Maria’s Note: It’s a dangerous world out there… As Bill wrote yesterday, America is in for a real crisis. But when it comes, no one will suggest the real solution: honest money and balanced budgets.

For more on that, we turn to Dan Denning. Dan is Bill’s coauthor on The Bonner-Denning Letter. And below, he shows the consequences of the feds’ misguided experiments with phony money…

Is it just me, or is 2019 beginning to feel a lot like 2007?

Remember when then-Federal Reserve Chairman Ben Bernanke said the subprime “crisis” was contained?

Stocks had made a new high in July. But growth had slowed. The Fed cut rates in September. The market made a new high in October. It was too late. The bull was over.

The signs had begun appearing earlier in the summer, even as the market made new highs.

Bear Stearns, at the time one of the largest global investment banks, had trouble in two of its mortgage-bond-related funds. A slow-motion credit crisis had begun…

One that would end with banks hoarding capital from one another and the death of Lehman Brothers a year later.

Now look at the chart below.


Repo rate spikes, Fed loses control

The collapse of Lehman Brothers didn’t come out of nowhere. It came because banks stopped trusting one another and refused to loan each other money overnight in the repo market.

By the way, “repo” stands for “repurchase agreement.” It’s when a borrower sells short-term government securities overnight in exchange for cash, agreeing to repurchase the securities the next day – and return the cash.

A full technical explanation of why banks need to shore up their cash overnight is beyond our scope today.

(If you read our new Postcards From the Fringe letter, you know the backstory. Editor Tom Dyson used to work on the repo desk at Citigroup, where multibillion-dollar trades crossed his desk. Get his insider’s take here.)

The important point is that the rate at which banks lend to one another (when they do lend) is based on the federal funds rate.

In other words, it’s the Federal Reserve that sets the price of overnight money in the guts – or, as Tom puts it, the “plumbing” – of the banking system.

What the chart above shows is that the actual rate banks charge to lend to one another overnight spiked much higher last month. The Fed lost control of the price of overnight money. And no one seemed to know why.

Did the banks run out of cash? Did they not trust each other’s collateral (like in 2008, when no one trusted the value of mortgage-backed securities)? Or was it something else this time?

Let’s take a look…

A Crisis That Dwarfs 2008?

Back in 2000, the Fed responded to the tech crash with easy money. That led to the housing bubble of 2007, which led to even more easy money via quantitative easing (QE).

That, in turn, has led to an “everything bubble” in which the systemic risk for our fake-money system is now concentrated in sovereign U.S. bonds.

The mainstream media are going to spend their time telling you why this story doesn’t matter. Why it’s not 2008. And why the Fed is still in control and has plenty of ammunition.

Don’t believe the tripe.

Remember the Troubled Asset Relief Program (TARP)? That was the $700 billion Wall Street bailout package that Congress passed and President Bush signed in early October 2008.

$700 billion seems like a lot of money. It was the total amount set aside for the duration of the financial crisis in 2009. Yet last month, in response to what you saw in the chart above, the Fed injected $275 billion into Wall Street in just four days!

That’s right. In less than a week, and seemingly out of nowhere, the Fed mounted a huge intervention in markets to provide liquidity – an intervention that seems to dwarf the crisis days of 2008. Keep in mind that the ENTIRE amount for that round of QE was $600 billion.

This is “Central Banking 101,” according to New York Fed President John Williams. But it looks an awful lot like a central bank desperately trying to restore liquidity (and confidence) to a part of the financial system that suddenly appears broken.

What broke? And can the Fed fix it before it’s too late? To answer these questions, we need to turn to U.S. deficits.

A Systemic Crisis Requires Radical Intervention

As Bill has shown you in these pages (and we’ve shown at greater length in The Bonner-Denning Letter), the debt and deficit numbers are bad and getting worse.

The Congressional Budget Office (CBO) reckons the U.S. Treasury will run trillion-dollar deficits for the next five years. There will be over $12 trillion in new borrowing in the next decade – and that’s if nominal GDP projections are met, tax revenues come in as expected, and government spending doesn’t increase.

What do you think will happen when we have a recession and a Democrat (like Elizabeth Warren) in the White House… or really, ANYONE in the White House?

Tax revenues will go down, and spending will go up. The deficits will be even larger. We’ll be well on our way to a $30 trillion national debt. And who is going to pay for all that, Dear Reader?

The only one who can pick up the slack is the Fed. Which is why it’s now expanding its balance sheet again (by buying up bonds) in an attempt to prevent a repeat of what we saw in the repo markets last month.

This is, after all, the idea of a Federal Reserve system: to be a lender of last resort in the banking system.

But think about what that really means for a second. It means the Fed is effectively financing U.S. deficit spending. Or, as economists say, the Fed is “monetizing” the U.S. debt.

Wash, Rinse, Repeat

It’s true that in the repo market, the lending is overnight. In theory, the liquidity the Fed adds to the system is drained away each night when the cash a bank has borrowed is returned. Wash. Rinse. Repeat.

It’s also impressive how quickly the financial media decided there was “nothing to see here” in the repo market.

The spike was attributed to “technical issues.” And we were assured that this was nothing like 2008. That everything is fine. Move along, please! Nothing to see here.

But you have to ask yourself what kind of a financial system it is if the central bank is required to permanently provide liquidity overnight in the banking system.

What’s the point of having a central bank at all if it loses control of the price of money?

The Fed will find itself fighting for its life (to head off the Modern Monetary Theory, or MMT, crowd from taking complete control of America’s money). That’s where we’re headed.

So be prepared for big swings in ALL prices as we enter the next phase of this systemic endgame.

It’s why, in August, we urged paid-up Bonner-Denning Letter readers to reduce their allocation to bonds and increase their allocation to tangibles and precious metals. With all this going on, that decision seems timely.



Dan Denning
Coauthor, The Bonner-Denning Letter

P.S. It’s not too late to take control of your finances before the mother of all crashes falls upon us. If you’re a paid-up Bonner-Denning Letter reader, see our latest asset allocation guide in full here. If you’re not paid-up yet, get the details from Bill on what the next crisis will look like… and what you can do about it today… right here.