BTFP: Buy The F*cking Print
The ongoing, inevitable destruction of fiat money
It doesn’t matter what you call it.
You can call it a bailout or a not-bailout.
You can call it QE or BTFP.
What matters is that, no matter how you slice it, moarrr dollars are now being digitally printed to purchase debt and prop up a global fiat financial system which is living, literally, on borrowed money and time.
WHAT (H
The US and global fiat banking system is fractional reserve, meaning that banks only hold a fraction of deposits in reserve, typically enough to meet deposit outflows, and lend out the rest as productive capital seeking a return.
This isn’t all bad. That’s the whole concept of a fractional reserve bank — take the unproductive capital of savers and put it to productive use in the economy by lending it out to worthy borrowers in need, earning an economic return by doing so.
That borrower in need can be, for example, a home-owner in need of a mortgage or a car loan, or a business in need of debt financing. In 2020-2021, that “borrower in need” was often the U.S. Government (USG), meaning banks took customer’s deposits, which they paid 0% interest on, and bought U.S. treasuries (UST) which paid, call it, 2%.
When banks make these loans to (individuals/corporates/governments), they carry the loans as assets on their balance sheet, while their customer’s deposits are the matching liabilities. The amount that assets exceed liabilities is the banks net equity or book value - a rough guide for what the stock of the bank is worth. If a bank reliably earns more on its assets than it pays on its liabilities over time, the net equity, and stock price, of the bank go up.
But a funny thing happens when the Council of Elders led by Sir Powell decides to hike short-term interest rates by 5% in a year — the market value of all those loans falls drastically. When interest rates go up, the value of outstanding bonds/loans (a bond is just a tradabale loan to a business or government) goes down until a buyer of those bonds can earn the same yield to maturity as they can in buying newly issued debt at current rates. The longer until the bond matures (technically, the higher the duration), the more the market value of the bond is impaired.
Luckily for banks, there are some funky accounting rules that say if a bank classifies its assets (which, again, are loans to various counterparties) as “held to maturity” (HTM), meaning it does not intend to ever sell the assets but rather hold them to maturity, it does not need to mark down the book value of those loans on the balance sheet because of a change in interest rates. Since the assets aren’t marked down, the banks assets continue to appear to be greater than its liabilities and the bank appears to be solvent. It just has unrealized losses.
But if a depositor demands their money back and the bank has to sell some of its assets to raise the cash to give the depositor their money back, it doesn’t matter what the balance sheet says the value of the assets are, it matters what you can actually sell them for. The losses are realized, and the balance sheet is impaired.
If all the depositors ask for their money back at once and the bank has to sell all of its assets to raise the cash to give depositors their money back, there will not be enough money to go around.
This is because in reality, the market value of the banks assets has declined so much that the banks assets no longer exceed its liabilities, and the bank is insolvent.
This is actually okay so long as the bank has ample liquidity - i.e. cash on hand to meet desposit outflows and other working capital needs to run the business.
But when a bank is discovered to be insolvent, uninsured depositors might rightly worry that, in a bank run, they wouldn’t be able to recoup their deposits. So they pull their deposits. Bank has to sell a little bit of assets to meet the desposit outflow, realizing losses and further impairing the balance sheet. Catching wind of potential insolvency on, say, Twitter, other despositors pull their deposits. More losses are realized. Pretty soon, you have a full blown bank run.
Bank runs are as old as fractional reserve banking. But what’s not as old as fractional-reserve banking are 1) social media and 2) digital banking. The combination of a globally connected 24/7/365 world on Twitter and the ability to transfer all of your bank deposits at the click of a mouse — two things that were not really present in 2008, mind you! — means things can unravel faster than ever in our digital age.
This is what happened to Silicon Valley Bank.
It is important to note that this is much different than 2008 in one critical way. In 2008, banks got rekt due to credit risk, i.e. they made bad loans (subprime mortgages) that couldn’t repayed by the borrowers. This time, banks are getting rekt by duration risk. They made loans to the USG, the best credit risk around. But the rise in interest rates caused the market value of their bond portfolios to fall.
“Not-Bailout”
In response to the failure of SVB, the Treasury/Fed/FDIC announced that all depositors (as well as depositors at Signature Bank) would be made whole. This was carefully crafted and worded as a “not-bailout” because the funds to make depositors whole would come out of the FDIC’s Desposit Insurance Fund, which is funded by premiums assessed on all U.S. banks, and any losses incurred by the fund by going beyond the $250k desposit insurance level would similarly be recovered by a special assessment on banks — “no losses will be borne by the taxpayer.”
Make no mistake, the losses will be borne by the taxpayer.
The money that depositors are getting back…that same money is still lent out to counterparties. That same money is still sitting, in this case, at the U.S. Treasury, helping to finance government deficits. The money was simply duplicated, to make sure everyone got the money they thought they were due.
What do you do when the money’s gone? Print the difference.
You think that comes free? No. That’s why your wages aren’t keeping up with inflation. That’s why you graduated with $100,000 in sudent debt. That’s why medical bills bankrupt families and insurance premiums are sky high. That’s why you can’t afford to buy a house in California (because real estate has accrued a monetary premium because the money sucks). That’s why value investors complain that stocks haven’t been fairly valued on a P/E basis for the last decade (because stocks have accrued a monetary premium because the money sucks).
That’s why a fucking Chipotle burrito runs you $15.
Admittedly, the Fed was in a tough spot here.
On the one hand, guaranteeing the deposits of these two banks above and beyond the $250k FDIC insurance limit is an implicit (implicit!) guarantee on all deposits. All desposits total about $18 trillion. The FDIC insurance fund totals $125 billion. That’s 144x leverage for anyone counting at home.
On the other hand, if they hadn’t guaranteed all deposits, all deposits >$250k would have fled small banks for Too Big To Fail banks Monday morning and the entire U.S. regional and community banking sector would have been wiped out. Because who would leave their deposits in an uninsured bank instead of putting them in an insured bank?
On one hand, we probably don’t want a system where depositors have to analyze bank balance sheets, determine their solvency, and treat their deposits as an unsecured loan to their bank.
On the other, fiat money is a bank liability?
But I think the Fed/Treasury/FDIC errored. I think uninsured depositors should have been left holding the bag. The economic loss must be beared, and I’d rather the market decide who bears the loss than the government decide who bears the loss.
“Oh, but the depositors did nothing wrong! They shouldn’t be held responsible.” Yeah, but guess what? When you keep uninsured desposits at a bank, you are an unsecured creditor to that bank. You can not like it. You can think that’s unreasonable. But that’s the way it *is* under the current system and with the current rules.
If we decide we don’t like that, then we need to change the rules.
But in the meantime the game must be played as it is, not as you wish it were.
Alas, these paradoxes are simply symptoms of a failing system.
Where deposits need to be both insured and uninsured.
Where interest rates need to be both high (to bring down inflation) and low (to relieve banking stress).
Where we need both more debt and less debt.
Where we need higher prices every year, but not too much higher prices.
Don’t you see?
Would QE and YCC By Any Other Name Smell As Sweet?
In conjunction with the not-bailout, the Fed announced the creation of a new Bank Term Funding Program (BTFP). This new lending facility will enable banks to lend against the UST and MBS they hold at par for up to one year at the one-year interest rate, currently ~5%.
The ‘at par’ part is critical. What this means is that banks that used their deposits to buy UST in 2020-2021 that got rekt in 2022-2023 due to the rise in rates, can pledge those UST to the Fed as collateral and receive 100 cents on the dollar for them (par) even though the market value might only be 90, 80, 60 cents on the dollar.
The Fed is using their magic wand to erase the losses of the banking sector, which at last count total about $620 billion.
They are attempting to avoid another SVB by providing banks liquidity without being forced to realize the unrealized losses on their balance sheet.
The BFTP also accomplishes two other things in a sneaky, clever manner.
1) They’ve suppressed bond yields by making it so that a large (the largest?) seller of UST no longer has to sell. Had banks been forced to sell UST to raise liquidity, bond yields would have risen as sell pressure = price down = yields up. This is the Fed effectively enacting Yield Curve Control (YCC) without technically having to buy the bonds.
2) By backstopping UST at par, they’ve effectively guaranteed that the US banking sector will remain an insatiable buyer of UST because now, in addition to carrying no credit risk (“backed by the full faith and credit of the USA!”) they also carry no duration risk (risk from a change in interest rates). So of course banks will buy UST - they’re not on the hook if anything goes awry! This is good for the USG, since they needs someone to keep buying their debt and funding their deficits, and foreign governments have been buying less and less.
Now that buyer is US commercial banks, with the explicit backing of the Fed. The Fed might as well be buying UST directly, it’s just inserting commercial banks as a middle man, having them buy UST directly and then giving them cash for them at par.
BTFP *is* debt monetization.
It’s just QE by another name, don’t you see?
BTFP: Buy The Fucking Print
Now, technically, the BTFP is supposed to last only one year and only assets held before 3/12/2023 are eligible to be pledged as collateral.
Bullshit.
This program is never going away, because the problems it “solves” are never going away. In theory, banks that tap facility are supposed to pay their loans back in one year. In practice, this debt is going to grow and get rolled over in perpetuity. I say grow because I also think the BTFP is eventually going to get opened up to new collateral purchased after 3/12/2023. Once the USG taps that money spigot it’s gonna be hard to turn it off!
If you don’t think so, I invite you to short BTC and stocks stay long USD until 3/12/2024 when the “emergency powers” expire.
But, for illustrative purposes, let’s assume that the Fed is true to its word and only assets purchased before 3/12/2023 are eligible collateral in the BTFP. How much are we talking?
(For context, the Fed conducted $4.2 trillion of QE during covid. We’ve instantly, implicitly, just injected more liquidity into the system than we did during covid. It’s not all gonna flow through at once, but the market is forward looking and can see that it’s on the come.)
But remember, when the Fed announced the BTFP the size was only $25 billion. Moreover, the Fed said it “does not anticipate that it will be necessary to draw on these backstop funds.”
lmao. lmfao.
That was on March 12.
By March 16, the BTFP was expected to provide up to $2 trillion in liquidity.
By March 18, it was leaked that U.S. officials were “studying” ways to guarantee all bank deposits, which effectively means guaranteeing all bank collateral at par. Again, that’s $18 trillion.
That’s not all though. We’re going international!
You might have heard about Credit Suisse? That Global Systemically Important Bank (G-SIB) that got acquired by rival UBS over the weekend for $3.2 billion in a shotgun marriage that Swiss regulators had to change the laws to make happen, not allowing for a shareholder vote, because if the deal wasn’t done by Monday morning things were gonna get much worse?
The one that the Swiss National Bank is putting up $280 billion of liquidity to support, equivalent to full third of Switzerland’s GDP?
Well, it turns out foreign banks also hold a lot UST that are underwater. And their depositors also want their money back.
So, on March 19, the Fed opened up swap lines with the central banks of Canada, England, Japan, Europe, and Switzerland, allowing them to access (practically unlimited) U.S. dollars to lend to their commercial banks domestically in a manner much like the BTFP to ease liquidity needs in their respective jurisdictions.
You see, after a year of rate hikes and QT, the world is short of dollars.
When the world is short of dollars, it needs dollars, and to get dollars it must sell assets. When assets get sold, the prices of those assets go down.
But the global fiat financial system consists of a bunch of debt collateralized by those assets. When the value of those assets fall, that debt gets called, and more assets must be sold to repay those debts, sending the prices of assets down even further. This is a credit crisis.
I think there’s a good chance this gets much, much worse for asset prices before it gets better. Idk. Idk what weighs more, the BTFP or the financial gravity of the impending credit crisis. I don’t think the Fed knows. Idk if anyone knows.
So I advise everyone to tread softly and be careful — this is not a time for making money but a time for preserving it.
But if we have a market crash here, I think it will be the greatest head fake of all time.
Because what I think I do know is that, in the end, the Fed will make sure damn sure the liquidity weighs more than the financial gravity of the debt.
As Arthur Hayes brilliantly writes, Kaiseki. Destination known, path unclear.
You see, we simply can’t let asset prices fall too much, or the system unravels as described and that is an unacceptable outcome. Everyone must get the dollars they’re due. So when the world is short of dollars, we simply create more.
Soon, the world will be awash in dollars again.
The can will be kicked.
And when it is — you’re gonna want to Buy The Fucking Print.
