Smarty_Pants

Crossing the Rubicon: Monetizing the Long Bond

"Ben, do not cross the Rubicon."

Surely you jest.

Ben is going to use his helicopter to cross. The traditional boat is far too slow for his needs.

Understanding Government Debt: The Treasury's Indispensable Role

One further point:

"The Fed's website ... also shows that total bank credit grew by 4.7%from April thru November 08" - Mr Hummel.


Yet the data above shows that bank credit increased 5.1% from August to November of 2008. It seems that the rate of increase is growing since the crisis began, though the small amount may be statistical noise.

Understanding Government Debt: The Treasury's Indispensable Role

"The Fed's website at federalreserve.gov... shows it dropped by 50 billion in November." - Mr. Hummel

Data taken from Mr. Hummel's FED link and also from FED monetary base data:

Date ......... credit .... monetary base
08/2008 ... 9415.2 ....... 871.333
09/2008 ... 9575.2 ....... 936.176
10/2008 ... 9957.1 ..... 1142.254
11/2008 ... 9897.9 ..... 1480.845

(my apologies if the colums don't align very well, I tried)

Granted, total bank credit was ~$50 billion lower in November than in October, but it was also ~$320 billion higher in November than in September and ~$485 billion higher in November than in August. Bank credit is higher now than when the FED began dumping base money into the system back in August.

It doesn't look like a contraction in bank credit to me, just the opposite. One small decline in a single month does not a contraction make when the trend is showing the opposite.


"The Fed's website ... also shows that total bank credit grew by 4.7%from April thru November 08 compared to 8.9% for the same period in 07. The annualized growth rate for the three-year period ending June 2007 when the sub-prime mortgage fiasco began to hit the financial markets was 9.4%. That's twice the growth rate during the last 8 months, a huge difference." - Mr. Hummel


Come, come now. As a retired engineer with a background in missile flight control you should know better than to claim that slower growth is equivalent to a reduction. Reductions require a negative sign, not a smaller plus sign.

Say your car is speeding toward a cliff at 100 mph and you take your foot off the gas during the last 50 feet. Do you feel better knowing that the car is only going 30 mph when it goes over the cliff? Just because you are no longer speeding along as fast, you are still moving forward and will eventually reach the precipice.

Bank credit is expanding while base money is exploding. The facts are there in black and white and supplied by the FED banks themselves.

According to your own theory, we should be preparing for further inflation until such time that we see significant reversals in those trends, such as bank credit back below 9500 billion or the monetary base back below 900 billion, where they were before the credit crisis began.

While those levels may yet come to pass, I for one will not be holding my breath waiting.

Understanding Government Debt: The Treasury's Indispensable Role

"base money (except for billfold cash) is not a part of the money supply. It exists only as bank reserves. And if banks are not lending against those reserves, there is no inflationary problem." - Mr. Hummel


Apparently there is cause to believe that this is not the case. A recent report published by Celent regarding the implementation of the credit crisis response has come to the conclusion that lending is occuring a levels higher than before the bailout was undertaken.

"1) Overall lending by US banks is at a record high and has increased during the credit crisis.
2) Interbank lending is at record highs and has increased during the credit crisis.
3) Consumer credit is at record highs and has increased during the credit crisis.
4) Commercial paper markets are operating within their historical norms.
5) Lending by banks to businesses is at record highs and has been growing rapidly.
6) Municipal bond markets are operating within their historical norms.
7) Deposits at banks have shown a substantial increase since the start of the credit crisis."
8) Commercial bank lending has increased 15% since Fannie/Freddie were nationalized.

Source:

www.celent.com/PressRe...


Sure looks like inflationary tendencies are what to expect at this point in time.

Understanding Government Debt: The Treasury's Indispensable Role

"However if there is more base money in the system than meets their needs or wishes AS A WHOLE, the only way the excess can be eliminated and earn a return is when some buy Treasury securities. If they continue to buy and sell financial instruments created in the private sector, that will simply move money around without eliminating excess." - Mr. Hummel


But if they 'continue to buy and sell financial instruments ... without eliminating excess' doesn't that imply inflationary pressures will result?

Take a look at the FED's long term graph of base money:

research.stlouisfed.or...

Two items of note:

1) The few instances of 'removing' base money from the economy are dwarfed by the overall growth of same. The instances which are noticable are tiny in comparison to the general trend of the chart.
2) Approximately 40% of the cumulative growth in base money over a period of 95 years has occurred in the past 3 months.

Taking those two items together, it would seem to me that the odds of removing the "excess" recently added to our money supply are very slim indeed. In fact, it would be the great exception to the rule.

While your original statement may hold in theory it doesn't necessarily equate to it actually happening. There is a difference between what might happen ('excess money being removed') and what does happen (base money growing over time and very rarely being removed).

I MIGHT win the lottery next month, but that doesn't mean I should go out and buy a $1,000,000 home tomorrow.

Until such time as the base money supply actually DOES begin to recede it would be prudent to plan for future inflationary pressures, especially given the immense growth of base money in the very recent past.

Understanding Government Debt: The Treasury's Indispensable Role

On Dec 17 02:58 PM moonbat1775 wrote:

> " Thus it's only interest earning alternative is to buy Treasury
> securities." The Author to Smarty
>
> Yep, roped by a government-backed money and banking cartel (GBMBC)
> into buying government debt. How convenient!

Yep. As The Mighty Mogambo (TMM) would say:

"We're freakin' doomed!"

MB, I hope you have recovered from whatever loco inducing substance got you going on my 1000 comment. I had absolutely no idea what you were ramblin' on about. There is nothing to forgive.

Understanding Government Debt: The Treasury's Indispensable Role

"There is no crowding out effect in buying Treasury securities. You are neglecting to account for the government deficit spending that caused the Treasury to sell its securities" - Mr. Hummel

And you are assuming without question that the spending done by the gub'mint would be anywhere near as productive as an equivalent amount of spending done by the public. That is a claim to which I heartily disagree.

How many billions has the gub'mint spent on studies to figure out why people smile, or other such nonsense? If that money had instead been spent by citizens on any market provided product or service at least it would be supporting an activity that was actually desired instead of one that some bureaucrat thought was useful.


"If the public has more base money IN THE AGGREGATE than it wishes to hold, it cannot get rid of it by buying corporate debt, stocks, or any other non-government assets." - Mr Hummel

I'm afraid you've lost me there. Your statement makes no sense to me whatsoever.

It appears to me you are stating that, somehow, magically, all the base money that "isn't needed" (whatever that means) is always returned to purchase Treasury debt. You will need to further define your terms because it seems you intend them to mean other than their usual and accepted definitions.

It seems to me that if I have more money than I wish to hold I can use it for a great many things other than to buy Treasury debt. I can only imagine that you mean something other than 'income in excess of my expenditures' when you speak of "more base money ... than [I] wish to hold".

To me these refer to the same thing. Money I have earned that I don't have to spend on necessities. What mechanism is there that forces me to put that money into Treasury debt?

You also write as though all the "excess base money" (in the aggregate) is somehow moved as a single block, as though one party is deciding where it must go, instead of millions of individuals making independent decisions on where they will each put their excess earnings.

Once that 'excess base money' is in circulation SOMEBODY must own it and be able to decide what to do with it. It certainly can't be one entity, and they all presumably have free reign to do with it as they wish. What economic law forces them to return it to Treasury debt?

Understanding Government Debt: The Treasury's Indispensable Role

"When that problem is solved and bank credit begins to flow freely again, the Fed will recapture the excess reserves to drive the Fed funds rate up to a more normal range in order to prevent inflationary pressures." - Mr. Hummel


Let's see if I understand this statement in its entirety:

1) Economy is tanking
2) FED creates 'additional reserves' in the amount of several $Trillion to prevent said tanking.
3) Economy presumeably recovers
4) FED removes the several $Trillion of 'additional reserves' before they can cause inflationary pressures, without again causing the economy to tank.

I'll believe it when I see it.

At this point, step 3) is a debatable point though more of step 2) could be argued to rectify the defeciency. What gets me is the claim implied in step 4) where all that extra money is somehow removed without causing a reversion to step 1).


"Hyperinflation is entirely different from ordinary inflation. It occurs when the government is unable enforce tax collection or sell its bonds, and resorts to simply printing money to spend." - Mr. Hummel

That's where I see us heading. There's no way the gub'mint can tax enough out of the populace to pay off the existing debt, much less any additional debt the FED might conjur up so that leaves a constantly increasing stream of debt issuance to paper over the shortfall. Just who is going to buy that massive pile of debt forever?

Our foreign creditors will eventually realize that it isn't worth buying our debt any more when they see that we won't ever improve our deficit spending "habit". Not only that, but there's a real threat that some of them may even begin selling the debt they already own rather than buy more at negative real yields.

Understanding Government Debt: The Treasury's Indispensable Role

"In effect the Treasury pays for its deficit spending by issuing securities rather than base money. That means deficit spending has no net effect on the immediate purchasing power of the private sector."

Well, if you want to ignore the crowding out effect of selling Treasury debt then sure, no effect. In truth however, the private money that was used to purchase Treasury debt might have been spent or invested in a profitable enterprise instead of tied up in Treasury debt (so the gub'mint could waste the same amount on pork barrel spending).


"If the private sector has more non - interest - earning base money in the aggregate than it wishes to hold, its only alternative is to buy Treasury securities."

This is one of the most myopic statements on money I have ever read.

The *ONLY* alternative for extra money is to buy Treasury debt? Really?? What about corporate debt? Stocks or mutual funds? Commodities? Real estate? Foreign currencies or debt? Precious metals? Small businesses? Mattresses or cookie jars?

What the author claims to know about monetary theory is almost as scary as what he appears not to know, IMHO.

The Fear Bubble: Treasuries and Gold

"I understand the central bankers have entered a new paradigm of 0% fed funds, but what are real rates?"

Real rates are negative. Even buyers of US long bonds are losing money in real terms. Check historical context: gold usually does very well when real rates are negative. Even fixed income guys eventually figure out that holding gold at no return is better than holding debt that's losing purchasing power.

Go ahead and short gold, I'm sure you'll find many here willing to take the other side of that trade.