the endgame for the banks and rates and stuff

[grapejelly]

So here's the dealio.

We know that the Western CBs in Euroland and the US and so forth are desperately dropping rates they charge their member banks.

So here is what will happen.

1. Acme Bank borrows at 2%.

2. Acme Bank buys government bonds paying 4%.

3. Acme Bank makes a no risk 2%.

You can jawbone Acme Bank (as the French are doing), you can threaten, cajole, take their candy away, give them corner time...but this is the trade that is baked into the cake right now.

But wait...what happens when long rates climb? The bank makes even more money, is what happens...but their portfolio of bonds falls in value. Well, then, let's throw out the mark-to-market rules and simply pretend that all bonds will be held to maturity.

You betcha. That is what will happen on a massive scale.

This serves to finance government deficits. Banks and government are in partnership for a massive hidden tax and always have been since the beginning of central banks. Better depreciation of the currency rather than raise taxes, right?

But I'm wondering if the end game screws things up...what pitfalls lay in this foolproof strategy?

What if long bonds really tank?

Long rates will be very high but the private sector won't be able to afford to borrow.

Only the public sector will be borrowing.

And who will be lending them money at this point? Nobody.

So it's a fool's game, this dealio, and is bound to end up very bad. It deepens the Depression. No private money being raised. Only the government as the lender of all resorts, not just the last ones.

Very serious stuff coming up.

[phirang]

Re: the endgame for the banks and rates and stuff

pretty much.

[jtabeb]

Re: the endgame for the banks and rates and stuff

So here's the dealio.

We know that the Western CBs in Euroland and the US and so forth are desperately dropping rates they charge their member banks.

So here is what will happen.

1. Acme Bank borrows at 2%.

2. Acme Bank buys government bonds paying 4%.

3. Acme Bank makes a no risk 2%.

You can jawbone Acme Bank (as the French are doing), you can threaten, cajole, take their candy away, give them corner time...but this is the trade that is baked into the cake right now.

But wait...what happens when long rates climb? The bank makes even more money, is what happens...but their portfolio of bonds falls in value. Well, then, let's throw out the mark-to-market rules and simply pretend that all bonds will be held to maturity.

You betcha. That is what will happen on a massive scale.

This serves to finance government deficits. Banks and government are in partnership for a massive hidden tax and always have been since the beginning of central banks. Better depreciation of the currency rather than raise taxes, right?

But I'm wondering if the end game screws things up...what pitfalls lay in this foolproof strategy?

What if long bonds really tank?

Long rates will be very high but the private sector won't be able to afford to borrow.

Only the public sector will be borrowing.

And who will be lending them money at this point? Nobody.

So it's a fool's game, this dealio, and is bound to end up very bad. It deepens the Depression. No private money being raised. Only the government as the lender of all resorts, not just the last ones.

Very serious stuff coming up.

Nah, the government can just choose to lend TO the private sector AFTER it borrows the money first.

Never underestimate the power of government to go into debt.

[ASH]

Re: the endgame for the banks and rates and stuff

Only the public sector will be borrowing.

And who will be lending them money at this point? Nobody.

So it's a fool's game, this dealio, and is bound to end up very bad. It deepens the Depression. No private money being raised. Only the government as the lender of all resorts, not just the last ones.

Very serious stuff coming up.

I understand you to mean a scenario in which the government is unable to borrow money from the public (implying the inability to sell bonds on the market).

I'll tell you who will be lending the federal government money if this happens -- the Federal Reserve, as in buying federal debt directly, as in monetizing the debt.

[grapejelly]

Re: the endgame for the banks and rates and stuff

I understand you to mean a scenario in which the government is unable to borrow money from the public (implying the inability to sell bonds on the market).

I'll tell you who will be lending the federal government money if this happens -- the Federal Reserve, as in buying federal debt directly, as in monetizing the debt.

yes but that will mean there is no real market for US sovereign debt...and that will mean that the USD won't be so attractive, will it?

[rj1]

Re: the endgame for the banks and rates and stuff

Why not just bypass the middleman (the bank) and give money to the people that need it directly (via a kind of temporary "National Clearing Bank" or something)? If the banks are not going to loan, there's no point in making things easy for them.

[ASH]

Re: the endgame for the banks and rates and stuff

yes but that will mean there is no real market for US sovereign debt...and that will mean that the USD won't be so attractive, will it?

I agree. The US reduced to directly monetizing its debt (and subsequent collapse of the dollar) qualifies as TEOTWAWKI... not Mad Max necessarily, but far, far worse than "high" inflation for a few years. So, from my standpoint, to conclude that we reach a condition where there is no real market for US sovereign debt is to conclude TEOTWAWKI.

If you're right about the government shortly being unable to borrow money, then "very serious stuff" is an understatement.

[metalman]

Re: the endgame for the banks and rates and stuff

I agree. The US reduced to directly monetizing its debt (and subsequent collapse of the dollar) qualifies as TEOTWAWKI... not Mad Max necessarily, but far, far worse than "high" inflation for a few years. So, from my standpoint, to conclude that we reach a condition where there is no real market for US sovereign debt is to conclude TEOTWAWKI.

If you're right about the government shortly being unable to borrow money, then "very serious stuff" is an understatement.

we watch next week's auction keenly... note in the comments on this story... ' What happens when no one shows up to purchase all this debt?'

Treasury to sell $55 billion in long-term debt

By Greg Robb, MarketWatch
Last update: 10:23 a.m. EST Nov. 5, 2008
Comments: 4

WASHINGTON (MarketWatch) -- The Treasury Department will auction $55 billion in notes and bonds next week in its quarterly refunding auctions, the government said Wednesday.

The department will auction $25 billion in 3-year notes, $20 billion in 10-year notes and $10 billion in 29-year, 9-month bonds to refund $54.9 billion in maturing securities and raise about $100 million.

The rest of the government's record $550 billion in financing requirements will be met with weekly bills, monthly 2-year, 3-year and 5-year notes and other instruments, Treasury said.

[ASH]

Re: the endgame for the banks and rates and stuff

note in the comments on this story... ' What happens when no one shows up to purchase all this debt?'

Well, if there aren't buyers, I will have to dramatically adjust my sense of where we are in this mess... and how we're doing in the ugly contest.. and whether I should already have laid in the farming supplies at my parents' spread.

[metalman]

Re: the endgame for the banks and rates and stuff

Well, if there aren't buyers, I will have to dramatically adjust my sense of where we are in this mess... and how we're doing in the ugly contest.. and whether I should already have laid in the farming supplies at my parents' spread.

the trouble is that these t bond auctions are turning into a death watch. as itulip pointed out, private investors stopped showing up to buy the long duration bonds in 2003. the 'they' who shows up are gov'ts. does the day come when china et al do not have the coin to buy them?

[Supercilious]

Re: the endgame for the banks and rates and stuff

we watch next week's auction keenly... note in the comments on this story... ' What happens when no one shows up to purchase all this debt?'

Metalman I hope I'm not contradicting another iTulip official position and antagonize Fred once more, but again you don't seem to know what are you talking about:

http://blogs.cfr.org/setser/2008/11/...way-from-risk/

But the Fed’s custodial holdings are still rising. That could imply that central banks are moving out of euros and into dollars, reinforcing the dollar’s rise. More likely though it is evidence that central banks are moving out of money market funds and other dollar assets with a bit of credit risk. No central bank wants to be in the same position as the China Investment Corporation. Explaining how you lost money on your safe investments isn’t fun. The general flight out of risk by central banks is one reason why the Treasury’s bailout of the Agencies has failed to halt the central bank run on Agencies. The flight out of Agencies — and flight into Treasuries — over the past two months has been stunning. Last week continued the trend: central banks added close to $20b to their Treasury portfolio at the New York Fed while cutting their Agency holdings by $7 billion. That helps support the Treasury market amid all the new supply, but hasn’t done wonders for the Agency market.
Just look at a graph — produced by my colleague Paul Swartz of the Center for Geoeconomic Studies — showing the 52 week change in Agency and Treasury holdings.

Keep on watching next week's auction keenly ...

[touchring]

Re: the endgame for the banks and rates and stuff

Metalman I hope I'm not contradicting another iTulip official position and antagonize Fred once more, but again you don't seem to know what are you talking about:

http://blogs.cfr.org/setser/2008/11/...way-from-risk/



Keep on watching next week's auction keenly ...

i'm not optimistic. I don't trust statistics, there's a lot agenda going on, i only know money is now scarce.

the dollar might looks attractive to the europeans or south american, but to people holding yuan, yen or the singapore dollar, the dollar is very risky and not attractive at all.

[FRED]

Re: the endgame for the banks and rates and stuff

Metalman I hope I'm not contradicting another iTulip official position and antagonize Fred once more, but again you don't seem to know what are you talking about:

http://blogs.cfr.org/setser/2008/11/...way-from-risk/



Keep on watching next week's auction keenly ...

That is consistent with our analysis here FIRE Economy and the Dollar Ratchet.

You are also a critic of our Dollar Ratchet theory. Yes?

[GRG55]

Re: the endgame for the banks and rates and stuff

Metalman I hope I'm not contradicting another iTulip official position and antagonize Fred once more, but again you don't seem to know what are you talking about:

http://blogs.cfr.org/setser/2008/11/...way-from-risk/



Keep on watching next week's auction keenly ...

Given the recent shape of that Treasury curve and the number of standard deviations away from the long term trendline, we will look forward to your "Treasury bubble" posts with eager anticipation.

[Starving Steve]

Re: the endgame for the banks and rates and stuff

Just thinking about this 2003 inflexion point in total U.S. treasury debt, why did the Federal Reserve Bank allow that downward path to reverse course? Or putting this another way, when Bush and his morons ( the supply-side economists ala. Arthur Laffer ) decided to spend on endless wars, why did the Federal Reserve Bank under Alan Greenspan happily oblige them? Finally, how can long-term deflation occur when FRB policies are this accommodative and this inflationary?

Or is the FRB (and all world central banks) no longer credible, and are the world's financial markets now operating independently of central bank authority? Hopefully, this is the case.

If central bank authority is now being repudiated by financial markets, then interest rates are going to go up whilst central bank policy worldwide reduces interest rates to zero. And that means no loans. No credit. No nothing.

It's beautiful! And it's exactly what the central banks deserve.