MotorCity Crashes, another domino down?

[Polish_Silver]

How does QE affect real world

I don't think for a moment that the Fed can can reverse policy without disrupting the credit markets. But I don't think we can be at all certain they won't try.

btw: I don't think the Fed's timing is at all an accident or coincidental. 1. QE is demonstrably less effective as time passes. 2. The Fed has bought the fiscal authorities time to get together a coherent policy and economic restructuring framework, and look what has happened - no action but the deficit declined anyway. 3. We are in a low-inflation, perhaps disinflationary, phase globally now that China is slowing measurably, EM economies are under considerable stress and Europe continues to contract all of which is a headwind for rising US bond yields...if it happens, a decline in oil prices will cement the disinflationary trend. The US economy continues to grow, albeit slowly (inflation? what inflation?), and the 2013 version of "That Giant Sucking Sound" is coming from Fortress America as capital flows inward supporting the US$ (to the complete disbelief of the doomers). This might be the best chance the Fed thinks it will ever get to end QE, and set themselves up to eventually start to unwind that massive balance sheet.

I'm still lost how the QE affects the real world. Doesn't it all boil down to interest rates and debt levels? Was the significance of QE that the FED was explicitly controlling long term rates, not just short term rates?

So ending QE means rates will go up?

Are there people whose debt service cost will rise with the rate increase--say people with adjustable rate mortgages, or others who need to roll over debt?

Since rates go up, asset values go down: houses, other debt financed capital, and most of all, bonds. Will this cause bankruptcy or solvency problems for banks, homeowners, etc?

That makes me think Social security should sell off all Their T-bonds now, while they are still at premium value. But maybe that would trigger the avalanche.

[jk]

Re: How does QE affect real world

there is no market for social security's putative holdings of t-bonds. they are "special" bonds that may only be held by the social security "trust fund."

[Polish_Silver]

Re: How does QE affect real world

there is no market for social security's putative holdings of t-bonds. they are "special" bonds that may only be held by the social security "trust fund."

I had not read that, and I am still grappling with what it means. If I understand you right, it means that pensioners get the interest from the T-bonds, but they can never be sold to get the principal. Can they be sold to the FED?
That puts the inflation question in a whole new light! It strikes me that this actually works against the pensioners, and it's a wierd kind of asset that cannot be sold. How do you even pretend what the "value" Is? You cannot "mark to market" if there is no market.

[jk]

Re: How does QE affect real world

I had not read that, and I am still grappling with what it means. If I understand you right, it means that pensioners get the interest from the T-bonds, but they can never be sold to get the principal. Can they be sold to the FED?
That puts the inflation question in a whole new light! It strikes me that this actually works against the pensioners, and it's a wierd kind of asset that cannot be sold. How do you even pretend what the "value" Is? You cannot "mark to market" if there is no market.

the social security "trust fund" is just an accounting entry. get over it.

[Polish_Silver]

Cities should not use debt financing

Cities and states are borrowing to finance routine operations and future obligations.

They should not be allowed to do that.

There should be some office like Czar of Auditing that prevents it. If they need to finance a "once in a life time" big cost, it should be done with bonds issued based on an earmarked tax. All the routine expenses should come from recurring revenue.

What I am worried about is, with rates so low, could the entire private sector also be financing operations with borrowing?

There was a book published in the 1930's called "The bond bubble that broke the world".

It seems to have many parallels to our time . . .

[c1ue]

Re: Cities should not use debt financing

there is no market for social security's putative holdings of t-bonds. they are "special" bonds that may only be held by the social security "trust fund."

They're more special than that - the interest rate on these bonds isn't determined by the 'market'. It is a 5 year hindcast average.

Thus the accounting entry is absolutely correct, but more importantly, ZIRP can be seen as a direct siphoning off of present day Social Security receipts for other purposes via damping down of future Social Security payouts.

[charliebrown]

Re: Cities should not use debt financing

i believe that the only way that the SS bonds can be redeemed is by selling them to the u.s. treasury. And since the treasury does not have a "vault" full of cash, it will have to sell regular treasury debt to raise the cash to buy SS bonds.

I don't think we ever got a clear answer on what happens under a debt ceiling do SS checks go out? If SS is cash flow negative, as I think they are flirting with this, and the treasury cannot expand borrowing will checks go out?????

The SS trust fund should be changed to normal treasuries for this reason, so even if there is a debt ceiling portions
of the trust can be liquidated without political wrangling.

[GRG55]

Re: Cities should not use debt financing

Cities and states are borrowing to finance routine operations and future obligations.

They should not be allowed to do that.

There should be some office like Czar of Auditing that prevents it. If they need to finance a "once in a life time" big cost, it should be done with bonds issued based on an earmarked tax. All the routine expenses should come from recurring revenue.

What I am worried about is, with rates so low, could the entire private sector also be financing operations with borrowing?

There was a book published in the 1930's called "The bond bubble that broke the world".

It seems to have many parallels to our time . . .

This seems inconsistent with your "get rid of the Fed" position on another thread. If the States need a central authority to prevent them from going into too much debt, what makes you think those same States are capable of regulating their banks and exercising any discipline over the issuance of currency?

If there was no Central Bank today, guess how the States would be dealing with their current debt problem...