Reverse Repurchase Transactions to Smooth Normalization

Risk Minus Reward

If we are operating with a “new normal” then what can we expect normal to be?

It’s a real brain bender!

“Normalization” has to do with the expected risk of repossession (the fully assumed risk of loss). The Fed uses the repo-rate to stabilize bank reserves, and Yellen says the Fed will be using reverse-repurchase operations to stabilize the possibility of illiquidity (like the crisis proportion I’ve been telling you about, bubbling in the bond market).

The reverse-repo rate is a mechanical tool. When understanding the mechanics of, for example, probable repossession of your home, the reverse-repurchase operation is probably the last thing you consider but, without it, overnight illiquidity can suddenly put everything, including you, into default.

The default rate is the rate of probable repossession on demand. In other words, without mechanical manipulation of capital reserves to engineer the probable occurrence of the risk, it would “normally” happen by default.

If we let normal happen by default, like before we had monetarism, big banks force the big risk, forcing people to sell short their equity interest so that its value is less than the credit that supports it, which is the collateral obligated to pay the debt on demand. This all looks spontaneously accidental, and the emergent property is monetarism to control the risk, but no, while it may be spontaneous (referred to in a margin contract as “unanticipated triggers) it is not at all accidental! It is intended (organized) to do harm (induce the fully assumed risk of loss) without any liability, which according to conservatives is perfectly normal.

The Fed’s FOMC decided to raise the interest rate. Normally, that would make equities move down. Equities moved up because (like I’ve been telling you for many years now) the wealth under management is so consolidated that the higher risk normally associated with owning equities is abnormally low and the reward is unnaturally high (unnatural meaning that it will be corrected–a distribution will occur–one way or another, on demand). The result, using the tools of monetarism, is “risk minus reward”–which means (occupying space over time) you get stuck with increasing risk minus the reward.

Gaining reward without risk is quite unnatural. Capitalists know it very well, and the political consequences of doing that on a normal basis is, to quote Donald Trump, HUGE!

The best thing you can do for yourself now, quite naturally (and capitalists know it very well), is to be sure and vote for Bernie Sanders!

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About griffithlighton

musician-composer, artist, writer, philosopher and political economist (M.A.)
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