Raising The Debt Ceiling Will Trigger A Crisis (Here’s Why)

everything that you have been hearing in the news lately is all about the United States debt ceiling and it could be absolutely catastrophic if this debt ceiling would not be resolved it would be Financial Armageddon it prevents the worst possible crisis on default for the first time in our nation's history but what the mainstream media is not telling you is the real problems begin when the debt ceiling is raised I'm going to explain this to you in one simple fast step let's go over this liquidity crisis that we could see once the debt ceiling is actually raised once the problem is quote unquote solved we're going to start by going over some balance sheets we've got the government the FED Banks and non-bank entities represented by everyone's favorite the average Joe so on the left we have assets right liabilities with the government we're gonna have Bank Reserves as an asset liabilities treasuries okay fed those assets are going to be treasuries mortgage-backed Securities now what's interesting what I want you to note is these Bank Reserves that are an asset of the government they're actually a liability of the Federal Reserve they're in an account called the TGA treasury general account all right other liabilities would be Bank Reserves but those aren't assets of the government those are assets of the Commercial Bank banking system the same types of Bank Reserves they're absolutely identical on the bank's balance sheet we've got those reserves we were talking about and we've have loans everyone knows how the majority dollars are created they are lent into existence from the commercial banking system and on The Average Joe's balance sheet we got a couple bucks there and on the liability side we've got loan and we have the mortgages that's uh the FED there we go has on their balance sheet in the form of mortgage-backed Securities or what I like to call them mortgage back sausages okay so this is all pretty straightforward but what happens once the debt ceiling is raised well Janet Yellen ah I forgot to put her name here but you can tell by my incredible artistic ability that that is obviously Janet Yellen she has said that she wants to fill up the TGA because it only has maybe 10 20 billion dollars in it right now she wants to fill it up to who knows five six seven hundred billion dollars and she wants to issue a trillion dollars worth of T bills into the market once the debt ceiling is raised so this would be a deluge of Supply a tsunami of bills hitting the market in a very short period of time all right well let's think this through let's go to the balance sheets and see how this would work as far as the mechanics and the plumbing so what the government is going to do they're going to add treasuries to the liability side of their balance sheet because they're trying to fill up the TJ and get more of those Bank Reserves okay makes sense so what the FED would do assets still the same but they're going to take the Bank Reserves from the commercial banking system and move them down into the government's account okay well why on Earth would they do this all right let's say that Janet Yellen is issuing all these t-bills here she's making it rain and the non-bank entities in the real economy like the average Joe are buying those t-bills hence this Black Arrow going right over there to The Average Joe's balance sheet so now he's got those dollars that he had to begin with but he's traded some of his dollars for those T bills that he just purchased okay so what happens to the bank's balance sheet well what they do is they actually go over to the Average Joe's account and they delete some of those dollars that were there to begin with okay well that's reducing the liability side of the balance sheet but what else do they have to do aha they have to transfer those Bank Reserves down from their account into the account of the government the TGA on the fed's balance sheet so their balance sheet they the banks is actually Contracting but wait a minute here if the bank's balance sheets are Contracting that means they have fewer Bank Reserves they have less liquidity and we all remember what just happened with Silicon Valley Bank signature First Republic they had all these deposits leave they didn't have enough cash they didn't have enough Bank Reserves and they went bust so basically how this works is the government sells all these T bills a trillion dollars I think over the span of about a month a very short period of time all these non-banks buy so this contracts the bank Banks balance sheets we see that right here and if it contracts the bank's balance sheets that means they have fewer Bank Reserves they have less cash because those Bank Reserves are going into the TGA right here the treasury general account that's how Janet Yellen is filling up what is effectively her checking account this creates a liquidity crisis there's not enough reserves cash in the system Banks go bust stocked could collapse we get a 1930s type of Great Depression and oh by the way rates would most likely explode higher why because she's issuing a trillion dollars worth of Supply into the market well how is that going to be soaked up most likely yields go up and prices go down which would require the Federal Reserve the central planners and authoritarians to come in and do yield curve control because they've got to keep those interest rates artificially low because they know the economy can't handle the higher interest rates created by this Deluge this tsunami of treasuries that have been thrust upon the market by obviously Janet Yellen so then the question becomes how would the Federal Reserve Implement yield curve control how would they buy all the bonds that they would need to buy because of the supply demand imbalance well that's when money printer goes Burr they would have to create all of this money all these new Bank Reserves and that most likely leads to the dollar crashing and that's why the real problems begin once the debt ceiling has already been raised and now I'm going to tell you why this entire Theory is complete nonsense you weren't expecting that one were you editor help me out as usual the devil is in the details let's look at the fed's balance sheet again but this time we're going to use a little more Nuance so it is true the banks have these accounts the Fed in aggregate total right now they've got about 3.2 trillion in Bank Reserves the TGA is getting a little sparse last time I checked about 60 billion it could be even a little bit lower than that but they also have another account that is a liability of the Federal Reserve this is what they call RRP or reverse repo and typically this is what a lot of the money market funds use to go ahead and park cash so right now that balance in aggregate total is 2.2 trillion dollars all right but it's important that we go over this in even greater detail so like I said right now the bank's exit total balance right around 3.2 trillion to give you some context about the scenes we had at the beginning of 2021. okay so if liquidity to a certain degree for banks according to that theory that we just went over has to do with the reserves relative to the deposits well we've got to see what the deposits were back then and make some comparisons okay so the deposits at the beginning of 2021 about 16.3 trillion today 17.1 so they have gone up I call it 800 billion dollars you could say Okay George well that ratio is getting smaller therefore we could be having a liquidity crunch right but let's go back to 2019 and I'd like to point out that prior to the cervasive sickness this Ratio or the percentage of reserves that Banks had relative to deposits was about 12 percent so now at 17 it's much higher than it was before why is this important because it shows you there's most likely a significant buffer but let's go ahead and take this one step further like we said earlier the concern is that all these non-banks will start buying that reduces the amount of Bank Reserves significantly all right but if the amount of Bank Reserves are going down because banks are taking those Bank Reserves and putting them into the TGA something that would look like this as an example then that means those same banks are reducing the amount of deposits they have as well so if we had let's say 440 billion of reserves go into the TGA then the commercial banking system would go from 3.2 down to 2.76 but their liabilities those Bank deposits would go down by the same 440 billion and it is true this may go down slightly but it doesn't take us anywhere near where we were when liquidity was not a problem at all I know a lot of you that are really paying attention are saying to yourself right now okay George yeah I get how this works but you're the one that says the devil is in the details so let's look at more Nuance with the commercial banking system you're looking at aggregate totals that's fine and dandy but what about when we compare midsize and small size versus these Mega Banks we know that the Regionals are really walking on thin ice when the JP Morgan's the Bank of America's the Wells Fargo's are flushed with reserves or flushed with liquidity and this is a very good point but let's assume for a moment that all of these treasuries 100 percent that Janet Yellen issues in a very short period of time are purchased by not just non-bank entities but non-bank entities like the average Joe that bank with those mid and small banks that right now are walking on thin ice okay well what happens there well the reason that the average Joe The non-bank Entity would want to buy one of these t-bills in the first place is because they can get more money than they can oh I don't know with one of these money market funds it will just park it and reverse repo so right now reverse repo is paying about five percent so let's just assume for a moment that the yield on these T bills just pick one goes up to six percent so the average Joe then has an incentive to say whoa why am I parking all my cash in this money market fund it's just putting it on the fed's balance sheet when I can go ahead and buy these t-bills and get an extra 100 basis points right that makes a lot of sense doesn't it but the fund manager that manages this money market fund is seeing the exact same interest rate and you can tell how greedy he is just by the fact that he's got dollar bill signs for eyes tells you everything you need to know in other words if the average Joe is thinking about that opportunity the fund manager I can guarantee you is going to beat him to the punch okay so what happens then let's look at this other example of the balance sheet so in this case that 500 billion or the extra 440 would not come from Bank Reserves it would come from the balance that's currently in reverse repo so or we can go up here so 2.2 trillion right now in reverse repo with all those fund managers beat Joe to the punch then they're going to draw down this account because they can get a little bit higher interest rate just buying those T bills so the Bank Reserves wouldn't come from the bank's balance sheet the Bank Reserves would come from the balance sheet of the money market funds another super simple way to think about this is the money market funds a reverse repo would suck up all of those bills and therefore Janet Yellen would get her money directly from reverse repo and therefore the amount of reserves Banks had in total wouldn't be affected at all oh but wait there is more it's a silver moment that all the big Banks do the buying the JP Morgans of the world okay well how would that impact the fed's balance sheet well same thing as this example the reserves would go down to 2.76 trillion TGA would go up to 500 billion and reverse repo wouldn't be impacted all right well we don't have to worry about a liquidity issue with the JP Morgans of the world why because they're flushed with Bank Reserves so that is a complete non-issue also I'd like to pose a question to all of you watching this video right now for one of these big Banks what is more liquid as far as an asset on their balance sheet a bank reserve or a t-bill editor go ahead and cue the Jeopardy music most people would say well George I don't really know or maybe they're the same but if you're very sophisticated there's a strong argument we're saying the T bill is actually more liquid and the banks would prefer to have those T bills above and beyond just plain old Bank Reserves that you can really only utilize in the domestic economy those t-bills are good as gold pretty much anywhere throughout the global monetary system oh and wait there's just one more thing let's think about what a t-bill actually is to a big Bank all it is is Bank Reserves that you're going to get in one month but you're getting paid interest so my point is all a t-bill actually is one of these big Banks is just simply Bank Reserves that they'll get paid in the future plus a little bit of Interest so how can you argue that if these big banks are swapping out reserves for T bills it actually reduces liquidity makes no sense at all let's also remember the primary dealers themselves may come in and buy a lot of these t-bills okay well if they buy a lot of the issuance that means there's going to be let's say an extra 500 billion dollars of T bills or collateral on the balance sheet of these primary dealers why is that important because that's an extra 500 billion that they can re-hypothecate that's more collateral in the system and there's a strong argument that because we have a lot more t-bills therefore a lot more collateral this would actually increase the overall amount of liquidity but the main thing you need to take away from this entire video is the fact the banks themselves produce liquidity this is their job this is why they exist to loan money into existence and they don't just loan you money for a mortgage or an auto loan or maybe your credit card they also loan money create cash for other Banks themselves so what we really have to get our head around is the idea that the FED is not the sun in the monetary solar system most people think the FED is the sun and the banks kind of our planet that just revolves around the Sun but it's actually the opposite that the banks themselves are the sun in the monetary solar system and the FED is just simply revolving around the commercial banking system so what's my point it's that when you're looking at liquidity or a lack of liquidity the most important thing to consider is right here counter party risk because the counterparty risk or perceived counterparty risk within the commercial banking system is very low then I can assure you liquidity is going to be very very high so the question becomes if the debt ceiling is raised meaning if the government is no longer at risk at defaulting on their debts causing Armageddon and the whole world to come to an end is there less perceived counterparty risk or more perceived counterparty risk I think the obvious answer is that there's a heck of a lot less and if there's less perceived counterparty risk then that means you would expect to see actual liquidity go up not down let me be very clear I'm not making a prediction here the purpose of this video is to give you both sides of the argument and to give you a lot more detail and Nuance than you're getting just on Finn twit social media or in the mainstream media but you've got to come to your own conclusions not based on certainty but as always based on probabilities for more content that'll help you build wealth and thrive in a world of out of control central banks and big governments check out this playlist right here I will see you on the next video

Channel: George Gammon

Views: 150,520

Keywords:

Id: C_ch8MNWSRo

Length: 19min 9sec (1149 seconds)

Published: Fri Jun 02 2023