The repo market can be a little abstract and frankly boring, but it’s an important part of the US financial system. It’s part of the system by which the fed can control the amount of money in the system, which varies from day to day and hour to hour. This is on purpose, since in early America was primarily rural agrarian and we needed more money during the harvest than we needed during the winter. This changing money supply is broadly good, but it allows the fed to make changes to the money supply that have profound effects on US wealth without a lot of fanfare.

It’s call repo, short for a repurchase agreement because you sell something to the government, like a T bill, and sign a contract to buy it back 24 or 48 hours later, which is there it gets the name “repurchase” — you repurchase the asset you just sold. As such, it’s effectively just a loan; you primarily buy repo to gain liquidity by selling a non-liquid asset for liquid cash, using the liquid cash to cover your expense or make your overnight investment, then get your asset back.

My finance professor would always say, liquidity kills you quick. If you’re insolvent (you spend more than you make), you can move money around and use financial instruments to cover the losses, but once you stop making payments or payroll because you don’t have any money on hand to pay, things unravel pretty fast for a firm or bank, even if you’re profitable. This practically means that the fed might be significantly warping the market.