A new Macro Watch video has just been uploaded.
This presentation warns that the financial system may be heading toward another liquidity crunch.
Bank Reserves have been shrinking for more than two years, first because of Quantitative Tightening and more recently as the Treasury General Account has been replenished. At the same time, the pool of Reverse Repos that had been providing a cushion of liquidity has almost entirely disappeared.
Meanwhile, the total assets of commercial banks continue to grow. As they expand, regulatory requirements force banks to hold more reserves. With reserves falling and demand for them rising, the cushion is getting thinner.
If reserves fall too far, money market strains could erupt — just as they did during the Repo Crisis of September 2019. Back then, the Fed was forced to step in with emergency operations and eventually launched a new round of Quantitative Easing. The stock market surged.
Will history repeat itself?
This video examines the evidence and outlines the risks.
Subscribers to Macro Watch can click here to watch this video now.
If you have not yet subscribed, now’s the time.
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This video is 16 minutes long and offers 32 slides that can be downloaded.
A new video will be added every two weeks.
Separately, if you are interested in learning much more about economic history and monetary policy, click HERE to see a list of books I highly recommend – since I wrote them. 😉
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