Today I wanted to discuss the looming financial crisis in America, focusing on the US because they are the back-bone of the global economy and so where they go, we go.

We've discussed it before but recent events out of the Fed raise increased concern.

Federal Reserve: "What Financial Crisis?"

The Fed has become the lender of last resort within the REPO market providing liquidity to broke bankrupt banks who cannot carry their own balance sheets through the night. But Dwayne, "the REPO market is nothing new, and intra-bank, overnight lending is common, and fine"… no, not like this.

Yes, banks have a history of lending to one another overnight to cover costs, and that is not in itself a dangerous, however this is different.

What we have here is the Fed trying desperately to hold interest rates at an artificially low place, and the free market trying to bring the rates higher due to observed risk.

Overnight lending between banks is supposed to take place at between 1.75% and 2% interest, and yet certain lenders have looked at the borrowers, such as JP Morgan Chase, and decided they are too risky. The overnight rates spiked in some cases to over 10%! If this lending is normal, and these borrowers are solvent, why this spike?

Liquidity is drying up because risk is too high, and returns artificially low and this is a HUGE problem.

Do you understand how serious that is?

JP Morgan Chase is the largest bank in America yet they aren't credit worthy? Why? What do the lenders know that you and I do not? I'll tell you, these major banks have leveraged themselves beyond reason, chasing after profits, and combined with derivative exposure they are at the breaking point.

JP Morgan Chase is terrible risk and the lenders know it. That's why interest rates spiked to 10% on the overnight market, because lenders decided 2% was not enough justify the risk of lending to these bankrupt borrowers.

The REPO market, QE & POMO: It never ends

This started September 17, 2019, and the Fed has had to pump between 50 - 100 Billion into the REPO market nightly, since then. What's more there is no end in sight.

Additionally, Jerome Powell came out and announced that the Fed will begin a natural and permanent expansion of their balance sheet. Yes, you read that right. The Fed announced they will PERMANENTLY pump money into the economy, starting in November 2019.

Oh, but don't worry, there is nothing to see here.

Permanent quantitative easing has been announced, but we are to believe the bonds and equity markets are fine as is? No.

QE by any other name still stinks the same

This is a public acknowledgement by the Fed that the US economy requires permanent QE in order to stay at current levels, let alone grow. Oh, but wait, this isn’t QE. This is POMO, which is totally different.

POMO is just QE by another name

What’s POMO? “Permanent Open Market Operations”, is when the Fed prints money, and uses it to buy and bonds and securities on the open market, creating a market where there is none. Implying that this economy cannot naturally sustain itself.

How is that different than QE? Well, it isn't in any meaningful way.

Having said that its not the exact same. POMO includes securities, which is an expansion of its reach and manipulation, making it more severe and dangerous. Second, and more importantly, this has a new name! This is not QE, why? Because if it was then the Fed would have to admit their QE plans failed.

QE was supposed to be a temporary emergency intervention, followed by a natural and predictable “unwinding” of the balance sheets, also known as QT. But as you know QT failed miserably, ending in November 2018 when the US economic bubble popped, where the Dow and the S&P fell approximately 20%.

Since then the writing was on the wall, the only answer is more printing, but we can all rest easy because it has a new name: Permanent Open Market Operations (POMO).

It sounds complicated but its not.

Summary & Conclusion:

The Fed is simply announcing the economy is artificially inflated, and naturally unsustainable. The Fed refuses to let the bubble pop naturally. In order to avoid that outcome, they are going to pump funny-money, printed by the Fed, into the economy… forever.

This will end badly. Hyperinflation is where this road leads.

Buy gold, buy silver, buy bitcoin. Hedge your wealth with something that cannot be printed into existence at a whim.

Thank you for your time and attention. Have a good day, God bless.

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