Z Man also suspects things are coming to a head:
The central banks remain the most important government institutions on earth and this is particularly true of the Federal Reserve. They control the global economy, because they control the supply of money and credit. This is why the massive intervention into the credit markets by the Federal Reserve recently should be front page news. Something very big is happening and no one seems to know why, but the Fed is responding to it with $500 billion in new money.
Now, they are not just printing up cash and throwing it out the window. Instead, they are intervening in the repo market to head-off a market crash. For those who don’t know, the repo market is not where repossessed items are sold. The word “repo” is slang for repurchase agreement. A repurchase agreement is a short-term funding mechanism where one party needing cash, sells an asset to a party for cash, with an agreement to repurchase the asset at an agreed upon price.
Since the financial system is like a watch with gears interlocking with gears, one gear seizing up has the potential to seize up all the other gears. A frozen repo market could result in a cash crunch for banks, which locks up business and retail lending. That locks up the Main Street economy and we’re looking at bread lines. The economy, as we understand it, relies on a steady supply of money and credit freely flowing through the system according to the rules established by central banks.
The Federal Reserve is cornered. It cannot go to nominally negative interest rates. Doing so will cause a global bank run on cash reserves. Those cash reserves do not exist. They’re nowhere close to existing. Not even one dollar in one-hundred exists. And they cannot exist without unfathomably massive dollar printing.
But the Fed can’t raise rates, either. As we saw in late 2018, even approaching 3% sends markets crashing. The Fed is stuck in the narrow range between just over 0% and just under 2%. The rate has to be kept nominally positive but negative in real terms. Any deviancy outside of the restrictive range and the system collapses.
This is why the Fed has been trying to move the goal posts on targeted inflation. The ceiling used to be 2%. Now 2% is the alleged target and the Fed is claiming the right to carry forward the difference from prior years when measured consumer price inflation was under 2%!
When I say the Fed has no more arrows in the quiver, no more tools in the toolkit, this is what I mean.
Even if the Fed wanted to raise rates and brace the economy for the subsequent financial pain, doing so will destroy the dollar. About 8% of the federal budget currently goes to interest on the national debt. Treble or quadruple the funds rate, and the percentage of the budget devoted to net interest skyrockets to one-quarter or one-third of all federal outlays. The same thing will happen at state and local levels. The illusion that treasury debt is the safest asset in the world will shatter and the dollar will, too.