Show Me The Money

The Fed’s reverse repo just hit another new all time high at $1.33 trillion (that’s trillion with a T not billion with a B, let that sink in). Since the interest rate is 0.05% annualized, the Fed pays $665.000.000 annualized to banks and funds who park their money there. Not exactly spare change, eh? And why does the Fed do that, pray tell, since it is still pumping out $120 billion per month in QE? The mind boggles.

The Fed (ie basically the taxpayer) is giving out money for free and then allows those who receive it to give it back at a guaranteed markup. Oh, but it gets better (umm… worse, actually). The way you get the Fed to give you the money in the first place, is that you put a bunch of mortgages together, create an MBS (at a mark-up, of course) and sell it to the Fed.  The whole operation is, of course, chock full of fees accruing to you and, essentially, risk free. Hey, nice work if you can get it, no? 

And oh, yeah, there’s so much demand for this nice little money-making machine that the Fed just doubled the amount it will accept per counterparty for the reverse repo. And the QE keeps pumping… it’s nuts!!

But that’s not my main topic today. Keep reading..

The Fed’s Reverse Repo Hits Yet Another All Time Record

The government borrowed a bunch of trillions in the past 12-18 months and stuck them into its account at the Fed, called Treasury General Account. It has now spent almost the entire cash pile, taking the TAG balance down from $1.8 trillion to a mere $200 billion - see below. The two charts are, quite obviously, reverse images of one another.

The Treasury’s General Account Drops To $200 Billion

Let that sink in, too: the government’s cash reserves are now just $200 billion. We know that its monthly deficit is an average of ca. $150-160 billion (outlays minus receipts), of which some $25-30 billion is interest on debt alone.  

 

Where’s the money going to come from?  Show me the money!! Normally, the government just borrows by selling bonds - but the debt limit has now been reached; so, no more bonds for now.

Therefore, unless the debt limit is raised rather immediately - as in now! - the US federal government is going to shut down next month and stop paying  Democrats and Republicans are at complete loggerheads on the issue.

 

The Republicans are swearing up and down that they won't vote to raise the limit because the Democrats want to attach an amendment to increase social spending by at least $1 trillion. This requires at least 60 votes in the Senate, where the Democrats only have 50 votes. Gridlock..

The Democrats could vote it in by themselves with 50+1 votes (the VP vote), but only if the Republicans don't filibuster.

 

Hmmmm…. Maybe read again yesterday’s post on US defaulting?