Out of control ?
By printing money
it is hoped to:
–Replenish bank reserves
–Hold interest rates low,
to moderate interest payments on treasury loans,
and to encourage home purchases
–Raise the stock market.
By keeping rates low
and paying interest on bank reserves
the banks have been successfully induced
to withold commercial loans
thereby holding the economy in check
and so, in spite of printing,
holding money velocity low
and so, keeping some pressure on inflation.
Jun 27, 2013
“the Treasury sold $35 billion in five-year notes
to the lowest demand since September 2009,
with a bid-to-cover ratio of 2.45 times.”
“The April TIC report showed
a shocking drop in foreign ownership of US government debt.”
“the selloff [in the bond market]
has now reached the status of the worst ever bond market selloff
(of 90 days or less)
in percentage terms.
“Since May 2nd 2013,
10-year yields have risen from 1.626% to 2.609%,
a 98.3bp selloff
which means that yields have risen 60.5%
in less than two months”
–“There are more than $12 trillion paper dollar assets
(stocks, bonds and cash)
held by foreigners outside the U.S.”
if this is the start of ‘recognition’
and foreign holdings of US paper is offloaded
rates will substantially rise
–“the global derivatives
have increased in size from $100 trillion in 1998,
to $1.2 quadrillion today.”
and the majority of those derivatives are interest rate swaps
and that the banks have sold the fixd rate,
and hold the variable rate
the effect of rate rise, on the banks,
on which the world economy relies,
will be catastrophic,
and the expense to the treasury
will be far greater than tax income will cover.
Except for a miracle
this implies immanent western world
deflation on bank collapse
or hyperinflation on attempts to print
to cover bank or treasury payments
or simultaneously, both.
“The U.S. federal government,…has reached a stage
where forty cents of every dollar spent at the federal level is borrowed,
and a lot of that money has been printed.”
“the Fed has become a significant buyer of debt,
purchasing some 75 percent of US Treasuries last year
because there were no other buyers.”
“the notional value of all OTC derivatives
is in excess of ONE QUADRILLION DOLLARS globally.
The vast majority are related to interest rates.”
“According to the Comptroller of the Currency report, as of December 31, 2011,
JPMorgan Chase held $70.2 trillion in derivatives
and only $136 billion in risk-based capital.
…the bank’s derivative bets
are 516 times larger than the capital that covers the bets.
Goldman Sachs has $44 trillion in derivative bets
covered by only $19 billion in risk-based capital,
resulting in bets 2,295 times larger than the capital that covers them.”
If rates rise
JPMs & GSs variabl rate payout on ‘Interest Rate Swaps‘ could rise abov
the fixd rate recd fr their counterparty + fixd rate recd fr their bond hedg
resulting in *major* losses.
Meaning derivitive mkt disaster
affecting the US financial system.
[Even now, considering real rates, they are a wasting asset, incurring loss.]
So printing *must* continue
so the Fed can continue to purchase US Treasury instruments
to maintain low rates.
“The Real Numbers,
(as opposed to Bogus Official Statistics)
show inflation in the U.S.,
is already…at 9.3% annualized per shadowstats.com”
“since January 1, 2000, US dollars have lost…26% in purchasing power.”
ie. Printing/liquidity is causing price inflation in food, gas, medicine, education, etc.
BUT despite the price inflation:
“Since 2008 the money (M2) multiplier has dropped from slightly under 9 to 3.7.”
“Velocity has also dropped sharply in the last few years.”
“Household debt has now declined for the last 16 quarters…
It still has a long way to go in order to reach the 66% level of 2000,
let alone the 60-year average of 55%.
Since this reduces the demand for goods and services,
businesses have little reason to hire new workers or increase capital expenditures.
Since household spending accounts for 70% of the GDP,
the negative effects are felt throughout the economy.”
“Recently we have seen lower-than-expected results or actual declines in
GDP, job growth, retail sales, income growth, core capital goods orders,
vehicle sales and initial unemployment claims.”
So, the prognosis appears as
economic recession or depression
with price inflation,
ie. the US dollar still losing value.
InfCession or InfPression,
with the Damocles sword of derivitive implosion,
Lean toward hard assets ?
Why QEs *must* continue.
If rates rise
changes in outstanding ‘interest rate swaps‘ means derivitive mkt disaster.
ie iaw w the interest rate rise
JPMs & GSs variabl rate payout would rise
abov the rate they are receiving
from the fixd rate instrument they sold
resulting in *major* losses
affecting the US financial system
also, It is a fact that
in the US and Europe tax revenues do not cover
retirement of debt and govt spending;
so, borrowing to cover bond rollover and new expenses,
by issuing bonds, is required.
But if the necessary borrowing,
under present conditions of:
–large scale borrowing,
–poor economy [poor tax revenues], and
–hi debt to GDP ratios,
would cause hier rates:
“Imagine what the US economy would look like
with the base rate set to Italian levels of six per cent.
Asset values from bonds to stocks to real estate would be decimated.
[cause of inability to pay off the debt at such hi rates
and the fall in asset values]
depression would set in.”
Therefore, to avoid such a rate rise
printing *must* continue
so so that govt can buy back its own bonds
at higher prices than other bond buyers would bid
ie hi bond prices = lo int rates.
ie the deficits must be monitized
The handwriting on the wall:
1. “The fed has become a significant buyer of debt,
purchasing some 75 percent of US treasuries last year
because there were no other buyers.”
2. LTRO, the ECB‘s longer-term refinancing operation
[which has now loaned out above a trillion dollars]
lends banks cash at about 1%
by loaning against sovereign bonds
that those banks currently hold,
so the banks can, in turn, lend to their domestic governments
by buying newly issued bonds.
The question is not wether QEs [printing] will continue,
the question is,
Is there a way to get off the merry-go-round ?