Zoltan Pozsar laid the groundwork for the modern repo market, which is an overnight market used by banks to borrow and lend liquidity. Pozsar also played a key role in the response to the Great Recession of 2008.
Just over a week ago, Pozsar predicted that an extreme liquidity crisis would take place due to the year-end turn, and the economy would basically collapse unless the Federal Reserve did something drastic.
Only two days later, the Federal Reserve pledged to print and inject another $500 billion into the economy in the next month to prevent a liquidity crisis, on the heels of the $350 billion printed since August. This shows how shaky the economy really is and will likely create favorable conditions for the Bitcoin (BTC) market, as we will explore in this article.
As detailed in a previous Crypto.IQ article, a repo crisis occurred in the middle of September, meaning the rates for overnight lending of liquidity skyrocketed due to a lack of liquidity. Think of this as the oil of the financial system, without the liquidity the financial engine begins clunking and eventually overheats and explodes.
Simultaneous to the repo crisis, the Federal Reserve began losing control over the Fed Funds Rate, since the lack of liquidity could not support such low interest rates.
This lack of liquidity was caused by the Fed performing quantitative tightening, where it began to wind down the assets that it put on its books during the Great Recession of 2008.
The promise all along during the Great Recession and subsequent injection of trillions of dollars via money printing was that the Fed would eventually pay this money back. However, the Fed wound down its balance sheet from $4.5 trillion to $3.75 trillion, causing the banks to run out of liquidity and making an economic crisis imminent.
This proved that the banks, corporations, and the economy cannot survive without the free money from the Fed. The Fed was forced to print $350 billion since August to keep the economy going, bringing the Fed balance sheet back up to $4.1 trillion.
However, that was not enough, and Pozsar discovered that banks would run out of liquidity due to the year-end turn since banks need extra liquidity at the end of the year to pay their taxes and other debts. Pozsar also predicted the Fed would have to print a ton of money to prevent this crisis or choose to watch the economy go up in flames.
Lo and behold, Pozsar was right, and only two days after his analysis, the Fed announced a $500 billion money printing and liquidity injection operation to get banks and corporations through the year-end turn.
This operation will take the Fed balance sheet beyond its all-time high of $4.5 trillion, drastically higher than its balance of $0.9 trillion right before the 2008 Great Recession. This means that the economy is depending on $3.6 trillion of free money to be stable up until this point.
In other words, the real economy is not making its own money, and the Fed is providing all of the money that the economy needs to appear healthy. This is creating a sort of Matrix-like scenario, where all the stock and economic indices look healthy, but it is a facade, and the reality is quite bleak. Indeed, the fact that the economy needs an injection of $500 billion just to get through the end of the year proves that it is on life support.
All indications are that this $500 billion liquidity injection is just a temporary patch for the fundamental problem of the economy not making enough money to sustain stock and asset prices at current levels. The belief is that the Fed will tide over banks and corporations and eventually the economy will improve and produce its own money, but this theory has proven itself to be wrong over the last decade.
It seems clear that the Fed will continue printing money to keep the economy propped up no matter how much it takes. The question is, how long until the real economy gets so weak that the stock market crashes despite this continuous injection of capital from the Fed — and how long until the USD is significantly devalued from all the money printing? Only time will tell.
Even though Bitcoin (BTC) is having a rough end of year so far, the conditions for a Bitcoin (BTC) rally are ripening since Bitcoin (BTC) can act as a safe haven during fiat inflation and a stock market collapse. It may be a matter of when not if the stock market will crash, considering how the economy is requiring nearly $850 billion of life support to just make it through half a year.