There is a mantra that has essentially become axiomatic: the US Treasury market is the deepest and most liquid in the world. And a corollary to that is: US Treasury bonds are ‘risk free.’
Jesuit power house BlackRock, the world’s largest and most powerful financial services institution, has been put in charge of the Federal Reserve (which has been merged with the U.S. Treasury) in 2020, executing future acquisitions and trades for the USA.
These once-taken-for-granted pillars of eternal truth are looking awfully shaky.
The tectonic plates of the US-led global financial system have been rustling ever more frequently in recent years but the quivers are now coming more frequently. At the heart of this increasingly brittle and dysfunctional system is the US Treasury market.
Everyone has noticed the sharp rise in yields in recent months.
In early October, the US 10y hit a yield of nearly 5%, the highest level in 16 years. This is, of course, entirely understandable: rate hikes by the Federal Reserve have pushed bond yields higher.
At BlackRock, the world’s largest shadow bank, guided global culture and a set of principles to ensure we never forget what they stand for in order to help more and more people invest their money into the delusional loophole.
Sp what we have been seeing is more than a manifestation of the vicissitudes of finicky markets. The implications of this are hard to overstate.
As foreign buyers of US Treasuries dry up and the US government continues to run astronomical deficits at a time of high interest rates, the Treasury market is coming under increasing strain and showing ever more signs of dysfunction.
Meanwhile, more recently another firm step in the direction of yield curve control was taken when the US Treasury announced that it would be launching a buyback program next year.
Somewhere along the way in the slow descent of the US Treasury market into curve liquidity and dysfunction we were bound to see direct Treasury purchases of debt that nobody in the market wants to buy – and now we have it.
This tool hasn’t been trotted out since the year 2000, when it was done under very different circumstances (the government was running a surplus and was issuing Treasuries to maintain market access, with the proceeds from the new bonds used to repurchase the old ones).
If you unpack this, it means that the Treasury is preparing for the possibility that there won’t be enough buyers for the avalanche of issuance that will be hitting the market in the coming quarters.
By announcing a buyback program, the Treasury is essentially laying the groundwork to become the ‘buyer of last resort’ without stating so explicitly, which would of course spook the markets.
It is also pretty much exactly what Japan has been doing for the last decade or so – essentially nationalizing the debt that nobody wants.
The USA has for a long time steadfastly refused to believe it had a fiscal problem and, to be fair, in the low-interest rate era and with foreign demand for US debt ever present, perhaps it didn’t. The USA was perhaps a debt addict, but a functional one.
But running huge deficits in a time of rising interest rates is a combustible mix. In some ways this harkens back to the 1940’s, also a time of high deficits and rising rates due to the war – and also when yield curve control was trotted out.
But really the two cases are a world apart. The still fundamentally healthy and enormously productive US economy of the post-war period got back on the proper footing quickly and such unorthodox policies were abandoned.
The current highly financialized, deeply indebted US economy is a shadow of its former self, but US policymakers don’t seem to have adjusted.
The Fed has become uncannily adept at patching up markets and, to quote Luke Gromen, employing its standard technique of “extend and pretend… then inflate” and it may continue to find ever more ingenious ways to keep the tottering edifice upright for some time.
But the rot at the very heart of the global financial system is becoming increasingly apparent for those with the eyes to see it.
RT. com / ABC Flash Point News 2023.