Fed starts printing press: $1T+ in additional purchases

[snakela]

Re: Fed starts printing press: $1T+ in additional purchases

If the fed now owns long treasuries do they now have interest rate risk?
What if the price of long t's fall 10 - 20%. I assume the grand plan is that if inflation picks up the fed can hoover up all the money out there by selling their treasuries, well if their portfolio is already down 20% and they try pusing out a 300B wad of 10 yr T's it's just not going to happen without further driving down the price and hiking interest.

If anyone else wants to comment on these questions feel free.

well, I'm just a lowly engineer too but I'll tell you how I believe this all works:

If the price of treasuries falls (because the treasury itself is busy selling them to finance a deficit) the fed open market committee decides to buy them back up - putting upward pressure on the price of the treasuries. So how do they keep inflation expectations from driving prices down while using funny money to buy them back up? I dunno...guess thats why the called greenspan "miestro"

What happened today (as I understand it) is that Ben said the fed would be buying MBS. I guess there aren't enough people willing to sell treasuries to get enough money into the system so they promise cash for overpriced garbage.

The fed can also give short-term loans with treasuries or garbage mortgages as collateral but I don't think thats what today was all about. To be honest, the jargon kinda confuses me, which is why I hang out on websites like this to understand it.

[ax]

Re: Fed starts printing press: $1T+ in additional purchases

Keep in mind, only $300 billion of the over $1 trillion in new money is going to treasuries. $750 billion is going towards buying MBS. Who the hell are we going to sell that to when inflation kicks in?

[ltullos]

Re: Fed starts printing press: $1T+ in additional purchases

well, I'm just a lowly engineer too but I'll tell you how I believe this all works:

If the price of treasuries falls (because the treasury itself is busy selling them to finance a deficit) the fed open market committee decides to buy them back up - putting upward pressure on the price of the treasuries. So how do they keep inflation expectations from driving prices down while using funny money to buy them back up? I dunno...guess thats why the called greenspan "miestro"

What happened today (as I understand it) is that Ben said the fed would be buying MBS. I guess there aren't enough people willing to sell treasuries to get enough money into the system so they promise cash for overpriced garbage.

The fed can also give short-term loans with treasuries or garbage mortgages as collateral but I don't think thats what today was all about. To be honest, the jargon kinda confuses me, which is why I hang out on websites like this to understand it.

Just wonder how many "lowly" engineers we have here? I am one and was introduced to iTulip by a fellow one. Perhaps this is why I find much of the work here more comprehendable and logical than other sites!

[bpr]

Re: Fed starts printing press: $1T+ in additional purchases

May be she can tell us how these extra programs can be paid for. In the realm of leftist fantasy land, of course, no amount of spending is too great. Klein and her ilk can rip off the fools who are willing to pay for these programs. They won't get a red cent out of me.

Have you read the book? Seriously, dude, that's a review. It's basically a history of nation-building policies since the sixties with an eye toward reforming the leadership's (or the counter-revolution's) economics bent by sending in the "Chicago Boys" and then reforming the country by means of economic distress or "shocks." There are times when he will mention the loss of social programs in the process, but social programs has nothing to do with what the book is about. There's also a bit of black magic she employs in drawing the direct line between economic shocks and state violence (in some cases, like Pinochet, it's more effective; in others, like Yeltsin, not so much IMO), but much of the book is solidly grounded in policy research. She does fall into the left-of-liberal camp, but at least they're willing to condemn Clinton alongside Kissinger.

[c1ue]

Re: Fed starts printing press: $1T+ in additional purchases

BTW: Do you recall when you remarked that maybe I did not 'grok' the situation, and I responded that I was having trouble deciding whether the crisis is now, or a decade from now when the entitlements bill really starts coming due? Well, let's just say that I'm no longer wondering about that.

ASH, no tooting of own horn, as I have and have always been the 'dark cloud' dude.

But my views are based not on just numbers, but on the people involved. While I am an engineer like you - my specialty was understanding my customers to the point where I could predict their behavior 90% of the time.

As I noted in another thread - the domino scene in 'V for Vendetta' describes exactly my feelings on what is happening.

What we're seeing now is a classic beggar thy neighbor.

I think it is now quite clear that the government we have in place is going to do exactly what iTulip has stated: inflate its way out.

My 2 cents added is simply that the rest of the world is not going to let this process occur in isolation. The interaction of what's being done here vs. what's being done elsewhere is what brings the hyperinflation scenario into play: because inflating your currency while everyone else is inflating doesn't help you in the short term. The result is a runaway competitive currency devaluation.

My view on the next step is that the knock down effect of this policy on the dollar combined with the resulting jump in internal inflation - just as government revenues trough and overall unemployment spike - will force more drastic action.

And that action can only be something drastic enough to make a difference: fiat devaluation.

[ASH]

Re: Fed starts printing press: $1T+ in additional purchases

I assume what this means is that uncle ben fired up his P.C. and typed in 3T into the fed balance sheet enty box (electronically printed money), then this new money will be used to buy long treasuries.

The Fed is buying three things: mortgage-backed securities (MBS), agency debt, and long-term Treasury bonds. Here's the score:

To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve's balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.

So, they have mostly been buying MBS, and the purchases are spread out over time. They have bought a bit of agency debt (like stuff issued by Ginnie Mae), and are just starting to buy the Treasury bonds.

Who are the sellers of T's? will this money go after outstanding notes, and bonds? Is the money earmarked for the day when the treasury tries selling new issues? does it matter? So in six months is there now 1T of new dollars out there ready to be spent? Is this how the stimulus plan is funded? Did they say what maturity they are going to target? 10yr 30yr?

There are a number of folks around here who understand the mechanics better than I. The usual way this works is I write down what I think is going on, and then someone like bart or Symbols or C1ue or Sharky or (etc. etc. etc.) chimes in with a helpful correction.

My impression is that the sellers of the MBS are mainly banks and other financial institutions. Monetizing the MBS does a couple of things -- it takes these under-performing securities off the books of the banks at prices higher than they could get in the market (helping the banks with capitalization problems), it creates demand for MBS and therefore further securitization of new mortgages (allowing folks to refinance at lower interest rates, or buy homes), and it gives ownership of the mortgages to the Fed (which can then re-write the terms of those mortgages to provide relief for the debtors).

Regarding the Treasury bonds -- my understanding is that the identity of the seller doesn't particularly matter. The Fed's purchases should create extra demand for the T bonds in the market, allowing the Treasury to raise more money by selling bonds into the market. The Fed normally buys T bonds as part of its routine "open market operations" if they desire to increase the supply of reserves in the system, and thereby lower the overnight lending rate for those reserves. However, since the system is chock full of reserves already (and the overnight rate is right around zero), the point of further monetization is not to manipulate the availability of reserves but rather to provide demand for the bonds that the Treasury needs to issue to finance our big federal deficit, and possibly to manipulate exchange rates and inflation/deflation expectations. That's why this action is being announced as something separate from the routine open market operations that go on all the time. Will it pay for the stimulus? We're talking $300B so far out of a total projected deficit of $1.75T this year, so it'll pay for part of it, but not all. What maturity? Their statement didn't say, but I assume "long" means 10-year and longer.

Is now the time to buy more gold? at 920? Will we wake up tomorrow and find out who else is going to devalue their currency tomorrow? China?
are we going to see oil start to spike, as people scramble for an inflation hedge? Are the Saudi's going to break their dollar peg?

I don't feel like I have any useful insight here. If I had no gold, I'd buy some, even at $920/oz. If I had a fair amount of gold, I'd sit tight. I think it would be correct to characterize the situation as chaotic -- that sudden dramatic developments are likely to occur, but specific developments are hard to predict. My posture is defensive -- PM and cash -- and I'm not taking any positions based upon short- or medium-term expectations.

If the fed now owns long treasuries do they now have interest rate risk? What if the price of long t's falls 10 - 20%. I assume the grand plan is that if inflation picks up the fed can hoover up all the money out there by selling their treasuries, well if their portfolio is already down 20% and they try pusing out a 300B wad of 10 yr T's it's just not going to happen without further driving down the price and hiking interest.

I think it may matter what the cause of the inflation is -- is it "cost push" inflation from rising import prices and a falling exchange rate for the dollar, or is it "inflation by dilution" from the increase in the money supply. If it's cost push inflation that results from trashing the dollar's reserve currency status, then draining reserves from the system probably won't be much help (and interest rate risk will be the least of our problems). If the inflation results from too much lending against bank reserves, then the authorities can simply change the reserve fraction requirement if open market operations prove inefficient because of interest rates.

[Down Under]

Re: Fed starts printing press: $1T+ in additional purchases

gold was flat today in EUR, down - 1% in SEK.

not to rain on anyone's parade . . . .

Sure, down in AUD as well. However, it has to take a breather from time to time. Given what happened to AUD last year, where it fell off a cliff, I'm extremely happy to be in gold, and wouldn't be surprised to see AUD fall off another cliff.

[gwynedd1]

Re: Fed starts printing press: $1T+ in additional purchases

As I see it the Fed buying 300 billion would mean, for example, when the Treasury sells bonds to cover say a 1 trillion dollar deficit, it means 700 billion of that will come from the existing money supply while 300 billion will be added from the Federal Reserve. If one trillion is spent it will circulate existing money as well as this new money. The big difference is in interest rates I figure.

[cjppjc]

Re: Fed starts printing press: $1T+ in additional purchases

I came to this forum on February 10, 2009. I came with the question; were does the Fed get it's money. The answer in one form or another was they just pressed a button, and digitially transfered any amount needed. Please tell I'm wrong. Because why stop here. Just wear out that zero key as EJ mini helecopter showed before.

[goadam1]

Re: Fed starts printing press: $1T+ in additional purchases

Have you read the book? Seriously, dude, that's a review. It's basically a history of nation-building policies since the sixties with an eye toward reforming the leadership's (or the counter-revolution's) economics bent by sending in the "Chicago Boys" and then reforming the country by means of economic distress or "shocks." There are times when he will mention the loss of social programs in the process, but social programs has nothing to do with what the book is about. There's also a bit of black magic she employs in drawing the direct line between economic shocks and state violence (in some cases, like Pinochet, it's more effective; in others, like Yeltsin, not so much IMO), but much of the book is solidly grounded in policy research. She does fall into the left-of-liberal camp, but at least they're willing to condemn Clinton alongside Kissinger.

All I thought was interesting is the idea that we are lead by crisis to crisis. I said it was a review. The cowboys really hate any reference to the lefties.

[goadam1]

Re: Fed starts printing press: $1T+ in additional purchases

Yes -- my own thinking, based on numbers from the GAO and the Trustees of the Social Security and Medicare Trust Funds.

No doubt there are many things to be freaked out about. But I remember a similar state of anxiety getting us into Iraq.

[mmr]

Re: Fed starts printing press: $1T+ in additional purchases

Agreed that this seems to be just the Fed's desperate attempt to keep mortgage rates down and keep the mortgage market from locking up again. Foreign central banks and investors won't touch Fannie / Freddie MBS and debt anymore (why buy a proxy for Treasuries backed by questionable mortgage collateral when you can just buy Treasuries?) The Fed has been one of the largest investors, if not the largest investor, in all of the agency MBS auctions over the last few months. They can't afford to stop buying agency MBS now - otherwise, Fannie and Freddie would have to cut back on mortgage purchases, the banks that originate and sell mortgages to the agencies would cut back, and the mortgage market would completely seize up again like it did last fall.

Of course, the ability to refi at a lower rate doesn't do any good for homeowners in California, etc. with negative equity, but that's a different issue (and not one that the government can fix, given that so many of those houses should never have been built in the first place).

If the Fed buys existing MBS, most of the sellers will be foreign central banks and investors. US banks and insurance companies have favorable treatment for holding MBS and aren't likely to be major sellers (it's been the non-agency MBS and other securitized debt that has been killing them). We'll see how quickly the dollars that we send to foreign banks come back onshore and if that's enough to start some real inflation...

[Quincy K]

Re: Fed starts printing press: $1T+ in additional purchases

As EJ pointed out a few posts ago, there is a distinct possibility that the Fed will soon be buying equities as well.

Their whole objective at this point is to keep the Ponzi going at whatever costs. I would be amazed if they are successful past summer without some sort of exogenous event occuring. Too many personalities in the game right now with different agendas(who in thier right mind would continue to trade physical commodities, namely oil, for long-dated FRN's that will inevitably be depreciated through inflation, or worse hyperinflation, before they come to maturity?)

[bpr]

Re: Fed starts printing press: $1T+ in additional purchases

All I thought was interesting is the idea that we are lead by crisis to crisis. I said it was a review. The cowboys really hate any reference to the lefties.

I was responding to Hayek. I was reading TSD right when Paulson came to Congress with three pages and it was surreal. It says: TPTB create an emergency so that they can pass laws that normally wouldn't, and the country pays for it for years or even decades. It is exactly what's happened and is now unfolding.

[Sharky]

Re: Fed starts printing press: $1T+ in additional purchases

My impression is that the sellers of the MBS are mainly banks and other financial institutions. Monetizing the MBS does a couple of things -- it takes these under-performing securities off the books of the banks at prices higher than they could get in the market (helping the banks with capitalization problems), it creates demand for MBS and therefore further securitization of new mortgages (allowing folks to refinance at lower interest rates, or buy homes), and it gives ownership of the mortgages to the Fed (which can then re-write the terms of those mortgages to provide relief for the debtors).

I don't think the Fed is authorized to pay higher than market value for the MBS. I recall a big flap along those lines from the CBO recently. So the purchases will take the securities off of the books of the banks, but it won't replenish their capital like TARP did. At least that's my understanding. TARP was Treasury-directed purchases that resulted in new capital being added to banks. Actions by the Fed don't do the same thing.

The Fed's purchases should create extra demand for the T bonds in the market, allowing the Treasury to raise more money by selling bonds into the market.

That might be a secondary effect, but my opinion is that the primary goal of the Fed at this point is still to rescue the banks, who are hemmoraging as a result of loan defaults.

If the inflation results from too much lending against bank reserves, then the authorities can simply change the reserve fraction requirement if open market operations prove inefficient because of interest rates.

With the advent of sweeps, reserve requirements don't have as much impact as they once did.

As I see it the Fed buying 300 billion would mean, for example, when the Treasury sells bonds to cover say a 1 trillion dollar deficit, it means 700 billion of that will come from the existing money supply while 300 billion will be added from the Federal Reserve.

The Fed is not allowed to buy directly from the Treasury (except for certain roll-overs). All securities are first sold to the public, through a network of dealers. That process determines interest rates. Then the Fed can step in and buy some as part of FOMC actions.

I came to this forum on February 10, 2009. I came with the question; were does the Fed get it's money. The answer in one form or another was they just pressed a button, and digitially transfered any amount needed. Please tell I'm wrong. Because why stop here. Just wear out that zero key as EJ mini helecopter showed before.

You're not wrong. The only thing I would add is that the Fed can't just create money. When they create money, the way they do it is to buy something -- Treasury securities, etc. They basically have a bottomless checkbook, and new money is created when the checks they write are deposited.