Warning!

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  • Mon, Sep 27, 2010 - 03:21am

    #1
    Davos

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    Warning!

I would HIGHLY encourage everyone on this site to read the following article closely. 

Why QE2 + QE Lite Mean The Fed Will Purchase Almost $3 Trillion In Treasurys And Set The Stage For The Monetary Endgame

(and in fact we believe this is merely the first step to an outright monetary collapse also known in some textbooks as hyperinflation), but merely as a means of frontrunning Ben Bernanke, as the entire bond market goes offerless,

  • Mon, Sep 27, 2010 - 04:23am

    #2
    Peak Prosperity Admin

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    Re: Warning!

Warnings all over the internet 

US Long Bonds Remain An “Enron-like” Train Wreck

http://edegrootinsights.blogspot.com/2010/09/us-long-bonds-remain-enron-like-train.html

  • Mon, Sep 27, 2010 - 11:27am

    #3
    Peak Prosperity Admin

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    Re: Warning!

The 0 Hedge article talks of direct monetization by which the Fed stops using the Primary dealers as middlemen thereby removing the current restrictions imposed by SOMA guidelines, limiting holding to under 35% of any specific marketable CUSIP.

One of the main problems facing the Fed in indirectly monetizing US Treasurys (keep in mind the proper definition of monetization is the Fed buying bonds directly from the Treasury, as opposed to using Primary Dealer middlemen, which is how it operates currently), is that there simply are not enough bonds in circulation to be bid, under its current regime of operation! Readers will recall that as part of existing SOMA guidelines, the Fed is limited to holding at most 35% of any specific marketable CUSIP. Furthermore, applying the SOMA limit to the $2 trillion in upcoming next twelve month issuance, means that in the interplay of the prepayment feedback loop coupled with collapsing rates, the Fed will need to either change the cap on the SOMA 35% limit, or the Treasury will need to issue far more debt to keep up with the sudden expansion in the Fed’s outright, and not just marginal, capacity for incremental debt. Priya Misra summarizes this conundrum facing the Fed best:

  • Mon, Sep 27, 2010 - 12:22pm

    #4
    Peak Prosperity Admin

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    Re: Warning!

This is a highly interesting article, but I think some of the assumptions may be extreme cases.

For starters, it’s assumed that QE 2 is going to succeed at driving rates down. Why do people assume this, when the first $300 billion tranche of QE 1 ‘worked’ for only six weeks before rates went higher? You can see the sequence on the T-note yield chart. In mid-March 2009 when the $300 billion Treasury purchase was announced, its yield dropped from 3.0% to 2.5%. But by mid-June 2009, it had popped all the way to 4.0%. Chart:

http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=tnx&sid=0&o_symb=tnx&freq=1&time=9

If this pattern should occur again, even on a longer time scale, then the assumed 90% refinancing of mortgage securities held by the Fed wouldn’t happen. But it’s a very extreme assumption even if QE 2 does ‘work.’. Not everyone is quick to jump on the refi bandwagon. And importantly, many homeowners CAN’T — either because they no longer have enough equity thanks to falling prices, or because they no longer have the income they used to. I would guess that even with a 100-basis point yield drop, only 30 to 50% of the Fed’s mortgage securities would be retired in the following year.

Finally, I don’t understand why the pool of outstanding Treasuries eligible for purchase is so low. The Treasury says debt held by the public is approaching $9 trillion, so it seems that almost $3 trillion should be eligible for purchase, even with a 35% limit on any one issue. There may be additional constraints which limit eligible securities, but I don’t know what they are.

Where the author is correct, I think, is in the Bubble implications. The Fed has no plan other than inducing a Bubble III, which is already evident in Treasuries. If investors believe (as the Zerohedge author does) that Treasuries are a government-sponsored, price-floored market, their prices could soar to very extreme levels … and then proceed to crash, as the end of Fed purchases approaches. Because of the size of the Treasury market — and the corporate and municipal markets which price off of Treasuries — the popping of a debt Bubble could be very painful and destructive indeed.

 

  • Mon, Sep 27, 2010 - 01:10pm

    #5
    Peak Prosperity Admin

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    Re: Warning!

Thank you machinehead!

The ZH article had my head swimming. Your post cleared it up. Mostly.

  • Mon, Sep 27, 2010 - 02:23pm

    #6
    Peak Prosperity Admin

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    Re: Warning!

I am skeptical that they really intend to proceed with this.  As i know you recall, Bernanke has made a number of threats–his historical printing press in the basement speech for example;  that he would create additional money supply for the purposes of causing inflation.  Althouugh in fact, the fed has proceeded to monetize in limited amounts, the numbers so far have not been large enough to affect the interest rate markets.

Conditions today are quite different from historical situations where government creates additional spending power with a printing press–primarily because of the information flow–if the fed really proceeds, it will be common knowledge (in a very short period of time) what has transpired.  Among other expectable consequences, the price of alternative monetary assets will rise sharply–I suppose we could expect draconian efforts to control those markets.  But as the $3tril works it way through the system, other disconnects will appear which will be difficult to control through monetary and fiscal policy remedies. 

On balance, it is not likely they will do this without having in view methods of dealing with follow on conditions;  also recognizing that their ability to resolve the disconnects they create will be difficult. 

I recognize that anything is possible at this point;  further, none of us really knows enough about the driving plan that we can accurately predict where they are going;  but I tend to doubt this is likely to be the immedite direction. 

  • Mon, Sep 27, 2010 - 03:53pm

    #7
    Peak Prosperity Admin

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    Re: Warning!

[quote=seattlelaw]

I am skeptical that they really intend to proceed with this.  As i know you recall, Bernanke has made a number of threats–his historical printing press in the basement speech for example;  that he would create additional money supply for the purposes of causing inflation.  Althouugh in fact, the fed has proceeded to monetize in limited amounts, the numbers so far have not been large enough to affect the interest rate markets.

Conditions today are quite different from historical situations where government creates additional spending power with a printing press–primarily because of the information flow–if the fed really proceeds, it will be common knowledge (in a very short period of time) what has transpired.  Among other expectable consequences, the price of alternative monetary assets will rise sharply–I suppose we could expect draconian efforts to control those markets.  But as the $3tril works it way through the system, other disconnects will appear which will be difficult to control through monetary and fiscal policy remedies. 

On balance, it is not likely they will do this without having in view methods of dealing with follow on conditions;  also recognizing that their ability to resolve the disconnects they create will be difficult. 

I recognize that anything is possible at this point;  further, none of us really knows enough about the driving plan that we can accurately predict where they are going;  but I tend to doubt this is likely to be the immedite direction. 

[/quote]

Here is what Eric Sprott said recently in an interview:

“Well it is. I’m debating whether it’s happening (quantitative easing II) while we speak, because the Fed’s balance sheet continues to grow, even though they said they are going to stop buying most instruments at the end of March. But every week it keeps growing by $10 billion. I mean $10 billion a week is half a trillion dollars a year.”

I don’t know what you have to substantiate your warm-n-fuzzy take on things. While I certainly hope you are correct I’m quick to point out that all the recovery figures are based on growth – which just ins’t there. I myself don’t think they are going to act like a potted plant.

Time will of course tell.

One thing for certain, they have to print in order to avoid default.

 

  • Mon, Sep 27, 2010 - 10:44pm

    #8
    Peak Prosperity Admin

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    Re: Warning!

More on this from a second 0 Hedge article

Seventh, and most important, is Bullard’s admission that even $100 billion of QE a month (and possibly up to $200 billion assuming prepays) is equivalent to outright monetization (as it adds up to $1.2 trillion a year) “Mr. Bullard says the idea of doing more than $1 trillion of purchases a year “gives me pause” because that is how much net debt the Treasury will issue this year, meaning the Fed would be financing it all.” In other words, the Treasury will have to issue ever more debt to satisfy the open mandate for demand (possibly all the way up to double the $1 trillion per year in issuance). That should not be a problem. What is however, would be the implicit lie that Tim Geithner will have committed by swearing on live TV that the Fed will not monetize debt. Alas, as Bullard confirms, the Fed would be doing just that. Which incidentally is precisely what the Weimar government was doing before the hyperinflation train took off.

Country Year Old Dollars Needed To Buy New Dollars
Angola 1991-1999 1 New Kwanza = 1,000,000,000 1991 Kwanzas
Argentina 1975-1991 1 New Peso = 100,000,000,000 1983 Pesos
Belarus 1994-2002 50,000 = 100,000,000 2000 Rublei
Brazil  1986-1994 1 Real = 2,700,000,000,000,000,000 1930 Reis
Bosnia-Herzegovina 1993 Massive hyperinflation
Bulgaria 1991-1997 Defaulted on its debt, food shortages, reduced the number of zeros that were added to its currency.
Chile 1971-1973 500%+ Inflation military overthrew the democracy.
China 1939-1950 1937 3.4 Yuan traded $1.00 USD. By May 1949, $1.00 USD = 23,280,000 Yuan
Ecuador 2000 Pegged to USD after 70-80% drop in its dollar
England 1100s
1455-1485
1543-1551
1100s silver in coins fell.
Coins were clipped.
Henry VIII debased the coins to raise money
Greece 1944-1953 1 1953 Drachma = 50,000,000,000,000 1944 Drachmai
France 1789-1797 Death sentence on anyone selling the notes at a discount to gold and silver livres. 1795 a new currency was issued, the mandat, which promptly lost 97% of its value. 1797, both paper currencies recalled new monetary system backed by gold.
Georgia 1995 1 new lari = 1,000,000 laris.
Germany 1923-1924
1945-1948
See chart above.
Hungary 1944-1946 Forint 400,000,000,000,000,000,000,000,000,000 = 4 × 1029 Pengõ
Israel 1979-1985 Price freezes
Japan 1944-1948 5,000%++ Inflation. Issued military currency, anyone caught with Honk Kong currency was tortured.
Krajina 1993 Country folded became part of Croatia.
Madagascar 2004 1 Ariary = Madagascan Francs – Riots persisted.
Mexico 1993-1994 Defaulted 1982. 1 Nuevo Peso = 1,000 Old Pesos.
Nicaragua 1987-1990 1 Gold Cordoba = 5,000,000,000 1987 Cordobas.
Peru 1984-1990 1 Nuevo Sol = 1,000,000,000 1985 Soles de Oro.
Poland 1990-1993 1 new Zloty.10,000 old Zlotych
Romania 2000-2005 1 new Leu = 10,000 old Lei
Ancient Rome 270AD +/- Took the Romans 300 years to do what the Fed did in 84 years – debase the currency by 95%. The Roman empire fell, they welcomed the Barbarians.
Russia 1992-1994 100 Rubels = 1 USD 1991 30,000 Rubels = 1 USD 1999.
Taiwan 1940-1950 1 New Taiwan Dollar = 40,000 old Taiwan yuan.
Turkey 1990-2005 1 New Turkish Lira;= 1,000,000 old Lira.
Ukraine 1993-1995 1 Hryvnya =100,000 Karbovantsivi
United States 1812-1814 Continental Currency – Failed
United States 1861-1865 Confederation Notes – Failed
Vietnam 1981-1988 Gold trading was outlawed.
Yugoslavia 1989-1994 1 Novi Dinar = 1,300,000,000,000,000,000,000,000,000 Dinars.
Zimbabwe  1999 – 2010 Ongoing mess.

  • Tue, Sep 28, 2010 - 12:08am

    #9
    Peak Prosperity Admin

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    Re: Warning!

“Mr. Bullard says the idea of doing more than $1 trillion of purchases a year ‘gives me pause’ because that is how much net debt the Treasury will issue this year, meaning the Fed would be financing it all.”

It gives me pause too, when Bullard puts it that way.

Having a primary dealer stand in the middle between the Treasury and the Fed is of no economic substance. The end result of the back-to-back transactions is that the Fed buys debt from the Treasury, and the primary dealer earns a commission or a bid-ask spread on both legs of the transaction.

In substance, Ben Bernanke is proposing a new independent movie called The Year of Monetizing Dangerously — coming soon to a theater near you. Admission is free, because the cost of the ticket will be added to everything you buy.

  • Tue, Sep 28, 2010 - 12:20am

    #10
    Peak Prosperity Admin

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    Re: Warning!

[quote=machinehead]

In substance, Ben Bernanke is proposing a new independent movie called The Year of Monetizing Dangerously — coming soon to a theater near you. Admission is free, because the cost of the ticket will be added to everything you buy.

[/quote]ROTFLM_O & Oh, our great, great grandkids will pay the movie. That’ll be the title of my next trashy write: Intergenerational Tyranny

 

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