The entire shadow banking system is suffering a major liquidity crisis. This is something that the financial media fails to mention. It is easy to see why people misunderstand what is really taking place.
We are seeing a major situation arising that is guaranteed to spread to the rest of the world. Forget the Fed, Russia, and all the Shanghai lockdowns. That is just noise on top of what was already in motion.
Each time there is another crisis it comes back to the same issue. The global banking system is being starved of both cash along with collateral. Once again, the Fed proves that the reserve it produces are worthless.
Selling Treasuries
China is selling Treasuries. Europe has been selling them since 2014. Why is this being done?
The media and other false narratives tell us it is because everyone wants out of the USD. After all, we are told the dollar is going to collapse.
Think about that for a second: why would countries in Europe divest from USD holdings when the EURO is probably the worst of the major currencies out there? There is no reason for the Europeans to do this except one.
They need USD.
This is why countries sell US Treasuries. There is no reason under the sun to sell what the global banking system considers to be pristine collateral. When you have the most valued asset, you leverage it, not sell it.
That is, of course, unless you need the money. This is the situation that many countries find themselves in.
Reserve Currency
Here is another myth we hear: the USD is not going to be the reserve currency for much longer. Presuming the USD fits that description, which it does not exactly, there is no way its status is in jeopardy. This is more of the same nonsense that was espoused over the last 30 years. Ideologues claim that the USD is collapsing and going to be replaced. Yet it never is.
Some feel China wants the YUAN as the reserve currency. That is a total joke. There are two problems with this.
- The Chinese are not trusted by the international financial community
- The CCP is not willing to give up capital controls
To be the reserve currency, people need access to it. If the CCP was to open up the YUAN to distribution, capital controls go out the window. That means the wealthy in China could get their money out. It is impossible to provide the world with the currency and still keep it locked in the country. Once those pathways are established, it is impossible to control the flow of capital.
It is also where the nation that is in that position of providing the currency has to be willing to run a trade deficit. China runs a massive surplus with the rest of the world, especially the United States. If we think there is a shortage now, what would happen when each month hundreds of billions of YUAN flow into China.
This goes against the idea of a global reserve currency.
China's Economic Woes
The reality is China has some serious economic woes. Everyone in the West, especially the United States, should pay heed to this.
We see the YUAN collapsing and not because it is being devalued. This is another false narrative. The CCP does not want a crashing currency. Instead, it wants stability. Xi warned the West for two years that things are crappy yet few paid heed. Now, it is really starting to get bad.
It is easy to see why the YUAN is crashing but why the YEN. This is not as obvious yet it makes a lot of sense.
The Japanese banks did a lot of investing in China. Even though they were breaking away with commerce (manufacturing) to a degree, the financial industry got heavily involved. Since there is massive exposure, the currency markets are hitting the Japanese with the same stroke of the bearish pen.
All of this can be traced back to the shortage of USD. With a simple supply/demand equation, if there was adequate supply, the USD against other currencies should be going down. Nonetheless, we finding it pushing higher.
Even the markets that were holding up well, the ones with a "commodity" backing their currency, like the emerging markets, are getting hammered. The global financial players see there is a USD shortage and acting accordingly.
When there is not enough liquidity in the market, it is impossible to have economic expansion. The Fed, with their quantitative easing programs did the exact opposite of what they set out to do. Their easing actually tightens economic conditions. When the Repo market is starved of collateral (because the Fed is growing its balance sheet), the entire system gets wrecked.
This is not a novel situation. Since the Great Financial Crisis the global banking and monetary system was being starved. We already saw a collateral shortage due to the fact that US Treasuries are the only form of top notch collateral. Now, with the US banking system awash with cash, the global system is suffering. The latter creates Triffin's Dilemma while the former crushes the solution.
Have no fear, the Fed is here to save everyone. Their solution is to crush the global economy.
We all know how this one is going to work out.
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