Cash Gone Nuts: General treasury account drops to $ 674 billion, as Fed’s cash drain hits $ 534 billion
A massive source of liquidity is about to run out.
By Wolf Richter for WOLF STREET.
The federal government’s current account surplus balances – the “General Treasury Account” (TGA) at the Federal Reserve Bank of New York – which had swelled to $ 1.8 trillion in July 2020 plunged to $ 674 billion on Wednesday , according to the Fed’s balance sheet, released today, the lowest since April 2, 2020, after unwinding most of the peak in monetized but unspent debt of the spring of last year.
The Mnuchin Treasury began to reduce the TGA balance in stages by borrowing less than it spent. Treasury Yellen announced in February that it would increase the account to $ 500 billion by the end of June. $ 174 billion more to go:
Last spring, the government sold a gigantic amount of debt, racking up an additional $ 3 trillion on top of its mountain of debt in just a few months.
At the same time, the Fed bought $ 3 trillion in securities as part of its quantitative easing and wealth effect program, thereby monetizing almost all of the $ 3 trillion in new debt that the government issued during this period.
But the government has not spent all of the $ 3 trillion in new debt proceeds, and the TGA – a liability on the Fed’s balance sheet – has grown from around $ 400 billion in February 2020 to 1.8 trillion. billion dollars in July. This $ 1.4 trillion addition that the government borrowed and then the Fed monetized did not go into the economy and the markets but ended up in the government’s current account.
But now, during the TGA withdrawal, that money has gone into the economy and the markets. The withdrawal so far is the money the government has spent since February but has not had to collect taxes or borrow from investors since it already borrowed it over a year ago , the Fed having monetized the new debt.
Since February, this money has started flowing through the economy, markets and banking system, as the government has spent it, and is partly responsible for the influx of liquidity that suddenly started to flow. appear in the banking system that was already up to the gills in cash, and poured out from there.
And that liquidity was starting to go haywire, pushing several interest rates to zero or below zero, even as inflation began to soar at a rate not seen in decades.
The Fed therefore intervened with its reverse repurchase agreements (RRP) to absorb this liquidity and keep these interest rates above zero. This has the opposite effect of QE.
This morning, the Fed sold a record $ 535 billion in Treasury securities through overnight RRPs to 54 counterparties. These night RRPs will expire and take place on Friday morning and will be replaced by a new batch of RRPs. Wednesday’s $ 503 billion overnight reverse repurchase agreements matured and unwound this morning and have been replaced by this new pile.
The amount of liquidity the Fed absorbed on any given day is the RRP balance on that day, currently $ 534 billion, thus canceling 4.5 months of $ 120 billion per month QE.
When the TGA is finally reduced to $ 500 billion, that source of liquidity will have dried up. At the same time, the Fed is getting closer to reducing its asset purchases. And he is under pressure to do it as soon as possible because they are another source of this flood of liquidity in a system already crunched under the insane amount of liquidity.
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