SW Richmond

Crossing the Rubicon: Monetizing the Long Bond

Nothing moves in a straight line, except Bernie Madoff.

Bernanke makes numerous references to 'credible threats', AKA jawboning the markets, in his pieces on fighting deflation. He acknowledges that to remain credible, these threats must be backed up by action. The pressure on the Fed to directly intervene in the long Treasury market is building. Anyway, since they have 'credibly threatened' to buy mortgage debt, the markets have been complaining that they've only bought $50 Billion of the $500 Billion promised.

If you want an answer (which you are free to not consider a serious attempt) then I suggest you read my earlier article here:

seekingalpha.com/artic...

I believe now that my earlier estimates are low, and that the Fed's balance sheet will approach $8 Trillion within a few years.



On Feb 03 01:39 PM mark glennon wrote:

> Baloney. Tens of trillions of liquid wealth have been erased, yet
> Ben's helicopters have created only about two trillion new dollars
> -- and the Fed balance sheet has actually shrunk a bit in the last
> few weeks. Merely talking about Fed purchases of GSE debt, which
> Ben did a few weeks ago, was hugely successful because it knocked
> down mortgage rates. Questions of degree matter. Yes, unrestrained
> Fed purchases would be a disaster, but nobody proposes that and you
> are attacking a straw man. The Fed has always bought and carried
> treasury obligations to some extent. The question is how much more
> is prudent in this circumstance. This article, like so many others,
> make no serious attempt at the answer.

As Bond Prices Sink, Hold on to Gold

"Moreover, investors can see that governments can inflate the supply of bonds - but not the supply of gold and silver."

Anytime a government can create something of ‘value’ out of thin air, the only thing limiting supply is the supply of air.

This is true of all financial assets. One of the dichotomies of money is that in order to be useful it must be plentiful, but in order to be valuable it must be scarce. The dilemma, then, is that a useful economic system should have a large quantity of a scarce resource to use as money. One important point must be emphasized: the scarcity of money must be enforced and must be known to be enforced.

Enforcing this scarcity, though, seems to be a problem. Further, I find an interesting parallel here to the problem of the "lender of last resort" function and moral hazard.

Simply put, the scarcity of money must be known and universally believed; this means there must be an enforcement mechanism assuring scarcity. If the enforcement mechanism is internal to the money system (some man-made mechanism like "Congressional hearings" or "Ben Bernanke's mouse-click finger") then the scarcity of money is not assured and the money cannot be trusted. But if the enforcement mechanism is external, and implies some difficulty requiring work, then everyone that uses the money can be assured of its scarcity.

This connection between work and money is immutable. Humans know, and math requires, that nothing of value comes without effort. Money must represent "stored work". It makes absolutely no sense to be paid small amounts of money for a day’s labor when vast quantities of the same money can be clicked into existence at the whim of one man. Everyone intuitively knows this, except monetarists.

A friend of mine recently pointed out that the "lender of last resort" function presents a similar dichotomy. It is an extremely valuable safety valve, yet if it is known to exist then its existence creates moral hazard, because men and women will know it exists and will feel free to assume too much risk in their pursuit of return. Since the lender of last resort is a function of man it is corruptible, just like fiat money.

Interestingly, both problems have the same source: central banking. This makes the solution elegant: eliminate central banks. In one fell swoop we eliminate moral hazard and initiate a stable currency. Risk is now something to be carefully assessed, as the safety net has been taken down. The question of “too big to fail” is answered. The man on the street can be assured that his labor is respected.

Crossing the Rubicon: Monetizing the Long Bond

You may be correct. After additional digging I found this article
www.telegraph.co.uk/fi...
which adds the detail that "The Bank said it will still publish details of its balance sheet, but, significantly, the data – the main indicator of the extent of quantitative easing – will not be presented until more than a month has elapsed."

Was this information included in a later update to the news release? I don't recall seeing it, and the article above has been "updated".

On Jan 22 02:56 PM Stevie b. wrote:

> "Now BoE can print all it wants in order to reinflate the UK bank
> system, and no one need know just how much new money there is. How
> can anyone judge dilution when there are no numbers on which to make
> judgment?"
>
> Methinks you exaggerate a tad. They've just changed the reporting
> period - there will still be numbers.

Crossing the Rubicon: Monetizing the Long Bond

LJS,

I want to be optimistic, I have two teenagers. I won't give up hope, but my optimism has fled. BTW, I'm still trying to get through "Man,Economy, and State".


kelm,

There is widespread belief that the US government can't / won't default. It's possible that the USD will be the last refuge short of PM's. Just recently we have seen evidence of gold and USD moving in tandem and some new flirtation with gold backwardation. This may be in response to the building UK banking crisis. I think it is.


Smarty,

I know he's going to do it, I just wish he wouldn't, because I know what happens next.

Is Buying Bonds Really a Good Idea?

We need disclosure of genuine financial conditions to get spreads back to sanity levels. Risk is perceived as greatest where it is unknown. Do any of you remember the kids' card game "Old Maid"?

Capital will hide until fear of destruction subsides. The surest way to not get the Old Maid is not to play the game. There will be a time to buy bonds, but this ain't it.

Some Wall Street perp walks would be nice, too.