So Much Fragile *Cannot* Be Random Deflationary Coincidences

Too much money, they said. It began with the Fed’s Reverse Repo (RRP) use suddenly going nuts. From seemingly out of nowhere, this was mid-March last year, and, from what every last bit of “expert” commentary claimed, a combination of the government drawing down its TGA account in anticipation of debt ceiling difficulties along with the Fed’s gargantuan QE6 still creating bank reserves by the tens of billions per week.

No one ever explained, however, why mid-March. Just out of the blue, the RRP got useful.

Other things, big things, happened around the same time, though. For one, repo fails (as discussed last week). And while the mainstream has its preferred excuse for these, too, an eruption of fails was actually consistent with the more likely explanation for RRP – not just what but, very importantly, also when.

No sir, this is collateral contributing even more to the deflationary pressures already visible since Feb 24-26.

If we view the RRP – explained yesterday – as a possible, even decent indication of collateral constraint or scarcity, then what you see above actually makes perfect sense. Reflation is and has been real, but like all those (three) which came before this latest one it already is being undercut by deflationary, anti-growth monetary deficiencies only starting in the world’s collateral streams.

Rather than “too much” money, it was immediately deflationary conditions being mixed with further much greater down-the-road deflationary potential. As such, the RRP correlated only too nicely with falling nominal Treasury yields as well as the preceding rise in repo fails.

But, how, why, what India?

Among the currency pairs available across the world, here’s one that is as little directly connected as anywhere. The eurodollar touches India as it does everywhere else, of course, but India is, at the margins, a pretty self-contained system at least as one might count nowadays.

Too much money, too big a flood of digital dollars, wouldn’t that be hugely dollar negative especially against something like the rupee? The greenback’s exchange value against it really should have been falling if not quickly. Yet, another correlation among all those others:

Quite simply, the eurodollar system can’t afford the luxury of so much self-denial, not with ever-present, never-fixed liquidity risks paramount among the minds of its global participants. Therefore, February 24, 2021, should have been nothing yet we continue to follow in its darkening shadow.

Before then, global reflation. Not quite a flood of money, but at least less of a drag when compared to 2020 (not saying much).

Swap spreads, too, what may otherwise seem a whole bunch of random coincidences is decidedly un-random, all eurodollar, entirely deflationary no matter what and how far the US CPIs.

Oil is a big one, and some of it lately is indeed Russia, but this really goes back to last February and March. Long before war in Eastern Europe, the shadow money system has shown itself to be increasingly fragile. That was the thing about Fedwire, and all the at-first tiny little fractures that have since radiated out from it spreading all over the world.

All these things have been building right out in the open for over a year already.