The Fed's Maginot Line

[labasta]

Re: The Fed's Maginot Line

Yeah, they can't get something going because they can't get the farms going lol.

I imagine it was the farms which formed the backbone of Zim's real economy. Ignore the rule of law and property rights and everything else is window dressing.

Gold could get it going if they gold backed the currency at the same time as having the rule of law which allowed property laws to be upheld. Would take a while to build up as nobody would trust them for a couple of decades. (mmmm... the disappation of trust... sound familiar?) Without the latter, the people will just be as poor whether they have 1 zim dollar or 10 gazillion.

Instead, Zim's resources are elite owned and pilfered in a trickle down economy which only includes their military and anyone with connections to government (expenditure). Their Swiss bank accounts (which could now be insolvent because of the banking crisis lol!) get the rest (profit).


In a nutshell, it's just the elite giving the finger to the people.

Africa is the ultimate example of a 100% trickle down economy. It seems America is following this path at a tremendous rate. If it really wants to stop the crisis, it has to go from the bottom up (this all depends on how selfish, scared and individually detached America's elite really are).

If it does not, then America will become two countries, one where resources are pilfered to support the military (mmm... sounds familiar too) and one, which exists entirely on the black economy, which will be much more successful than Zimbabwe because of the rule of law.

If property rights and the rule of law can be maintained in the West, then the real threat to the Elite is the loss of power through their issuance of money and credit. The black market could spawn an era of a new beginning. The (new) elite will be the land owners and gold hoarders. Perhaps the old elite are positioning themselves to become the new elite as we speak.

Although, I would say, in such an event the new powerful will be more localised, rather than national, as everything breaks down to its immediate surroundings.

However, if martial law is announced, then Zimbabwe here we come.

Martial law, is the elite's way fo saying we will remain in power no matter what. Then, I'm afraid, the human experiment is over and darkness will reign, unless there is a revolution.

Let's just pray there are some people in powerful positions who care. The intention is enough, even if they get it wrong first, they will eventually get it right. If the intention isn't there, then we are screwed.

[bda_guy]

Re: The Fed's Maginot Line

Anyone who suggests that last week's ballooning reserve deposits represent inflationary pressure or the Fed monetizing the deficit simply doesn't know what they're talking about. Banks are sitting on the reserves, not withdrawing them as cash. When markets settle down, the Fed can and will absorb those reserves back in with sterilizing sales of Treasury securities, just as it did in 2001 or after the more modest spike in August 2007. Providing new reserves aggressively is absolutely and unquestionably the way the Fed needs to respond to this kind of development. Is the deflation/inflation debate similar to the heaven/hell debate?.

After having read full article on "Econbrowser", the argument as I can figure is as follows:

1) There have been a number of lending facilities that have pumped money/treasuries into the financial system which are backed by various forms of (increasingly risky) collateral. The credit may available is based on the value of the collateral less some haircut, depending on the riskiness of the collateral.

2) To the extent that money has been used (instead of treasuries), the Fed has sold additional treasuries into the market (having obtained the additional treasuries from the Treasury on a temporary loan basis) to absorb money from the system by an offset close to equal to what was provided by through the lending programs. Therefore, there has been no significant influx of new money actually in the system.

3) By pumping the system with treasuries while keeping the currency within the system flat, this helps increase bank reserve ratios (since more credit is given to treasuries than the supporting collateral) but does not have an inflationary impact.

4) At the point in time when the market starts to stabilize, treasuries can be withdrawn. I believe that a key assumption here is that the prices on the underlying collateral have also stabilized (maybe even risen) and the market starts to function again so that the banks have a more reliable place that they can sell these assets into. Therefore, there would be no need to change the amount of money in the system since money would flow out of treasuries and back into the assets that the collateral is comprised of.

5) The excess treasuries that the Fed borrowed from the Treasury would be returned, the money level would remain at a stable level and all would be fine.


Ok, so that's my understanding of how this all works. The key assumptions are that (1) the banks that borrow money/treasuries under these various lending facilities return the money/treasuries (+ interest) back when they're due, and (2) there will be some stabilization of the prices on the underlying collateral.

To the extent that a participating bank defaults on one of these lending facilities, the Fed now has significant credit risk which was not considered within the original article. If the collateral ends up being worth less than the hair-cutted values that were considered when posted to the lending facility, the Fed will be on the hook for any deficiency. Unless the Fed plans to default on the treasuries, the only way that they can buy back the treasuries from the market would be for the Treasury to increase the money supply which is obviously inflationary.

As to my second point, it is vastly important for the prices of the underlying collateral to firm up such that companies can sell them into the market at the level at which they are carrying them on their balance sheet. If the value of the assets used as collateral continue to deteriorate, the capital of the companies holding this stuff will also deteriorate. The need for all of these credit lending facilities will be required as long as the financial health of the companies participating remains weak. If banks fail, this adds turmoil to the currently dysfunctional marketplace and increases the credit risk assumed by the Fed.

All of the central bank market actions work on the premise of supplying an ever increasing supply of high quality, liquid assets in the form of treasuries (or other gov't bonds) while trying to keep the aggregate money supply constant. However, if the fundamentals that underlie the collateral continue to deteriorate (ie. home prices continue to decline), the collateral value will continue to decline increasing the Fed's credit risk leading to substantial credit losses. At that point, the Fed will be reduced to only two options, default on gov't treasuries or increasing the amount of currency in circulation. Neither option is good and both are inflationary since defaulting on treasuries will lead to a mass exodus of capital from the US and a declining USD.

Therefore, it is vitally important that banks return to health and a liquid market supporting the risky forms of collateral forms once again. However, neither appear to be coming back anytime soon. But that's not going to stop the Fed and other central banks from providing support through TARP, equity injections, etc. to prime the pump until either stability is restored or everything goes to hell!

[metalman]

Re: The Fed's Maginot Line

My margin account has been slashed!
I have been wondering if this would happen but to actually see it is shocking. My currency trading account has had its margin slashed from 100:1 to 20:1! Without any notification which is obviously illegal.
This takes my positions from an average leverage of 3% which is a very conservative play to 16% which is getting very dangerous.
People that had higher leverage than me and are not paranoid enough to check their accounts on the opening of the currency markets will get margined out of even winning positions if they have high leverage and their positions temporarily move against them.
I will be posting updates on www.slycapital.com

Your brokers are in survival mode - beware!

wow! other here are worried about brokers. here's data. thanks for the link to your blog. will follow.

[GRG55]

Re: The Fed's Maginot Line

The Fed is far from clueless: they are instruments in the effort to further USD seignorage.

Notably, the USD is controlled by a private, opaque entity: The Fed.

This hasn't been a collapse: it's been a demolition, clearing the low-income housing for McMansions.

The next bubble: whatever helps further USD seignorage and consolidate control of global banking. Infrastructure, new-deal? Issuing bonds for new assets in the US helps move more US paper abroad.

Bubbles, busts... there's are the weapons that the Fed uses to drill more dollars into the wallets of the world.

Even the Japanese are going to start taking orders from the Fed post-MS acquisition.

Maybe that's why they are reconsidering? Or want a better deal?

Mitsubishi and Morgan Stanley Renegotiating
By ANDREW ROSS SORKIN
Published: October 12, 2008

Morgan Stanley was racing to salvage a crucial investment from a big Japanese bank on Sunday in an effort to allay growing fears about its future — negotiations so critical to the financial markets that they have drawn in both the Treasury Department and the Japanese government...

[vinoveri]

Re: The Fed's Maginot Line

I fall off the planet for 2 years, come back to discover that everything is "back to normal", credits is everywhere, global GDP growing, inflation is <4%, the DJI is 17k AND the U.S. fiscal budget deficit is $1.5 Trillion per year and the total U.S. debt is $20 Trillion.

Why is this not a somewhat probable if not likely scenario? Although the credit/debt game has to end at some point, but what's to prevent it from continuing for another 20 years. All it would seem to take is a major increase in the U.S' credit limit and continued cash advances from the ROW.

Although I tend to agree with from pure common sense and intuition the notion that real capital comes from real savings, it would seem to me that recent history has shown that this idea of "Confidence" is the key to the credit Ponzi scheme, and as long as one thinks the scheme is still in its early stages, greed will drive participation; i.e. paper and fictitious wealth are "real" as long as there is "confidence" in the system.

[phirang]

Re: The Fed's Maginot Line

I fall off the planet for 2 years, come back to discover that everything is "back to normal", credits is everywhere, global GDP growing, inflation is <4%, the DJI is 17k AND the U.S. fiscal budget deficit is $1.5 Trillion per year and the total U.S. debt is $20 Trillion.

Why is this not a somewhat probable if not likely scenario? Although the credit/debt game has to end at some point, but what's to prevent it from continuing for another 20 years. All it would seem to take is a major increase in the U.S' credit limit and continued cash advances from the ROW.

Although I tend to agree with from pure common sense and intuition the notion that real capital comes from real savings, it would seem to me that recent history has shown that this idea of "Confidence" is the key to the credit Ponzi scheme, and as long as one thinks the scheme is still in its early stages, greed will drive participation; i.e. paper and fictitious wealth are "real" as long as there is "confidence" in the system.

Your intuition is good! It will likely be the case.

[GRG55]

Re: The Fed's Maginot Line

Your intuition is good! It will likely be the case.

All except the < 4% inflation guess. It'll be there only if the BLS keeps fiddling with the measurement criteria. Not out of the question, of course, but increasingly difficult to do while maintaining that "confidence thing"...;)

[Andreuccio]

Re: The Fed's Maginot Line

I fall off the planet for 2 years, come back to discover that everything is "back to normal", credits is everywhere, global GDP growing, inflation is <4%, the DJI is 17k AND the U.S. fiscal budget deficit is $1.5 Trillion per year and the total U.S. debt is $20 Trillion.

Why is this not a somewhat probable if not likely scenario?

C'mon, be real.

What are the odds you fall off the planet?

[c1ue]

Re: The Fed's Maginot Line

I fall off the planet for 2 years, come back to discover that everything is "back to normal", credits is everywhere, global GDP growing, inflation is <4%, the DJI is 17k AND the U.S. fiscal budget deficit is $1.5 Trillion per year and the total U.S. debt is $20 Trillion.

Why is this not a somewhat probable if not likely scenario? Although the credit/debt game has to end at some point, but what's to prevent it from continuing for another 20 years. All it would seem to take is a major increase in the U.S' credit limit and continued cash advances from the ROW.

It won't happen because the ultimate cause of the problem: securitized lending, is broken and a replacement has yet to be found.

The actions of the US and other G7 governments will temporarily alleviate the consequences of the securitization debacle, but the fundamental securitization mechanism must be replaced for the free credit to again flow. Unless you think Europe will buy crap MBS bonds again?

Even a return to the 1985 model of banking won't do; that would still mean losing 2/3rds of the previously available credit (or more).

If you think things are bad now - just wait to see what happens when government guaranteed loans are being made by banks capitalized with government capital.

That will be a very short but spectacular bubble.

[vinoveri]

Re: The Fed's Maginot Line

It won't happen because the ultimate cause of the problem: securitized lending, is broken and a replacement has yet to be found.

The actions of the US and other G7 governments will temporarily alleviate the consequences of the securitization debacle, but the fundamental securitization mechanism must be replaced for the free credit to again flow. Unless you think Europe will buy crap MBS bonds again?

Even a return to the 1985 model of banking won't do; that would still mean losing 2/3rds of the previously available credit (or more).

If you think things are bad now - just wait to see what happens when government guaranteed loans are being made by banks capitalized with government capital.

That will be a very short but spectacular bubble.

Now that Fannie and Freddie are nationalized, nothing would seem to limit there ability to buy and hold mortgages, and provide whatever terms they choose. In fact, what's to prevent them from having their charter modified (or another GSE created) to take on other debt,e.g., car loans, credit cards, student loans. Nationalization is a really radical change to the system - it's really difficult to get your arms around the extent of what can now happen.

and the vicious cycle is now a self-fulfilling circle
1) Treasury sells bonds to banks
2) Fed buy bonds from banks and voila credit
new 3) Fed borrows from Treasury

The national debt can go to the moon as all this happens.

The only check it would seem is the credit-worthiness of the U.S. And by whom and when that will be challenged (if ever) is anybody's guess.

[Slimprofits]

Re: The Fed's Maginot Line

U.S. now in recession, says Volcker

Mr. Volcker was asked by a member of the audience if the massive infusion of liquidity by the Federal Reserve could lead to inflation or stagflation.

“It’s not going to be a problem in the short run. Inflation doesn’t flourish in the face of recession,” he said.

“It’s something we have to worry about when we get out of this recession.”

[c1ue]

Re: The Fed's Maginot Line

The national debt can go to the moon as all this happens.

The only check it would seem is the credit-worthiness of the U.S. And by whom and when that will be challenged (if ever) is anybody's guess.

Credit worthiness is exactly how the Alt-A debacle was created.

Some arbitrary score set by a ratings agency whom you pay for said score doesn't mean squat - and this has been fully revealed.

The point is - every 1$ of debt the US piles up must be matched by a Treasury or corporate or some type of bond sale to someone. Even before this latest crisis, more than half of purchases were from foreign central banks.

Why again will the foreigners continue to purchase?

I can see some purchasing as a quid pro quo to retire some of the bad MBS debt, but I still cannot fathom a reason beyond that.

[DrYB/C]

Re: The Fed's Maginot Line

Cointegration and Cagan's model of hyperinflation under rational expectations

by Tom Engsted

WHEN MONEY AND PRICES ARE INTEGRATED of order two, I(2), and shocks to money demand or velocity are stationary, then the Cagan (1956) monetary model of hyperinflation has the implication that real money balances cointegrate, in the sense of Engle and Granger (1987), with the rate of inflation. As a result, one can estimate the interesting parameter in the model, the semielasticity of the demand for real balances w.r.t. expected inflation, super-consistently in a cointegrating regression without having to specify the exact expectations formation process....

As it plays out in the real-world (?):

1. Icelandic Shoppers Splurge as Currency Woes Reduce Food Imports http://www.bloomberg.com/apps/news?p...d=aVFtDRGwcc50

2. Icelanders Sink Under Foreign-Currency Loans as Krona Plunges http://www.bloomberg.com/apps/news?p...&refer=economy

3. U.K. Used Anti-Terrorism Law to Seize Icelandic Bank Assets http://www.bloomberg.com/apps/news?p...d=aXjIA5NzyM5c

4. The Next World War? It Could Be Financial. http://www.washingtonpost.com/wp-dyn...002441_pf.html

Related:

a. China snaps diplomatic, military contacts with US http://in.news.yahoo.com/20/20081007...tary-cont.html

b. Russia stunned by UN-NATO cooperation deal http://en.rian.ru/russia/20081009/117635210.html

c. Medicines shortage looms as winter approaches http://business.timesonline.co.uk/to...cle4931435.ece

[vinoveri]

Re: The Fed's Maginot Line

The point is - every 1$ of debt the US piles up must be matched by a Treasury or corporate or some type of bond sale to someone. Even before this latest crisis, more than half of purchases were from foreign central banks.

Why again will the foreigners continue to purchase?

I can see some purchasing as a quid pro quo to retire some of the bad MBS debt, but I still cannot fathom a reason beyond that.

Neither can I unless they have no where else to go or to avoid economic MAD?

What I don't understand is if the gov with fiat money system can create money out of thin air why does this newly created money need to be associated with a creditor? What is the significance of the fed's balance sheet for instance, if it can get new funding at any time from the treasury?
With a nationalized banking system, what's to prevent the gov from asserting anything it wants in reference to it's balance sheet, that of the banks, who owns who what, etc? It's back to the confidence game again. I don't get it.

[donalds]

Re: The Fed's Maginot Line

For those of you who would like to expand your understanding of inflation and Volcher, or at least gather in a differing perspective, listen to this audio of an interview with York University, Toronto, Political Economy professors:

http://www.leftbusinessobserver.com/Radio.html