There are serious problems in the plumbing of the US financial system. This short overview shows that the entire system is getting closer to failure.
When you finish reading this blogpost, you will become a respected overnight repo expert. You will impress strangers in airports and cocktail bars as you speak loudly and knowledgeably on the subject.
Have you noticed the phrase overnight repo in the news lately? It’s there, but most people don’t pay attention.
And they’re right not to. Because it’s boring.
Unfortunately, it is also one of the scariest things happening in finance. So I’m going to explain it as simply and accurately as I can, because a crucial and disturbing story is hidden within.
The American economy is built on a secret. The United States has the biggest, most expensive government in the world. And, since 1974, a large percentage of US government spending has been funded by productive foreign nations. First Japan, Germany, France and others. Later, China and other Asian nations joined in.
The world’s producers fund the lifestyles of the American consumer.
This is an extremely unbalanced system. It allows ~5% of the world’s population to consume ~20% of the world’s oil every year. The US government pays for this by creating promises-to-pay that cannot and will not be honoured. These promises are called US dollars – and related instruments such as US Treasury bonds (USTs).
The productive nations are not stupid. They fund the US lifestyle because they are forced to by the petrodollar system.
The petrodollar means most nations need US dollars to buy oil. Everyone needs oil. So everyone needs dollars. To get dollars, the world sends real goods and services to the US – receiving IOUs in return.
The US then borrows dollars BACK from the rest of the world, by issuing US Treasury bonds. This is called petrodollar recycling. Since 1974 it has been a key source of funding for the US financial system.
This was an incredible deal for Washington and Wall Street, but increasingly bad for everyone else.
So after 45+ years, the petrodollar system is breaking down. Russia, China, Iran, the EU and others are taking steps to evade the US dollar in energy trading.
Also, since 2013, foreign central banks have stopped or slowed purchases of US Treasury paper. Instead they are buying something yellow, shiny and useless.
Without massive inflows of capital from abroad, the US government faces a serious funding crisis.
Foreign inflows must be replaced by increased borrowing or printing. But there is no-one big enough, productive enough, and dumb enough to work ‘for free’ to fund the US warfare/welfare state.
Theoretically, the Fed can create infinite amounts of dollars, but they cannot openly buy their own paper, because that would show the world that they are printing money to fund their government.
That would cause worldwide panic. A run on the dollar. A collapse of the system.
So the Federal Reserve and US government are in a corner.
On Sept. 16th 2019, the US Federal Reserve started typing billions of US dollars into existence to give to US mega banks (Citigroup, Goldman Sachs and JP Morgan etc.).
They call this “Overnight Repurchase Operations” (repo for short).
The Fed is quietly creating money and giving it to major commercial banks. These banks then buy US paper, and fund US deficits through the backdoor.
The Federal Reserve explains this by talking nonsense designed to mislead and confuse people. Elite media outlets also help to disguise the true nature of what is happening. I cannot tell if this is:
• by accident (they don’t understand the reality behind the Fed’s overnight repo), or:
• by design (they do understand the problem, but deliberately mislead the public and investors).
Below is a repo ‘explainer’ video from the Wall Street Journal. In my opinion it fails to be interesting or useful. It looks like an attempt to make overnight repo seem like something too boring and technical to bother with. [Warning: video not suitable for those who find ‘vocal fry’ hard to listen to]
Whatever the motives, it is clear that Federal Reserve has much to worry about. It would be sensible for them to mislead people, because they don’t want to scare markets and the algorithms that move markets.
The only thing more scary than doing overnight repo, is NOT DOING it, which would cause a US financial crisis within weeks or months.
So the Fed has succeeded fairly well. So far. Their next problem is there may be no way to stop to printing billions every day, because stopping risks the financial collapse they are so desperate to prevent.
Overnight repo is a clear signal of crisis in the US financial system. It tells us that the issuer of the world reserve currency is bankrupt – and is creating currency tokens out of thin air to fund itself.
A US dollar crisis is coming. In my opinion it will be sooner than most experts expect. In fact, I would say it already: started on the 16th of September 2019.
Superbubble is about helping non-expert people navigate this.
If you start seeing the words overnight repo in your news feeds, you can check back here and see how well it matches reality. I will update this blog post if and when the facts change.
Update 13 Feb 2020
Jim Rickards on the Fed’s Overnight Repo:
• says it’s the most important economic event of 2019
• calls it the beginning of QE4 (although the Fed denies this),
• it indicates extreme distress ‘behind the curtain’,
• the Fed is painted into a corner, and they cannot get out.