In one of the Back to the Future sequels (the one that I never rewatch), the villain Biff makes a bunch of money gambling by using a sports magazine from the future that lists all the winners. It’s a classic trope that excites 8-year-olds at school lunch tables the world ’round. Oh, golly, I’d be a trillionaire with that kind of foresight. On September 17, 2019, interest rates in the overnight repurchase agreement (“repo”) market spiked to nearly 10%. That is to say that banks would not take 5, 6, or even 7 percent interest to lend out cash to other banks that was fully collateralized with Treasury bonds, which are generally called “as good as cash” or “risk free”. The problem, in part, was that the average T-bill had been lent and relent in a process called “rehypothecation” to the point where the web of liabilities began to look a bit like the riskier derivatives market than plain vanilla bank lending.
More than $200 billion was injected as a backstop into the market to ensure liquidity, which is well-known. I worried at the time that this would be the end of the dollar. And I still think that’s the trajectory, but not until after much of the rest of the world’s fiat currencies are kindling fires and serving as official tender in compost piles. But something else happened around that time, and most people never knew about it, or quickly forgot about. The Federal Reserve also loaned $4.5 trillion to just three banks. MEMORY HOLE ALERT – YOU ARE ORDERED TO FORGET WHAT YOU JUST READ. I’m old enough to remember when $4.5T was the national debt. And I may live long enough to cart it in a wheelbarrow to buy beer.
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