FAST FIVE: The 2021 Liquidity Supernova: Step Aside Fed – US Treasury Will Unleash $1.3 Trillion In Liquidity
Putting this number in context, in total these 8 central banks are expected to add liquidity worth 0.7% of annual nominal GDP, on average, every month in 2021.
What is even more striking is that this may not be enough: as we showed two weeks ago, after the Fed monetized virtually every dollar of net Treasury issuance in 2020, in 2021 Treasury supply will significantly outstrip Fed purchases (and this is even without factoring in the possibility of another major fiscal stimulus).
Considering that in 2020 under the auspices of “helicopter money” (from which we remind readers there is simply no coming back) the Fed will have monetized virtually every dollar of net issuance, this is a huge cliff and one which could lead to a shock drop in Treasury prices if the market reprices (lower) its expectations for Fed monetizations.
In the US, the Treasury can increase liquidity by allowing its cash balance – held at the Federal Reserve – to decline.
We hope this massive liquidity injection explains why Biden was so interested in getting a former Fed chair – Janet Yellen – in charge of the Treasury.