The Grim Repo

America’s massive debt is causing weird problems in the financial markets.

Nobody seems to care about America’s massive debt anymore. Global debt has reached “mind-boggling” levels, according to the Institute of International Finance. Yet America is set to continue borrowing $1 trillion a year.

This kind of massive borrowing has massive consequences—but those consequences aren’t immediate, so we ignore them.

But now, this borrowing seems to be affecting the financial system in an obscure but critical part of the infrastructure called the “repo market.”

Banks need quick loans all the time. The repo market, or repurchase market, provides short-term cash. It’s basically a pawnbroker for banks. The bank in need of cash sells an asset—usually Treasury bonds—with an agreement to buy it back, with interest, soon afterward. Generally, over $1 trillion is loaned this way overnight every day.

The last time there were problems in the repo market was in 2008. Lending banks feared the borrowers would not be able to pay them back. They also feared the assets they were being sold were not as valuable as advertised. Banks stopped lending to each other, and the situation became very dangerous very quickly.

In September, the repo market was back in trouble, which is odd.

Unemployment is at record lows. The stock market is at record highs. Why is one indicator of a financial crash flashing bright red while all the other lights are green?

Since September, the Federal Reserve has had to step in and fix the repo market. It is now loaning out the money that other banks won’t. The Fed has spent around $300 billion since September—though not all of that is on the repo market. On Monday, it injected $86.4 billion in a single day. The Financial Times wrote, “The Fed has been flooding the system with cash in the form of short-term loans.”

Why has the repo market stopped working? Bloomberg wrote, “Plenty of factors helped cause liquidity to dry up, but one that’s getting more attention is concern that dealers are starting to choke on Treasuries as the U.S. government goes deeper into the red.”

“Simply put,” it wrote, “there was too much new debt flooding the financial system and not enough money, causing lenders to jack up repo rates.” The big banks were so busy lending money to the U.S. government, they didn’t have enough to lend anyone else.

“[T]he mid-September repo upheaval is a clear sign there might actually be limits on just how much debt the U.S. can take before triggering more frequent disruptions,” wrote Bloomberg. “Deficits aren’t exactly new, but they do add up. Since the crisis, the market for Treasury debt has roughly tripled in size.”

There are other factors at play. The September crunch came when firms needed a lot of cash to pay their tax bills. Rules introduced since the 2008 financial crisis, forcing banks to keep a certain amount of cash on hand, also played a significant role. But the massive debt is certainly an important factor.

Since the financial crisis, the Federal Reserve has been creating money and using it buy up U.S. debt. It became one of the biggest, if not the biggest, buyer of U.S. debt. It began winding that down in 2017, and now, just two years later, problems are emerging. With the Fed propping up the repo market, it is essentially back in the business of creating money and lending it to the U.S. government—but in a more roundabout way.

None of this means the U.S. is going to go bust tomorrow. But it is some of the first concrete signs that our deep-seated addiction to debt is causing major structural problems. The Fed will compensate, for now, by basically printing more money and loaning it out themselves. Managing the repo rate will soon become the new normal.

But that’s not sustainable. More and more structural problems will crop up. The Fed will fix one after another. It may succeed at first. But even it can’t stop the crash that will inevitably come from an economy that borrows $1 trillion a year even when times are good.

That this is unsustainable should be common sense. But we can’t seem to stop the crash everyone sees coming.

It’s a collapse we’ve been warning about for years. Herbert W. Armstrong wrote in 1984 that a banking collapse in the United States would have major consequences abroad, as well as at home. It “could suddenly result in triggering European nations to unite as a new world power, larger than either the Soviet Union or the U.S.” (co-worker letter, July 22, 1984).

The book of Revelation prophesies of a sudden revival of a power in Europe that is hostile to the U.S. Revelation 18 describes the vast wealth its merchants acquire—they take over the global trading system. The implosion of America’s financial system could easily pave the way for this economic revolution.

The Bible also confirms that our financial practices are unstainable. Psalm 37:21 says, “The wicked borrows, and cannot pay back, but the righteous is generous and gives” (Revised Standard Version). Borrowing money like this is “wicked” behavior—it never ends well.

The Bible also forecasts a real solution. It’s not just a tweaking of interest rates. The smartest men in finance haven’t been able to come up with a working solution within our current system. It needs something entirely new. Soon, God will establish a fair, stable, prosperous financial system on Earth. Man’s system will end in chaos. And that chaos will herald the imminent arrival of the wonderful World Tomorrow. You can learn more about this great hope in our free booklet The Wonderful World Tomorrow—What It Will Be Like, by Herbert W. Armstrong.