The Thing About Reverse Repos

1 Min Read
267 words

You might have seen some headlines about the reverse repo market lately.

It sounds like financial techno-babble, and it is, but it's kind of a big deal.

The Fed makes swap arrangements with its member banks. Usually these take the form of repurchase agreements (repos) where the bank "sells" some of its assets to the feds so they can get more cash on the books at the close of business. In the morning they "buy" the assets back and pay a tiny, tiny bit of interest. It's in quotes because nothing actually changes hands.

So at the close, they have more cash and all looks good.

But now the banks are using the reverse repo market to the tune of 800 billion a day. This is the reverse of the above situation. The banks have too much cash and not enough assets. So they "buy" assets from the Fed and reduce their cash balances overnight.

This is the result of the absolute flood of dollars that have been printed over the past 18 months or so. Banks are saying they literally have too much money. When you deposit money into a bank account, you are lending that money to the bank. That loan (your account balance) is an asset for you and a liability for the bank.

So the banks are signaling they have too many liabilities and not enough assets by about 800 billion dollars.

Remember when 700 billion was "a very big number?"

Anyhoo, we're due for another banking system blow up in about 3 months.

Have fun with that!

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