World's Largest Investment Fund BlackRock To Lead Fight Against COVID-19
In the world of money and finance, "revolutions" have occurred periodically over the past half century. So, in the 70s, the gold standard was finally eliminated, the Central Bank of the United States was able to print dollars as much as it wanted. All that remained was to maintain the demand for the “green paper” by inflating financial markets, introducing new financial instruments (such as derivatives), carrying out privatizations and removing any restrictions on cross-border capital movement (to buy any assets).
In the 21st century, the most revolutionary innovation was the policy of central banks called “quantitative easing”. The US Federal Reserve, the ECB, the Bank of Japan, and other central banks have received unlimited opportunities to buy government debt securities and pump the monetary sphere with billions and trillions of dollars, euros, yen. Some central banks (Sweden, Denmark, Japan, Switzerland) organized a "revolution" of a different kind - they dropped their key rates below zero. The central banks of Japan and Switzerland are carrying out their quiet revolution. They are no longer limited to buying up government securities, but are increasing their assets at the expense of corporate securities, including shares. All of this is intended to save degrading economies, but these funds are like drugs in ever-increasing doses. Nobody knows how it will end.
The viral and economic crisis that is unfolding before our eyes is pushing the monetary authorities (treasuries and central banks) to seek new "revolutionary" methods of saving economies. Quantitative easing has been resumed in full. Most likely, key rate cuts will continue, and new central banks will go negative. The innovations of the US monetary authorities attract particular attention.
The media spread the news that the US Treasury and the US Federal Reserve have allocated a total of about $ 6 trillion to combat the coronavirus and the crisis caused by it, which is about 30% of US GDP. Only Germany is comparable to America in terms of the relative level of financial assistance. Other Western countries have a smaller relative level of aid: Italy - 20% of GDP, Great Britain - 16%, Spain - 16%, France - 14%. However, a fair share of the declared assistance from European countries is made up of guarantees and loan limits, which may not be fully selected.
In the United States, out of $ 6 trillion in total financial assistance, approximately $ 2.2 trillion. dollars falls on the Ministry of Finance, and 3.8 trillion. dollars - at the Fed. Treasury money is provided for by a law signed by Trump on March 27 (The Coronavirus Aid, Relief and Economic Security [CARES] Act - Law on Assistance and Mitigation of the Consequences of the Coronavirus Pandemic and Economic Security). The numbers are not final. US Treasury Secretary Steven Mnuchin and Fed Chairman Jerome Powell say additional money could be provided by the end of the year if needed. However, now I want to draw attention not to the quantitative, but to the qualitative side of the issue. To promote the indicated astronomical sums of money, the creation of special mechanisms is provided.
A new scheme of interaction between the two institutions of US monetary power is emerging.
Previously, the interaction was carried out as follows: the Ministry of Finance (Treasury) issued its debt securities (bonds) and sold them to the American Central Bank, receiving from it other pieces of paper called dollars. The volume of exchange of bonds and dollars increased significantly after the crisis of 2008-2009. as a result of the implementation of quantitative easing (QE) programs. At the end of last year, the Fed's Treasury portfolio amounted to 2.54 trillion. Doll.
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This scheme continues to operate, and the scale of operations within its framework will increase. The Fed said it will start buying Treasuries at $ 75 billion a day from March 23 (plus mortgage-backed securities at $ 50 billion a day). That is, in a week (five working days), the portfolio of Treasuries of the Federal Reserve increased by $ 375 billion. But at the height of the third CU program, purchases of Treasury securities by the Federal Reserve reached only $ 50 billion a month! Last year, the US Federal Reserve's assets were less than $ 4 trillion. dollars, and in April they have already crossed the level of 6 trillion. Doll.
Now, in addition to the usual buying up of treasury and mortgage-backed securities, the Fed will buy other securities as support, but not directly, but through the mediation of the Ministry of Finance. For this, a new scheme is introduced, which includes the following facilities (facilities):
the first mechanism - the Primary Market Corporate Credit Facility (PMCCF) - is intended for the purchase of new corporate securities during their initial placement on the market;
the second is the Secondary Market Corporate Credit Facility (SMCCF) - to support securities already traded in the market;
the third is the Term Asset-Backed Securities Loan Facility (TALF) designed to buy securities issued against the security of bank loans (this operation is called the securitization of bank loans). And bank loans, in turn, must be secured in the form of guarantees or pledges. First of all, we are talking about loans to small and medium-sized businesses, secured by guarantees of the Small Business Administration (SBA);
the fourth mechanism is the Money Market Mutual Fund Liquidity Facility (MMLF). It is intended for financial support of municipal authorities (purchase by the Municipal Securities Fund);
the fifth mechanism is the Commercial Paper Funding Facility (CPFF). Through this mechanism those securities will be bought that do not meet the standards of the first four.
Most importantly, as reported by both the Fed and the US Treasury, is that within each mechanism, a Special Purpose Vehicle (SPV) will be created. The SPV will be founded by the government, which will allocate money from the budget to form the initial capital. SPVs will receive loans from the US Federal Reserve for buying up their profile securities on the market. It is foreseen that the leverage will be 1:10. That is, for every dollar of SPV's authorized capital, the Central Bank will issue a loan of $ 10. In the aforementioned CARES law, $ 454 billion is earmarked for SPV capitalization; therefore, it can be assumed that the maximum amount of loans that can be obtained by new companies will exceed $ 4.5 trillion. All assets of the US Federal Reserve System at the beginning of 2020 were measured approximately by this value.
Experts are already commenting on the "revolutionary" innovation of the monetary authorities. A bit like a partial bank reservation. Many believe that one real dollar of the Ministry of Finance can create ten not very real (even virtual) dollars. However, some believe that the original Treasury dollar invested in SPV capital will also be virtual, created out of thin air. After all, an increasing part of the dollars in the US federal budget is not taxes, but FRS loans. By the way, where will the government get the announced money in the amount of more than 2 trillion dollars to fight the virus-economic crisis? In the previous (2019) fiscal year, the federal budget was closed with a deficit of about 1 trillion. In the current fiscal year, even if there were no crisis, the deficit would still be at least 1 trillion. The Trump administration doesn't raise taxes. It has lowered them before to stimulate economic growth, and in times of crisis is seeking to further reduce them. This means that the government's generous gesture of more than $ 2 trillion means an increase in the budget deficit by the same amount. This means that the Fed will additionally purchase more than $ 2 trillion in Treasury securities.
It turns out that the two trillion budget aid was created out of thin air.
A closed loop appears in which almost exclusively virtual money will circulate. Financial analyst Steve Saville comments on the new scheme: “The craziest thing here is that the dollars injected by the government into the Fed's SPV were previously created out of nothing when the Fed monetized Treasury securities. That is, the Fed creates money out of thin air, then this money goes to the government, the government pours it into new SPVs, and the Fed, based on these injections of “capital,” creates a lot more money out of nothing”.
It is noteworthy that until now the Federal Reserve System has not worked with corporate debt. Now she will take care of it. The total US corporate debt is estimated at 9.5 trillion. dollars. Most of it today has low investment ratings, and part of it qualifies as junk or trash. With the planned scale of SPV procurement, they will inevitably have to accumulate trash papers on their balance sheets. American experts are confident that in the near future SPV will buy not only corporate debt securities (including junk), but also shares of American companies (as the central banks of Japan and Switzerland are already doing).
It seemed that with such a policy, SPVs were doomed to go bankrupt, but the government would not allow this, throwing them a lifeline in the form of new tens and hundreds of billions of dollars that the Treasury would borrow from the Federal Reserve. A financial and monetary "perpetual motion machine" appears. True, the movement with the help of this miracle machine will be illusory. And sooner or later one will have to leave the world of illusions into the real world, but by that time the real world (real economy) may be completely destroyed.
Regarding the new scheme, they do not notice at all that it testifies to a strong convergence of two institutions of US monetary power - the Federal Reserve and the Treasury (Treasury). The same Steve Saville notes: "The American government and the Federal Reserve System are taking the lead, and any supposed delineation of the two structures is blurred or disappears." And then he adds: "… no one else pretends that the Fed is independent from the government." Some have already called this innovation the "nationalization" of the Federal Reserve. However, there is a second point of view: the new scheme is more reminiscent of the "privatization" of the American Treasury in the interests of the owners of the money. It seems to me that the second is more correct.
Indeed, in the new scheme, besides the two named participants, there is a third one. This is BlackRock - the world's largest financial holding, investment fund, which has assets in its trust management of 27 trillion. dollars and participates in equity capital in the capital of many key banks and corporations. In particular, he has stakes in most Wall Street banks.
I do not exclude that in the new design BlackRock will be the main of the three. He is entrusted with the day-to-day management of the assets of special-purpose companies, and the coronavirus pandemic allowed him to take this place of honor under the sun. BlackRock will now lead the fight against COVID-19.