pressure on the exchange rate will have an increase in the fed’s balance sheet by ten percent (to a record 4.5 trillion dollars) in just a month.
At Goldman Sachs believe that the fed will not be able to refuse cash injections into the economy. “The dollar market is in constant need of replenishment in connection with the giant offerings of government bonds to cover the budget deficit”, — ascertain in Bank. And so, the American currency will continue to fall in price.Natalia Dembinski

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