“The prominent risk lies deep in the weeds of the monetary system, with so-called collateral shortages. These are systemic failures of the daisy chains formed in repo markets, which tend to occur during panics…

When disorder emerges, as we’ve seen in many recent blowups, these daisy chains begin to unwind. Like in 2008 and 2020, investors will prefer to hoard collateral, refusing to provide the necessary liquidity. Only after the Federal Reserve intervenes will sentiment rekindle…

Thus, the duty to stabilize the monetary system remains at the sovereign (state) level, but that now comes with increased power and control. The reliance on U.S. government securities to back the majority of loans globally leads to one logical outcome: Since the Fed is becoming the sole entity capable of restoring confidence in a crisis, its powers are not about to diminish but grow.”

Interesting read on a topic that’s nuanced but important to the long-term view that liquidity expansion is not just wishful thinking, but necessary.

Link to the full piece here.