Zombie Necrophilia and the Banking System, OR Why Banks Need Reserves

A lesson in financial perversion and why the Fed needs to maintain a regime of reserve (read zombie) abundance for the monetary meth-heads.

• Banks needed zero reserves from WWII to 2008. Now they need trillions. Why? Because of zombie necrophiliacs, that's why.

• Palladium appears to be in an active short squeeze.

• Gold COTs similar to the 2009-2011 gold bull phase.

• Check out Chris Marcus’s new substack below

Robin Wigglesworth writes for the FT, one of the less horrible MSM rags. He responded to the Fed's new tool to measure reserve abundance/scarcity, and mocked it, rightfully. The tool was dreamed up by NYFed president John Williams in order to make reserves look more abundant than they are. Wigglesworth writes:

Last week the New York Federal Reserve unveiled a new measure of how flush with money the US financial system is. Lo and behold, it showed that bank reserves “remain abundant”. We’re shocked. SHOCKED…

It’s a cool new measure, but the conclusion is extremely unsurprising.

Can you imagine the Fed unveiling it if it showed that reserves were alarmingly tight? That the name of the NY Fed’s president John Williams is on its write-up of the gauge is a pretty clear indication of high-level involvement.

Moreover, like all attempts to corral a multitude of different dynamic factors into single straight lines, there can still be gremlins lurking out of sight. As Teresa Ho, JPMorgan’s head of US short-duration strategy, noted in an (excellent) podcast on the subject:

The problem with answering that is that no one really knows what that magical level is. The notion of reserve scarcity is dynamic, it changes over time, depending on the environment that you’re in . . . It’s one of those things that you know it when you see it.

Wigglesworth's key point though is this, and it's so obvious that if should make you belly laugh (my bold):

Secondly, the measure’s reliance on the Fed funds market is a bit curious, given how comically emasculated it is these days. JPMorgan says that daily trading volumes average $50-100bn, compared to the vastly larger and more diverse SOFR market.

In other words, they're measuring reserve abundance/scarcity based on an overnight market that almost nobody uses, and completely ignoring the market that everybody uses. The Fed funds market is about 4% of the size of the SOFR market. The main difference is that the Fed funds market is strictly bank to bank. SOFR is bank to non-bank and non-bank to bank. Think hedge funds neck deep in some basis trade they need to multiply a trillion times over to squeeze copper pennies out of the radioactive core of a nuclear warhead. They use SOFR.

When they run out of dollars there, they all have to close positions due to margin calls. That spills over into the bond market, which spills over into banks, real estate held by hedge funds who have to sell, and it all happens within a matter of days or even hours.

Wigglesworth closes thusly: "It could be a highly amusing thing if the NY Fed really has gotten this horribly wrong, so we’re rooting for that scenario."

Why Reserves Need to Be Abundant Now, but Not in the Past - because of Zombie Necrophiliacs

Nobody asks the fundamental question behind all this whacked out alchemy, and that is, why does the banking system suddenly need TRILLIONS of reserves just to stay alive? It basically functioned at near zero reserves from WWII to 2008, so what the hell is going on here?

The basic answer is that debt is credit. When you give someone credit, they are in debt to you for the amount of that credit. Credit cannot shrink, therefore debt cannot ever default. Otherwise the banks, which have no money but issue plenty of credit, all die.

When a debtor cannot pay back a debt, the Fed buys the debt with dollars, and those dollars become reserves, or the ghost of past credit/debt. These bank reserves then get mixed into a hellish concoction used to jerk around derivatives markets to squeeze more credit out of the Fed, that is then used to multiply the trades even further. Banks cannot do anything else with this zombie crap. It cannot stop without crashing suddenly.

Until 2008, most debt was paid back as the dollar supply kept gently inflating. In 2008, it ended, and a whole slew of debt could not be paid back all at once. The Fed bought it all with new reserves, and the banks started playing with those reserves inappropriately like a bunch of drugged necrophiliacs. (Sorry for the imagery, but what is going on is really disgusting.) There's nothing else they can do with them. They have to play or they get left behind.

That's why, boys and girls, we need abundant reserves. Because the banks are a meth fueled zombie orgy and you can't get rid of the zombies or the banks die.

Gold COTs Could Go Either Way Here

On the right side of the chart below,