Robert Aro on the Fed's Reverse Repo Trick

Summary

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Podcast Summary: The Human Action Podcast – Robert Aro on the Fed’s Reverse Repo Trick

Host: Dr. Bob Murphy
Guest: Robert Aro
Release Date: April 27, 2026
Podcast: Mises Institute’s Human Action Podcast
Main Topic: Delving into the Federal Reserve’s balance sheet manipulation, particularly the surprising effects of the Fed’s Reverse Repo operations during and after its post-2020 monetary tightening.

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Episode Overview

In this episode, Dr. Bob Murphy interviews Robert Aro about his recent article, “Why the Crash was Delayed,” which investigates why an expected market crash, anticipated by Austrian and mainstream economists alike, didn’t materialize after the Federal Reserve began aggressive tightening. The conversation centers on the underappreciated (and often overlooked) role of the Fed’s reverse repurchase agreements (RRPs), revealing how they acted as a liquidity buffer that prolonged market stability—effectively offsetting the visible “quantitative tightening.”

The discussion blends technical details with the Austrian perspective on business cycles, demystifying the underlying mechanisms of the Fed’s actions and their broader economic implications.

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Key Discussion Points & Insights

1. Why No Crash? The Mystery of Delayed Fallout

• Expected Crash: After the Fed’s massive post-2020 monetary stimulus, many anticipated a “mother of all crashes” as the central bank rapidly shrank its balance sheet during quantitative tightening (QT).
• The Puzzling Calm: Contrary to expectations, the market soared, and the systemic failure never came.

“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…” – Dr. Bob Murphy [00:38]

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2. The Fed’s Balance Sheet: Assets vs. Liabilities

• QT Mechanics: The Fed allowed $2.3 trillion of assets (treasuries and mortgage-backed securities) to roll off its balance sheet over roughly four years, “deleting” this money from the system.
• The Overlooked RRP Facility: The guest notes that, while everyone watches the asset side, the liability side—specifically the RRP—held $2.5 trillion, which also decreased to zero during this period.

“We thought that on one hand the Fed was tightening... but on the other side they're also reducing the liabilities, which is to say the 2.5 trillion other repos was entering the market.” – Robert Aro [03:30]

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3. How Did the Reverse Repo Facility Work as a Buffer?

• RRP Explained: Money market funds parked cash at the Fed via the RRP to earn interest. This “stored liquidity” then flowed back into the system as rates on Treasury bills became higher and more attractive, incentivizing funds to shift out of the RRP and into T-bills.
• Result: The supposed “tightening” was counteracted by this liquidity influx, acting as an unofficial stimulus.

“At its peak, this was effectively a backdoor stimulus program that bypassed the Fed’s official QT narrative and funded the government’s deficit.” – Dr. Bob Murphy (quoting Aro’s article) [06:40]

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4. Why Did Money Leave the RRP All at Once?

• Market Dynamics Not Policy: The rush out of RRPs wasn’t a policy decision but a rational market response—money managers simply chased higher returns as T-bill yields surpassed what the RRP offered.

“As a money manager, you actually have a duty to put your customer's product in the highest yield possible… Once the one week treasury outstripped the rate on repos, then the money managers essentially just had to take their money out.” – Robert Aro [05:14]

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5. When the “Buffer” Runs Dry—What Next?

• RRP Now Empty: By 2026, the RRP balance had flatlined at zero, meaning the trillion-dollar offset to QT had been exhausted.
• The Fed’s New Moves: Coinciding with this exhaustion, the Fed quietly announced it would resume balance sheet expansion—reserve management purchases (RMP)—to maintain liquidity.

“Perhaps it was no coincidence that once the RRP hit empty, the Fed's tightening ended...they’ve returned to official balance sheet expansion. They're being forced to replace the lost RRP liquidity with fresh money printing.” – Dr. Bob Murphy [11:01]

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6. Is This Still QT or Back to QE? (And What Does It Mean?)

• Net Effect: For a period, what the Fed described as “QT” was—when accounting for RRP roll-offs—effectively still an easing in net liquidity on a month-to-month basis.
• Now: The absence of further liquid RRP funds, combined with slow “official” asset growth, might even mean a slowdown in liquidity injections compared to the recent past, potentially presaging a contraction.

“It’s possible that what they called QT was actually QE, which becomes ironic because now the Fed is doing QE potentially.” – Robert Aro [18:41]

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7. Impact on Market and Macroeconomy

• Debt Pressures: With U.S. federal debt reaching $39 trillion, the Fed’s balancing act between mortgage-backed securities and treasuries is increasingly precarious.
• Yield Curve Warnings: The current cycle has seen the deepest and lengthiest yield curve inversion on record—still a reliable leading indicator of recessions within the Austrian framework.

“Now this time around, we’ve had the biggest yield curve inversion, I think, ever, at least since World War II… Every time that thing goes below, pretty soon afterward there’s a recession, which is shown by the gray bars.” – Dr. Bob Murphy [25:33]

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8. The Road Ahead: Crash, Inflation, or Complacency?

• Three Scenarios:
  • 1. A delayed crash occurs now that the buffer is gone;
  • 2. The Fed’s modest expansion fails to prop up markets, risking financial instability;
  • 3. No crash, just endless minor “flash crashes” and continued asset bubbles, fueling even greater complacency and risk-taking.

“I think maybe my fear is...if there is no crash...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...” – Robert Aro [19:20]

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Notable Quotes & Memorable Moments

• On the Backdoor Stimulus:

  “In less than two years the RRP withdrawals injected around 100 to 200 billion plus a month into the financial system.” – Dr. Bob Murphy (quoting Aro) [06:50]

• On Fed Transparency:

  “They did reduce the balance sheet, but it was kind of, you know, don’t pay attention to the man behind the curtain, right? Because...they never really talk about repos.” – Robert Aro [09:09]

• On Yield Curve Inversion:

  “If there is a recession, let’s say this year, then that pattern will be fine. In other words, future economists, looking back on this chart will just see, yep, that pattern holds up.” – Dr. Bob Murphy [25:43]

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Relevant Timestamps

• 00:18–02:00: Introduction of the “puzzle”—expected crash post-QT and outline of main article thesis.
• 02:00–04:33: Explanation of balance sheet rundown and discovery of reverse repo impact.
• 05:55–07:33: “Backdoor” stimulus from RRP unwind and market effects.
• 10:27–13:39: Consequences of zeroing out RRP and Fed’s new “reserve management purchases.”
• 16:38–18:41: Synthesis—how the illusion of QT was sustained; transition to Fed buying Treasuries.
• 24:38–27:39: Inverted yield curve as a recession signal and applicability of Austrian theory.
• 32:58–34:25: How to gauge market froth—watching VIX and “everyone’s a genius” moments.

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Final Thoughts & Outlook

• The episode delivers a nuanced explanation for why the anticipated market crash following the Fed’s post-2020 tightening never arrived: the multi-trillion dollar RRP facility acted as an unseen buffer, offsetting the effects of QT and feeding markets via a backdoor stimulus.
• Now that the RRP is exhausted and the Fed is quietly expanding its balance sheet again (albeit softly), financial conditions and the business cycle could be on the verge of turning more volatile.
• Both hosts express concerns about official narratives, growing debt, and the risk of future instability or complacency, reaffirming the importance of examining monetary mechanics from the Austrian perspective.

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For deeper dives: Links to Robert Aro’s article, related research on the yield curve, and further commentary are available in the episode’s show notes at mises.org.

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Transcript

[A]

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. Robert, welcome back to the Human Action Podcast.

[B]

Thanks for having me.

[A]

So the specific reason that I invited you here again is because I came across your recent mises.org article, daily article, which of course we'll link to, folks called why the Crash was Delayed. Yeah. So I think maybe if we just kind of walk through that and we'll, if folks are watching the video version of this interview, you know, we'll flash up charts as appropriate. But let me just read the opening paragraph 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 in the past. Crises 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, geez, they pumped in a boatload of money, especially after 20, 20, 20, and then they started, you know, letting the balance sheet shrink. In fact, even M2 was coming down, which typically doesn't happen. It's usually just like, you know, the rate of increase slows way down and, 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, the other element involved.

[B]

Okay, sounds good. Yeah. So I mean, the last, was it four years or so, the Fed, they did unofficial QT quantitative tightening and that was your classic, you know, we're going to drain the balance sheet, we're gonna let the mortgage backed securities and Treasuries roll off. So essentially or literally the Fed was draining, was it 2.3 trillion in that time? So it was about every month a billion or so treasuries were coming back to the Fed and then the Fed would quite literally delete the money. So the balance sheet, as we said, it's shrinking. It literally was shrinking. When you look at the chart, you'll see that the 2.3 trillion decline happened in that time. And again, it must have been maybe four years. Just like you and probably everyone else, we're just wondering, where is the crash? Right? We know when they tighten the yield curve inverts and everything that follows the offshore business cycle that typically leads to a crash. And not only do we not get a crash, but we had the stock market soar in that time. And honestly I was, you know, it stunned me for a good while and I kept looking at the balance sheet and when we say balance sheet, we're talking about the asset side. 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 the reverse repos. I remember maybe one time a few years ago I did an article called Don't Fear the Repo Man. That was probably the only time I talked to the repo. And then when I looked at that, I saw that they had a balance of 2.5 trillion. 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. And then I just kept digging and digging and then that's where we are now, right? And lo and behold, we thought that on one hand the Fed was tightening, they're reducing their assets, but on the other side they're also reducing the liabilities, which is to say the 2.5 trillion other repos was entering the market. So it was kind of like revolving door tightening on one hand and then letting the market, you know, and liquidity come back in on the other.

[A]

Okay, do you, I don't mean to put 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?

[B]

I don't think it was a wind down of the repo per se. It was more so every time the Fed would set the rate, they would set it just like they said, interest on reserves, they set the repo rate or on the chart, they call it the award rate. So when rates were increasing, 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, you had this kind of leveling off. And then the repos, the repo rate, it leveled off too. And then what I think happened is the yield on other short term maturities like the one week treasury that became more attractive. So as a money manager, you actually have a duty to put your customer's product in the highest yield possible. So especially once the one week treasury outstripped the rate on repos, then the money managers essentially just had to take their money out. And that's what we saw.

[A]

Okay, yeah. And so just to read, you actually spelled it out in the article. I realized as soon as I was asking you, you said here, so actually I'll give the recap. You say. So to recap, during qt, the Fed allows its holdings of treasury securities and mortgage backed securities to mature. Financial intermediaries repay the Fed and the Fed literally deletes that money from the system. This is the classic setup that exposes malinvestments, stresses credit markets and reveals the imbalances described in Austrian business cycle theory. Okay, so so far it's textbook. And then you say but this time it really was different because of 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 month 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, this was effectively a backdoor stimulus program that bypassed the Fed's official Q T narrative and funded the government's deficit. And you say correlation is not equal causation. But it's also not surprising. The Dow Jones broke out to new highs at almost the exact moment the RRP began to unwind.

[B]

Yes. Yeah, I Thought that was interesting because in 2022, the, the balance of the repos, it didn't even move. And even when you look at the stock market, again, correlation doesn't equal causation. We know that. But you know, it is funny or isn't it strange that nothing really happened in the stock market and then once 2023 came around, of course the bank term program came. But then at the same time you had all this, you know, new money, 100, $200 billion coming back into the market. And then, I mean, the stock market just seemed to go up and up and up. Right.

[A]

So, so you used a phrase in there like frozen liquidity or private liquidity to say, is it, how do you feel about this claim? And I'm not even sure if I agree with this. Let me just throw this out there because some people might be wondering, it is part of your thesis, now that you're stepping back and looking at the whole episode, is it perhaps that some of the headline figures 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.

[B]

Exactly. Yeah. Whether that was just by happenstance 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. You know, I, I just don't like that.

[A]

Right.

[B]

I mean, if you think of 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. So it's very difficult when the Fed talked to, you know, tightening its belt and reducing the balance sheet, which they did. So again, they're not lying. They don't 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. 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. So, you know, I, I, I definitely think it had to be a buffer. Right. When you do the math, even when you look at the net injections, even if the Fed was reducing at 100 billion a month, if 200 billion came back from the repos, that's not even, you're not even shrinking. You're actually injecting liquidity into the market. All the while you are saying, yes, this is qt. So it's a very tough thing that happened.

[A]

Yeah, yeah. So just to continue then with that narrative, so you say again, but 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. It is essentially zero, meaning that the trillion dollar offset to QT has been fully exhausted. And now here's the what else. It was very interesting what you said. Perhaps it was no coincidence that once the RRP hit empty, the Fed's tightening ended. On December 11, 2025, the Federal Reserve bank of New York announced it would begin reserve management purchases at a pace of approximately 40 billion per month. 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 RRP liquidity with fresh money printing. So you want to just elaborate on that in case people missed the punchline?

[B]

Yeah, yeah. So there's a lot going on there. So I guess maybe we could think of the, are the repo balance kind of just like a big savings account. Right. When this 2.5 trillion came from, we're talking about primarily money market funds, right? This money went to the Fed, the Fed just kept it, they didn't do anything with it. It was, it was literally, it was savings, it was out of the system, it wasn't being let, it was just sitting dormant at the Fed. On top of that, the Fed was actually paying interest. So we're talking tens of $20 billion of interest because the rate is like probably 3.54. So essentially in that period, the Fed was paying around 3 to maybe 5%, maybe interest to these, the money managers on the 2 trillion. So just a big piggy banker just sitting there as the QT went through the bouncy trunk and the money kind of came out into the market. 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 primarily of treasuries a month. And again they don't call that Q E, they don't call it quantitative easing now. They call it RMP Reserve management policy, I think. 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. And they're buying the Treasuries again. So this is your typical qe. But it makes sense because now that that's savings of the repo funds are gone, they need something to bring liquidity to the market, meaning they need, someone needs to buy Treasuries. So yeah, so that's the new don't call it QE, it's RMP and it's only $40 billion a month.

[A]

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 like a pause on the, on the rolling off. But they said they were going to continue letting the mortgage backed securities roll off.

[B]

Yeah.

[A]

And then it was just in December they were going to start stop the rolling off of the Treasuries like you just pointed out. And I just checked. Yeah, they still have been letting those roll. I mean they still are sitting on like 2 trillion or something. But so yeah, nothing to sneeze at. 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 for people partly too, I was giving, you know, a worrying warning about real estate that's saying hey, the Fed, even though they stopped tightening, they're still getting rid of their mortgage backed securities. Now there's, 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, because 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 mortgage market go of something if we got a pick. How do you feel about, about that? General conclusion.

[B]

I mean, yeah, I guess they have to choose. I mean you know they're. The US debt's now at 39 trillion, I think. Yeah, I'm with you. That's probably the most worrying thing. Again, mortgage may be their thing. Well no one even understands mortgage backed securities anyway so let's just see what we can do. But that is funny because yeah they are and literally when you look at the MBS chart, the mortgage backed security chart, it's, it's on a steady pace. Nothing seems to have stopped. But now the Treasuries, you see they are, they are skyrocketing again. So I guess, yeah, it's kind of a mix then. Right, because you're, you're qting on the mortgages and now you're qeing on the, on the Treasury. So maybe that's why they call it rmp, a bit of a mix.

[A]

Yeah, I think, I think you're right. That's, that is why they're. And again this was all I didn't see like you know normally people like Zero Hedge or something, you think we all over but I didn't notice anybody else talk about it was, yeah, I'm almost positive it was the late October 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 mortgage backed securities roll off. But then they were going to reinvest it into Treasuries and they even front

[B]

ran it to a bit. It wasn't even if you look at it it's probably closer to 50 billion a month. They said 40 but I think they, at the very beginning they just wanted to get as much Treasuries as you can because I said I think they're already at like 200 billion or so in since December. But I mean, yeah, you got to keep those yields down. Right?

[A]

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.

[B]

Yes.

[A]

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 shouldn't There have been a huge crash by now.

[B]

Yes.

[A]

And you're saying partly the reason, you know, there could be a giant asterisk. There is. Amidst all that, they also were drained. Like sort of the mirror image in terms of the accounting. They were letting the res reverse repos pull out. And that was possibly just because people in the private sector were flipping just based on the rates of return. And so in a sense, that was like sterilizing the qt, if you wanted to use that kind of language. Yes, I guess you could say it was reinfecting if it's the opposite of sterilization. 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 what you're saying. And note, lo and behold, once that buffer, you know, shrank to zero, basically of the RP balance, that's when the Fed stopped letting its holdings of, of total assets shrink. And then, you know, now I'm adding the little nuance that they still are letting the subcomponent of mortgage backed securities shrink, but they're offsetting it by increasing their holdings of Treasuries. Okay, so exactly.

[B]

Yeah, no, that was perfect. Okay.

[A]

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

[B]

Yeah, no, it's, it's definitely not easy because everyone wants us to have a crystal ball. 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, because when you do the net differences between how much of the asset was being reduced and then how much of the repos were coming back on each month, you'd have something like at the peak, around the 2003, a year and a half or so, you were having something like 100 to 200 billion dollars coming into the market. So it's possible that what they called QT was actually qe, which becomes ironic because now 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 that much, that is still less than what was potentially coming online at the peak of the RPP roll offs. 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 into the market. Now what they call an RMP is only 40 billion. So what I'm trying to say is potentially there's a room for slowdown because it's that cessation of credit, there's less money coming in. 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. In addition to that, you get this inversion of the yield curve, you know, that's happening potentially. So potentially you may get that type of a contraction and then we, we see the cycle conversely, maybe, maybe not. 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. So, yeah, I, I'm, you know, it's tough, it's hard to see what exactly is going to happen. 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. Officer.

[A]

Okay, let me, I don't want to put words in your mouth, but is this a fair summary 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 an 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 happen. 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. 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 that.

[B]

Yeah.

[A]

And so could you interpret 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 and then 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 pull 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?

[B]

Yeah, that's pretty good. I didn't think of it in that regard. That seems, that seems like it was a plan, the way it spilled out, which I wouldn't put past them. 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 literally just sat for a good while. Right. It was dormant. It wasn't. It didn't just go in and then it, it's kind of stay there. Like if you look at 20, 20, 22, I think it was just more flatlining. It didn't really, really do much. So yeah, it was kind of just like 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. But yeah, you know, whether by design or by accident, I think it had that. Right. It kept the money out of the system. The money wasn't being lent, wasn't, wasn't do anything. It was just making interest for, you know, money managers. And now it came back online. So I agree. Yeah, it may have staggered potential price movements or movements in treasuries or, or at best it just kept the QE at bay. Right. It just allowed a buyer to, to kind of normalize things so you don't have wild spikes or prices or crashes.

[A]

Yeah, yeah. Okay. So that's interesting. 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. So this that we're showing you folks, is the 10 year treasury constant maturity minus the three month there. Some people look at the 10 year minus the two year. I like the 10 year 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 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 three month is higher than the ten year. So the yield curve is quote, inverted. And you can see this chart goes back to the early 80s. 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.

[B]

Yeah.

[A]

And so what's funny is if, if there is a recession, let's say this year, then that pattern will be fine.

[B]

Right.

[A]

In other words, future economists, looking back on this chart will just see, yep, that pattern holds up. 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 un. Inverts, 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 do you have any thoughts on any of that stuff?

[B]

Yeah. And then. So everything you said, and then you said the inversion. So yes, it always predates 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. The recession, quote unquote. It really happens once you see that on aversion. Right?

[A]

Yeah.

[B]

And now I think because I've been looking at the 10 minus the two year but yeah, I remember you, you said you like the 10 minus 3, but the 10 minus 2, the spread is like at 0.5 and I think that's potentially maybe kind of heading into danger zone.

[A]

Right.

[B]

I guess if we think what, maybe if we think of 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, let's say bond vigilantes or maybe people are just demanding more debt or debts become more expensive and you get this more of a mean reversion or more of a natural rate coming in or the Fed essentially is losing control of things. So I think it all looks like it is on that track. Right?

[A]

Yeah. And by the way, just for listeners, I'll link to the Show Notes page to some stuff I've written. I have a QJE article with Ryan Griggs on this stuff. It's not just blindly looking at charts and saying, oh, when the, 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, let me just explain that. When 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 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 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 the exact pattern you'd see. And I Think the reason it typically would uninvert is presumably policymakers see signs of the economy weakening and so they start cutting, you know, short rates in anticipation of all we got slack labor markets and unemployment sticking up and blah, blah, blah, 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, they 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, 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. 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 on 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 caused the economy to tip into recession.

[B]

I think we're seeing in real time now, like you said, I think potentially, and hopefully the RPP was that bit of the puzzle that everyone seemed to miss because I looked for, there wasn't. Again, not much has ever been said on repos. Right. Intuitively it does make sense. Right. Just want to do the math. 2.3 minus 2.5 trillion is, you know, net 200 billion. Right. So 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. And again, the Fed, you know, what will the Fed do? I think that's the, that's the problem. Will they actually raise rates? I mean, I can't even imagine with the $39 trillion debt and, you know, no one wants to raise.

[A]

Right.

[B]

I can't imagine even if inflation or price inflation is high, but then they're going to cut rates 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 as commit to more qe. So I think this is always, you know, we're living in interesting times more than even the, the last cycle, the COVID crash And all the last time, qt. This is a different ball game now. Right. Again, exacerbated by the $39 trillion debt. They, they seem really stuck. Right. So what I think might just happen, you'll just get that unversion. And I, again, I'm just guessing, but I just seem like, I imagine the under version was getting more apparent and then maybe then something will happen.

[A]

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. 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 in no 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. And that kind of gives them. Because, Because I think what happened, a bad thing was post 2008 when the Fed did all those rounds of QE and various people were alarmed, including me, and then it looked like, oh, nothing happened.

[B]

Yeah.

[A]

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 trillionaire 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 Covid, like, oh, wait, maybe they can't do that. So.

[B]

Yeah, exactly.

[A]

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?

[B]

Yeah. So I, I guess it's kind of, I like the VIX as far as, just as a measurement of complacency. 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 the Repos look and all that. 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. Remember Michael Blurry in that. The movie where he knew the crash is coming. He was in a. He was with 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 is going to crash. I think potentially the same kind of thing when, you know, valuations are stretched. They're all time highs. And again, if yields go up, valuations will look worse, of course, but it's just that stretching and, you know, I think something has to happen at that point. Right? So I just kind of.

[A]

So you're telling people to go out to exotic dancers and get market research

[B]

that way is that it works for Michael Blurry.

[A]

Okay, fair enough.

[B]

But no, no, no, I'm not, I'm not saying that. Yeah, be mindful of, 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 their pumping, as you've seen one way or another. Even when they're saying qt, they still manage to pump. So we just gotta be mindful of that. Right?

[A]

Okay. Well, great. I guess the last thing I have for you is are you working on a book? Do you want to tell us about that?

[B]

Yeah. Thank you, Bob. Yeah. So in the last year, right, I haven't been writing much. I just took some time off for the kids and just, you know, do that. But I am writing a book, but I'm also a superstitious guy too, so I don't want to say anything about it, okay. Until it comes up. But I'll be sure to. To message everyone when it does come off Shabbat. I assure you it'll be awesome.

[A]

Okay. Okay, well, fair enough. That's. Yeah, we only promote awesome books here, so definitely, as long as it passes that criteria, we'll. We'll do so. Okay, well, folks, my guest has been Robert Arrow. I will put links, folks, to his article and some other things about the yield curve and other such items at the Show Notes page. Robert, thanks so much for your article and for your time with us today.

[B]

Okay, thanks again, Bob.

[A]

Thanks everybody for tuning in. See you next time. Check back next week for a new episode of the Human Action Podcast.

[B]

In the meantime, you can find more

[A]

content like this on mises.org.