Robert Aro on the Fed's Reverse Repo Trick

追加: 2026-05-05

[00:00:02]This is the Human Action podcast where we debunk the economic, political, and even cultural myths of the days. Here's your host, Dr. Bob Murphy.

[00:00:13]>> Robert, welcome back to the Human Action Podcast.

[00:00:16]>> Thanks for having me.

[00:00:18]>> So, uh, the specific reason that I invited you here again is because I came across your recent mises.org or article, daily article, which of course we'll link to folks called why the crash was delayed.

[00:00:30]>> Yeah.

[00:00:31]>> So I think maybe if we just kind of walk through that and we'll if folks if you're watching the video version of this interview, you know, we'll flash up charts as appropriate. But um let me just read the the opening paragraph and then maybe Robert, I'll let you kind of take it from there. You say, "Whatever happened to the mother of all crashes that was supposed to arrive when the Federal Reserve began tightening its balance sheet back in 2022?" For several years, I've been scratching my head, convinced that draining the balance sheet by trillions of dollars should have triggered a systemic banking failure or some other black swan event.

[00:01:03]In the past, crisis like Lehman/ AIG or the 2020 lockdowns took the blame when in reality, the root cause was always monetary. And so I was instantly intrigued and you know wanted to see what what you had to say on this topic because likewise I've been watching this stuff and you know on paper yeah it looked like gez they pumped in a boatload of money especially after 2020 and then they started you know letting the balance sheet shrink in fact even M2 was coming down which typically doesn't happen. is usually just like you know the rate of increase slows way down and uh and the yield curve inverted and everything and yet you know we're so interestingly we'll maybe get to this later that we may get a thing and people will blame it on Iran or something but in any event yes had there been a major crash last year none of us would have been surprised from an Austrian point of view so I'll let you take it from here maybe if you want to first just make sure people understand just how significant that tightening was and then give your uh the other element involved Okay, sounds good. Um, yeah. So, I mean, the last uh what was it 4 years or so, the Fed, they did an official QT, quantitative tightening. Um, and that was your classic, you know, we're going to drain uh the balance sheet. We're going to let the mortgage back securities and treasuries roll off. Um, so essentially, or literally, the Fed was draining uh was it 23 trillion in that time. So it was uh about every month a billion or so treasuries were coming back to the Fed and then the Fed would quite literally delete the money.

[00:02:40]Um so the balance sheet as we said is shrinking. It literally was shrinking.

[00:02:45]Um when you look at the chart uh you'll see that the 2.3 trillion decline happened um in that time. Um, and again, it must have been maybe four years. Um, just like you and probably everyone else, we're just wondering where is the crash, right? We know, uh, when they tighten and the yield curve inverts and everything that follows the Austrian business cycle, um, that typically leads to a crash. Um, and not only do we not get a crash, but we had the stock market sore in that time. And honestly, I was, you know, it it st me for a good while.

[00:03:22]And I kept looking at the balance sheet.

[00:03:23]And when we say balance sheet, uh, we're talking about the asset side. Um, and then I don't know, I just must have missed it before. But then I looked at the liability side to see what's the other side of the balance sheet because we always focus on the asset side. And then I saw um the reverse repos. I remember maybe one time a few years ago I did an article called don't fear the repo man.

[00:03:47]>> Um, that was probably the only time I talked to a repo. Um, and then when I looked at that, I saw that they had a balance of 2.5 trillion. Um, and in that same time that the Fed was tightening, that 2.5 trillion on the liability side, it went down. It decreased and now it's at zero.

[00:04:07]And then I just kept digging and digging and then that's where we are now, right?

[00:04:12]And um, lo and behold, we thought that on one hand the Fed was tightening.

[00:04:16]They're reducing their assets, but on the other side, they're also reducing the liabilities, which is to say the 2.5 trillion of the repos was entering the market. So, it was kind of like a revolving door, tightening on one hand and then letting the market, you know, and liquidity come back in on the other.

[00:04:34]>> Okay. Do you I don't mean to put you on the spot. It's fine if you just say you're not sure, but I mean I do remember the reverse repos and all that stuff going on, but do you know like what the like was there an official reason that they gave as to why they were you know letting that stuff wind down as well?

[00:04:50]>> Um I don't think it was a windown of the repo per se. It was more so um every time the Fed would set the rate uh they would set it just like they set interest on reserves they set the repo rate or on the chart they call it the award rate.

[00:05:06]So when rates were increasing um you know the the repos going up and everything was going up but then what it looked like and if you see on one of the charts I have once the rate subsided once the Fed funds rate subsided um you had this kind of leveling off and then the repos um the repo rate it it it leveled off too um and then what I think happened is the yield on other short-term maturities like the onewe treasury Y that became more attractive.

[00:05:37]So as a money manager, you actually have a duty to put the your customers product in the highest yield possible. So especially once the oneweek treasury outstripped the uh rate on repos, then the money managers essentially just had to take their money out. Um and that's what we saw.

[00:05:55]>> Okay. Yeah. And so just to read, you actually spelled that out in the article. I realized as soon as I was asking you, um you said here, so uh actually I'll give the recap. You say so to recap during QT the Fed allows it holdings of treasury securities and mortgage back securities to mature financial financial intermediaries repay the Fed and the Fed literally deletes that money from the system. This is the classic setup that exposes male investments, stresses credit markets and reveals the imbalances described in Austrian business cycle theory. Okay.

[00:06:23]So, so far it's textbook and then you say but this time it really was different because the reverse repo facility and now to get into the point as to you know what changed and how it wasn't necessarily a conscious policy decision but just the way things played out given the incentives you wrote by mid 2023 the Silicon Valley bank crisis which had been in March of 2023 had passed and the Fed's bank term funding program was alive and well. Then the hikes finally tapped out. Eventually, the one-mon market yield on US treasuries outpaced the Fed's RRP rate and the incentive changed. Fund managers began a stampede out of the Fed's facility and rotated into T bills to chase a higher risk-free return. And then you go on to say, "In less than two years, the RRP withdrawals injected around 100 to 200 billion plus a month into the financial system at its peak.

[00:07:16]This was effectively a backdoor stimulus program that bypassed the Fed's official QT narrative and funded the government's deficit. Um, and you say correlation is not equal causation. But it's also not surprising that the Dow Jones broke out to new highs at almost the exact moment the RRP began to unwind.

[00:07:32]>> Mhm. Yes. Yeah. I thought that was interesting because in 2022 uh the the balance of the repos didn't even move. And even when you look at the stock market, again, correlation doesn't equal causation. We know that. But it, you know, it is funny or isn't it as strange that nothing really happened in the stock market and then once 2023 came around of course the bank term program came but then um at the same time you had all this you know new money 10020 um billion dollars coming back into the market and then I mean it the stock market just seemed to go up and up and up right so >> um so I you used a phrase in there like frozen liquidity or private liquidity is it. How do you feel about this claim?

[00:08:16]And I'm I'm not even sure I if I agree with this. Let me just throw this out there because some people might be wondering it. Is is part of your thesis now that you're, you know, stepping back and looking at the whole episode, is it perhaps that some of the um headline figures of of the amount of liquidity that the Fed infused into the system post 2020, they somewhat sterilized with the reverse repo. Like they kind of bottled some of it up. But then that means on the flip side when some of that headline you know quantitative easing was unwound then this thing was like like a buffer the opposite way.

[00:08:51]>> Exactly. Yeah. Um whether that was just by happen stance or whether that was planned you know who knows about that but I mean you know you had 2.3 trillion shrink and then 2.5 enter the market in about the same period. Um you know I I just don't like that. Right. Um I mean if you think about what was happening yes the the the type of you know the the process different QE and the balance sheet and repos and money managers savings that's they're very they're still very different but at the same time it is still we're talking about trillions of dollars. Um so it's very difficult when the Fed talked about you know tightening its belt and reducing the balance sheet which they did. So again they're not lying. They did not lie. They did reduce the balance sheet, but it was kind of, you know, don't pay attention to the man behind the mirror, the curtain kind of thing, right?

[00:09:45]>> Um because, >> you know, they never really talk about repos. You know, I I'm reading that the whole time. I'm I'm always reading the Fed stuff, but >> you don't really hear anything of the repos. You don't hear much about this money coming back online into the system. Um so, you know, I I I definitely think it had to be a buffer, right? Um, when you do the math, even when you look at the net injections, even if the Fed was reducing at a 100red billion a month, if 200 billion came back from the repos, that's not even a you're not even shrinking. You're actually injecting liquidity into the market.

[00:10:20]>> All the while you are saying, yes, this is QT. Um, so it's a very tough thing that that happened.

[00:10:28]>> Yeah.

[00:10:29]>> Sorry.

[00:10:30]>> Yeah. So just to continue then with that narrative. So you say again going back to your article the system was running on stored liquidity thanks to a giant buffer accumulated during the pandemic stimulus era. But as of 2026 that buffer is gone. The RRP liability has flatlined at essentially zero. Meaning that the trillion dollar offset to QT has been fully exhausted. And now here's the what else was very interesting what you said.

[00:10:53]Perhaps it was no coincidence that once the RRP hit empty the Fed's tightening ended on December 11th, 2025. The Federal Reserve Bank of New York announced it would begin reserve management purchases at a pace of approximately 40 billion per month.

[00:11:06]While they use Fed speak to avoid the term quantitative easing, in reality they've returned to official balance sheet expansion. They're being forced to replace the lost RP liquidity with fresh money printing.

[00:11:17]So you want to just elaborate on that in case people missed the punch line?

[00:11:21]>> Yeah. Yeah. So there's a lot going on there. So, um I I I guess maybe we could think of the our the the repo balance kind of just like a big savings account, right? When this 2.5 trillion came from we talk about primarily, you know, moneymark funds, right? Um this money went to the Fed, the Fed just kept it.

[00:11:43]They didn't do anything with it. It was it was literally it was savings. Um it was out of the system. It wasn't being litting dormant at the Fed. On top of that, the Fed was actually paying interest. So we're talking tens of 20 billion dollars of interest because um the rate is like probably 3.5 four. So essentially in that period the Fed was paying around 3 to maybe 5% maybe um interest to these the money managers on the two trillion. So just a big piggy bank was just sitting there as the QT went um through the bouncy trunk and the money kind of came out into the market.

[00:12:22]So yes, again another coincidence and you know I'm not a big fan of coincidences but it is funny that on December of 2025 when the the repo balance really flatlined to zero once all the 2.5 trillion was back into the system that the Fed said all right we're going to start buying officially $40 billion um primarily treasuries a month and again they don't call that Q they don't call it quantitative easing Now they call it um RMP reserve management uh policy I think. Um so again just too many coincidences but essentially what that signals is that yes the balance sheet now on the asset side as you've seen it is expanding. I think in the last like the last quarter it's probably up maybe 200 billion or so maybe more.

[00:13:14]Um and they're buying as treasuries again. So this is your typical QE. Um, but it makes sense because now that that savings of the repo funds are gone, they need something uh to bring liquidity to the market, meaning they need someone needs to buy treasuries. Um, so yeah, so that's the new don't call it QE. It's RMP and it's only $40 billion a month.

[00:13:39]>> Okay. Okay. And then I just checked while you were talking to see if they had kept up with it. But also the announcement they made, I think it was in late October where they sort of announced what they were doing it like a pause on the on the rolling off, but they had said they were going to continue letting the mortgage back securities roll off.

[00:13:57]>> Yes.

[00:13:57]>> And then it was just in December they were going to start stop the rolling off of the treasuries like you just pointed out.

[00:14:03]>> Um and I just checked. Yeah, they still have been letting those roll. I mean, they still are sitting on like two trillion or something, but so nothing to sneeze at.

[00:14:10]>> But yeah, it to me then that was I didn't have the reverse repo element in my analysis, but I was pointing that out, you know, in real time as this was going along with for people partly too.

[00:14:22]I was giving, you know, a a worrying uh warning about real estate that saying, "Hey, the Fed, even though they stopped tightening, they're still getting rid of their mortgage back securities. now they're they're just kind of flipping that over into into treasuries to expand their balance sheet that way. So yeah, to me it definitely looked like if they had to, you know, cuz inflation was running hot and they had to choose and so they said, "Okay, it's more important for us to maintain, you know, lower yields on treasuries than, you know, we can let the the mortgage market go something if we got to pick." How do how do you feel about about that general conclusion?

[00:14:59]>> I mean, yeah, I guess they have to choose. I mean, you know, there the US debt's now at 39 trillion. I think, yeah, I'm I'm with you. That's probably the most worrying thing. Again, mortgage maybe they're thinking, well, no one even understands mortgage back securities anyway, so let's just see what we can do. Um, but that is funny because yeah, they are and literally when you look at the MBS chart, the mortgage back security chart, it's it's on a steady pace. Nothing seems to have stopped. Mhm.

[00:15:27]>> Um but now the treasuries you see they are they are um skyrocketing again. Um so I guess yeah it's kind of a mix then right cuz you're you're QTing on the mortgages and now you're eating on the on the treasury. So maybe that's why they call it RMP of a mix. Yeah, I think I think you're right that that's that is why and again this was all I didn't see like you know normally people like zero hedge or something you think be all over but I didn't notice anybody else talk about it was yeah I'm almost positive it was the late October >> um you know Fed announcement and that's where they laid all this stuff out and they said what they were going to do November was kind of like a a grace period and then as of December they flipped it around where they said yep we're going to keep letting >> the u mortgage back securities roll off but then they were going to reinvest it into treasuries And they even front ran it too a bit. It wasn't even if you look at it, it's probably closer to 50 billion a month.

[00:16:22]They said 40, but I think they at the very beginning they just wanted to get as much treasuries as you can cuz >> like I said, I think they're already at like 200 billion or so in since December. Um but I mean, yeah, you got to keep those yields down, right?

[00:16:38]>> Yeah. Okay. So, just to connect this with, you know, the first part of the discussion. So, big picture, is this true? You're saying again regardless of what the motivations were, the intent, but clearly what actually happened in fact was even though for several years now the if you just look at the Fed's assets, they've been trending down.

[00:16:57]>> Yes.

[00:16:58]>> And you might have thought, well, gee, isn't that standard Austrian business cycle there, they pumped in a boatload of reserves initially like after 2020, and then they start draining it?

[00:17:06]Shouldn't there have been a huge crash by now?

[00:17:09]>> Yes. Yes.

[00:17:09]>> And you're saying partly the reason you know there could be a giant asterisk there is amidst all that they also um were d like sort of the mirror image in terms of the accounting they were letting the re reverse repos pull out um and that was possibly just because people in the private sector were flipping just based on the the rates of return. And so in a sense that was like sterilizing the QT if you want to use that kind of language. Yes. Um I guess you could say it was reinfecting if it's the opposite of sterilization.

[00:17:41]Um and then but that's now that buffer's gone >> and then you're to make it sound you know to to tie into your your thesis to give some more credibility to it. You're saying and not lo and behold once that >> buffer you know shrank to zero basically of the RRP balance that's when the Fed stopped letting its holdings of of total assets shrink. And then now, you know, now I'm adding the little nuance that they still are letting the sub component of mortgage back securities shrink, but they're offsetting it by increasing their holdings of treasuries. Okay. So, >> exactly. Yeah, that No, that was perfect.

[00:18:18]>> Okay. All right. Um Okay. So, then where does that leave us then in terms of, you know, Austrian business cycle theory? Again, not to be unfair, put a crystal ball in front of you and say go, but where where do where does that leave people now? Like what what do you think that means that so does that mean okay now there's going to be a crash or is it like oh no now they're inflating again so now they're trying to buy more time or what do you think?

[00:18:41]>> Yeah. No, it's uh it's definitely not easy because everyone wants us to have a crystal ball. Um, it's hard because on the one hand, just to circle back, it's kind of like when the Fed said they were doing QT, one could even argue that that was almost QE like um because when you do the net differences between how much of the asset was being reduced and then how much of the repos were were coming back on each month, you would have some like at the peak around the 2003 a year and a half or so, you were having something like 100 to 200 00 billion dollar coming into the market. Um, so it's possible that what they called QT was actually QE, which becomes ironic because now if the Fed is doing QE, potentially it's almost like a QT in the sense that if it's true that the Fed stays at just increasing by $40 billion a month, again, only $40 billion a month if they're buying assets are that much. um that is still less than what was potentially coming online at the peak of the RPP rolloffs. So in the one sense when the Fed was doing QT they were maybe only adding say 100 billion a month of this money coming to the market now what they calling RMP is only 40 billion. So what I'm trying to say is potentially there's a room for a slowdown because it's that sessation of credit. There's less money coming in.

[00:20:15]Um so on one hand I could see you may have almost a contraction because the rate of new money coming into the system is less. Um in addition to that you get the this inversion of the yield curve.

[00:20:30]You know that's happening potentially.

[00:20:32]Um, so potentially you might get that type of a contraction and then we we see the cycle. Conversely, maybe maybe not.

[00:20:41]Maybe the 40 billion is enough. Again, I don't think so because with the debt skyrocketing, I don't think 40 billion is enough. So I think yields are going to spike and you have all that. But I I think maybe my fear is or I think the worst thing that could happen is if there is no crash, you know, maybe we enter that Keynesian era of, you know, never no crash ever again. Maybe at worst we just get these flash crashes, dip buying, you know, and then the stock market just goes to the roof and everyone's a genius, right? Um so yeah, I I I'm you know, it's tough. It's hard to see what exactly is going to happen.

[00:21:19]Um, but in any event, when there is a crash or a flash crash, you know, you can bet that the Fed will be there to buy every bond necessary. Uh, for sure.

[00:21:28]>> Okay, let me I don't want to put words in your mouth, but is this a fair summary um of what you think happened just to, you know, kind of give people a 30,000 foot view that if you look for example at what the Fed did to its balance sheet post 2020, I mean, it was incredible. like it made the earlier rounds of QE look like child's play and those things, you know, were >> making Glenn Beck have a heart attack when those things happened. So, and yeah, we did get the worst price inflation, you know, since the early 80s, but you know, it wasn't as bad as some warned it would be.

[00:22:06]Excuse me. And so maybe one way of interpreting what you're talking about here is because you were saying there how even during the so-called QT when you factor in the RRP unwind they're actually on net was there's a sense in which there was like 100 million a month at least at the peak that was coming in you know on net.

[00:22:24]>> Yeah. And so could you interpret it as saying, okay, yes, that if you just looked at the massive infusion on the asset side in the immediate wake of 2020, that exaggerated how much new money was actually like in the system as it were because a lot of it was being held back through the reverse repos.

[00:22:43]And then on even on the down, you know, coming down, then they sort of let more in. So there's a sense in which they staggered it. In other words, they kind of spread out all that massive stimulus right after 2020 in p and spread it out over several years as opposed to it really all just hitting right in the beginning. And maybe that could explain why, you know, eggs didn't go up to be $12 or something. And, you know, you did see a spike, but it wasn't as much because they kind of spread it out over several years. How do you feel about that?

[00:23:11]>> Uh, yeah, that's pretty good. I didn't think of it in that regard. Um, that seems that seems like it was a plan the way it's spelled out, which I wouldn't put past them. Um, but yeah, it does make sense because when all that money was created and then essentially that 2.5 of the repos, it could have gone elsewhere, but it it literally just sat for a good while, right? It was dormant.

[00:23:36]Um, it wasn't it didn't just go in and then it it kind of stayed there. Like if you look at 20 uh 2022, I think it was just more flatlining. It didn't it really it didn't really do much. So yeah, it was kind of just like a a res a a a reservoir or a reserve. They were just kind of maybe building it up for this exact instance. Or maybe they were saying, well, we're going to control price inflation that way. Um but yeah, you know, whether by design or by accident, I think it it had that right.

[00:24:07]It kept the money out of the system. the money wasn't being lent, wasn't it wasn't doing anything. It was just making interest for, you know, money managers and now it came back online.

[00:24:18]So, I agree. Yeah, it may have staggered potential price movements or or movements in treasuries. Um or or at best it just kept the QE at bay, right?

[00:24:29]Um it just allowed a buyer to um to kind of normalize things so you don't have wild spikes or or prices or crashes maybe.

[00:24:38]>> Yeah. Yeah. Okay. So, that's interesting. Um, let me I've done a fair bit on the yield curve and so since you've been talking about that, let me just we'll flash up here folks the chart of this.

[00:24:50]So, this that we're showing you folks is the 10-year Treasury constant maturity minus the 3month there. Some people look at the 10-year minus the 2-year. I like the 10year minus the three-month because in terms of the past quote predictive power, this one seems to be the best one to use. But in any event, so what's interesting is, you know, the the the pattern here. Again, if you're looking at the video version of this, folks, you can see when that thing goes negative, that means the yield on the 3month is higher than the 10-year. So the yield curve is quote inverted. And you can see this chart goes back to the early 80s.

[00:25:22]Yep. Every time that thing goes below it, pretty soon afterward, there's a recession, which is shown by the gray bars. And now this time around we've had the biggest yield curve inversion I think ever at least since World War II.

[00:25:35]>> Yeah.

[00:25:36]>> Um and so what's funny is if if there is a recession let's say this year then that pattern will be fine. Right. In other words future economists looking back on this chart will just see yep that pattern holds up. Yeah.

[00:25:48]>> But what made this time, you know, and I include myself in this, >> it may have misled people is because that thing was inverted for so long >> that, you know, guys like me were looking back and saying, well, you know, if history is our guide, that once the thing inverts, typically there's a recession within such and such time >> and not, you know, and you can see that that pattern didn't hold up here. But again, that's because the thing was just inverted for so long. So that's the, you know, in other words, so long as there is a recession in the not too distant future, the overall pattern is still there that yeah, when the yield curve inverts and then it uninverts, pretty soon there's a recession. But this time around, once the thing was deep in inverted territory, people might have thought the recession was coming sooner because they weren't expecting the inversion to last as long as it did. So any do you have any thoughts on any of that stuff?

[00:26:33]>> Uh, yeah. And then so everything you said and and then you even said the uninversion.

[00:26:39]So yes, it always predates the the inversion predates the recession typically, but I think and maybe that's even where we are now or what's coming in the immediate.

[00:26:48]The recession quotequote, it really happens once you see that uninversion, right? Um >> yeah.

[00:26:55]>> And now I think cuz I've been looking at the 10 minus the two year, but yeah, I remember you you said you like the 10us 3, but the 10 minus 2 the spread is like at 0.5.

[00:27:05]And I think that's potentially maybe kind of heading into danger zone, right?

[00:27:10]Um I guess if we think what maybe if we think what it says what it's happening, right? I think does it say then the the yields on the long-term bonds are just increasing. Maybe the you know they say bond vigilantes or maybe people are just demanding more debt or debts become more expensive and you get this more of a you know mean reversion or more of a natural rate coming in or the Fed >> essentially is losing control of things.

[00:27:34]So, I think I think it all looks like it is on that track, right?

[00:27:40]>> Yeah. And and by the way, just for listeners, I I'll link to the show notes page to some stuff I've written. I have a a QJ article with Ryan Griggs on this stuff. It's not just blindly looking at charts and saying, "Oh, when then, you know, when the graph does this, that means this." Obviously, we're tying it back to human action and and Mises and so on. And the quick version is the reason I thought if you believe in Austrian business cycle theory, you might expect to see this pattern that we do in fact see about the yield curve inversion because the idea being and sorry Robert, but let me just explain that when um so like okay the the Fed's loose and they inject a bunch of liquidity. What does that do? Oh, it pushes down interest rates, >> but which interest rates is it more likely to push down or push down more as short-term rates. So that's when you'd have quote a normal upward sloping yield curve in a boom period when the especially too because long-term rates would build in more of you know higher price inflation expectations. So Fed the Fed pumping in money might even push up long rates and push down short rates. So you'd see that quote normal upward sloping curve and then when things start getting out of hand the Fed tightens and what does that do? It it jacks up short rates. So typically when the yield curve inverts, it's not because the long rate falls, it's mostly because the short rate spikes up. And so if the Fed's slamming on the brakes in terms of Austrian business cycle theory, then means, oh, there's going to be a recession really soon. Again, that's that's the exact pattern you'd see. And I think the reason it typically would uninvert is presumably policy makers see signs of the economy weakening and so they start cutting, you know, short rates in anticipation of, oh, we got slack labor markets and unemployment's ticking up and blah blah blah and GDP growth slowing. So again, that's why you would you would see that pattern where it would, you know, in a boom period, you'd have it wouldn't be inverted, then the inversion would happen when they're slamming on the brakes and then the thing would uninvert right before slipping into recession. Yeah. So I think that's all consistent with, you know, Austrian business cycle theory.

[00:29:32]The thing with this cycle, so I guess that we've, you know, pushed the puzzle back a step, but now the issue is how could they keep short rates up high, you know, that high for so long, like how come the crash didn't occur? And I wonder if you know your thesis here, Robert, helps explain some of that that they dumped in, ironically, they dumped in so much liquidity up front >> and then had this like reserve buffer that they were like, you know, opening up and kind of un counteracting the tightening that maybe the way that those two forces interplay that they were able to keep short rates up for higher than they normally are before, you know, they cause the economy to tip into recession.

[00:30:08]I think we're seeing in real time now uh like you said I think potentially and hopefully the RPP was that bit of the puzzle that everyone seemed to miss. Um because I looked for there wasn't again not much has ever been said on repos right um intuitively it does make sense right just when you do the math 2.3 minus 2.5 trillion is you know net 200 billion right so um now without that we get to see kind of what happens in a more freer I don't know freer market but >> at least we don't have the buffer anymore um and again the Fed you know what will the Fed do I And that's the that's the problem. Would they actually raise rates? I mean, I can't even imagine with the $39 trillion debt and you know, no one wants to raise I can't even imagine even if inflation or price inflation is high, but then they're going to cut rates um and and then that's not necessarily good too because they can only cut rates and manage that if they are going to commit to buying more bonds and and commit to more QE. So, um I think this is always, you know, we're living in interesting times more than even the the last cycle, the the COVID crash and all the last time QT um this is a different ballgame now, right?

[00:31:25]Again, exacerbated by the $39 trillion debt. Um they they seem really stuck, right? So, what I think might just happen, you'll just get that um uninversion. Then I again I'm just guessing but I just seem like I imagine the underversion was get more apparent and then maybe then something will happen.

[00:31:48]>> Yeah, with that number I mean people can do arithmetic in their heads but every percentage point that the Treasury yield curve shifts up that's another $390 billion >> in annual interest expense you know which is more than most countries spend period their governments and that's just you know extra from just that one move.

[00:32:06]So yeah, and again we're, you know, coming off the heels of the worst price inflation, you know, since the early 80s. And clearly they're they're sort of boxed into a corner. I think you're right, Robert, when you were saying like the worst thing that could happen is if >> if nothing happens in the short term.

[00:32:22]And that kind of gives them >> because because I think what happened um a bad thing was post 2008 when the Fed did all those rounds of QE >> and various people were alarmed including me. Yeah. Yeah.

[00:32:34]>> And then it looked like, oh, nothing happened.

[00:32:36]>> And so I think that convinced a lot of people even in the markets and, you know, bond watchers and stuff that, oh, apparently, >> you know, they've got the new tools or something and interest on reserves or whatever. And so they can just print money and they can inject a trillion here and a trillion there, rescue the mortgage back securities and what and it doesn't cause gasoline to go up. That's great. And then now all of a sudden after co like, oh wait, maybe they can't do that. So >> yeah, exactly.

[00:32:57]>> Um, so as far as what what you look I know like for example, you look you're watching the VIX. Do you want to explain to people the kind of thing that you're watching to get a sense of the timing?

[00:33:06]>> Um, yeah. So, I I guess it's kind of, you know, I like the VIX as far as just as a measurement of complacency.

[00:33:13]Um, and it just goes back to when, you know, when when times are good as far as the stock market and everyone's a genius, everyone's making money, then the VIX will trend lower. And it's kind of that, you know, when everyone's, you know, everyone's day trading and everyone feels good and then we're just looking at the data. We're looking at the debt. We're looking at, you know, the repos. We're looking at all that.

[00:33:36]And, you know, nothing seems good when the data as far as what Austrian sees that nothing looks good, but everyone's a genius. And, you know, I got a guy who said he sold his business, he's going to day trade, and you get all these things, right? And the VIX kind of I think kind of measures that, right? Kind of like in um remember Michael Blurry in that the movie where he knew the crash was coming. He was in a he was with like a a he was in a with a stripper and she said, "Oh, everyone has four houses out here." And then he said, "Oh, the housing market's going to crash." Um I think potentially the same kind of thing when you know valuations are stretched their all-time highs. And again, if yields go up, valuations will look worse, of course, but it's just that that's stretching and um you know, I think something has to happen at that point, right? So, I just kind of >> you're telling people to go out to exotic dancers and get market research that way. Is that >> it works for uh Michael Blurry?

[00:34:32]>> Okay, fair enough. Fair enough.

[00:34:33]>> But no, no, no. I'm not I'm not saying that.

[00:34:35]>> Yeah.

[00:34:36]>> But I'm be mindful of uh you know, when everyone's a genius and no one's scared, I think we should be scared. I'm not saying to go out and sell all the stocks now maybe, but be mindful that, you know, we're not everyone's not as smart as they think they are because the Fed is always behind there pumping as we've seen one way or another. Even when they're saying QT, they still manage to pump. Um, so we just got to be mindful of that, right?

[00:35:03]>> Okay. Well, great. I guess the last thing I have for you is are are you working on a book? Do you want to tell us about that?

[00:35:08]>> Uh, yeah. Thank you, Bob. Uh, yes. So, in the last year, right, I haven't been writing much. Um, I just took some time off for the kids and just, you know, do that. Um, but I am writing a book. Um, but I'm also a superstitious guy, too.

[00:35:22]So, I don't want to say anything about it.

[00:35:24]>> Okay.

[00:35:25]>> Until it comes out. But I'll be sure to to message everyone when it does come out, for sure. But I assure you it'll be awesome.

[00:35:32]>> Okay. Well, fair enough. That's Yeah, we only promote awesome books here. So, we definitely as long as it passes that criteria, we'll uh we'll do so. Okay.

[00:35:40]Well, folks, my guest has been Robert Arrow. Uh, I will put links, folks, to his article and some other things about the yield curve and uh other such items at the show notes page. Robert, thanks so much for your article and for your time with us today.

[00:35:53]>> Okay, thanks again, Bo.

[00:35:55]>> Thanks everybody for tuning in. See you next time.

[00:35:59]>> Check back next week for a new episode of the Human Action podcast. In the meantime, you can find more content like this on mises.org.

[00:36:21]Heat.