It took the sudden emergence of a pandemic to demonstrate how pathetic the global financial system really is. The US Federal Reserve (Fed) is now doing a live demo on how to print money out of thin air and buy government and corporate securities with it. It seems that Plan B’s model will work indeed.
US Central Bank Pumps $1 Million Per Second
The US financial system showed the first signs of a crack well before the COVID-19 was even a thing. In September last year, the Fed started to pump money to control the overnight general collateral repo rate, which surged over 1% at the time. The central bank said it was only a temporary measure to bring the repo rate closer to its low interest rate, but it has continued those operations to this day.
Moreover, the major crisis caused by the coronavirus outbreak has forced the US government and the Fed to take unprecedented measures to save the economy. What is happening right now will be in history books.
The Fed has implemented the following measures to inject money into the economy:
- It has cut the interest to zero, though the same tactic was used after the financial crisis in 2008.
- It has bought unlimited amounts of government bonds and mortgage-backed securities. This is the first time in history that the Fed has pledged unlimited stimulus.
- The Fed announced it would start buying municipal bonds.
- For the first time ever, the Fed said it would purchase corporate bonds.
Bazooka is not even a term to describe the massive pile of money the Fed is creating right now to buy everything. It seems that the central bank has the capability to move on to purchase company stocks and even make direct transfers to individuals.
The Fed’s balance sheet is now at a record $5.3 trillion.
One million dollars every second.
That’s how much the Federal Reserve is printing.
It’s balance sheet increased by $586.1 billion last week to a record total of $5.24 trillion. Which is $84 billion a day and $60 million printed per minute.
— Vis (@Vis_in_numeris) March 27, 2020
To clarify, what the Fed is doing right now is issuing cash out of thin air and buying government and corporate IOUs.
Fed Moves On to Buys Bonds from Abroad, May Buy Stocks As Well
Another day, another “emergency lending program” is created by the Fed. Now the private entity wants to pump money on a global scale. A few hours ago, the US central bank said that it launched a “temporary repurchase agreement facility aimed at international monetary authorities (FIMA Repo Facility).”
In other words, the Fed will create money to buy US Treasury securities from central banks and other monetary authorities, which can use the US dollars in their jurisdictions.
At home, economists argue that the Fed might intervene in the stock market for the first time. However, the central bank would need permission from the US Congress.
Quincy Krosby, chief market strategist at Prudential Financial, commented:
If there were any major dislocations, it is clear that they will go into whatever nook and cranny in the market that starts to choke. We know that when you have choking in one part of the market, you have choking in another part of the market that leads to dislocation. As soon as you cross that line, you are now facing something else that you could conceivably buy.
It’s funny how JPMorgan CEO Jamie Dimon said three years ago that:
You can’t have a business where people can invent a currency out of thin air and think the people buying it are really smart. It’s worse than tulip bulbs, OK?…It’ll eventually blow up. It’s a fraud, OK?
He was speaking about Bitcoin, but why wouldn’t he apply this to the US dollar? The latter is becoming a major bubble right now. While the Fed’s emergency measures might reduce short-term damage, it only fuels the America’s long-term problems.
It’s Not Only About Fed, US Government Is Involved As Well
If you think the US government will handle the bubble, you are wrong. The Fed has been regarded as a private entity that has not been ruled by any government entity. However, judging by the credit and funding facilities it just launched, it means that it collaborates with the US Treasury simply because the Fed doesn’t have permission to buy corporate bonds, stocks, and municipality bonds. Does it mean that it is taking over the US government or vice versa?
In an old interview, former Fed chief Alan Greenspan said:
First of all, the Federal Reserve is an independent agency, and that means basically that there is no other agency of government which can overrule actions that we take.
Despite everything, the Fed is now working in tandem with the US government. Specifically, the central bank will finance a so-called special purpose vehicle (SPV) for each of its credit operations (of buying government bonds, corporate bonds, commercial paper, etc.). The US Treasury will make an equity investment in each SPV through the Exchange Stabilization Fund, effectively buying all these securities. The Fed is only acting as banker, offering financing. It recently hired BlackRock to buy all securities and manage the SPVs on behalf of the Treasury.
It means that the US government is nationalizing the financial markets. This scheme merges the Fed and Treasury into one organization, at least for now. Thus, the printing press is in the hands of US President Donald Trump, and who can guarantee that he doesn’t use it after the pandemic is gone?
The crypto market will boom in the coming years because the Fed is pumping unlimited cash right now.
Do you think the injection of liquidity will boost Bitcoin? Share your thoughts in the comments section!
Images via Shutterstock, Twitter: @Vis_in_numeris, digitalik.net