One trillion dollar reason, please pay close attention to this report from US Treasury Secretary Yellen

There is one trillion ()reasons why the U.S. economy is likely to remain strong before the election: From now until the election day, Yellen may release nearly $1 trillion in liquidity to the market and the U.S. economy through the Treasury General Account (TGA).

Next, the author will introduce in detail the operating mechanism of TGA water release and its impact on the market. But first, it’s necessary to take a step back:Clarify the operations of various monetary policiessuch as quantitative easing (QE), quantitative tightening (QT), fiscal deficit, reverse repurchase agreement (RRP), and TGA water storage/release, etc. Understanding these operations will create significant advantages for macro investors in the next decade. .

Nominal income grew at a rate of 6% and stabilized at about 2%. The labor market remains solid,No clear signs of widespread economic weakness.

Facing one of the most aggressive interest rate hike cycles in history,The federal funds rate has remained at5%Above for nearly a year and counting.how should we understand this phenomenon?

The answer lies in private sector balance sheets and fiscal stimulus.

Typically, higher interest rates slow economic growth: Businesses and households face higher debt-servicing costs and have to cut capital spending, hiring and spending to allocate more resources to the debt burden. Less spending means the economy is slowing. In other words, high interest rates tend to have a negative impact on the liability side of the private sector’s balance sheet.

However, things may be different this time and the private sector may be affected by high interest rates for longer,On the contrary, the opposite situation occurs.

household balance sheet

Let’s look at a simplified household balance sheet: the assets side includes bank deposits, stocks, and short-term Treasury bills, and the liabilities side is a loan or mortgage plus net worth (equity).

What changes have occurred recently?

1.continued fiscal stimulus: Subsidies and tax cuts boost private sector net worth;

2.High interest rates bring additional income: Households and businesses can benefit from high interest rates by investing their funds in short-term Treasury bonds with a 5% yield;

3.High interest rates have not yet affected debt service burdens: If households have 30-year fixed mortgages and businesses have longer-term debt, then a federal funds rate of 5% isn’t that scary.

currentU.S. private sector debt service ratio(Debt Service Ratio)As shown in the chart below: Although it is rising, it is rising at a slower pace compared to the Federal Reserve’s rapid and intense rate hike cycle.

U.S. private sector debt service ratio

The main reasons for this slow conduction are:

A) Long-term mortgages and corporate borrowing have kept households and businesses from facing a massive refinancing cliff so far;

B) The low proportion of floating-rate mortgages and corporate loans limits the transmission effect of rising federal funds rates on debt costs.

If the private sector is temporarily insulated from high borrowing costs while enjoying the benefits of high interest rates and continued fiscal stimulus, is it not fair to say that high interest rates are stimulative?

This type of very “creative” argument usually appears when the market and economy reach local highs. For example, the term “soft landing” was popular in the second half of 2007, and in October 2023, the 10-year U.S. Treasury yield reached At 5%, CNBC even launched a special program to discuss why the yield will rise to 13%.

However, given the private sector balance sheet coupled with the effects of fiscal policy mentioned above, this argument is hardly unreasonable. In particular, while you can argue that sooner or later the refinancing cliff will start to take effect and the cost of servicing the debt will eventually increase, it’s hard to argue against the argument that fiscal policy has been generous.

This is why today I thinkThere’s a trillion (dollar) reason why this economic and market pattern could persist six months after the U.S. election.

American TGAAccount balance trends

In the next six months, massive liquidity may be injected into the market and economy (again)!

How to achieve?

The way is to let Yellen pass TGARelease water.

TGA can be understood as a checking account opened by the U.S. government at its bank, the Federal Reserve. Whenever the U.S. government accumulates excess funds through taxes or bond issuance that are not immediately intended for spending, it deposits them into the TGA account at the Federal Reserve.

As can be seen from the chart above, TGA usually remains between US$250 billion and US$350 billion, occasionally increasing to US$1 trillion before returning to normal size. With the end of the current tax season, TGA funds in Yellen’s hands will be close to US$1 trillion, which is a quite high level, so we have reason to expect that Yellen will release money through TGA.

also,Bill to suspend U.S. debt ceiling only lasts until2024end of yearby then the United States will have “nowhere” to issue new debt, and the only way to support spending is to use funds from the TGA.This promotesTGAReleasing water provides excellent political cover.

So, why is TGA’s release of water so important to the market and the U.S. economy?

This is because TGA releases water likePutting new money into the economy(similar to deficit spending), whileInjecting new liquidity into the interbank system(Similar to QE).

Borrowing slides from TMC’s Money Mechanisms course, we can follow the entire process step by step:

TGAimportance of

1.first step: The government releases money through the TGA account at the Federal Reserve. Although its own position is reduced, it injects this fresh money into the real economy (= household net worth increases);

2.Step 2: Households hold more bank deposits, and these deposits eventually flow into the banking system, leading to an increase in bank reserves; a decrease in TGA on the Fed’s balance sheet is perfectly offset by an increase in reserves (= rising interbank liquidity).

Do you now understand the power of this combination of monetary mechanisms?

The United States will achieve real GDP growth of 2%+ and core inflation of 3%.Create real economic currency and financial currency at the same time.

But what happens when fuel is added to the fire?

Conclusion

The U.S. economy is still growing at a solid nominal rate becausePrivate sector temporarily shielded from high borrowing costswhile enjoying the benefits of high interest rates and continued fiscal stimulus.

“temporary” is the key word, because once the refinancing cliff appears, the negative effects of high borrowing costs will eventually appear.

But Yellen may be planning to pass TGARelease water and inject nearly 1 billion yuan into the market and real economyTrillions of dollars in liquidity and stimulus, delaying this “temporary” window until after the election!

therefore,Please pay close attention4Quarterly refinancing announcement at the end of the monthto learn about Yellen’s next move.

This is a clear example of how mastering various monetary policy operating principles such as QE, QT, fiscal deficit, RRP, and TGA water storage/release can help macro investors gain significant advantages in the next decade.

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