The Fed's Bond Bubble Doomsday Machine

[Toro]

The Bernank mentions "taper," and emerging markets go into the crapper.

Now we're waiting for US rates to eventually rise and kill the Canadian real estate market.

 

[f252863]

When you buy a bond, you are making a loan to the issuer. That bond is money owed to the buyer, making it an asset.

When the Federal Reserve buys a US Treasury bill, note, or bond, it is making a loan to the federal government because the federal government has appropriated more spending than it has received in revenues.

The Fed doesn't purchase from the Treasury. The Fed buys Treasuries from dealer banks.

This is called "monetizing the debt". Putting more money into circulation.

Because of the crash resulting from the global derivatives bubble, the Federal Reserve has also been buying Mortgage Backed Securities (MBS). This is also printing money and putting it into circulation.

The "money" that the Fed uses to purchase Treasuries or MBS' isn't "put into circulation." That money sits on the bank's accounts at the Fed and only circulates among banks. The net financial assets of the private sector have not changed. The Fed has exchanged one financial asset (a T-bill, bond, or MBS) for another financial asset (bank reserves).

What this does do is change change the capital structure and maturity profile of bank balance sheets. It would become inflationary if banks increased their lending.

A key component of inflation that is almost always overlooked is something called "the velocity of money".

If the Fed gave you a trillion dollars, and you buried it in your backyard, then that trillion dollars will have absolutely no effect on the value of the money in circulation. The velocity of that trillion dollars is zero.

Just so since the crash of 2008. The velocity of money slowed considerably. Which is precisely why the Fed has been printing so much more of it. The Fed is attempting to get more cash out there to increase the sluggish movement of money.

Put more money into more hands and some of it is going to move around.

The traditional measures of velocity of money are outdated in that they are too narrow. When we talk about "money" now we must consider things like collateral and collateral chains.

M.S. in economics, ok.

What about the displacement effect of purchasing 4 trillion of MBS and Bonds?

If the Fed is the largest purchaser of these instruments doesn't it reduce the supply available to the market?

 

[g5000]

The BOJ Jumps The Monetary Shark—–Now The Machines, Madmen And Morons Are Raging

For alliterative purposes, Stockman had to use "morons", but you know he really wanted to say retards.

This is just plain sick. Hardly a day after the greatest central bank fraudster of all time, Maestro Greenspan, confessed that QE has not helped the main street economy and jobs, the lunatics at the BOJ flat-out jumped the monetary shark. Even then, the madman Kuroda pulled off his incendiary maneuver by a bare 5-4 vote. Apparently the dissenters——Messrs. Morimoto, Ishida, Sato and Kiuchi—-are only semi-mad.

In fact, this was just the beginning of a Ponzi scheme so vast that in a matter of seconds its ignited the Japanese stock averages by 5%. And here’s the reason: Japan Inc. is fixing to inject a massive bid into the stock market based on a monumental emission of central bank credit created out of thin air. So doing, it has generated the greatest front-running frenzy ever recorded.

The scheme is so insane that the surge of markets around the world in response to the BOJ’s announcement is proof positive that the mother of all central bank bubbles now envelopes the entire globe.

 

[g5000]

M.S. in economics, ok.

What about the displacement effect of purchasing 4 trillion of MBS and Bonds?

If the Fed is the largest purchaser of these instruments doesn't it reduce the supply available to the market?

Yes, but this policy increases liquidity and thus inflates asset prices across the board. The Fed has a double mandate; control inflation and full employment. It has sacrificed the latter in favor of jacking up the Dow Jones average.

 

[g5000]

More from Stockman's article:

Accordingly, the 10-year JGB is now trading at a microscopic 43 bps and the 5-year at a hardly recordable 11 bps.

Jesus H. Christ.

That's like a Mississippi shotgun shack being on the market for $500,000.

 

[g5000]

Let's connect some dots:

...Japan’s state pension fund (the GPIF) intends to dump massive amounts of Japanese government bonds (JCB’s). This will enable it to reduce its government bond holdings—built up over decades—– from about 60% to only 35% of its portfolio.

...50% of GPIF’s $1.8 trillion portfolio will flow into world stock markets.

... it has generated the greatest front-running frenzy ever recorded.

 

[g5000]

The GPIF's selling of government bonds is happening, not coincidentally, at the same time the BOJ announced it is increasing its purchasing of government bonds to an annual pace of $709 billion.

A global bond bubble and a stock bubble.

 

[iamwhatiseem]

Just another day in the concentration of wealth of America

 

[iamwhatiseem]

Plutocracy or Kleptocracy take your pick - either one fits what America is today.
We are not a Democratic Republic. Have not been since the Clinton era.
The U.S. Government exist today to increase the wealth to themselves and the central banks, Wall Street firms and super corporations. Period. Both sides. Republican or Democrat doesn't matter. In fact, Obama is the KING of trickle down economics and is the greatest friend to the kleptocracy than any President before him. Gruber is right - the average American IS stupid when it comes to economics

 

[g5000]

Ponder this: Your government borrows money at 1.5 percent interest. Sounds pretty good, right?

For simplicity's sake, let's suppose your government's annual tax revenues is $50,000, but your government debt is $100,000.

The interest payment on government debt would be 30% of your revenues, leaving only 70% for things like healthcare and roads and bridges and national defense and everything else.

If your debtors demanded just a measly increase of 50 basis points on the interest rate, your interest would then jump to 40% of your revenues.

This is the problem with ever increasing debt. Even though you may have a low interest rate, the sheer volume of your debt can crush you with the slightest swings.

This is the problem faced by Japan today.

Japan's "solution" to this problem is to buy every available government bond on the market. This forces the interest rate to stay low, but it also makes their debt all that much larger!

This is a death spiral. A crash is inevitable. They will be first.


Not only that, by degrading their currency they are making their exports cheaper. How long do you think China and South Korea will tolerate that before they go to war with Japan? That war may be a currency war or it may end in a real war.

 

[g5000]

This just in:
Defying Expectations, Japan’s Economy Falls Into Recession

The tax plan was intended to curb Japan’s immense government debt, which at about two and a half years’ national economic output is the largest in the developed world. But there are concerns that after years of sluggish wage growth, consumer confidence is still too weak handle the increase. Instead of solving the debt problem, heavier taxes could simply push the economy back into a downward slide.

“Raising the consumption tax is supposed to increase government revenues, but if we fall back into deflation it will all be for nothing,” Mr. Abe said at a meeting of Group of 20 leaders in Brisbane, Australia, on Sunday.

Currency war, here we come:

Mr. Abe and his inner circle appear to have interpreted the economy’s struggles as signaling the need for an even bolder, purer stimulus program. Instead of encouraging economic activity through central bank money printing, on the one hand, while constraining it with higher consumer taxes on the other, he seems poised to twist the policy dial fully toward stimulus.

 

[g5000]

Draghi Sees Almost $1 Trillion Stimulus as QE Fight Waits

Pledging to “significantly steer” the European Central Bank’s balance sheet back toward the 2.7 trillion euros of early 2012 from 2 trillion euros now, the ECB president yesterday announced a final round of interest-rate cuts and a plan to buy privately owned securities. His mission: to revive inflation in the 18-nation euro area.

Privately owned securities!

 

[g5000]

And so it begins. The Fed has raised interest rates and now some junk bond funds are crumbling:

http://www.bizjournals.com/boston/n...d-turmoil-threatens-boston-fund-managers.html

 

[g5000]

The first casualty is Third Avenue: Junk Fund’s Demise Fuels Concern Over Bond Rout

A firm founded by legendary vulture investor Martin Whitman is barring investor withdrawals while it liquidates its high-yield bond fund, an unusual move that highlights the severity of the monthslong junk-bond plunge that has swept Wall Street.

The decision by Third Avenue Management LLC means investors in the $789 million Third Avenue Focused Credit Fund may not receive all their money back for months, if not more.

 

[EdwardBaiamonte]

The first casualty is Third Avenue: Junk Fund’s Demise Fuels Concern Over Bond Rout

A firm founded by legendary vulture investor Martin Whitman is barring investor withdrawals while it liquidates its high-yield bond fund, an unusual move that highlights the severity of the monthslong junk-bond plunge that has swept Wall Street.

The decision by Third Avenue Management LLC means investors in the $789 million Third Avenue Focused Credit Fund may not receive all their money back for months, if not more.

do you have any idea what your point is???

 

[g5000]

This is called "monetizing the debt". Putting more money into circulation.

Because of the crash resulting from the global derivatives bubble, the Federal Reserve has also been buying Mortgage Backed Securities (MBS). This is also printing money and putting it into circulation.

The "money" that the Fed uses to purchase Treasuries or MBS' isn't "put into circulation." That money sits on the bank's accounts at the Fed and only circulates among banks. The net financial assets of the private sector have not changed. The Fed has exchanged one financial asset (a T-bill, bond, or MBS) for another financial asset (bank reserves).

What this does do is change change the capital structure and maturity profile of bank balance sheets. It would become inflationary if banks increased their lending.

That was actually the whole purpose of purchasing the MBS. To get banks to increase lending because lending had ground to a halt.

The whole intent was to get banks to stop hoarding cash and get it out there. That is why the Fed keeps talking about lowering the interest rate it pays on Reserves.

When the economy heats up, the Fed will raise the interest it pays on Reserves to cause the price of borrowing from banks to rise.

See that last bit I just bolded an enlarged? I wrote that almost three years ago.

Check out the big brain on G5000!:The Fed Raises Rates...By Paying the Banks

The business and financial press has been abuzz with speculation about when the Federal Reserve would begin raising interest rates. After the meeting of its Federal Open Market Committee (FOMC) on December 15-16, the Fed ended the suspense by announcing that it was raising its target federal funds rate by a quarter of a percentage point (to a range of 0.25 to 0.50%). Flying under the radar, though, was the Fed’s use of a dramatically different method of raising interest rates. The new method involves paying billions of dollars to banks, primarily by paying interest on banks’ reserves held at the Fed. The payments will reduce the amount of money that the Fed remits to the Treasury and, ultimately, to taxpayers.

 

[EdwardBaiamonte]

The payments will reduce the amount of money that the Fed remits to the Treasury and, ultimately, to taxpayers.

Is this a good or bad thing? Why?

 

[g5000]

The payments will reduce the amount of money that the Fed remits to the Treasury and, ultimately, to taxpayers.

Is this a good or bad thing? Why?

Considering we are in a deep deficit situation, it is a bad thing.

But that is not the most significant thing about this new development of paying higher interest rates on reserves. It signals the Fed is worried about the very thing I warned about in my opening posts.

 

[g5000]

If these items don't convince you we are in an historic bubble, nothing will:

http://www.nytimes.com/2016/01/30/business/international/japan-interest-rate.html

Bernanke says Fed likely to add negative interest rates to recession-fighting tool kit


This is eye-popping, holy-shit-we're-fucked news.

 

[EdwardBaiamonte]

This is eye-popping, holy-shit-we're-fucked news.

no idea why you think negative interest rates are so bad?? Can you tell us??