Global liquidity collapse approaches

The hidden fracture lines of global finance

From Tuomas Malinen’s Forecasting Newsletter.

Issues contributed:

• The change in the composition of global financial enviroment as a fragile one has not been widely understood.

• Global banking crises seem to have started already in 2020, but has been hidden (in plain sight) by authorities.

• These two issues combined with the quantitative tightening of the Fed create a risk of a sudden and a catastrophic collapse in global market liquidity.

Recently, I read an excellent Twitter thread by a former hedge fund manager, under the pseydonym MacroAlf, on the risk of approaching liquidity/systemic crisis. He also publishes an excellent newsletter, The Macrocompass, which I recommend you to check.

Macroalf (Alfonso Peccatiello) concentrates on the MMF, excess reserves (above reserve reguirements deposits of banks in the central bank) and repo-markets to explain why the quantitative tightening of the Federal Reserve is likely to lead to a liquidity crisis within the 6-9 months.

I whole-heartedly agree, but like to add two important points to this, which practically make the onset of a liquidity crisis a near-certainty.

QT and that ‘sucking sound’

First is the fact that quantitative tightening (QT) is also draining liquidity from investors (households, institutional investors, etc.), as it reverses the process of quantitative easing (QE), which created not just central bank reserves, but actual bank deposits. I have explained this still rather badly misunderstood feature of QE in my piece at the Epoch Times. I recommend you to read it.