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A year ago, we published a piece entitled “Where from here?” In it we envisaged that the central Special report on surviving the
banks were “effectively out of means to stimulate”. While this certainly may have been true as global economic collapse
economic growth sputtered into the end of 2019, they most definitely were not “out of means” to bail- Euro, markka and the exports of
out the financial markets, or even corporations. Finland
The new financial crisis started with the implosion of the repurchase agreement, or the “repo” market, Select Category
on 16 September, 2019. Repo-markets ‘blew-up’ because of the massive leverage built into the
financial system through constant central bank support which made them unstable.
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banks in a way that encouraged the hoarding of U.S. Treasuries. Hedge funds had also been increasing
their leveraged positions using repo. The very low interest rate environment, also caused by the central
banks, forced hedge funds to employ very high leverage ratios to obtain decent returns.
The instability of the repo-market, combined with the high liquidity needs of state and local
governments, was an accident waiting to happen. One day in September the big banks did not show
up to lend to the repo-markets. A crisis of confidence and a drastic liquidity shortfall instantly
developed.
The crisis was stopped from engulfing the world economy by the Fed through its emergency repo-
lending program, It had previously been used during the Global Financial Crisis (GFC), a decade ago.
When economies closed, panic spread through the highly levered financial system as investors
correctly calculated that recession would result. A run on high-risk assets and highly levered financial
positions erupted. The profitable process of ‘risking-up’, pushed relentlessly by the major central
banks since 2009, abruptly went into reverse with devastating consequences.
The financial markets were pushed to the edge. Liquidity evaporated and signs of sheer panic
emerged. Not since October 2008 had the world been so close to financial meltdown than in the dark
days of mid-March 2020. The financial system was teetering on the edge of collapse.
Central banks and governments, once again, ran to the rescue of not just the financial markets but also
the real economy. The 12-year period of constant central bank meddling reached its pinnacle when
the Fed stepped in to support Treasury markets, corporate commercial-paper and municipal bond
markets and short-term money-markets. In addition, governments issued multi-trillion stimulus
packages. Similar desperate actions were witnessed across the globe.
The era of monetary and ‘Keynesian’ madness was pushed to never-before-seen extremes. Nothing
probably shows this better than the ‘aggregate social financing’ of the real economy of China, which
started to ‘blast into orbit’ in March 2020.
Figure 1. Yearly cumulative aggregate financing to the real economy (flow) in China. Source: GnS Economics, People’s
Bank of China
Figure 2. The leading indicators of the OECD. Source: GnS Economics, OECD
Many observers fail to recognize that the pandemic struck a highly levered financial system which was
already in crisis. The Fed provided support to the repo-markets, and the economic output was
declining (in the Eurozone) or seriously slowing (in the U.S.). The European banking sector was fragile
and unable to cope with any larger economic shocks.
Now, we have stock markets that have decoupled from real economic activity to an unprecedented
degree and a moribund European banking sector practically doomed to collapse. The constant
resuscitation and bailouts of the central banks since the last crisis in 2009 have pushed us to the brink
of ‘Financial Armageddon’, initiated this time by the repo-market implosion and the coronavirus
pandemic.
When it truly gets going, as it likely will, do not blame the virus. Blame the reckless central bankers.
More information
In our Bear’s Lair -report we detail, how investors, households, enterprises and governments
can survive from the coming economic collapse. Buy it from GnS Store
Read our in-depth analyses on the factors affecting the financial markets yields probabilities for
market crashes and financial crises.
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