Abundant Cash Is Not Cash Available Abundantly

The pandemic, Fed interest rate policy and bond purchases, restrictive banking regulations, and banks’ swelling cash balances will have a lingering impact on liquidity and produce some mind-bending policies to deal with this uncharted territory.

As the pandemic emerged in March 2020, strange things happened:

o Bond markets seized up and investors panicked.

o Bond yields spiked causing severe price declines.

o Credit default swap prices (debt protection derivatives) rose 100x in less than a month.

o The dollar rose and liquidity dropped for U.S. Treasuries, usually the world’s most liquid security.

o There was substantially lower demand at U.S. Treasury auctions.

The Federal Reserve responded with an almost never-ending pile of cash, buying vast quantities of bonds with newly created cash. It has continued its purchases, at a pace of at least $120 billion a month.

But this has not resulted in “happy days are here again.” This mountain of dollars is limiting liquidity and constraining markets. That’s right, read that again if you must – too much cash can constrain the economy.

Does the Music Stop in China?

Chinese economic policies and motivations since 2008 not only emphasize growth and sustainability of state-owned enterprises but, a critical but much less well-appreciated dimension is the Chinese government’s emphasis on stability. No economic policy in China will ignore this, and the high value placed on stability pervades all the current trade talks with the United