Sign Montana Banking IOU Secure

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so let's kind of take this one piece at a time so I think there's a lot of people who have no clue about the Treasury markets about how the auctions work and why that's so important maybe explain how do these auctions work and then also why they're so crucial right we talked about kind of funding for the government etc if you can explain both how the auctions work and then why that's the thing to pay attention to I think a lot of people kind of get it a little bit better yeah the auctions are really the nerve center of capital markets and like I said the Treasury bond US Treasury is considered so-called risk-free asset I put that deliberately in air quotes but but there are a number of so-called primary dealers that are required to step up and bid on those auctions and then they turn around and resell the Treasuries but effectively they're guaranteeing that the Treasury Treasuries get sold but to the extent that the banks have challenges with with their own funding keep in mind that's sort of a loop right because the banks actually need those Treasuries at the same time for them to get funding in the repo market so I probably won't go into more details than that but let's step back and understand about the auctions specifically but but the big picture is what does it mean the US Treasury is essentially the reserve asset of the securities industry just like the so called monetary base is the reserve asset of the traditional banking industry and what happens is that a huge amount of debt gets piled on on top of those so-called reserve assets again Treasuries in the securities industry and monetary base in the banking sector most of you if you studied economics in school understand how fractional reserve banking works that you take a dollar of so-called monetary base and then typically the banks issue out ten dollars worth of loans through fractional reserve multipliers that you turn one dollar of monetary base into ten dollars of credit that's the way the traditional banking system works but that's not where most of the credit has been issued in the economy or in the financial system in the last couple of decades most of it has been issued in the so-called shadow banking system which is really the securities markets where Treasury bonds which are io u--'s of the US government just like our analogous to the monetary base being an IOU of the Federal Reserve again both of these I owe use they're a really important point we're gonna pile even more IOUs on top of that and there's actually a lot more leverage than ten to one in the in the securities industry and so when you think about the fact that a lot more leverage got piled on those Treasuries that the next question is alright what happens if we get into a deleveraging environment you usually see a run to to safety and and again the risk-free risk-free in quote air quotes asset is is the Treasury bond and we see the rush to safety we certainly saw that Treasury yields collapsed which meant that the price went up his yield and a price move in opposite directions you saw them hit record lows across the entire interest rate curve US Treasury interest rate curve this past week and so there was a rush to rush to quality but then you start to get the the reality that in fact actually liquidity has kind of disappeared from these markets and it took a Fed bazooka to get a 30-year Treasury auction done the auction was done at a relatively good yield it was only a couple of basis points wide but but the what's called the bid to cover the it the internals of that auction were really challenging so it just is it it's indicative that we're in a pretty severe dislocation in the financial markets even more so in fixed income than in equities got it and so when you say that that auction was in trouble and the Fed steps in with you know the 1.5 trillion dollar announcement explain kind of the mechanisms of they say hey we're going to inject this liquidity but what exactly is happening there from a mechanism standpoint so that people understand kind of how they quote say yeah so so the the injection of liquidity is literally injecting reserves into the banking system injecting cash into the banking system the Fed's balance sheet increases some people call that printing money that's a that's an outdated term but it's still a term that describes what's going on you're literally creating the feds writing a cheque on itself they're creating assets out of thin air and expanding their balance sheet and in the last crisis in 2008 the Fed's balance sheet was about 800 million and then it swelled up to well over 4 trillion and then the Fed started to reduce its balance sheets it's through through as it was raising interest rates and and letting some of the assets that it had purchased run off but now that's reverse course and now the feds increasing its balance sheet again and and so from the Fed perspective were north of four trillion I think around 4.2 4.3 trillion of fed balance sheet right now again up from 800 million in the last financial crisis one of the analysts who I must take my hat off to Doug Nolan who really got this whole thing right and has been chronicling what was coming in the in the credit markets he predicted that the Fed's balance sheet would swell to 10 trillion in this next crisis which i think is here he predicted that by the way he's been predicting that all along so that's not a new prediction and and at the time and she thought last fall when he published it most recently it struck me as way too low and in fact actually I think it's going to turn out to be way too low so everyone from my perspective and again I should step back and say none of this is advice you're getting what you're paying for here this is just one person's perspective and you can't rely on it but hopefully it'll just help make you think that's the only thing I want to want and what would like for you all to take away from this is just one person's perspective to help make you think it's just it's a different perspective than you're gonna read in the mainstream press but anyway coming back to that is the 10 trillion dollar number that much you know I back it back in last fall I think a lot of people were shocked by that prediction and at the time I said no way that's way too low the Fed's balance sheet is actually going to be a it end up being a lot bigger than that now what's the impact it means that the banking system is very liquid from the traditional banking system they've got all kinds of cash the problem is that cash is in the wrong place it doesn't help the securities markets because the banking industry and the securities industry are pretty separate there are a few of the gigantic banks the money center banks that are in both sides there are traditional banks and their and their Securities Dealers primary dealers that have that handle Treasury auctions for the US Treasury and but but even there they they actually the balance sheets are typically not even in the same legal entity so there's some there's that the cash is going into the traditional banking industry but not into the securities industry and and that's part of the reason why you see these dislocations that don't totally make sense but in fact actually if you understand the plumbing it does make sense yeah and so help us understand right when we talk about this kind of expansion of the balance sheet one of the things that I saw on Twitter recently is I think Ben Bernanke on a 60 minutes episode somebody said to him you know what exactly like where is this money coming from are using taxpayer money and he you know kind of nonchalantly said no we just go in and we just edit the account number so then he talked a little bit about that expansion of balance sheets and the fact that the number really is backed by nothing and is kind of at will can be expanded without any kind of logic behind well you just laid out exactly the way it works the Fed is literally writing a check on itself it's the only institution only bank it's illegal it's legally a bank it's the only bank that's allowed to do that to literally create money out of thin air and then it's it's monetary base like I said gets multiplied by other banks who are allowed to create a different type of money out of thin air but all this is coming out of thin air now if what's the what's the real impact of it it's all debt it's right it's all an IOU actually in fact even the dollar is an IOU everything's an IOU go look at the dollar in your wallet if you have one it says Federal Reserve Note pay to the order of it is it is a debt instrument the dollar itself is a debt instrument so everything everything is an IOU piled on top of an IOU piled on top of an IOU that's a really important point I think to some for some listeners that's going to be news most of you probably understand that the the banking system is an IOU we don't legally own the deposits in our bank account that's a promise to pay from our banks so effectively we've lent them the dollars we've deposited in the bank the piece that very few people understand in my experience though is that the same is true in the securities industry we think we own the shares in our brokerage account in fact we don't they are IOUs the same way that the deposits in our bank account are IOUs we're actually taking an obligation from our counterparty to deliver us the asset and they have an obligation from a different counterparty to deliver them the asset and they have an obligation from a different counterparty to deliver them the asset and there's a huge daisy chain of IOUs in the securities and banking industries respectively they both work the same way and so but at the end of the day the bottom remember I talked about the base asset in each of the two types of financial industries the banking industry and the securities industry the base asset in and of itself is an IOU to your point