China is putting $174 billion into the financial markets to prevent financial disruptions related to the coronavirus.
China’s central bank said it will inject 1.2 trillion yuan ($174 billion) worth of liquidity into the markets via reverse repo operations on Monday as its stock markets prepare to reopen amid an outbreak of a new coronavirus.
Chinese authorities will use various monetary policy tools to ensure liquidity remains reasonably ample and to support firms affected by the virus epidemic, which has so far claimed 305 lives.
In 2019, the US Federal reserve had put $234 billion to dampen market volatility and keep the central bank’s overnight funds level. There have been repo market problems.
In 2020, the New York Fed reserve had put nearly $100 billion for repo market intervention.
The Federal Reserve had been trying to reverse the quantitative easing during and after the 2007-2008 financial crisis. Quantitative Easing (QE1, QE2 and QE3) brought the Fed balance sheet to $4.5 trillion vs $700-800 billion in assets at the start of the crisis.
The world economic system is growing but is still fragile. The US and China are the main drivers of growth in the world economy. The US and China are about 40% of overall world economic growth.
Brian Wang is a Futurist Thought Leader and a popular Science blogger with 1 million readers per month. His blog Nextbigfuture.com is ranked #1 Science News Blog. It covers many disruptive technology and trends including Space, Robotics, Artificial Intelligence, Medicine, Anti-aging Biotechnology, and Nanotechnology.
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Yah, about our fearful scrambler.
Glad you liked the mind-dump.
Nice one Goat. Pity our ever reliable comment system displays them all in random order. Good thing you stick a big number at the top.
Part 2
Since it is an auction, if you don’t like the price (≡ interest rate return!) then you don’t have to raise your paddle. If nothing appealed, then the bank will hand you back your remaining balance in cash-equivalent bank cheques. On the other hand, if you bought stuff … then you’ll get a smaller (or no) cheque back, but in addition, some LARGE pieces of paper bearing lots of little coupons, to be snipped off when they come to maturity, and exchanged at the sovereign bank for BRAND NEW currency.
In a sense, it is a ‘gold standard, without the gold’, since the market itself determines the real value of the sovereign paper and coupons. Note too, it is HUGELY fungible! You name isn’t inscribed on the bantam sheets. If you like, at any time and without any approval, you can sell the remaining sheet to someone else, for whatever price you CAN get.
So, let’s say people — the public, or its bankers — begin to lose trust in a currency’s floating value. You know, because of a government overspending itself into penury, or ‘trying too hard’ to inflate the money supply by printing and auctioning too many sovereign bonds. Or there’s a war suddenly afoot. Or a tsunami that ruins stuff. Or a virus that pops out of a crevace and is seriously compromising the nation’s manufacturing abilities. That kind of thing.
Part 3
The auction takes place, as it always does. However, the trust-drop means that buyers, whether you or any of the people sitting next to you, will be less inclined to buy the paper at a price that yields the same interest it did at last auction. Since the auctions are so-called “Dutch Declining Bid”, the price of paper goes down, and down, RAISING the effetive payout coupon’s interest the paper is pre-printed to pay. Got that? Its fun!
Essentially, in numbers, you might be able to buy a $1,000,000 bond for $850,000 — an immediate 15% facia drop; this raises the note’s effective yield to (a complicated formula, but in simple terms) 1,000,000 ÷ 850,000 = 1.1765 or +17.65% immediately. If the coupons are ‘2.00%’ (say), then they become 2.353% yield, immediately.
Moreover, AT BOND MATURITY, the covenant holds the central bank to pay the holder back, the FULL $1,000,000 of its printed face value! (see why the effective yield is hard to calculate?)
Anyway, this becomes feedback to the goverment, too.
Part 4
Feedback for the next issuance of bonds to have a HIGHER posted interest coupon rate. So that the auction is much closer to full-face value. Because remember, the government itself only got the $850,000 instead of $1,000,000 that it had printed.
THIS MECHANISM is sheer genius at creating a REAL trust-value for the currency underwritten by the Covenant, so long as the Central Government and Central Banks stick to the deal, and not issue NEW money, no matter how appealing the cause (i.e. bailing out defunct banks, or stock markets, or repairing tsunami damanged towns, or playing catch-up technologically, or even ’emergency-need’ increases in elder pensions). It must issue more bonds, to pay for its government-spending debts, while like her money, are also sovereign.
Brilliant.
THE WEAK SPOT however is something created relatively recently: an absolutly huge ‘repo’ market for the government to ‘reposess’ or ‘repatriate’ (you choose) the paper sold at auction and held by the public trust, in order to inject a boatload of NEW MONEY to the markets managed by the paper holders.
Like this…
Part 5
You bought one bond, with 2.00% stated interest, face value $1,000,000 for $850,000. It has a maturity of 10 years, over which every quarter you’ll be clipping out a 2.00% ÷ 4 = 0.50% of $1,000,000 = $5,000 coupon, and bringing it to the central bank’s sovereign exchange, to get $5,000 of real cash, new or old, you don’t care. Eventually the coupons end up at the GPO (government printing office), where great stacks of brand new, never used paper-and-coin money are exchanged for the coupons. Everyone’s happy.
But you really don’t want to hold onto that paper say, 3 years in. Your firm, now on the ropes due to an economic down-turn, needs a cash injection. So, you sell it to a friendly banker. However, ‘interest’ is now sitting at 5.00% and rising as the Depression is taking its toll. The monkey-with-the-cash isn’t interested in your tattered bond unless the remaining coupons and remaining face-value yield 5.00% or better. She offers only $650,000 for the sheet!
Yowza!
That’s not what you hoped for!
But if life is rough, you’ll take it.
Your firm is on the line.
You sell it for $650,000, and get a big pile of in-circulation currency.
The government is none-the-wiser, and specifically protects you by having all bond exchange profits/losses tax free.
It is this LOSS OF TRADE VALUE that ironically gives additional value to the currency. Bond holders do NOT want to lose value, so will hold out and not sell paper below a certain — floating to be sure — price.
Part 6
QE
This is when government, sensing a rapidly developing socio-economic squall ahead, decides to BREAK THE COVENANT and offer to buy paper outside the free-market trade agreement, BEFORE that printed maturity-date of the bonds. Even tho’ in our example, you have 7 years left on your 10 year bonds, the government is offering to pay $800,000 for the sheets, themselves. The money is new, unfortunately … which erodes the value-holding-proposition of the covenant.
So long as the QE “mass” isn’t too large compared to the whole-of-all-bond-paper-outstanding, QE has little direct effect on the currency-value trust covenant. But what is “too large”?
Ah, that turns out to be reflected in the upcoming week’s auction!
When QE is large and impossible to overlook as a rounding-error, then prices in the market start eroding further; its like the government has an ability — if it were gold — to from time to time just “make a bunch more gold”, out of thin air. The market REALLY doesn’t like that, even if it is gold!
I could go on, as you might imagine. But I don’t need to… if you’ve been following along, it ought to be obvious why a fresh round of astoundingly-high short-term QE is a dangerous and potentially diastrously bad plan. Yes, “the financial markets” might well need cash injection due to “freezing up” from the perceived real-or-fake upcoming financial crisis. And a judiciously applied cash injection WILL keep the same financial makerts from imploding precipitously.
PART 7, FINAL
As Mr. Bernake once said: if we have to resort to QE, we MUST set a time-and-cap limit on its issuance. For the sake of our currency’s value, and our industries’ net-net bottom line.
Paraphrased, to be sure, but still essentially accurate.
UNFORTUNATELY, the present international monetary policy pogrom doesn’t really cotton to Bernake’s policy prudence. They just want to sluice away any tsunamis that are ‘incoming’.
So, we shall see.
Yes, “its all funny-money” in the end.
But some of that funny-money is quite real, to those either who hold-and-use it, or to the next eschelon’s community of sovereign paper investors, traders and non-sovereign bond issuers (e.g. State of California, Republic of Egypt…)
⋅-⋅-⋅ Just saying, ⋅-⋅-⋅
⋅-=≡ GoatGuy ✓ ≡=-⋅
I could be flippant and say “its all just funny-money anyway!”, and that wouldn’t illucidate the article’s points at all.
THE BIG problem, internationally, is that the fundamental value-creation basis for the world’s fiat currencies is beginning to seriously erode. I’ve explained a few times before, but I think it serves to quickly do so again.
The “FIAT CURRENCY” basis of value comes down to this: signatories to the Bretton-Woods II and subsequent IMF agreements stipulate that they will only inject NEW money to their economy by ONE method: payback of mid-to-long term sovereign treasury notes.
That’s it.
To create market-controlled value, the treasury paper is actually auctioned periodically in a strikingly open market. Basically, if you have the cajones, you can sidle up to a sovereign reserve bank on auction day, deposit a boat-load of real cash (or its equivalent proxy, hard-currency bank cheques), be assigned a seat and sit thru the various today’s issuances offerings. When something appeals, you raise your paddle, and buy a chunk of sovereign paper.
SEE NEXT PARTS (7 total)
yes, all that patriotism. Though most of liquidity crunch are investors losing their shirts in the market and margin calls to small banks who rely on repos to fund themselves.
Chinese banks live off the repo market. I.e., except for the largest 4 state-owned banks, the rest of the 4,500 banks (60% of official banking assets) fund themselves via repos where the large state-owned drive the market. Pretty crazy. The repo market in itself is not huge – $500bn per day against $40 trillion in total assets. Every now and then the largest banks stop “trusting” the other banks (one can be cynical and say it’s a shakedown) and the repo market stalls and rates soar. Just like in June 2019 and in 2013. The PBOC then rushes in to put money in the system (even though the PBOC=state banks= the party).
The main cause of repo-dependence is shadow lending (about 40% of total lending) to companies that can’t pay back the money due to general economic slow down. Add to this the virus that has extended the lunar new year holidays and demand for stuff has really dried up.
Push comes to shove the PBOC could use this “opportunity” to clean up the shadow banking system and basically socialize the whole thing. Benefit to hardliners who never really liked the “market system within The System”. Downside is of course no foreign investors will trust the system again. Rock meets hard place.
Despite a huge chunk of their country being under effective quarantine, China is yet to report any dip in any of their economic statistics. Seriously. Lol.
But constant 30mph impacts are likely to be much worse overall.
Repo market seized in August 2007 and Bear Sterns fell apart March 2008. Then in Sep 2008 Lehman Brothers failure, AIG bailout, government takeover of Fannie Mae and Freddie Mac.
Wouldnt it befunny if the chinese caused their own recession by being overly peranoid about a flu with with a fancy name… heres the country that is obsessed with always reporting 7% growth rate…
Injecting money means they are a few moves from disaster….
It merely lifted the foot of the accelerator pedal, but didn’t apply the brakes. But yes, a 30 mph impact is more survivable than a 70 mph impact.
Déjà vu and an ‘uh-oh’ moment. It’s like that day in very late 2007 or very early 2008 were the world economy came within hours of tanking overnight, and global financial entities had to inject billions to keep the hammer blow from getting worse. I’m sure you could google the exact date and the players involved.
You are way undercounting Chinese capital injections. The $174 billion is on top of $83 billion that China injected into its banking system just two weeks ago. China injected $2 billion in December into to the banks and expands its money supply by about 10% each year, it expanded it by 12% in 2017 which amounts to an injection of about $4 trillion a year, given that Chinese M2 is not about $40 trillion. This compares to a 2% annual increase for the US and an M2 of about $17 trillion (M2 is the total money supply). No one in the World injects liquidity into their markets like China.
https://www.reuters.com/article/us-china-economy/china-central-banks-record-83-billion-injection-heightens-worries-over-ailing-economy-idUSKCN1PA0UW
If the market needs support from the government consider the alternative. Its great the markets have risen so much the downside is when the value is so high the stimulus needed is so excessive that the collapse will be horrific. Secure your money..
Better put they are adding liquidity into the markets to delay the repercussions of the financial crisis. GDP in the US up 4% sounds great until you realize the inflation rate was 6%. It just papers over the ongoing recession that would clear by itself if the games stopped. Stopping the games would mean losing power though, and luckily for the printers the average American/Chinese citizen went to a public school funded by debt.
The story I’ve heard is that major business landlords, shopping centres etc. have been told that this month is rent free. (Seeing as the businesses will be earning close to zero revenue this month, though still with wages etc. to pay)
I don’t know whether the government is paying for this month’s rent, or that the landlords will be providing it out of the goodness of their hearts and patriotism.