U.S. and China face liquidity banking crisis

U.S. and China's Central Banks have lost control of their overnight repo rates and are both are expected to devalue their currencies and flood their banking system with fiat money to avoid banking collapse.

Because of a spike in repo rates, the Fed surprised the market on Friday, September 20, and announced an increase in the use of Temporary Open Market Operations (TOMO).  Monday 9/23 the Fed will add $75 billion in over night repo funds.  Tuesday 9/24 the Fed will add $75 billion in overnight liquidity and at least $30 billion in 14 day repurchase loans. From Wednesday 9/25 until Thursday 10/10 the Fed will add approximately $285 billion in overnight and 14 day repurchase liquidity to the banking system.

Because this will cause a wave of repo funds that will need to be rolled over, Goldman Sachs and Bank of American Merrill Lynch expect the Fed, at their October 29-30 meeting, to announce a Permanent Open Market Operations (POMO) and expand the Fed balance sheet by purchasing  $400 billion in Treasuries over the next two years. This will devalue the dollar and restore liquidity to the banking system and avoid a collapse. Gold prices are expected to spike. 

Ever since the failure of China's Baoshang Bank in May, 2019, their has been a freeze in the interbank market among smaller, less credible banks. Interest rates on Negotiable Certificates of Deposit have gone sharply higher. Bank repo rates have skyrocketed. Corporate bonds are no longer accepted as collateral for repo financing and lenders are increasingly demanding top quality bonds such as Chinese sovereign bills. Funding among China's financial institutions has become clogged, almost to the point of paralysis. Four-day repo rates in China's government bonds on the Shanghai exchange briefly spike to 1,000% one afternoon! It appears China will have to devalue the Yuan and flood the banking system will fiat money again to avoid a banking collapse. I am long gold because it is money, and short the dollar because the purpose of central banks is to expand money supply and devalue currencies.      

© 2016 - 2020 Steve Johnston - All Rights Reserved.
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