Much of the western world has been under some type of control of what some have called a bio-security state since late February of 2020. Many pundits, public health officials and politicians have been speaking non-stop about the dangers of SARS-COV-2 and proposing mandate after mandate to ‘control the spread’. The focus on this ‘what’ has led to thousands of hypotheses about the ‘why’ of the C19 response. One possible unexamined reason for the overreaction and singular focus by government on non-pharmaceutical interventions may have something to do with an event that took place in September 2019. An early warning, if you will, that major economies were on dangerous footing and could use a boost. That event was a liquidity freeze in the global repo market.
For context, let’s take a high level look at what the global repo market is. Short for repurchase agreements, the repo market is where firms trade trillions of dollars’ worth of debt for cash. It’s a two-way market where one firm sells securities to an another and agrees to purchase them back at a higher price in the future, typically overnight. The difference between these prices is the ‘repo rate’.
On September 17th, 2019 the repo rate soared to 10%. Why was this a problem? Well, the federal funds rate at the time was 2-2.25%. Essentially, this market had seized. No one was willing to part with their cash for these securities. There have been lots of reasons put forward for this sudden spike in rates, some with merit and some without. Ultimately, the interest rate is a price and it responded, as all prices do to supply and demand forces. There was simply high demand for cash and very little demand for the securities being offered. A healthy economy isn’t usually where you’ll find a large institutional desire to horde or demand massive amounts of cash.
So how could this relate to government C19 responses? One can speculate. The ability to protect the repo rate and to keep the cash flowing might have been much more challenging in a non-emergency environment. The public would not easily be taken down the path of another set of 2008 type bailouts, but central bankers had a mess to clean up, nonetheless. On that first night the Federal Reserve Bank injected $125 Billion into the repo market and the fun has never stopped. October saw $278 Billion more and ongoing injections have occurred ever since. In fact, most major central banks joined the party and have been injecting liquidity throughout the entire C19 response period. The price inflation we see today is a direct result of this priming of the pump. So did SARS-COV-2, an otherwise unremarkable event, provide cover for a clandestine rescue of the G7 economies? I posit the initial responses may have been connected but once that ball was rolling, the usual governmental hubris, misaligned incentives and power lust took over. The post pandemic responses by central banks and government fiscal policy will be telling in the months and years to come.
