Convenient for the central planners that the Coronavirus Lockdown will pose as the one and only cause of the next recession in the Official Version of History. Like many government-engineered catastrophes, we will pretend that history began in January of 2020 and ignore the previous decade of artificial credit expansion, low interest rates, and liquidity pumping, so that the very same destructive interventions can be put in place again. This has already happened as the Fed already inflated and expanded credit to unprecedented levels, acting purely as funding for the Treasury and the lender of first resort. The interventionists call this “ammunition” in the Fed’s “back pocket.”
Already forgotten is the obvious weakness revealed in the economy shown in the repo crisis in fall of 2019 and the earlier lowering of interest rates by the Fed.
The Repurchasing Agreement market, or repo market is where borrowers offer safe securities as collateral for cash for 24 hours. Borrowers demand liquidity and are willing to lend their securities for cash. Lenders are willing to lend their cash for a safe security for 24 hours. A rise in repo rates would indicate an excess demand for cash over the supply.
The complete a priori truth of business cycle theory is beside the point, except that years of low interest rates discourage real savings and encourage massive borrowing. Towards the end of the expansion business is artificially propped up by borrowing created by artificial credit rather than real savings.
Last fall the repo market spiked longer than usual. Sudden increases in the market are normal, however this time the rates did not normalize after a few days and the Federal Reserve “stepped in” to inject billions of dollars to enter the repo market. Although the Fed declared immediately that this was not Quantitative Easing (QE), this was the creation of bank reserves out of thin air to buy securities, which is QE.
This is recognition that the credit market is manipulated and the economy is far weaker than political correctness dictates. Besides the QE that began last fall (before the Coronavirus), the Fed lowered interest rates throughout 2019. Essentially the Federal Reserve was using those magic “tools” to fight recession long before the coronavirus shutdown. All of this should be an indication that the state of the economy, and what will come in the future is the pulling back of the curtain, rather than simply a strong economy that was forced to go into lockdown.
The stimulus by the Fed in 2019 was forgotten, but it still happened. If the economy were strong it would not require artificially created bank reserves to keep it floating.