The Panic of 2020

The Panic of 2020 is not the virus panic. It’s the financial panic that is now about 17 trading days old. An early sign of the impending panic was the repo market explosion on Sept. 17, 2019 when the repo rate jumped from 2% to 10%. This was a scramble for cash and short-term liquidity.

This itself was amazing given the huge outstanding bank reserves, but banks were unwilling to lend them except at high rates. The Federal Reserve (FED) wouldn’t stand for a 10% market-determined rate because it would cause a panic as high interest rates brought on a depression. A free market was the last thing the FED could countenance. The FED began to inflate right away, but it didn’t resolve the problem.

Financial markets are experiencing an old-fashioned panic, like those of 1819, 1837, 1857, 1873, 1893, 1907, and 1929. Our most recent panic was in 2008-2009, resulting in a serious recession. There is a 3 in 4 chance that we are now in or will shortly be in a recession or depression.

A panic is a credit squeeze. It’s a time when a wide range of companies, financial and non-financial, have a hard time rolling over their short-term debts; or else they foresee a sharp rise in their need for liquidity but are unable to obtain short-term funds without paying sharply higher rates of interest. The sharp decline in stock prices is reducing prices from inflated pre-panic levels that reflected absurdly low risk premiums brought about by FED easy money policies. There has also been an oil price shock that has promptly and sharply reduced prices of stocks in the energy sector.

This is a worldwide panic. Expect there to be a major failure of a large bank like Deutsche Bank, or else a number of other failures of financial concerns, all to be papered over by FED and government actions.

Trump funny money (Trump Chex) won’t stop a financial panic like this because its sources are excessive and mis-allocated debt combined with inflated asset prices.

The Panic of 2020 has as its main cause the FED’s absurd easy money policies that began in September of 2008. This has had the eventual paradoxical effect of causing a scramble for liquidity. This can happen in several ways for different panic cases. The Panic of 2020 occurred when risk premiums declined to absurdly low levels. Stock markets ignored risks and bid prices to excessively high levels.

In panics, there are always one or more triggers that cause people to realize that risks that were previously ignored are, in fact, present and/or actually occurring. A major bank may fail. A major brokerage house may fail. An illness occurs that reveals fragile supply chains. A war breaks out. A short-term interest rate suddenly rises. At such points, the inflated system of prices collapses. Collateral values decline, and some players need immediate cash if they are not to fail. Lenders re-assess potential borrowers. Counterparty risk in options markets rises sharply. A panic ensues marked by a heightened demand for cash bumping up against a reduced supply.

In our system, the FED is forced into liquifying loans in order to avoid complete collapse. Alternatively, the government (meaning taxpayers) has to guarantee (or insure) these credits. Complete collapse is, however, the only remedy that allows for placing the system on an even keel of quick recovery. The FED and government cause a longer period of depression and slow recovery; they perpetuate companies and methods that should be eliminated; they cause the problems to fester and compound into even larger problems.

The FED and the government will now attempt to stem the Panic using methods similar to those they deployed in 2008 and 2009. These methods all involve greater issuance of debt by the FED and the U.S. government. They have their limits, which are not mathematically identifiable, but when breached will nonetheless produce extremely dire results.

In the 2008 case, the results of the rescue efforts were an anemic and slow recovery, higher inflation and steadily higher national debt, even after the recession was declared over. The main result, now evident, was an inflation in asset prices that has led to the Panic of 2020 and another recession.

These short-term fixes merely take us from one crisis to the next worse crisis. They do not provide any kind of true remedies. True reform of any kind or stripe has been notably absent. The campaigners on the Democratic side think even more government fixes and intrusions are the order of the day. They are clueless about the severe underlying system problems. Republicans are the same. Our dominant politicians are all do-nothings; or what is worse, they focus on non-essential tinkering or do something that makes matters worse. Trump has at least realized that we needed a huge dose of de-regulation, but he is only one man. Furthermore, he is an inflationist who thinks 0% interest rates and overpriced securities are just dandy.

The country desperately needs to place our currency and monetary system on a sound basis. It desperately needs to get the government out of most of its activities, both foreign and domestic. These are the true reforms we need.

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