Monday, March 16, 2020

Are We Going to Experience a Domino Debt Cascade in the United States?

Chris Barcelo emails:
There are many collapse scenarios afoot. While I am in your camp and don’t believe this to be a general bust and rather sector specific and exacerbated by various panics  could you comment on the below thesis and potentially the debt cascade / domino effect default assertions by Austrian Lites and perma bears. 
 The World Is Hit With A $12 Trillion Dollar Margin Call
RW response:

The key sentence in the article is this:
Had the Fed not stepped in [in during the 2008 financial crisis] with a barrage of liquidity-providing instruments and facilities, the rest of the world would have simply collapsed as the $6.5 trillion dollar funding gap closed in on itself...
Who is to say they won't do this again?

In fact, they are. It is astounding. but despite all the money the Fed is pumping into the system, the Fed is concerned about low price inflation on top of everything else.

Ths linked to article ends this way:
So far the Fed has already launched stealth QE, which will likely transform into an official, full-blown QE5 this week when the FOMC meets, and all that's missing are swap lines and an uncapped standing repo facility, both of which cross beyond the purely monetary realm and have political implications. 
Well, just a couple of hours after that article was posted, the Fed did activate swap lines with major central banks, including the European Central Bank and the Bank of England.

They cut the discount rate by 125 basis points to 0.25%.

They cut the Fed funds rate by 100 basis points to 0.00% to 0.25% and they eliminated reserve requirements.

In other words, the Fed is pumping money into the system every way it can. Those who claim some kind of debt cascade will occur just don't understand the ability of the Fed to prop up the system under these conditions. The only thing that really slows them down is very strong price inflation and that is down the road.



  1. How far down the road?

  2. “The only thing that really slows them down is very strong price inflation and that is down the road.”

    How far down the road?

  3. Why aren't gold and silver soaring? Weird.