Nobody is grasping the end of the 0 rates regime
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I'm far more concerned about the permanent 0% depository requirements change at the Fed far more than people not seeing the end of 0% rates.
What use is all that history and education around understanding the mechanics of fractional reserve banking when a small group of people make a fundamental and permanent change without announcement like that?
There is nothing more permanent than a temporary solution in government as was evidenced that no change has been made reverting that in 2 years, and QE printing continued for a decade after the previous financial contagion.
I believe this is not true for all banks, but surely is shocking that this measure is in place, as it is unclear what holds those primary banks from lending to any extent they wish. I must be missing something.
Here is the url for reference if anyone wants to look at it https://www.federalreserve.gov/monetarypolicy/reservereq.htm
It doesn't look to me like there is anything holding them back from loaning as much money as they want regardless of the risk now.
Check this out
https://www.federalreserve.gov/newsevents/pressreleases/bcre...
The Board's stress tests help ensure that large banks can support the economy during economic downturns. The tests evaluate the resilience of large banks by estimating their capital levels, losses, revenue and expenses under hypothetical scenarios over nine future quarters.
I try to always keep a healthy level of skepticism with these things.
I'll have to dive into this in more detail tomorrow as it is now quite late and I spent most of my time deep diving/corroborating research from the recently released BiS report regarding the off-balance sheet, 85 trillion in USD denominated FX market swap liabilities, which supposedly are expiring in 12 months.
Looked real bad, but its too early to draw any kind of sentiment/market speculation without a lot more research.
This is the report I was checking out. https://www.bis.org/publ/qtrpdf/r_qt2212h.htm
Make no mistake, the Fed, and other regulators, have full visibility of what banks do. Every dollar they lend, every derivative, every repo, every mortgage, everything.
With the annual CCAR exercise, banks send a huge amount of information to the Fed. Not only numbers, but documents as well. A large bank will send tens of thousands of pages in one year. And countless number of spreadsheets with lots and lots of numbers.
A lot of these numbers have to be disclosed to the public as well. This way the banks are not subject to only regulatory supervision, but to market discipline as well. That's by design. The financial regulations rules were overhauled over the last decade and a half, and this is one of its pillars, the disclosure and market discipline.
If you are curious, here's [2] the full Basel framework in all its glory. Almost 1700 pages. Of course, this is just the tip of the iceberg. The actual regulations go into the hundreds of thousands of pages.
[1] https://www.bis.org/statistics/rpfx22.htm
[2] file:///Users/viorelcosteanu/Downloads/BaselFramework.pdf
The obvious issue, and worry is financial contagion.
There are so many USD denominated swaps outstanding, that will need to be paid back in full plus interest in the same short time horizon with USDs (12 months), and the global amount of USDs available in circulation falls far short of the currency needed to fulfill the obligations.
Also, thanks to interest rate changes, you have it behaving in some respects like an underwater variable interest rate mortgage if they try to roll it forward, it acts in many respects similar to a naked options contract with exponential losses as we are already going into a global recession.
The worry, is the balance of payments crises that these will likely develop into if a default/liquidity issue occurs. Then there is also the matter of actually settling the issue as the amount exceeds what the dealers and swap banks would be able to absorb or cover.
The mechanics seem to be somewhat similar to what happened with the naked shorting on Gamestop above the float, you get a squeeze but on a much larger scale since its all US notes and dollars.
It can potentially lock the entire system up by depriving foreign markets of sufficient USDs needed to pay back their obligations in that time horizon (liquidity crisis).
The relative yield of the dollar to other currencies would skyrocket uncontrollably, and due to the energy sectors close ties with the petro-american dollar, those products would also likely skyrocket as well, unless OPEC nations decide to take a loss (they historically almost never have done that).
Exchange rates due to the shock would be un-affordable to most contries, and the USD for the global reserve currency could potentially be abandoned if rates become inequitable for an extended period for foreign trade.
Its a real knifes edge between maintaining the global reserve currency by printing enough to fulfill the obligations which could cause Weimar like inflation domestically, or abandoning the trade status, military bases, UN votes, and other leverage we commonly use which are largely derived from debt obligations after a unofficial default, which have been provided through various entities such as IMF and World bank investments.
I still have a lot more to dig into it, but just as a casual observation, it looks like some group of people are trying to create the economic factors described in Ayn Rand's book Atlas Shrugged.
VS’s aren’t in the game for a 4%, 10%, or even 20% return. They’re investing in startups that have the potential to get something like 1,500% or 5,000% returns on their money and many times, they eventually succeed. Sure raising money in a high interest rate environment will be harder but it doesn’t kill the VC model at all.
But more important high discount rate means much shorter runway for startups.
And many, many, many more times they fail. The higher the risk-free interest rate, the higher the returns need to be to justify high-risk investment unless, like SBF, you simply eschew risk premiums. But most sane people, even VCs, aren’t that risk insensitive.