The US Treasury has become a key driver of stocks and other asset markets through its pro-cyclical issuance of debt and the increasing depth and liquidity of repo markets. A pullback in fiscal spending now not only indirectly threatens markets through a weaker economy, but also more directly through a contraction of money-like liabilities and the forced deleveraging that it entails.
The year 2016 marked a sea change in US government policy. For the first time in the postwar period, fiscal spending significantly expanded outside of an economic downturn, in the beginnings of the Treasury put. Even more significantly for markets, that was also the precursor to the Treasury becoming the world’s largest de facto shadow bank, through its issuance of the debt which underpins the creation of trillions of dollars of money-like repo liabilities, allowing more leverage and boosting asset prices.
