Volatility, expansion, and recession are all regular forces to be dealt with in the stock market. But last Monday, liquidity in the overnight lending market evaporated. Illiquid markets create nebulous pricing issues for a great deal of the banking system’s financial instruments, which can quickly lead to panic, market selloffs, and concerns for bank insolvencies. The overnight reserve loan interest rate jumped to nearly 10%. Reasons given for the surge consisted of cash for response to the Saudi oil field attacks, cash to cover corporate quarterly income tax payments, and of most concern – a general lack of cash needed to absorb the huge number of Treasury bills being issued to cover the rapidly increasing budget deficit. It’s not the first crunch we’ve faced and it won’t be the last. We had a crunch in December of last year and again in April of this year. We’re much better prepared to deal with it, but it’s the kind of crisis were all but destined to lose at some point.
We didn’t handle it well at all back in 2008, because Fed policy didn’t permit the Fed to step in and take necessary actions. By the time the Bush Administration could put a plan in place the liquidity crunch had caused Lehman Brothers to spiral out of control, immediately generating a global financial crisis. This time, the Fed was right on top of it. They pumped $53.2 billion back into the market by buying up Treasury bills from banks, allowing them to refresh their reserves. The action was immediate and effective, but it hardly got noticed by the media. Conveniently, they moved along like business as usual, glossing over what could have been another global disaster, permitting Wall Street to act like it was, in fact, no big deal.
Wall Street desperately wants to avoid panic, that’s understandable, but not at the expense of honesty and accountability. The simple fact of the matter is that our entire financial system is overextended and there won’t be enough liquidity available to meet reserve requirements when a Black Swan crisis occurs. Even though we’ve opened the door for short-term and stop gap fixes, the reality is that by allowing our banks to become ‘too big to fail’ we’ve essentially traded our capitalistic free market for a watered-down socialist market that’s ultimately doomed to fail, but Wall Street doesn’t want that to even be a consideration, at least until it’s too late. Corporate greed and stupidity has replaced common sense and the media has become an accomplice, unwittingly or otherwise.
Wall Street and the media continue to produce a daily dog and pony show, geared to placate the average American and encourage them to hold tight to the American Dream, that against all odds our bull stock market will run forever, our international indiscretions will be unilaterally forgiven or forgotten, and our national debt will simply dissipate one day without ramifications. What a world it would be, but it’s all hogwash and anyone who doesn’t prepare with individual asset protection is destined to become a casualty of the next Black Swan event. Physical precious metals may need to be a bigger part of that protection package than ever before, due simply to the potential scope of the next event and the historically large protective scope of gold and other precious metals.
Although the information in this commentary has been obtained from sources believed to be reliable, American Bullion does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice. American Bullion will not be liable for any errors or omissions in this information nor for the availability of this information. All content provided on this blog is for informational purposes only and should not be used to make buy or sell decisions for any type of precious metals.