February, 2020
The world’s stable now. People are happy; they get what they want, and they never want what they can’t get. They’re well off; they’re safe; they’re never ill; they’re not afraid of death; they’re blissfully ignorant . . . they’re so conditioned that they practically can’t help behaving as they ought to behave. And if anything should go wrong, there’s soma.
– the Controller in Brave New World by Aldous Huxley, 1932.
In Huxley’s story, soma is a government-provided drug which helps people escape the real world by artificially enhancing their joy, arousal, and overall sense of well-being. Coincidentally, in our financial and economic story, the Federal Reserve (“Fed”) increases their SOMA (System Open Market Account) by buying assets with freshly printed money for the same purpose. So, while Huxley’s future citizens drank soma or ate it in infused strawberry ice cream, today’s financial markets consume the Fed’s monetary infusions to the same effect.
Quantitative easing waned starting in 2017 as the Fed actively sold bond holdings (for which they receive money which then leaves economic circulation). As detailed in the chart below, this situation reversed in late 2019.
Ostensibly, the reason was to “calm money markets” last September when they experienced . . .
. . . funding shortages Monday and Tuesday [September 16th and 17th], driving the rate on one-day loans backed by Treasury bonds – known as repurchase agreements, or repos – as high as 10%, about four times greater than last week’s levels.(1)
The Fed’s interventions in the repo market have continued unabated. On February 4th alone, Fed purchases totaled $94.45 billion. Since repos are reversed in a fairly short time frame, the impact of any intervention must be netted against such reversals. But even after such considerations, the overall level of outstanding repos owned by the Fed stands at $187.2 billion.(2) All of this comports with the Fed’s operating policy as detailed in a December 12th statement.(3)
But could there be another reason? The fact that these repo operations serve as de facto quantitative easing without the stigma of citing economic concerns cannot be dismissed as a convenient coincidence. Since December 2018, when the stock market decreased dramatically and Treasury Secretary Mnuchin startled Wall Street with his “ample credit” statement at Christmastime, the Fed has been a bit scared and highly reactive.(4) The repo market simply provides them public relations cover to continue their post-2008 monetary mischief as measured in the SOMA. The financial markets are truly living in a Brave New World.
Endnotes:
- McCormick, Liz and Harris, Alex. “Fed’s First-in-a-Decade Intervention Will Be Repeated Wednesday” Bloomberg. 17 September 2019.
- Derby, Michael. “New Fed Repos Total $94.45 Billion, Total Temporary Money Ticks Up To $187.2 Billion” The Wall Street Journal. 4 February 2020.
- Statement Regarding Repurchase Operations. Federal Reserve Bank of New York. 12 December 2019.
- Paletta, Damian and Dawsey, Josh. “Treasury secretary startles Wall Street with unusual pre-Christmas calls to top bank CEOs” The Washington Post. 23 December 2019.
