{"id":748520,"date":"2018-06-06T20:49:29","date_gmt":"2018-06-06T20:49:29","guid":{"rendered":"http:\/\/juniorminingnews.com\/?p=748520"},"modified":"2018-06-06T20:49:29","modified_gmt":"2018-06-06T20:49:29","slug":"an-urgent-warning-for-the-fed-2","status":"publish","type":"post","link":"https:\/\/juniorminingnews.com\/?p=748520","title":{"rendered":"An Urgent Warning for the Fed"},"content":{"rendered":"

By Brian Maher<\/a><\/span> <\/p>\n

This post An Urgent Warning for the Fed<\/a> appeared first on Daily Reckoning<\/a>.<\/p>\n

The Federal Reserve is unwinding its balance sheet.<\/p>\n

At the same time, the Treasury is issuing gorgeous amounts of debt to pay for the Trump tax cuts.<\/p>\n

Are the two policies \u2014 seemingly disconnected \u2014 combining to create a dollar liquidity crisis?<\/p>\n

Today we identify hidden linkages\u2026 connect far-flung dots\u2026 and unearth potential seeds of mischief.<\/p>\n

We first set the scene\u2026<\/p>\n

The Fed inflated its balance sheet by a cosmic $3.4 trillion between 2008\u20132015.<\/p>\n

And its ultra-low interest rates made dollars available nearly free of charge.<\/p>\n

Several emerging-market governments, corporations and banks rose to the bait.<\/p>\n

And they created their own mountains of debt with borrowed dollars.<\/p>\n

In fact, the world conjured new dollar-denominated debt with even greater gusto than the Fed conjured dollars.<\/p>\n

Over $60 trillion of fresh debt sprang into being during this time \u2014 much of it overseas.<\/p>\n

\u201cThis huge debt pyramid was fine,\u201d says Jim Rickards \u2014 \u201cas long as global growth was solid and dollars were flowing out of the U.S. and into emerging markets.\u201d<\/p>\n

But global growth slipped in 2018’s first quarter \u2014 growth even ran negative in Japan.<\/p>\n

And the outflowing tide that once swept dollars into emerging markets\u2026 is now receding.<\/p>\n

The dollar is surging.<\/p>\n

A rising dollar increases the burden of the dollar-denominated debt emerging markets took on in the heady days of near-zero interest rates.<\/p>\n

Rising U.S. Treasury yields also attract greater investor interest\u2026 which draws investment away from riskier emerging markets.<\/p>\n

In turn, fewer dollars are available to service the rising costs of emerging-market debt.<\/p>\n

That way trouble lies\u2026<\/p>\n

Bloomberg informs us that dollar-denominated debt is now becoming \u201cone of the weakest links in the global financial system.\u201d<\/p>\n

It should therefore not surprise that emerging markets have come in for hard sledding.<\/p>\n

The MSCI Emerging Markets Index has since fallen over 10% after peaking in January.<\/p>\n

January, the calendar confirms, arrived three months after the Fed began tackling its balance sheet in October.<\/p>\n

Coincidence?<\/p>\n

Not according to Urjit Patel, governor of India’s Central Bank:<\/p>\n

\n

Global spillovers did not manifest themselves until October of last year. But they have been playing out vividly since the Fed started shrinking its balance sheet. <\/i><\/p>\n<\/blockquote>\n

The Fed’s shrinking balance sheet is reducing dollar availability.<\/p>\n

And emerging markets are feeling the blade.<\/p>\n

But earlier we raised the issue of the Trump tax cuts.<\/p>\n

How in blue blazes do the tax cuts tie in with the Fed’s balance sheet\u2026 and a possible emerging-market crisis?<\/p>\n

It is time to connect dots\u2026<\/p>\n

Taxes have been cut.<\/p>\n

But government spending \u2014 to state it charitably \u2014 has not.<\/p>\n

February’s bipartisan budget deal lifts spending an additional $300 billion over the next two years.<\/p>\n

To make good the shortage, the Treasury is issuing vast amounts of debt.<\/p>\n

Through 2019, it is on track to sell $1.2 trillion worth of Treasuries to cover the projected deficit.<\/p>\n

And every dollar pouring into U.S. Treasury debt\u2026 is one dollar unavailable for overseas duty.<\/p>\n

Combine the shrinking balance sheet with the dollar-hoarding Treasury issuances\u2026 and the result is a global dollar shortage.<\/p>\n

The aforesaid Mr. Patel calls the business a \u201cdouble whammy.\u201d<\/p>\n

And he believes the Federal Reserve is sound asleep.<\/p>\n

Wake up, he tells Jerome Powell.<\/p>\n

And take your wingtips off the monetary brake \u2014 or else:<\/p>\n

\n

\u2026 the Fed has not adjusted to, or even explicitly recognized, the previously unexpected rise in U.S. government debt issuance. It must now do so\u2026<\/i><\/p>\n

Given the rapid rise in the size of the U.S. deficit, the Fed must respond by slowing plans to shrink its balance sheet. If it does not, Treasuries will absorb such a large share of dollar liquidity that a crisis in the rest of the dollar bond markets is inevitable.<\/i><\/p>\n<\/blockquote>\n

Mr. Patel adds the Fed should \u201cdamp significantly, if not fully offset, the shortage of dollar liquidity caused by higher U.S. government borrowing.\u201d<\/p>\n

Our agents inform us the Fed has no plans to heed Mr. Patel’s counsel at this time.<\/p>\n

But the prospect of a crisis in the dollar bond markets is enough to send Jim Rickards under the bed in terror:<\/p>\n

\n

It raises the prospect of a new liquidity crisis and financial panic worse than 2008\u2026 There are not enough dollars to go around. The losses will be enormous\u2026 We are closer to the stage (last seen in September 2008) where \u201ceverybody wants her money back.\u201d When that happens, there’s never enough money.<\/i><\/p>\n<\/blockquote>\n

And so the Fed could bumble its way into another crisis \u2014 if the foregoing analysis holds together.<\/p>\n

\u201cThe paths of error are many,\u201d said Aristotle, \u201cthe path of right doing is one.\u201d<\/p>\n

Given its record\u2026<\/p>\n

Do you think it more likely the Fed will select the right path\u2026 or one of the many paths of error?<\/p>\n

Regards,<\/p>\n

Brian Maher
\nManaging editor, The Daily Reckoning<\/i><\/p>\n

The post An Urgent Warning for the Fed<\/a> appeared first on Daily Reckoning<\/a>.<\/p>\n

…read more<\/a> <\/p>\n

From:: Daily Reckoning<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

By Brian Maher This post An Urgent Warning for the Fed appeared first on Daily Reckoning. The Federal Reserve is unwinding its balance sheet. At the same time, the Treasury is issuing gorgeous amounts of debt to pay for the Trump tax cuts. Are the two policies \u2014 seemingly disconnected \u2014 combining to create a […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""}},"footnotes":""},"categories":[366],"tags":[],"_links":{"self":[{"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/posts\/748520"}],"collection":[{"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=748520"}],"version-history":[{"count":0,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/posts\/748520\/revisions"}],"wp:attachment":[{"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=748520"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=748520"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=748520"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}