Real Money: What the Fed Giveth, the Coronavirus Taketh Away

February 24, 2020

Article by Maleeha Bengali in Real Money

Many Fed speakers deliberating over the past week suggested that low yields were a sign of a healthy economy, a sign of confidence by investors. They clearly need to go back to school or retake their Economics 101 examinations, as they do not deserve to be in that post to begin with.

In less-public circles, we all know that the Fed knows exactly what they are doing and why, they can't help it and they just can't admit it, at least not to the public that do not question their words.

Over the past decade, they have pumped the U.S. financial system with ample liquidity and kept rates low, such that neither the U.S. nor the world can handle even the slightest increase in interest rates, lest the entire system collapses.

This asset price bubble needs more and more money to fuel it higher. That is where we stand today. One little crack in the system, as we saw in the repo markets last September, and what did the Fed do? Throw even more money at the problem and raise their balance sheet in four months what they took 1.5 years to normalize prior to it.

Such is the dependence of the Fed's liquidity gravy train on the markets and asset classes. Fed Powell can claim all he wants that T-bill buying and repo are not QE, but we all know the markets have been defying any cracks in the system because there is money being pumped in by the U.S. Fed and various central banks. In some metrics, fundamentals were ignored over the past few months because of this very liquidity, even if some indicators showed wide divergences. But as they say, don't fight the Fed.

The other side of the argument is that the Fed and central banks will (or could) be there to support any major sell offs as they have stated. But the world is a lot more leveraged and in a far more precarious state today, given the huge debt amassed across the board. Back in 2007/08 Financial Crisis, they started with a balance sheet of $1.5 trillion, today they are already at $4.18 trillion and rates are hovering around 1.75%. Sure, they can print more and cut more, feed the beast, but their hands are certainly tied as the beast needs a lot more to keep going.

This is a reality check, an unwind of the excess. The virus did not cause the slowdown or collapse, it was just a spanner in the works that proves how weak the system really is. What the Fed giveth, the coronavirus taketh away.

To read this article in Real Money in its entirety, click here.

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