EUROMONEY: US treasury market reaches breaking point

[ASH]

Re: EUROMONEY: US treasury market reaches breaking point

In my opinion, there is a hole I see now that you've expanded your thought and I get it better.

If the Fed buys a GSE or other instrument at more than its actual value, that portion above real value is monetization.
Or if the Fed buys a GSE or other instrument from a bank that has basically been nationalized, that's monetization.

When the Fed loans directly into the system, fractional reserve principles apply... and that's basically monetization. The Fed is almost a hedge fund now too, in the sense that its balance sheet is leveraged at 40 or 50:1.

Thanks, Bart. I am looking for a reason why news of monetization (in the restrictive sense of a central bank directly buying the debt of its government) has not led to a rush for the exits. I thought perhaps the way in which the monetization is conducted -- and the purpose to which the funds raised in this manner are put -- was a possible explanation. I was making more of a psychological point than a mechanical point, but I agree that it is incorrect to draw a fine line at overt purchases by the Fed. I take it then that you don't think the form of the monetization (overt, versus "stealthy") matters, since the substance is the same... and hence monetization is old news. Does that mean the failure of a dollar panic to materialize is because the market does not yet see any erosion of the purchasing power of the dollar connected with this monetization -- perhaps because the money created in this way is balancing credit contraction? What is your interpretation?

EDIT: Whups. Didn't read your comment on the thread in the Premium section. Thanks for the response.

[ASH]

Re: EUROMONEY: US treasury market reaches breaking point

Its called DEBT DEFLATION. The world was super charged with credit resulting in massive appreciation in all world assets. Now that credit has poofed and what was propped up by the stupid ponzi scheme is falling like a rock. Central Banks can't print the 50 trillion or so of credit that is lost. Banks are insolvent so no way they are lending. Look for massive losses in commercial real estate next year as consumers stop shopping and strip malls become ghost towns. Quantitive easing can't do sqaut now until they pump trillions into the hand of consumers to pay off the debt and reflate the economy. Everyone should read A Bubble that Broke the World by Garrett, bloody brilliant. Massive deflation followed by massive inflation, god help us all.

Taking the word "print" to be figurative, isn't the way they pump trillions into the hands of consumers by "printing"? I get the impression that our economic officials have also read A Bubble That Broke the World and are not wasting much time getting the reflation effort rolling. Is your point that the central banks are unlikely to be able to reflate fast enough to arrest prices at their current level, so the massive inflation you expect will be starting from a much lower base? What constraints on rate and amount do you see upon the ability of central banks to create fiat money?

[bart]

Re: EUROMONEY: US treasury market reaches breaking point

Thanks, Bart. I am looking for a reason why news of monetization (in the restrictive sense of a central bank directly buying the debt of its government) has not led to a rush for the exits. I thought perhaps the way in which the monetization is conducted -- and the purpose to which the funds raised in this manner are put -- was a possible explanation. I was making more of a psychological point than a mechanical point, but I agree that it is incorrect to draw a fine line at overt purchases by the Fed. I take it then that you don't think the form of the monetization (overt, versus "stealthy") matters, since the substance is the same... and hence monetization is old news. Does that mean the failure of a dollar panic to materialize is because the market does not yet see any erosion of the purchasing power of the dollar connected with this monetization -- perhaps because the money created in this way is balancing credit contraction? What is your interpretation?

The form, overt vs. stealthy, only affects the sentiment portion of inflation expectations... and considering that other CBs continue to inflate and monetize, and that so many are almost literally in shock from all the huge changes recently, its not surprising to me that there hasn't been a reaction... and that's without any tinfoil hat based behind the scenes factors like the 27 million ounces of paper gold that the ECB bought a while back, or ESF intervention. The debt deflation vs. monetization is a factor too of course.

And also keep in mind that comment of Ben's about the cooperation amongst CBs as a factor in relative dollar strength. CBs do have a massive vested interest in relative stability of the reserve currency... and speaking of that, the PBoC allowed a very unusually large change in the yuan today. It moved from 6.8159 to 6.875 today after spending months in a very narrow band. One day does not a trend make, but it sure surprised me.

Overall though and as usual, its more than one factor that drives currency values. The comments of folk like Finster about the non intuitive relative shortage of dollars apply too... and always remember that a surprise dollar devaluation to combat deflation is very much on Ben's plate as an option too.

[oddlots]

Re: Thanks Ash - and some other resources for the perplexed

Thanks for the reply Ash. I think I'm just conflating things, confusing myself and sending the forum off track. Your description of monetization is correct; I've confused the concept with someone's discussion of the way bonds are (were?) used by the bond market as collateral for various transactions and so act almost like an "outboard" (think shadow banking system) of high powered money. It came up when the stimulus was being discussed and I never ran the idea to ground (i.e., understood it.) Walk before running.

Incidentally in trying to think through your post I came across a nice concise description of the debt monetisation process that might help others (helped me):

http://economistsview.typepad.com/ec...s_debt_mo.html

There's also an interesting analysis of the Fed's exploding balance sheet and its significance in terms of monetisation / sterilisation here:

http://www.newsneconomics.com/2008/1...ats-going.html

Finally, there is a good set of posts on the events of the past month or so as regards the explosion of issuance of Govt. debt among other issues:

http://www.howwealthworks.com/forum/...pic.php?p=8485

But having distracted everyone, is it too hypocritical to ask whether anyone thinks the fails rate could itself bring down the bond market?

[bart]

Re: Thanks Ash - and some other resources for the perplexed

There's also an interesting analysis of the Fed's exploding balance sheet and its significance in terms of monetisation / sterilisation here:

http://www.newsneconomics.com/2008/1...ats-going.html

Perhaps too geeky, but here's a cut & paste directly from my master database/workbook in the monetization & sterilization area that I've been fiddling with for a few weeks.

Sources & uses	Change since 6/2007	Starting value, 6/2007
Uses of funds:
Securities Lending	-1.52	31.80
Securities Lending, memo	155.87	0.00
SOMA	-268.32	692.58
Currency in circulation	51.09	813.60
Base, less currency	626.34	13.86
Swap lines (H41)	606.43	0.00
TAF	243.42	0.00
TSLF	185.15	0.00
CPFF	295.11	0.00
MMIFF	0.00	0.00
TOP	8.04	0.00
PDCF	205.15	0.00
TARP	377.40	0.00
TALF	0.00	0.00
FHFA, AIG, Maiden Lane	183.66	0.00
Misc.	-1.52	31.80
subtotal	2666.28
Known sources of funds:
Supp. Financing Program	465.00	0.00
Excess reserves	724.52	0.19
subtotal	1189.52
Total (unaccounted for)	1476.76
Additional factors:
Federal debt	1711.89	7973.68
Custodials	541.82	1959.31
Stimulus checks, etc.	162.00	60.00
subtotal	2415.71
All numbers are in billions

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Re: EUROMONEY: US treasury market reaches breaking point

rather than the filling holes analogy i look at it mathematically. correct me if i am wrong, but....

eg. fed buys 500b mbs' worth mark to market of zero. deflation is perceived by the market.

500b new cash is put into the system. this just counters the 500b lost. so net is zero. deflation taken care of, no inflation. system hopefully stabilizes.

if the mbs' go up in value to 500b, then the fed can pull the money supply in at that time or on an ongoing basis. so no inflationary expectations.

there is no fractional lending since they are buying assets from the fractional reserve system. fannie or freddie don't get to lend 5 trillion but only 500b, the same amount monetized.

[bart]

Re: EUROMONEY: US treasury market reaches breaking point

About the only small corrections are that the $500b added by the Fed could actually be used to fertilize the fractional reserve system, depending on what the original MBSs were, and also the the Fed needs to add more than $500b to have inflation above zero. There's also velocity/sentiment and monetary lags to take into account.