One of the topics I’ve tried to bring to our clients’ attention is the state of liquidity in our monetary system. Simply put, financial institutions like to use U.S. Treasurys as collateral when loaning money to one another, and when the availability of certain Treasurys shrinks, some financial institutions can have a harder time borrowing the cash required to meet short-term funding needs.
Previously, this has been a topic that, perhaps because of its complexity, hasn’t shown up often in financial headlines. But on May 31, 2023, TS Lombard’s chief U.S. economist, Steven Blitz, released a note warning of a “potent liquidity squeeze” ahead, resulting in stories on news outlets like MarketWatch. In other words, an issue we at U.S. Money Reserve have been writing about since at least March 2023 may be coming to the forefront—and that may make NOW the right time to reassess your asset allocation.
According to MarketWatch, the market is about to be hit with “a deluge of short-term Treasury bills.”
In brief, the Treasury General Account, or TGA, which MarketWatch cleverly likens to “the U.S. government’s checking account at the Federal Reserve,” was recently reduced from around $580 billion to less than $40 billion. To figure out how that happened, look no further than the recent fight over the federal debt ceiling and the “extraordinary measures” required to keep the government running. But now that a debt ceiling deal has been reached and signed into law, it’s time for the Treasury to refill its coffers. That means issuing a large number of new Treasury bills—as much as $1.4 trillion in Treasurys before the end of the year, with most being issued before the end of August, according to an estimate by BofA global strategists.
On the surface, this may seem like a good thing—banks and consumers gain the opportunity to loan money to the government, and more Treasurys means more available collateral for inter-bank loans. But then why is Blitz calling this massive fund-raising venture by the U.S. Treasury “the real problem”?
With more Treasurys available, depositors may continue taking money out of their bank accounts, thus pushing the economy toward recession.
The “real problem,” as Blitz puts it, is the impact of the “massive fund-raise by [the U.S.] Treasury.” While the market may be about to be flooded with the kind of collateral some financial institutions require to meet short-term funding needs, it also presents consumers with more opportunities to move their money away from their bank accounts and into these Treasury bills for the same reason banks prefer to accept them as collateral—they’re considered safe. Plus, Treasurys may offer greater returns than everyday deposit accounts—another major draw for these bills.
Currently, the Federal Reserve is in a mode of monetary tightening, raising interest rates to remove liquidity from the economy and slow down inflation. The addition of over $1 trillion in Treasurys to the market—a market that’s already seeing an influx of depositors withdrawing their funds from banks—could reduce liquidity more than originally planned and, according to Blitz, could be “the kind of shift that can push a teetering economy into recession.”
Those who remember the “credit crunch” of 2008 may be familiar with this idea. That, too, was a matter of illiquidity, and it contributed to both dropping home values and, ultimately, the resulting financial crisis and recession. And while the situation here is not the same as in 2008, another liquidity crisis could still have drastic implications for our economy.
With more market volatility possible, it may be time to add another asset to your portfolio, one that millions of Americans have used to help shield their wealth—physical gold.
Treasury bills are not the only asset that many Americans consider “safe.” Gold and other precious metals have long been considered safe-haven assets in times of economic uncertainty: They have not only protected consumers’ money, but have also provided impressive returns over the long term.
There’s always a chance that this latest rebuild of the TGA won’t impact markets or overall bank liquidity. But that risk still exists—and building and maintaining a diversified portfolio is all about risk management. If the potential for a liquidity crisis is a concern for you, one option may be for you to reassess your overall asset mix.
By moving a portion of your wealth into physical assets like gold, you may be able to help reduce your portfolio’s overall risk exposure, especially in the event of a major market downturn. To learn more about the benefits of owning physical gold, call U.S. Money Reserve today and request your free Gold Information Kit.
