US, UK, EU gross bond issuance for 2010 roughly 4.5 trillion dollars
The US will issue roughly 2.2 trillion in treasury paper this year alone. EU will issue 1.6 trillion EURO in bonds this year. UK will issue 225 pounds worth of gilts. All together this comes out to rougly 4.5 trillion dollars worth of issuance.
Where is the money going to come from?? The Asians dont have enough surplus cash to fund these operations. The US is bone dry of cash. The only plausible solution to this funding crisis is more QE. Surely this is what the central bankers were discussing recently at their secret meeting in Australia. EU, UK, US, and Japan all are going to inflate away thereby keeping exchange rates relatively similar.This is probably their plan.
This is a TON of debt being issued. Look what happens to a leveraged fractional reserve banking system when the money supply contracts! Governments are issuing debt like crazy to avoid the deflationary abyss from growing. Also all the entitlements to our older citizens are also draining the tax reciepts but thats another issue. The Crash Course concepts continue to come together as debt, demographics and interest are all converging.
There is noooo doubt in my mind that central banks will continue to provide “liquidity” to the system. QE1 shocked the world but QE2 will be begged for especially after the Greek debt fears and the weaker bond auctions on the 30yr note. It is mathematically impossible for all this bond issuance to be satisfied by normal market mechanisms (savings). I dont think there are even that many savings in the world! I know that US households are saving roughly 600b a year and this is the biggest economy in the world. Hence, prepare for more digital notes to fly around. What does this mean for the stock markets? Im not so sure but ill take Marc Fabers word for it and remain bullish on equities, even though stocks no longer serve as a indicator of economic health anymore.
Several big questions present themselves. One, what are all the present holders of gov debt going to do as more QE is announced? Wont all the new issuance dilute their existing holdings? If there is a selloff of gov debt where will the money go? It is possible that mattress mentality may return thus causing a dollar rally blow out above 90 on the USDX. One thing I do forsee is governments FORCING retirement funds to buy gov paper. In addition, I see govs not allowing retirement funds to buy foreign gov paper, or if they do, they must buy domestic paper first. I see protectionism forming in the bond markets.
Another question: what is going to happen with interest rates and the interest rate swap market. The IR derivative market is the LARGEST market in the world. The gross market value was $13.9 trillion in June 2009, up from $6.2 trillion in Dec 2007. 14 trillion represents the gross amount not the notional which runs in the 400 trillion dollar range. With all the IR swaps structured on low rates, i could only imagine the blow up when rates begin to rise, perhaps quicker than market participants expect. Also, there is a total of 45 trillion dollars worth of soveriegn debt outstanding. This is where the IRS find their value from.
The central bankers have more and more things to juggle lately. Here’s what Bernanke has to juggle lately:
1. Residential mortgage market including option arms
2. Other debt markets such as credit card, auto loan, student loan
3. The 1.4 trillion dollar commercial real estate showdown
4. Insurance funds
5. State, city pensions, plus state bankruptcies
6. Social security shortfall
7. Treasury bond auctions and exploding national debt
8. Derivative market contract clearing (new announcement with the DTCC)
In the end, i am willing to make a bet that the federal reserve balance sheet will grow to more than $4 trillion. If Bernanke wants to avoid a implosion, then he has no other choice. Sadly, by expanding the FR balance sheet so large, he will bring upon a even larger implosion.
Til next time
Firstly, you are obviously in the business so I want to thank you for sharing your knowledge and insights on the financial and currency markets.
Secondly, the Fed was “providing liquidity” and clearly fighting deflation in 2008 and 2009. As you have pointed out thiswas the first of what will probably many “liquidity events”. My question to you is… doesn’t the bond market and/or the currency market rebel at some point and close off the Fed option for continued “excessive” QE???
Thirdly, will the private sector that is accelerating process of deleveraging have the potential overwhelming what the Fed is doing. Here is will take a paragraph from David Rosenberg’s daily review… Feb. 16, 2010
And so it is. The next recession is likely anywhere from two quarters to two years away, and the only question will be is whether the last cyclical low of 2.08% reached on December 18, 2009 will hold or not. But you may want to be aware that before anyone can call the end to the secular bull market in government bonds we would first have to see the 10-year T-note fail on an approach of that level. This is why selloffs in Treasuries offer terrific buying opportunities, especially since we are on the cusp of seeing the deleveraging in the broad private sector about to swamp the massive balance sheet expansion in the public sector. This is a process that will likely prove to be highly deflationary and extremely conducive to lower yield activity. For the entiire commentary go to the URL https://ems.gluskinsheff.net/Articles/Breakfast_with_Dave_021610.pdf
Bear, I completely agree that the Fed and other central banks will do all they can to monetize the debt and that some type of capital controls will start to show up in the market place.
My basic confusions comes from the fact that even though the Central Bankers are the closes thing to Masters of the Universe on this side of Heaven they are still not omnipotent. I am just wondering if the Fed and other central banks are not already boxed in with only a limited set of options??
Is it possible that even thought we are not on the gold standard, etc. that the Fed still has some hard limits and that we will ultimately get deflation and collapse even if we get some more short term inflation??
I would appreciate your thoughts because I am confused between the deflationist and the Hyper-inflationist! Of couse in the end we end up in collapse but the path we take to get there is very important for either making or loosing wealth.
Back in October of 2009 I thought you wrote a very insightful posting about M1, M2 and the total Debet and GDP. It cause me to wonder if these gravitational forces of private debt would not suck everything into the vortex of the debt black hole… even with the Fed efforts.
Created 10/27/2009 – 21:57
The relationship between M1, M2 and total credit market debt and GDP.
In 1985, total M1 was $554 billion. Total credit market debt at 8.62 trillion. Debt to M1 ratio is 15-1.
M2: 2.34 trillion. Debt to M2 ration 3.6- 1. GDP to M2 is 1.79
1985: GDP at 4.21 trillion. GDP to M1 is 7.5-1
In 1990, total M1 was $798 billion. Total credit market debt stood at 13.7 trillion. Debt to M1 ratio is 17-1
M2: 3.17 Trillion. Debt to M2 ratio 4.3- 1. GDP to M2 is 1.82 to 1.
1990: GDP at 5.8 trillion. GDP to M1 is 7.2-1
In 1995, total M1 was at roughly $1.14 trillion. Total credit market debt stood at 18.4 trillion. Debt to M1 ratio is 16-1
M2: 3.5 trillion. Debt to M2 ratio 5.2 to 1. GDP to M2 is 2.11 to 1.
1995: GDP at 7.41 trillion. GDP to M1 is 6.5
In 2000, total M1 was at roughly $1.13 trillion. Total credit market debt stood at 27 trillion. Debt to M1 ratio is 23-1. Note that this is the peak of the dotcom bubble.
M2: 4.67 trillion. Debt to M2 ratio 5.78 to 1
2000: GDP at 10.28 trillion. GDP to M1 is 9-1. GDP to M2 is 2.20 to 1.
In 2007 M1 stood at roughly $1.37 trillion. Total credit market debt stood at 51 trillion. Debt to M1 ratio is 37-1!!
M2: 7 Trillion. Debt to M2 ratio 7.28 to 1.
2007: GDP at 13.8 trillion. GDP to M1 is 10-1. GDP to M2 is 1.97 to 1.
M1 has skyrocketed since the fall of 2008. M1 now stands at $1.66 trillion. Total debt has stalled to 52 trillion. Debt to M1 ratio is 32-1.
M2 8.29 trillion. Debt to M2 ratio 6.27 to 1.
Currently GDP is at 14.14 trillion. GDP to M1 stands at 8.5 -1. GDP to M2 is 1.70 to 1.
So we can see from this data that the discreptancy between M1 and total debt has widened considerably since 1985. Notice how the M1 spread was 37 – 1 right before the collapse of the financial markets. This difference is the largest in US history. Soon after the dollar went through the roof as institutions sold off dollar denominated assets in exchange for dollars. Depending on which measure you use the spreads widened right before the crash and are still highly elevated.
So the question that remains is: what will happen if institutions ever dispose themselves of these assets? If they do then the supply of dollars out there is limited as the data shows. Were a true panic to ensue then how low will persons be willing to sell those assets in order to get the supply of limited dollars? Based on this data assets should fall and the dollar should rise.
So I welcome your insights on the risks to deflation vs. hyper-inflation. I am not as informed as you are on the financial flows and the FX and debt markets so I would be interested in your percentage likelyhood of the options. A. Deflation; B. Hyper-inflation and C. Japanese still “slow death” deflation.