What has happened with the FED, money printing and debt creation? (2025/01/07)

What has happened with the FED, money printing and debt creation?

2025-01-07 19:21:00 +07:00 by Mark Smith

Fatastic segment at the start of the latest TFTC episode where Parker Lewis goes into the high level of what has happened with the FED, money printing and the debt creation [05:54]. I’ve transcribed the main points here, and added a few notes and questions:

2007: $53 trillion dollar denominated debt system wide, only $900 billion dollars base money in existence. That’s approx 50:1 ratio. With only $350-400 billion actually in the banks.
Banks are the source of leverage. That $400 billion is essentially the money available to the banking system. So the banking system can be thought of as being leveraged approx 150:1.
MS - liquidity ratio $400 / $900 ie 45% of system total
After financial crisis, FED increases base money by $3.6 trillion over 3 series of QE. Taking their balance sheet from $900 million to $4.5 trillion.
Then between 2007-2019 started taking certain of those reserves out. $700-800 billion. Which was about 33% of the liquidity from the banks.
MS - liquidity ratio $2.4 trillion out of $4.5 trillion i.e 55% of system total
2019 September - repo crisis when overnight lending rates went from 2% to 10%. That was the inception, right before COVID, of the wave of money printing that happened between 2020 and 2022, where the FED created $5 trillion over the COVID lock down. But the liquidity crisis had actually started before the lockdown.
So the FED went from $4ish trillion pre-COVID to $9ish trillion post COVID
MS - assuming similar liquidity ratio as before that’s approx $4.5 trillion out of $9 trillion i.e ~50% of system total
Then spring 2023 - the wave of bank crisis happened, a liquidity crisis, which is a credit crisis. Silicon Valley bank, First Republic, Signature, Silvergate. All for different reasons.
The FED then created their BTFP program to lend to banks at par even if treasuries that banks held were underwater. So that’s when they began to put a bit of money back in the system, 16 years after starting to slowly withdraw from the system.
MS - how much did they put back in??
But since the bank crisis was quelled, they then began taking money out of the system again.
From the post covid peak of $9 trillion, now there is approx $7 trillion. i.e they took out $2 trillion from the system from 2022 until today.
MS - there was $4.5 trillion available, they took out $2 trillion, that leaves $2.5 trillion. So $2.5 trillion minus the BTFP amount is what is left??
MS - how long will that last? Well previously $4.5 trillion lasted 12 years. Based on that $2.5 would last about 6 years, but you have to subtract the BTFP amount. Say it was 1.5 trillion, then it’s about 2-3 years. So next crisis will happen before 2027.
MS - BUT actually current debt interest repayment is around $1.5 trillion per year, so actually you probably only have 1 year till next crisis. i.e there will be a print before 2026
The reason they have the liquidity crisis / credit crisis is because as they were taking dollars out, and there were fewer dollars available relative to the same amount of debt, and people figured out what they were doing and started running for the exits.
It’s essentially re-leveraging the entire system. QE first quells the credit / illiquidity crisis, by providing more liquidity, but it’s also designed to induce the actual expansion of credit.
The system sits today at $105 trillion. That’s system wide, federal, state, local, corporate debt, financial, non-financial, consumer debt, auto loans, mortgages, student loans, credit card debt. All of that is $101.5 trillion.
So from pre-COVID, $52 trillion, the system has doubled in size. It’s induced by the creation of money.
$101.5 trillion of debt, $7 trillion of actual base money.
Even though the FED went from $9 to $7 trillion, the debt hasn’t gone away, it’s continuing to expand, with the government running $2 trillion dollar deficits plus.
As they take the money out, $9 to $7, there are not only fewer dollars that are being competed for, not just by the debt that exists, but everyone in the economy. From debt to dollars it’s functionally re-leveraging the system, 100/9 vs 100/7
That’s a significant re-leveraging of the system
The way to think about it: the only thing that can influence the supply side of dollar interest rates, is the supply of dollars. And the FED controls that. So even if they are reducing the overnight rates, they are still taking money out of the system. Reserves provided by the FED are still declining and that, more than anything, is driving interest rates higher across the board.
There are fewer dollars competing for more and more dollar debt, and the competition for those dollars becomes zero sum, which influences interest rates.
Whatever the Trump administration can do on the margin pales in comparison to what the FED is doing.
The FED are likely focusing on inflation and all the other metrics and they aren’t focusing on the re-leveraging of the financial system and the next liquidity crisis that it will inevitably cause, which will induce the need to print even more money to quell another credit collapse.
The system has moved from 11:1 leveraged to 15:1 leveraged

Parker Lewis [13:57]: "What’s impossible to predict is when and where. What’s possible to predict is the inevitability of there being a liquidity crisis if you are taking dollars out of the system and putting them into a black hole while this mestasticized credit system remains there and ever growing.

MS - How is bitcoin managing to keep to a 4 year cycle if the total system refinancing time is shrinking? Did the BTFP program just prop up the BTC 4 year cycle?
MS - what will happen if there is no new BTFP program? Printing will have to start by 2027?
MS - how much of a print can safely make it’s way into Bitcoin?
MS - isn’t it the case that the more money goes into Bitcoin, the tighter the system gets? Isn’t Bitcoin basically a giant pressure cooker lid, turning the entire world financial system into a pressure cooker? There will be less wiggle room for everyone.
MS - is this even a game one wants to win? Isn’t this a case where winning is actually loosing?

The whole episode is worth listening to, lots of interesting angles discussed. There’s a whole bit where they go through possible scenarios where the US moves to using Bitcoin instead of treasuries. The game theory is very interesting indeed, because what would other countries do that already hold US treasuries?

I wonder if there might ever be a world wide run onto Bitcoin. A tipping point where literally everyone, governments, organisations and individuals scramble to get all their net worth moved into Bitcoin before all the fiat currencies lose their value.

Also at what point will goods start to be priced in Bitcoin?

How does price discovery even work in a Bitcoin world? #