Exorbitant privilege and the cost of renting America’s balance sheet

Bankers are blaming tensions in the repo world on the increasing cost of renting out their balance sheets.

As we’ve broken down already, leverage and liquidity requirements make it harder than in the past for banks to borrow cheaply to buy (mostly) riskless and lend those same assets on at higher rates than they have to pay to their own creditors.

Which is another way of saying…new guys in the investment scheme don’t get to accrue the same rate of return from new asset purchases the early guys do unless the assets massively outperform, and hence are much more likely to run if and when these assets are priced below par value or start to outperform. Bitcoiners will, of course, know this as “early adopter syndrome”. For everyone else it amounts to the dynamics which drive debt overhang constraints.