Loading ...Goldman Spots A Huge Problem For The Fed
Ironically, this also means that an end to the coronavirus crisis is the worst possible thing that could happen to a world that is now habituated to helicopter money and virtually unlimited handouts, which however need a state of perpetual crisis.
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“Once there is an end to the crisis in sight, they will be less and less willing to provide support and it will fall more on the street to absorb paper,” said Mediolanum money manager Charles Diebel, who’s adding bond steepeners in anticipation of a coming inflationary supernova.
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His conclusion: “That means the market needs to come up with about one trillion dollars to pay for those securities over the next month.” Which, of course, is a euphemism because we all know who in the market needs to come up with one trillion dollar – the only one who literally prints money: the Federal Reserve.
Conveniently, Goldman’s argument allows us to recycle our conclusion from two days ago, in which we said that here is the layman’s version of what was just said: “the Fed has flooded the system with liquidity… and it is not enough, because the way helicopter money works, is that liquidity supply (the Fed), and liquidity demand (Treasury via debt issuance) go hand in hand, and periods of too much supply, as was the cash with the Fed’s massive QE in late March and early April, are promptly followed by periods of dramatic liquidity demand, such as the next month when $1 trillion in liquidity will be drained to fund the US government “money helicopter.”
Goldman’s own calculations suggest that the shortfall net of the Fed’s ongoing QE tapering could be as much as $1.6 trillion.
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As a result, Powell faces a two-fold problem: since the Fed chair has taken negative rates off the table, Powell has no choice but too boost QE again, and unleash another firehose of debt monetizing liquidity in the financial system. However, any such reversal to the Fed’s current posture of shrinking QE will be met with howls of rage, especially among what’s left of the conservative political establishment. Which means that, just like in March when the Fed used the first pandemic-induced market crash to unleash unlimited QE, the Fed will soon have to go for round 2 and spark a new market crash, one which it then uses as an alibi for the next massive liquidity injection. Failing to do that, watch as the dollar takes off as markets sniff out that another major dollar squeeze is imminent. And since this will accelerate the liquidity crunch.
https://www.zerohedge.com/markets/goldman-spots-huge-problem-fed