You may have heard that the Fed has resumed Quantitative Easing (QE). Earlier this week they started injecting more liquidity into the overnight markets. I saw a post where someone was asking for an explanation of what is happening and this is my response:
Many organizations need short-term funding to continue their operations. Sometimes they have money that is going to be coming in, but they need funding to make it until they collect. To get the funding, they use the overnight market.
The overnight market works by party A asking for funding from party B. Rather than getting a loan, party A actually sells something to party B with the promise to repurchase the item at a set date. One item that is most often used is US Treasury bonds. The issue lies in the fact that fewer and fewer banks (and countries) want treasuries. Because treasuries aren't desirable as collateral, the rate for using them skyrockets (2.5% went up to 10%).
If businesses can't get the funding they need, they could default on their obligations. This can rapidly snowball, especially if any of the organizations owe money to each other (this is one of the risks of the banking system since they all owe each other so much money).
The Fed is printing new currency to purchase the treasury bills that people are trying to use as collateral for their loans. This is problematic because it provides too much liquidity which lowers the interest that must be paid. There's no true price discovery when that happens. Also, the currency is further debased and the purchasing power reduced because more currency has been created.
It seems the Fed has plans to keep up the QE for a while. This is only going to exacerbate the issues that are underlying. Cheap money and debt are what got us into this mess. More of the same isn't going to get us out.
https://www.marketwatch.com/story/fed-plans-to-conduct-daily-repo-operations-until-october-10-2019-09-20
There's still time to protect your wealth. Invest carefully.
Not investment advice. Do your own research.
@themanwithnoname