Lots of US investors are realizing how this is a short term benefit, and are worrying about the inflation issues down the line (in only a matter of weeks) and how they could add to the overall problem.
Also, it looks like frozen credit is showing its ugly head again - U.S. Leading Indicators Fall 0.4% Amid Credit Freeze, Rising Unemployment
For the last 3 weeks the Treasury has been selling(or indeed rolling over the short term bills) about 200 billion of debt. There is no end in sight and the amount is about to grow greatly.
I also read that the Ching-chang trade balance has shrank from about 45 billion last October to 4.6 billion for February. It stands to reason that their buying of treasuries is done and selling is coming instead.
So the Fed just announced voluntarily what it would be forced to announce when there would not be enough buyers to subscribe to the bond auctions.
This is exactly what happened the Brits about 4 months ago when they could not sell the gilts as the interest rate the fools wanted to pay.
The announcement came just as the rate on the 10 year US bond was at 3% for the umpteenth time heading higher. They had the biggest rally since 1987 and dropped the rate .54%.
Mark it on your calender. Yesterday will be recorded as the day the US defaulted.
Dan:Originally Posted by youngdan
My knowledge of these things is weak I know but I'll make a stab at what I think you mean....
Uncle Sam always needs the readies to keep the show on the road
- so traditionally they issue 'Bonds' to raise the cash. Essentially this means getting long term loans from non government investors. As the USA is a 200 years old + Institution & a very wealthy Country that isn't usually a problem. Investors are cast iron assured of getting their money back & with a modest but guaranteed return in a few years time.
Trouble is said Uncle cannot now give investors the kind of return they like to think is theirs to have. Investors shy off so and that means less of them take up said offer. The Uncle is now a bit strapped for cash - what to do?
Go to the Fed - explain the situation - Fed says yes we can help - give us mortgage backed securities (and here I am lost - what the f.cuk are they?) and in return we will give you mega bucks of cash to spend as you please.
Where does the Fed get the cash? They 'print' it off of course thus increasing the money supply and easing cash flow in the Economy as the Gov distributes the money back out. But the downside is more money about = much weakened Dollar & that brings:
INFLATION
not just a small amount (acceoptable) but
MEGA INFLATION (given the sums involved)
But that’s not what investors want to hear, as all investors know inflation at that level kills investors’ confidence that the value of their return in the money they put in will be eroded or seriously devalued over the investment time period-
_ so they buy into Bonds even less than they are doing now
= Vicious Circle
So as Washington knows that then in effect they are incapable of sustaining the current model of propping up Government Finances and are trying to use ‘Mugabe’ style finances to stop the whole sorry mess from collapsing
Er am I even half right here?
Europa Conventus Delenda Est
this is not washingtons lead what the FED is doing is protecting is own shareholders which should have been done long go public money was not enough so the Fed realises this and had to interviene no public money no fed money they could have done this along time ago. its hard to explain but the fed just ended the recession a drop in the doller wont affect them long term a depression would.
We should support whatever Merkel proposes to do just because we are a member of the EU? Are you serious?
I am not necessarily saying Merkel is wrong on this, but Jesus Christ.
Spot on. Excellent post.
RTÉ Business: ECB 'has taken unorthodox measures'
Catalpa:
"But that’s not what investors want to hear, as all investors know inflation at that level kills investors’ confidence that the value of their return in the money they put in will be eroded or seriously devalued over the investment time period-
_ so they buy into Bonds even less than they are doing now
= Vicious Circle"
That is it in a nutshell but I will flesh out the whole thing.
Ireland has had two bond auctions this year so far where they borrowed 6 billion euro over 5 years where they ended up paying 4.11% followed by 4 billion over 3 years paying 4.09%. because the rate on the 3 year was almost the same as the prior 5 year it indicated less appetite or a higher rate demanded by the investors because normally a 3 year would have a much lower rate than a 5 year. The shorter the time period the lower the rate(normally). The have announced that they are to sell a bond maturing in2020 soon and we eagerly await to see what interest rate they will end up paying to get it all sold, that is to get the amount of money they need borrowed as a bond is just the fancy name for an IOU.
This is the auctions the US Treasury has just next week. 30 billion of 77 day bills, 31 b of 13 week bills, 29 b of 26 week bills, 40 billion of 2 year notes, 34 b of 5 year notes and 24 billion of 7 year notes.
A lot of the short term stuff is rolling over stuff maturing but the thing is these figures are set to skyrocket to cover bailouts. The fact that the Chinese will not have cash to buy even if they wished to means that even if they were not selling existing bonds it is clear that the Treasury was going to have a difficult time selling the huge supply.
An important thing to remember is that it is the buyers who decide on the interest rate not the seller. The buyers were demanding almost 3% for a 10 year bond Monday so the Treasury would know that in order to attract enough buyers the interest rate would have to be higher. The would pay it but they would not like paying it as rising interest rates would worsen the depression. The depression worsening would drop tax receipts. The drop in tax receipts would necessitate greater borrowing(bigger bond sales) and we have another vicious circle.
The Federal Reserve and the Treasury are 2 completely separate things. The Treasury is part of the government and the Fed is a bank and not part of the government. As far as bond buyers are concerned the announcement that there was a huge new buyer,the Fed, after arriving on the scene saying it was going to buy 300 billion inbonds was terrific news and prices jumped the most they had in over 20 years. A dollar printed by the Fed has the exact same value as a dollar in the wallet of James Grant, who is the big bond buyer.
So the vicious circle I described is postponed and the vicious circle you describe will kick in instead. In Britain the interest rates were low and the investors stayed away. The government did not want to pay the rate the market demanded to sell the bonds so the Bank of England became the buyer with the result that few investors are going to buy gilts bevcause of the inflation expectation.
What happened with the German bond was different. They too baulked at the interst necessary to sell 6 billion and the highest they were willing to pay was only high enough to sell about 5 billion so they used their own real treasury money to buy the last billion for no net loss or gain.
Now when we are talking about Treasury bonds forget about mortage backed securites for a minute. The Fed will buy 300 billion of bonds. Simple operation. The Treasury will say be selling 20 billion of 10 year notes at auction. A lad will come over from the Fed and make a bid for 10 billion of bonds. He will write a cheque for 10 billion and the Treasury guy will run in and deposit it. The Fed guy a bond certificate which he brings over to the Fed where it is called an Asset. The Fed has expanded it's asset base by 10 billion and the Treasury has 10 billion cash.
Anyone that is having difficulty with this transaction should watch a few episodes of Henry Cooper, just like dah.
The 750 billion for buying mortage backed securities is a different thing again. A security in this case is just another name again for a bond. Say a bank has 1000 mortages given out on 1000 houses each of a million dollars. The banker will say to an investor, give me a loan of a billion dollars and you take these 1000 mortages which will pay you back well over 30 years. Bob's your uncle. The banker has just "bundled" 1000 mortages, called it a mortage backed security and sold it to an investor for a billion. A miracle has happened, the banker does not have to worry about defaults and he has a fresh billion to repeat the process.
Fanny Mae and Freddy Mac was usually the investor buying the bundles. The question is where did Fanny get all the money, Simple, the government had implyed gaurantee saying that they stood behind Fanny. So if Fanny wanted to sell bonds there was no shortage of buyers as their bonds were seen to be as safe as treasuries. The end result is that Fanny borrowed 5.2 trillion and bought the bundles from the banks and now most of these mortages are worth very little.
At the initial bailout of Fanny I said the loss was about 2.5 trillion to much scorn but we are at about a trillion so far now.
So the Fed is going to buy this crap to the tune of 750 billion. They saw that it is to inject liquidity into the system.
Anyone who would swallow that Porker will probably vote yes to Lisbon 2.
If they wanted to inject liquidity they would spend 750 billion and mail every man woman and gossuin 2500 bucks. I could do with a cheque for 12500 buckeroos.
The 750 billion is going to the holders of the Fanny bonds with a face value of 750 billion and a value of a bucket of piss.
As obama would say, "Is feidir linn". That is swahilli for "Thanks Suckers"
Last edited by youngdan; 21st March 2009 at 06:18 AM.
OK thanks Dan that clears up a lot but i think it will be some time yet B4 I get it all....
Europa Conventus Delenda Est
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