Monetizing the Debt: Blogosphere Responds

Late Thursday evening I penned a piece which responded to a post at the blog Zero Hedge which had originally been written and posted at the blog of blogger Chris Martenson. The piece by Mr Martenson discussed the most recent 7 year note auction and the subsequent Open Market Desk purchase of nearly $5 billion of those bonds while the ink had not yet dried on that bond.

Mr Martenson posted a response to my post in the comments section of that post. It is well written and I think that more eyes will have a chance to read his thoughts here rather than in the comments section.

Here is his response in its entirety:

Hello, Chris Martenson here.

[Note: I left a similar comment at Naked Capitalism]

Just wanted to say that while I applaud the interest in this subject, and I am in awe of the knowledge on display here, I believe that some of my words and intent have been taken out of context or misinterpreted.

1) My only point in raising the specific 7-year CUSIP purchase by the Fed last week was in the context of the troubled 5-year auction being followed by a miraculous 7-year auction that now appears less-than-miraculous due to that fact that the fed took 47% of the Primary Dealer take off their hands a few days later. Yes, that’s a dot-connection that seems entirely relevant to me not because it reveals a greater degree of manipulation (the $1.25 trillion MBS target seems a tad larger to me…) but because it possibly reveals that there’s rebellion brewing in the Treasury auction world. While this may be over-reaching, it could also be legitimate spoor to be read as we try and illuminate some of the path before us. I was not, repeat not, making any overt claims about the extent of monetization in my post, just that one odd coincidence concerning the 7-year auction. I do collect and have all the base data for all the auctions and I track them closely and the Fed is very much on track with what it said it was going to do so there’s not much of genuine interest there for me yet. But stepping in to assure a “good appearance” at a critical auction. I consider that quite interesting and newsworthy.

2) My comment about “A more honest and open approach…” for the Fed to pursue, as my long-time readers will attest, was not a comment about what is legally permissible by the 1913 FR Act (yes, I’ve read the whole thing) or normal operating procedure (yes, I know how the Fed & Treasury operate) but rather just another statement about another way that complexity obscures our official monetary and fiscal actions. I regularly opine that we would be better off by being more straightforward in our official reporting and actions. I honestly didn’t know that this piece, out of the thousands that I have written, would catch a bit of internet-lightening and so I wrote a quick piece with my usual audience in mind. In retrospect I wish I would have framed that sentence a bit more because it is now being bandied about as proof that I don’t know how the Fed actually operates and, therefore, the rest of the piece (and maybe more!) is bunk as well. Ah well, such is life on the intertubes.

So that’s it, I think it smells that the 7-year auction seemingly went so well the day after the 5-year fiasco and then days later we find out that the Fed bought nearly half of the total load carried by the Primary dealers.

Perhaps it’s just a quirk in the largest bond auction week in history, or perhaps it portends a dangerous shift in Treasury appetite and is a sign that the greatest bubble of them all (Treasuries) has a small tear developing at the edge. I will continue to track the edges of this fascinating story because I personally don’t want to be in the position of someday reading about it above the fold in the NYT with everybody else.

Comments

[PCScipio:]

Something missing? Like a resonse to Martenson? Nothing like a good cat fight between bloggers. C'mon, John!

Aug 10 01:48 PM

[basehitz:]

John, I appreciate that you gave the rebuttal the same treatment as your initial critique. It's all about credibility.

Aug 10 03:02 PM

[Brian Bober:]

Yes, the Fed is printing money and the Fed is transparent about it; about as transparent as glue. Jansen wins his strawman argument; congratulations. Maybe we can focus on some of the externalities. The "efficiency" and "fairness" of these operations seem to make numerous assumptions. Here are three:

* Primary dealers do not discuss future market actions with the Fed
* The Fed's market actions cannot be predicted by primary dealers
* The Fed would never "bailout" primary dealer's excess inventory

Obviously if any of the three assumptions above are not true than the Fed basically prints money and hands much of it to primary dealers. Quite an enviable - dubiously legal - business. The market isn't necessary fair or efficient....

Aug 10 03:03 PM

[rogersails:]

Kudos to Mr. Jansen and Martenson for a back and forth that elevates objectivity and balance, and doesn't degenerate into a "catfight". Please take note, bloggers.

Aug 10 03:07 PM

[Donald Ingram:]

Yes. Definitely informative and constructive, when we can have a discussion based upon mutual respect.
I think we can all agree that the Fed is responsible for creating this 'tempest in a tea pot' for it's handling of the bond purchase after the fact. What one perceives by their action is something not so above board and verges upon an attempt to conceal. Not an action one would expect from a financial institution that is attempting to instill confidence and respectability in the banking/financial sector after all the recent negative press that is so far been well deserved!

Aug 10 03:42 PM

[Kinabalu:]

C'mon PCScipio

Why is a response needed? Martenson basically agreed Jansen's point was correct:

"I was not, repeat not, making any overt claims about the extent of monetization in my post,"

That was the issue Zero Hedge was hyperventilating over.


On Aug 10 01:48 PM PCScipio wrote:

> Something missing? Like a resonse to Martenson? Nothing like a good
> cat fight between bloggers. C'mon, John!

Aug 10 03:47 PM

[American in...:]

I didn't know that monetarizing debt was intrinsically evil. Despite the presumption, Japan successfully used debt monetarization to pull itself out of a severe depression.

Please get an economics education ...


On Aug 10 03:03 PM Brian Bober wrote:

> Yes, the Fed is printing money and the Fed is transparent about it;
> about as transparent as glue. Jansen wins his strawman argument;
> congratulations. Maybe we can focus on some of the externalities.
> The "efficiency" and "fairness" of these operations seem to make
> numerous assumptions. Here are three:
>
> * Primary dealers do not discuss future market actions with the Fed
>
> * The Fed's market actions cannot be predicted by primary dealers
>
> * The Fed would never "bailout" primary dealer's excess inventory
>
>
> Obviously if any of the three assumptions above are not true than
> the Fed basically prints money and hands much of it to primary dealers.
> Quite an enviable - dubiously legal - business. The market isn't
> necessary fair or efficient....

Aug 10 03:49 PM

[Gary A:]

John, this is a lot better than your miserable criticism of the truth about the Fed. The Fed is scared of deflation, really scared. High interest rates would kill the foreclosure flipping in the housing market, kill demand for our bonds or stocks or both, kill car demand, and make us more like Japan every day. Heli Ben cannot afford to be inflationary, and wants a miserable and slow recovery. Anything more than that would likely create inflation, making it even more necessary to raise interest rates and tank the economy.

Ben has a new name. Afraid to fly Ben.

Aug 10 05:50 PM

[Razer:]

Sorry, American in Paris, I couldn't let this go without comment. Japan's monetizing of its debt did NOT help them pull themselves out of recession. It was the worst of their hair-brained Keynesian schemes they tried to do so. The reason why their depression lasted so long is because they followed the idiotic prescriptions of economists like Krugman and Bernanke instead of ignoring them. Monetizing the debt will only send us into hyperflation and crash our currency that much quicker. Deflation is not the problem, as some seem to think it is. It's the cure for the previous inflation that happened during the inflating of the bubble. It's inevitible and must happen before recovery can begin.

Perhaps you are the one that should get an education in economics. Just be sure to throw away those Keynesian text books. Zimbabwe monetized its debt too, and look how wonderful that policy works. Keynesian economics at its finest. So with that inflation, I wonder if they achieved full employment?



On Aug 10 03:49 PM American in Paris wrote:

> I didn't know that monetarizing debt was intrinsically evil. Despite
> the presumption, Japan successfully used debt monetarization to pull
> itself out of a severe depression.
>
> Please get an economics education ...

Aug 11 03:44 AM