If you thought the repo market was insane, you need to sit down and buckle up because it is properly stiff drink time. That is for sure. Stock market + economy+ election?
I will reveal the secret government plan to create a stock market hyper bubble right before the elections.
In this article, I'll explain how the TGA use to work before the global financial crisis and how it works today, the relation between the economy, the TGA, and the stock market, and finally, what I think the election endgame will be like.
The Treasury General Account Before And After 2008
The TGA, the Treasury General Account, prior to 2008, used to be in the commercial banking system. For this example, we'll say the government has its TGA with Bank A, as you can see on the whiteboard.
When the government needs to spend some money the issue treasuries at auction. That goes into the treasury market and everyday people, financial institutions, and hedge funds buy those treasuries.
On the right side of the board, you can see your drunk insolvent Uncle Sam is needing to spend money. So he sells those treasuries and your friend and family member Fred, and a new guy with the HF hat, Hedge Fund Hank, buy the treasuries from Sam.
Those treasuries come down and go into Fred and Hank's balance sheet. Fred and Hank pay Sam some money and that money goes into the TGA.
Let's assume for this example, that the government has its account with Bank A. Fred has his account with Bank B, and Hank has his account with Bank C.
Let's go through the balance sheets to see how this transaction happened.
What happened to the bank's and the Fed's balance sheets?
Because remember all of the dealer banks and the banks under the Fed's umbrella have their reserve accounts held with the Fed. It's very important you understand that.
Let's say the TGA started with $100 in the bank, their checking account would have $1000 and Bank A would have $100 in reserves.
Fred started with $50 in the bank so he has $50 of deposits and $50 in reserves. Hedge Fund Hank started with $150 in deposits, therefore, the bank had $150 in reserves.
Remember they bought treasuries so Fred and Hank had to take money out of their deposits, out of their checking accounts.
Once the transaction was finished, the Treasury General Account had $150 in it. $150 in deposits and $150 in reserves. We'll just assume that Fred and Hank both bought $25 worth of treasuries.
Let me explain this again so we are on the same page. Fred and Hank, each one of them, spend $25 in treasuries.
That means the TGA goes to $150 because they now have an extra $50 in cash. What happens is the deposit, the checking account, for Fred as well as for hank goes down by $25.
But, what happened in this process with the reserves held at the Fed?
Absolutely nothing. In the beginning, there were $300 in reserves. $100, $50 and $150 equaling $300.
When we finished the transaction, meaning after Fred and Hank bought the treasuries from your drunk insolvent Uncle Sam, there were still $300 in reserves held at the Fed.
Because the reserves in total didn't change, they just switched hands.
Looking at the reserve accounts with these banks held at the Fed, they started with $100, $50, and $150. That matches up the reserves.
You'll have to forgive me for just a moment because I drew them blue just to show that they are assets, but on the left side, I drew them in red.
I know it gets a little confusing but I did them red because it's a liability of the fed. The reserves that you see in blue are the same reserves you see in red on the whiteboard.
Going back, Bank A started having $100, Bank B had $50, and Bank C had $150.$300 in total. Then, after the transaction, A had $150 in reserves, B had $25, C had $125. Again, it equals $300.
The main key for this part is to understand that regardless of what happens in the commercial banking system, transactions between each entity doesn't affect the amount of reserves held at the Fed.
They just change hands and go from one account to another.
One more thing I'd like to point out is when I'm talking about transactions between the entities and the real economy with the commercial banking system, I'm not only talking about transactions like buying treasuries.
I also mean when people like Hedge Fund Hank and your friend and family member Fred pay their taxes, the exact same process happens.
The deposits with B and C go down, and prior to 2008, the deposits of A would go up because that's where the TGA was, but the reserves don't change at all.
Now, going over to what happened after 2008…
This is where it starts to get really interesting. To find out, and take a deeper dive into what happened during the GFC, let's go right to the New York Fed's website. This is from a press release they published in April 2012. You can read the full document here.
When the Fed's credit policies caused its balance sheet to expand rapidly in September, 2008…
Meaning there were way too many reserves in the system because the Fed started printing all of this funny money during the GFC.
…The treasury took the first of two steps to offset the effects…
Meaning the treasury was helping the Fed by draining some of the excess liquidity from the system. If it doesn't make sense right now, don't worry about it. I'm going to explain it in more detail on the whiteboard in just a moment.
Specifically, it launched the Supplementary Financing Program, SFP, a sale of treasury bills to the public and deposited the proceeds in a new SFP account at the Fed.
In other words, it took the money from the sale of the treasury bills, and instead of depositing it in the commercial banking system, they now deposited it with a TGA set up with the Federal Reserve.
The SFP was designed to drain some of the reserves that the Fed's liquidity programs were creating and to prevent the federal funds rate from plummeting.
So, basically, what happened in 2008 is the treasury moved their Bank Account from the commercial banking system over to the Fed to help them manage the excess reserves the Fed created by printing funny money for bailouts and quantitative easing.
Now the TGA isn't with Bank A, they're with the Fed under their umbrella.
What does this do to the reserves in the system?
Remember the original example, where Hank and Fred are buying $50 worth of treasuries from your drunk insolvent Uncle Sam, in other words, the government or the treasury.
So, the system starts with $300 in the system, there is still $300, but now since the TGA is removed from the commercial banking system, there's only $200 in bank reserves.
Because there are $100 with the TGA, $50 with Bank B, and $150 with Bank C.
The big change and what happened was the treasury had a lot of control over the amount of reserves in the banking system.
Let me explain the transaction. It starts with $200 in bank reserves in the system that the banks have access to.
Then if the government sells $50 worth of treasuries, the reserves in the banking system go down by $50 because the $50 go over to the TGA account. Which, again, is now removed from the commercial banking system.
The opposite happens if the treasury spends money on the economy.
When they sell debt or sell treasuries, they're taking reserves out of the system. When they spend money on the economy, they're creating more reserves in the system.
You may be saying to yourself, “George, if the treasury has the ability to make the bank reserves in the system go up and down like that, it sounds a lot like what the Fed does with quantitative easing and quantitative tightening.”
Exactly. You're starting to put the pieces of the puzzle together.
The TGA, The Economy, And The Stock Market
Let's check out how a chart of what the TGA looks like right now. I drew it on my board and it starts in the year 2000 and goes all the way to 2020.
If you look at the complete chart you'll notice it goes all the way back to 1988, but prior to 2000 it's a flat line, it doesn't do anything.
As a matter of fact, prior to 2008, it stayed the same. But then, in 2008, everything changed. That's when their account went to the Fed and you notice it starts going up and down.
It doesn't look like much on the chart but that's because this chart goes from zero all the way up to $1.6 trillion.
But if you looked at the chart just as of maybe 30 or 60 days ago, all the moves would have seen really significant because the chart only went from zero to about 600 billion. Everything has changed now.
Once Trump got elected in 2016, notice the TGA started to go up, and then it came crashing all the way down.
Again, it doesn't seem like a lot on this chart, but it was huge at the time because the TGA was over $400 billion.
So they would have had spent $300 billion into the economy in a matter of just a couple of weeks! Keep in mind that quantitative easing, QE3 was about $80 billion a month.
That would have been like three or four QEs all at one time. It makes you wonder if Trump didn't find out about the TGA right around the peak in 2017.
Look at the chart again, after 2016 it went down, then it came back up during the repo crisis in September 2019.
But since we've had the coronavirus and the Fed is coming with all of the four and five letter programs to add more liquidity to the system, QE infinity, the TGA has gone through the roof. It's almost at $1.6 trillion right now.
Think about how massive that number is compared to what it was before 2008. If you look at this chart, you'll see the Treasury General generally fluctuated between maybe $2 and $5 billion.
Now it's almost $1.6 trillion, and let's remember quantitative easing is increasing the number of bank reserves in the system. That's the net effect.
When the TGA spends money they're also increasing bank reserves. This is another form of quantitative easing.
When the TGA doesn't spend, when they allow their account to continue to grow and collect money, this reduces the number of bank reserves in the system, or it's just like the Fed doing quantitative tightening.
Now let's take it to the next step.
We know that quantitative easing has the tendency to increase stock prices. They don't have to go up. I want to be clear. It just has a tendency to raise stock prices.
A lot of people get that mixed up. They think that if the Fed does QE and increases bank reserves, the stock market automatically goes up, meaning it's like a light switch.
Not necessarily because the primary dealer banks still have to take action.
If there're more reserves in the system, they'll have more capacity on their balance sheet or more flexibility and freedom to loan money to hedge funds and financial institutions.
Those institutions will take the money and buy stocks, lifting the value of the overall stock market or whichever stocks they're actually buying.
Just to reiterate, the Fed doesn't have complete control over the stock market going up or down. It's really in the hands of the primary dealer banks, the hedge funds and the financial institutions.
If they don't think they can make money buying stocks, they're not going to do it regardless of how many bank reserves they have in the system.
But, from a psychological standpoint, all of the market participants believe there's a Fed put, and it's a very weird cycle.
It's like a self-fulfilling prophecy that just because the entities think the Fed has their back, the Fed has their back just because whenever they do something, these people actually take action.
It's like a Pavlovian dog effect that whenever you ring the bell, they start to salivate. It's the same thing with the Fed.
Whenever the Fed does QE, the banks, the primary dealers, the hedge funds, financial institutions buy stocks.
It's again, a very weird system, and that's why I said at the beginning of the article, you have to buckle up for this one, it's definitely a stiff drink time.
The next question becomes…
If the TGA has gone buzz lightyear to infinity and beyond, just off the charts, why haven't stocks gone down?
Why haven't the excess reserves in the banking system gone down?
Because when the TGA doesn't spend, their bank account goes up and up, but that sucks reserves out of the system.
Here is the chart of the excess reserves in the system right now.
You'll see it goes parabolic as well. The same thing for the Fed's balance sheet and the M2 money supply in the real economy.
The treasury sits back and says, listen, “If the Fed is going to produce excess bank reserves and prevent the stock market from going down, then why don't we collect money and just build this war chest. This massive bazooka of trillions of dollars that we can spend into the economy at any time we choose. We know if we spend this into the economy that it'll most likely boost the economy through all this direct spending.”
Think about the stimulus checks and the increased unemployment that have gone out to all these Americans. They're spending it with a lot of velocity and increasing economic activity.
This could be a $1.6 trillion stimulus package, right before the election.
To understand this further, and just to make sure you know, that I'm not the only guy with a tinfoil hat here, look at the transcript of a recent interview I did with my buddy, Luke Groman.
Luke Groman: If you've watched what the Treasury General Account has done while the Fed has been pumping money on one side, treasury has been sucking it out in the same staggering rate really.
The biggest TGA balance we've ever seen, I think it's the $400 or $420 billion, and it's sitting at $1.45 trillion now.
Historically when the TGA and the dollar, the Dixie, have been very closely correlated is because the treasury is pulling liquidity out.
It's been surprising to me. Really on both sides, all this liquidity, the interest rate differential collapse, and the things that we were just talking about ever resulted in a weaker dollar.
Then on the flip side, I've been watching this TGA going up and up. At some point, that's going to reverse.
When it reverses, presumably you'd be increasing the currency in circulation in the US at a 60% annual rate or something crazy.
I wonder if it isn't just being sterilized for the moment by treasury and why treasury is even doing that. I mean, is it the Trump administration basically trying to hedge themselves against the Fed? Are they saying…
“All right, maybe the federal government is trying to make the economy bad and get us out of office so we're going to stock up this war chest of a trillion and a half that we can spend in the economy to turbocharge it in the last three months before the election.”
(End Of Transcript)
If the treasury were to spend all this money prior to the election… Keep in mind, it wouldn't just go into the economy, it would also increase the bank reserves in the system, which would most likely lift the stock market even higher.
We all know right now it's in a huge bubble, if it continues to go higher based on this funny money that the treasury is spending into the account, increasing bank reserves, then we're going straight into a hyper bubble.
Why would the government do this?
Because they want the stock market to go up and they want economic activity to go up right before the election.
I know a lot of you are probably asking” George, how on earth does the treasury account continue to go up and up, when they're doing all of these stimulus programs, the Cares Act, and the deficit spending?”
Because they manage it in a way that's very clever.
They'll have money trickle out in the form of stimulus checks while at the same time, they're collecting taxes and doing these huge auctions where they're issuing a massive amount of treasuries.
Although they have money trickling out, they have a lot more money coming in the form of new treasury issuance and tax collection.
The Election End Game
We know the government has a way to bypass the Fed to spend money into the economy, giving it a short term sugar boost and potentially increasing the stock market to try to win an election, but it doesn't stop there.
As you would imagine, there are huge unintended consequences. Let's dive right into them.
First, you have to understand there is a significant difference between when the Fed does QE and when the government does QE from the Treasury General Account that I mentioned before.
Let's start by understanding how the balance sheets work. That paints a very clear picture.
The Fed starts off with treasuries and mortgage-backed securities, or mortgage-backed sausages, as I call them. They're on the asset side of the balance sheet.
The liabilities are the bank reserves. In the case of bank A, their assets are reserves and treasuries, and in this case, also customer deposits and equity.
When the Fed buys treasuries from the bank, that's their version of quantitative easing, the treasuries go from the bank's balance sheet to the Fed's balance sheet.
The Fed increases the bank reserves for the bank, for whom they bought the treasuries, and it's very simple, the treasuries go from bank A's balance sheet to the Fed's balance sheet. The Fed increases the amount of bank reserves Bank A has.
Look at what this does to bank A's balance sheet.
They start with reserves and treasuries, but after the transaction, they only have reserves because those treasuries went to the Fed's balance sheet, but the deposits and the equity are the exact same.
This is key because the M2 money supply, meaning the amount of money in the real economy, hasn't changed at all. The only thing that's changed is the size of the Fed's balance sheet.
Contrast that to when the government does quantitative easing. They don't buy treasuries or mortgage-backed securities, they'll spend money into the economy.
As an example, they'll send out stimulus checks. Let's say that your friend and family member Fred gets his $1000 stimulus check right from the government.
He is dope as ever so he deposits that $1000 into his bank. Let's say he banks with Bank A as well.
To start, bank A's balance sheet had reserves and treasuries, deposits, and equity, the exact same as our example over the feds side, but after Fred deposits the $1000 stimulus check into his account, the bank's balance sheet increases.
Instead of just having the deposits, equity, reserves and treasuries, now they have an additional $1000 deposit from Fred.
The Fed from the TGA deposits the $1000 of reserves to back up the $1000 deposit into the reserve account of bank A.
Keep in mind, their reserve account is held at the Fed. Let me walk through this one more time to make sure I'm making myself clear.
As the government spends money on the economy, the individuals who received the money deposited into their bank account, and this increases the amount of deposits in the commercial banking system.
At the same time, the treasury just deposits the reserves into the bank's reserve account at the Fed so the balance sheet matches up.
There is an additional $1000 in reserves and additional $1000 in deposits. But the key is in this case M2 money supply has increased.
When the Fed did quantitative easing M2 money supply stayed the same.
What does this mean to the average Joe and Jane out there in the real economy?
It means potentially more demand in the real economy, even if unemployment is going up because the treasury is spending $1.5 into the economy, giving it the short term sugar rush.
Even if unemployment is going up, there could be more money in the back pocket of the average, Joe and Jane. They have more spending power while at the same time, if we look back over the past couple months, we see that supply has shrunk dramatically.
If supply continues to decrease while demand increases, it means the prices of what you buy on a day-to-day basis, such as food at the grocery store will continue to go up.
Everyone, myself included, knows how drastically food prices have gone up over the past couple months. Typically, when food prices go up, it leads to social unrest.
Is there any surprise we've had rioting, looting of Epic magnitudes almost unprecedented over the past three, four weeks?
When you look at how high the price of food has gone, not really. Let's think this through.
If the price of food going up has been one of the main underlying issues of all the social unrest we've seen in the United States, the food prices going up were a result of additional government spending, creating more demand and less supply of goods and services in the economy.
What's going to happen to social unrest, rioting and looting when the treasury spends $1.5 trillion before the election?
That will send consumer prices to unimaginable levels along with social unrest.
I know I said at the beginning of this article, that it's stiff drink time, but now, especially if the treasury tries to do what I think they might try to do to win the election, it goes from stiff drink time to Smith and Wesson time.
George, WOW!! My brain hurts. I think that I am going to have to listen to this 5 or 10 more times before I grasp all of the explanations. At least I understood that food inflation has kicked in – as confirmed by personal observation. What is the government going to spend that $1.6 trillion on between now and election day? Food prices will go to the moon.