Great Piece on the Mechanics of Coming Inflation

[oddlots]

... or at least why exactly the Fed's claim to be able to control it doesn't stand up:

http://us1.institutionalriskanalytic...ry.asp?tag=353

It starts about half way down: "Ben's Un-shrinkable Balance Sheet" by Michael Pento

[rjwjr]

Re: Great Piece on the Mechanics of Coming Inflation

... or at least why exactly the Fed's claim to be able to control it doesn't stand up:

http://us1.institutionalriskanalytic...ry.asp?tag=353

It starts about half way down: "Ben's Un-shrinkable Balance Sheet" by Michael Pento

Nice article. Thanks for sharing. Since Ben was going to use a helicopter to drop the money, what do you think he'll use to soak it up? Riding mower? Industrial vacuum? Street sweeper?

[GRG55]

Re: Great Piece on the Mechanics of Coming Inflation

Nice article. Thanks for sharing. Since Ben was going to use a helicopter to drop the money, what do you think he'll use to soak it up? Riding mower? Industrial vacuum? Street sweeper?

Maybe he justs collects them all up in a TARP?

[MLM]

Re: Great Piece on the Mechanics of Coming Inflation

He's going to try to sell Benny Bonds, and lots of them. Don't know about you, but I'm more likely to put my money into riding mowers, industrial vacuums, street sweepers, and anything else not made out of paper.

And in case you were wondering, I think this is all according to plan: provide whatever liquidity is needed to keep the system from seizing up during the Ka phase, then devalue the outstanding debt with inflation as the economy fitfully starts to grow a little due to force feeding in the Poom phase. Gonna be fun.

[The Outback Oracle]

Re: Great Piece on the Mechanics of Coming Inflation

Thanks oddlots...I thought it was only a few of we oddities left in the world who understood the interest rate fundamentals and their implication.
I loved the term "low interest rates by decree"

[Raz]

Re: Great Piece on the Mechanics of Coming Inflation

Michael Pinto is one of the very, very few voices of reason who occasionally appear on CNBC. (Communist National Bulls#*! Corp).
They have him on about twice a year so the "brilliant" wonks like Dennis Kneale can "rough him up".:rolleyes:

Last Fall I told a stockbroker friend of mine [who I used to work with twenty years ago] about the Fed's Balance Sheet.
When he saw the implications of what "Banana Ben" was doing he freaked out!

This guy is saavy enough that he's been pushing his bondholder clients to sell out at these ridiculous prices. He's also not afraid to push his clients toward a 10 to 15% position in gold. There are a few really good brokers left.

[gwynedd1]

Re: Great Piece on the Mechanics of Coming Inflation

... or at least why exactly the Fed's claim to be able to control it doesn't stand up:

http://us1.institutionalriskanalytic...ry.asp?tag=353

It starts about half way down: "Ben's Un-shrinkable Balance Sheet" by Michael Pento

Hi oddlots,

I find it to be nothing more than speculation and perhaps a convenient excuse to allow inflation at best. Why is the Fed limited to selling junk bonds to soak up liquidity? The Fed can raise the reserve requirements anytime it likes to soak up excess reserves. The government can jump in with a tax increase and on and on. Allowing inflation will be nothing other than a deliberate act from the Fed and our government.
I am sure they see to it to have their army in the press propagate the notion that they are helpless to market forces and thus may pass blame to some ethereal unspecific evil. That is what I think this is.

[Supercilious]

Re: Great Piece on the Mechanics of Coming Inflation

... or at least why exactly the Fed's claim to be able to control it doesn't stand up:

http://us1.institutionalriskanalytic...ry.asp?tag=353

It starts about half way down: "Ben's Un-shrinkable Balance Sheet" by Michael Pento

I believe Mr Pento is wrong on this one because he underestimates the magnitude of the fraud. The Treasury and the Fed are not really separate institutions,... just two ends of the same debt scam machine (as explained on Bart's forum in "Dissecting the Fed" thread)

The Fed's balance sheet can shrink in no time by a very simple trick: the US Treasury buys all the crappy securities from the Fed (basically the toxic paper is laundered in good treasuries at taxpayer's expense). Once the crappy securities are off Fed's balance sheet (and loaded on the taxpayer) then the laundered balance can be shrunk at will (If the Fed sells the treasuries).

And please, just don't tell me that passing crap from the Fed to Treasury can't happen because it will be illegal and an outright fraud. For your information the US Treasury is already loading with crap:

http://marketplace.publicradio.org/d...15/pm_bailout/

The Federal Reserve has been buying mortgage-backed securities, driving mortgage rates to historic lows. But the U.S. Treasury has been doing the same thing, and nobody's seemed to notice. Steve Henn reports.
[...]
You may have heard, for example, that the Fed has been buying up mortgage-backed securities, and that's driven mortgage rates to historic lows. But Marketplace's Steve Henn has learned the U.S. Treasury's been doing this too in a big way for the past eight months. And nobody seems to have noticed.

---

STEVE HENN: Since October, the U.S. Treasury has spent $124 billion buying mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac.
Tom LaMalfa is a mortgage industry economist. It's his job to know about stuff like this, but until we called and asked him about the program LaMalfa had no idea it existed.

TOM LAMALFA: We've all been tracking on a weekly basis Fed purchases. But the initial $124 billion that came out of the Treasury's pocket just fell into the black hole.

Since the beginning of this year Federal Reserve's been buying mortgage-backed securities too. Together the Fed and the Treasury have spent nearly $400 billion propping up this market. That's driven down interest rates, helping home owners. However, David Ries, a law professor at Brooklyn College, says if lots of homeowners default, the government could lose money.

[pinal]

Re: Great Piece on the Mechanics of Coming Inflation

I believe Mr Pento is wrong on this one because he underestimates the magnitude of the fraud. The Treasury and the Fed are not really separate institutions,... just two ends of the same debt scam machine (as explained on Bart's forum in "Dissecting the Fed" thread)

The Fed's balance sheet can shrink in no time by a very simple trick: the US Treasury buys all the crappy securities from the Fed (basically the toxic paper is laundered in good treasuries at taxpayer's expense). Once the crappy securities are off Fed's balance sheet (and loaded on the taxpayer) then the laundered balance can be shrunk at will (If the Fed sells the treasuries).

And please, just don't tell me that passing crap from the Fed to Treasury can't happen because it will be illegal and an outright fraud. For your information the US Treasury is already loading with crap:

http://marketplace.publicradio.org/d...15/pm_bailout/

Exactly. The fed has already unloaded the Maiden Lane and AIG assets on the Treasury. The rest will be taken by Treasury with a smile. I would not be surprised if a couple of well connected banks get the role of intermediary and get a nice cut from it too.

[WildspitzE]

Re: Great Piece on the Mechanics of Coming Inflation

I believe Mr Pento is wrong on this one because he underestimates the magnitude of the fraud. The Treasury and the Fed are not really separate institutions,... just two ends of the same debt scam machine (as explained on Bart's forum in "Dissecting the Fed" thread)

The Fed's balance sheet can shrink in no time by a very simple trick: the US Treasury buys all the crappy securities from the Fed (basically the toxic paper is laundered in good treasuries at taxpayer's expense). Once the crappy securities are off Fed's balance sheet (and loaded on the taxpayer) then the laundered balance can be shrunk at will (If the Fed sells the treasuries).

And please, just don't tell me that passing crap from the Fed to Treasury can't happen because it will be illegal and an outright fraud. For your information the US Treasury is already loading with crap:

http://marketplace.publicradio.org/d...15/pm_bailout/

I'm going to have to head over to that thread and read it in detail.

The things that come to mind immediately with this asset swap are the following (especially given the current size of the Fed balance sheet to be swapped, Federal debt/GDP, and the current Fiscal deficit):

(1) Can the federal government's fiscal deficit handle the additional indebtedness w/out triggering other inflationary and/or Fx-related loops, and,

(2) How can the Fed then sell this large number of treasuries w/out dramatically raising the cost of borrowing for the government and/or also avoid triggering another recessionary spiral as they suck out all this money from the system?

Perhaps, it's all about the purchase price the Treasury pays per pound of Fed balance sheet crap?

Meaning, and I don't know if it's even possible or how the Fed Balance sheet would be affected by the offsetting account changes, can the Treasury buy toxic paper at a discount (basically swap less treasuries per toxic paper) from the Fed so that the Fed's balance sheet is shrunk and sterilized at the same time?

The Treasury would also have "paid less" under such scenario.

[Supercilious]

Re: Great Piece on the Mechanics of Coming Inflation

Exactly. The fed has already unloaded the Maiden Lane and AIG assets on the Treasury. The rest will be taken by Treasury with a smile. I would not be surprised if a couple of well connected banks get the role of intermediary and get a nice cut from it too.

Welcome to iTulip pinal and congratulations for your first post.

I think you pointed very well what is happening and the Maiden Lane bait and switch is a good indication of things to come. If I remember correctly at the time of the Bear Stearns deal both Bernanke and Timmy were saying repeatedly the taxpayer would not have to pay for the Bear Stearns failure and if we didn't bail out Bear more failures were to come.

WildspitzE has also a good point. Losses are losses and someone has to pay for the fraud. If they just move the crappy assets from Fed to Treasury, then overburdening the taxpayer will be counter productive. If a shepherd kills all his sheep he will have nothing to fleece or milk. If all the crap is load on taxpayer then we have the well known debt deflation scenario, tor indirect he economy goes nowhere and the bondholders begin to take direct or indirect losses.

So the big question is how the Treasury is going to dispose of the losses without affecting future bank profits?

[pinal]

Re: Great Piece on the Mechanics of Coming Inflation

Welcome to iTulip pinal and congratulations for your first post.

I think you pointed very well what is happening and the Maiden Lane bait and switch is a good indication of things to come. If I remember correctly at the time of the Bear Stearns deal both Bernanke and Timmy were saying repeatedly the taxpayer would not have to pay for the Bear Stearns failure and if we didn't bail out Bear more failures were to come.

WildspitzE has also a good point. Losses are losses and someone has to pay for the fraud. If they just move the crappy assets from Fed to Treasury, then overburdening the taxpayer will be counter productive. If a shepherd kills all his sheep he will have nothing to fleece or milk. If all the crap is load on taxpayer then we have the well known debt deflation scenario, tor indirect he economy goes nowhere and the bondholders begin to take direct or indirect losses.

So the big question is how the Treasury is going to dispose of the losses without affecting future bank profits?

I don't have any good answer to that. If the problem is of excess supply, and it seems to be that way, then the supply must be removed. This can be done over time or suddenly. I am now 100% certain that the bank balance sheets will be cleaned up. It is the consumer balance sheet that I worry about. If they remain debt burdened and continue to pay down debt then the banks will be helpless and credit will not flow.

So to solve the current crisis, remove excess supply and find new consumers who do not have debt. So war, baby boom and inflation (not in that particular order) seem to be in the near future, I think.

[WildspitzE]

Re: Great Piece on the Mechanics of Coming Inflation

WildspitzE has also a good point. Losses are losses and someone has to pay for the fraud. If they just move the crappy assets from Fed to Treasury, then overburdening the taxpayer will be counter productive. If a shepherd kills all his sheep he will have nothing to fleece or milk. If all the crap is load on taxpayer then we have the well known debt deflation scenario, tor indirect he economy goes nowhere and the bondholders begin to take direct or indirect losses.

So the big question is how the Treasury is going to dispose of the losses without affecting future bank profits?

That's what I was trying to solve for with the question at the end of my post (only I was trying to leave the losses on the Fed's books):

The Fed has the exposure to loss now on it's balance sheet.

So, my question is, what happens when an actual loss occurs (let's say a pool of MBS defaults or the Treasury buys the assets at a 50% discount)?

But you're right... there will be a bill to pay.

[Supercilious]

Re: Great Piece on the Mechanics of Coming Inflation

That's what I was trying to solve for with the question at the end of my post (only I was trying to leave the losses on the Fed's books):

The Fed has the exposure to loss now on it's balance sheet.

So, my question is, what happens when an actual loss occurs (let's say a pool of MBS defaults or the Treasury buys the assets at a 50% discount)?

But you're right... there will be a bill to pay.

WildspitzE in order to be able to predict what the Fed will do next, you have to learn to think like a crook

The losses cannot be left on the Fed's balance sheet, because that would grip the debt machine. I bet they will transfered to the Treasury at no discount.
And yes there will be a bill to pay. The fraudsters can hide the losses for a very long time but they are not able to make them disappear

I don't have any good answer to that. If the problem is of excess supply, and it seems to be that way, then the supply must be removed. This can be done over time or suddenly. I am now 100% certain that the bank balance sheets will be cleaned up. It is the consumer balance sheet that I worry about. If they remain debt burdened and continue to pay down debt then the banks will be helpless and credit will not flow.

So to solve the current crisis, remove excess supply and find new consumers who do not have debt. So war, baby boom and inflation (not in that particular order) seem to be in the near future, I think.

I think you got the answer right. Who are the people with the highest savings rates these days ? ;)

Look how Russia has been deleveraged. Last year in summer they had $600 bil in reserves. Now officially they have only some $360 (although some people believe that $200 bil of that is already pocketed by silioviki) and guess what? Russia announced recently they are going to start borrowing again in dollars...first time in 10 years or so.

I think the scenario should be quite clear at this time.

[WildspitzE]

Re: Great Piece on the Mechanics of Coming Inflation

WildspitzE in order to be able to predict what the Fed will do next, you have to learn to think like a crook

The losses cannot be left on the Fed's balance sheet, because that would grip the debt machine. I bet they will transfered to the Treasury at no discount.
And yes there will be a bill to pay. The fraudsters can hide the losses for a very long time but they are not able to make them disappear

I read a speech by Kohn last night, thought that a few snipets (quotes below) may be of interest to you given the puzzle we're thinking through here and in bart's commentaries.

4/18 http://www.federalreserve.gov/newsev...n20090418a.htm:

However, our newly purchased Treasury securities and MBS will not mature or be repaid for many years; the loans we are making to back the securitization market are for three years, and their nonrecourse feature could leave us with assets thereafter. But we have a number of tools we can use to absorb the resulting reserves and raise interest rates when the time comes. We can sell the Treasury and agency debt either on an outright basis or temporarily through reverse repurchase agreements, and we are developing the capability to do the same with MBS."

Who will be willing to buy these at par? I think that they'll need to be wrapped (insured) by the Treasury for anybody to even consider them. Then the Fed passes the losses to Treasury, but, given that it is a contingent liability, the Treasury doesn't need to indebt the taxpayer for par to "purchase" the assets. It only indebts itself once and when the losses appear for the amount of such losses. Yes, the taxpaper still eats the losses, but the roll-out and amount of debt is "smoothed".

"We are paying interest on excess reserves, which we can use to help provide a floor for the federal funds rate, as it does for other central banks, even if declines in lending or open market operations are not sufficient to bring reserves down to the desired level. Finally, we are working with the Treasury to promote legislation that would further enhance our toolkit for absorbing reserves. "

Perhaps related to the point above, but I'd be interested to see what if anything this legislation is -- or just a con to make us feel nice that they've got a silver bullet in the works.