Base Money

[oddlots]

Here's another one of those fed charts we're always getting into a twist about. This one isn't non-borrowed or borrowed reserves of depository institutions - never did figure out what they, ultimately, showed. This is the monetary base:

http://www.itulip.com/images/BASENS1980-2008.gif
Percent change

So I'm going to go out on a limb and say this is inflationary. Anyone care to disabuse of that notion? My understanding is that over the last year the fed has been quite careful to control the money supply and have instead trashed their balance sheet to soak up crappy assets. It would seem that phase is decisively over.

No doubt I have got this completely wrong. (Self-taught gardener yes, self-taught banker no.)

[jimmygu3]

Here's another one of those fed charts we're always getting into a twist about. This one isn't non-borrowed or borrowed reserves of depository institutions - never did figure out what they, ultimately, showed. This is the monetary base:


Don't see the chart.

[*T*]

broken link to graphic...

[oddlots]

Thanks for the fix Fred. I'm not sure how this is related (would a big increase in Fed's lendings increase the money supply? If the answer is no I'm going to give up on trying to understand any of this)...

Brad Setser's blog today discussed the huge increase in the Fed's balance sheet:

In a post called "Extraordinary Times" he writes:

In the last two weeks — if I am reading the Federal Reserves’ balance sheet data (http://www.federalreserve.gov/releases/h41/Current/) correctly — the Fed has:
Increased “other loans” to the financial system by around $230 billion (from $23.56b to $262.34b);
Increased its “other assets” by about $80b (from $98.67b to $183.89b);
Increased the securities it lends out to dealers by $60b (from $117.3b to $190.5b);
That works out to the provision of something like $370b of credit to the financial system in a two week period. That may be a bit too high: the outstanding stock of repos felll by $40b (from $126b to $ 86b), leaving a $330b net change in these line items. But that is still enormous.
The most that the IMF ever lent out to cash strapped emerging economies in a year?
$30b, in the four quarters through September 1998 (i.e. the peak of the 97-98 crisis).
The most the IMF ever lend out over two years?
$40b, in the eight quarters through June 2003 (this covered crises in Argentina, Brazil, Uruguay and Turkey)
This is a very real crisis. The Fed’s balance tells a story of extraordinary stress. I never would have expected to see the Fed lend out these kinds of sums over such a short-period.


(Incidentally, he notes that there is no sign of at least official Capital flight; the custodial account figures continue to rise.)



Link: http://tinyurl.com/5ya45g


I posted this elsewhere but it seems germaine. One of Setser's regular posters - London Banker - had this very illuminating thing to say in the comments:

I’ve been speculating all week that the pressure being used on the Congress to pass the Paulson Plan is the threat of Fed illiquidity. As of two weeks ago, the Fed had lent out more than $600 billion of its $800 billion balance sheet Treasuries against crap MBS collateral. The Paulson Plan would have allowed the banks to unwind the repos putting the Treasuries back in the Fed, get cash for the crap MBS, and get more Treasuries from the issues financing the $700+ billion funding of the Plan. As a bonus, the Paulson mark-to-maturity price becomes the implicit Level 3 price for capitalisation of all the firms and banks in the system, giving them some breathing room to stay in business. Everyone wins except the poor American taxpayer.
The Fed is very close to being illiquid. That is the fear factor we are seeing at work, and the reason no one will discuss why the bailout is needed - only emphasise the urgency.


That explains a couple of things: 1) the strange kind of evasion of what the urgent problem is 2) why sensible comments like why don't we just re-capitalise the banks a la Sweden don't seem to gain any traction

[jtabeb]

The Fed is very close to being illiquid. That is the fear factor we are seeing at work, and the reason no one will discuss why the bailout is needed - only emphasise the urgency.


One can only hope that this would be the final nail in the Fed's coffin.

One can hope so, at least.:o

[$#*]

I'm not sure how this is related (would a big increase in Fed's lendings increase the money supply? If the answer is no I'm going to give up on trying to understand any of this)...
It's very simple to understand this issue if you wear a tinfoil hat (as I do) and begin to shout "End the Fed!' whenever you find an opportunity :)

IMHO, what we have now is a liquidity crisis. If you have a big bullion bar, worth $1 mil today) and tomorrow the gold price goes down 5% (and you believe the price of gold is going down on a long term) you go and sell that bar for $950,000. You get rid immediately of the yellow shiny junk.(goldbugs are going to lynch me for the last statement)

If 5% of the high risk tranches of a $1 mil CDO disappear (foreclosures of NINA mortgages) and you believe home prices are going down (more foreclosures)you don't/can't get $950,000 by selling that CDO. You get a terrible headache, because nobody wants to touch toxic paper.
If yo are really desperate you can do what Thain did with Merill's toxic stuff. You beg a sharky hedgie to buy that CDO from you for $220,000, but only if you agree to lend him the money for the deal.

Just a few years ago these CDO's were being gulped in an instant. CDO packagers could not keep pace with demand. There was no problem in selling your CDO for hard cash in a minute. Basically the same was with Auction Rate Securities; the best thing since the sliced bread.:D

Now let's look at the liquidity pyramid:

http://www.itulip.com/forums/picture.php?albumid=6&pictureid=28


Ben can turn derivatives from highly liquid good money to solid toxic ice in one stroke of the pen.

Let's consider the total area of the triangle as the total volume of liquidity (which is not the same with M3) in the global financial system.

If you have the derivative (red) sector disappearing fast AND if the fed is not compensating with an equal rate of dumping treasuries (yellow sector) , the total volume of liquidity (total area of the triangle) decreases and you get to the surreal situation where Ben keeps dumping treasuries and Finster's FDI shows deflation (http://www.itulip.com/forums/showthread.php?t=5038).

Ben can dump as many treasuries as he wants in order to satisfy his obsessive-compulsive printing behavior (having chili for breakfast), but that may not result in inflation as long as derivatives become illiquid (disappearing from the triangle) at a faster rate.

Corollary, if Ben finds a cork for himself, and the dumping of treasuries stops completely, but he smooches the rate with skill and art, he can put a load of those frozen derivatives in Wall Street's microwave ....and guess what ?... the derivatives (red) area of the triangle expands fast and we may have an inflationary shock with no bailouts and no treasuries river flowing from Hank.

It is my, tinfoil hat, opinion this is actually done on purpose, in order to change the internal distribution of the liquidity pyramid. I described before in detail, my screwball theory, called the Fed's Hammer Drill (http://www.itulip.com/forums/showpost.php?p=47409&postcount=7).


This is a very real crisis.
Not sure I can agree with that. IMHO this is not a real crisis at all it's completely phony, from the beginning to the bailout(s).
You can call it a very serious crisis, an extremely grave one, but it's not real, as I've tried to explain here (http://www.itulip.com/forums/showpost.php?p=50243&postcount=16).

The Fed’s balance tells a story of extraordinary stress. I never would have expected to see the Fed lend out these kinds of sums over such a short-period.

Or it tells a story of extraordinary determined intervention to replace frozen derivatives with fresh printed new power money (treasuries). You say tomato, I say tomatoe..:)


(Incidentally, he notes that there is no sign of at least official Capital flight; the custodial account figures continue to rise.)
The Fed's Hammer Drill Theory has a simple explanation for this "surprising" development, and also there are some interesting additional details becoming apparent lately, but I don't want to get off topic.


Everyone wins except the poor American taxpayer. That is actually the most important point that drives me completely crazy and compels me to yell: "End the Fed!"

The Fed is very close to being illiquid. That is the fear factor we are seeing at work, and the reason no one will discuss why the bailout is needed - only emphasise the urgency.

There is no real danger whatsoever of Fed becoming illiquid. They can bailout the FDIC, they can bailout the Fed, hell ... now they want even to bailout foreign banks ... wtf are they going to do next ??? are they going to bailout Fraudi and Chinese SWF's???:eek: That's charity with taxpayer's money, and they ar every good at it.


That explains a couple of things: 1) the strange kind of evasion of what the urgent problem is
There is no urgency whatsoever because there is no real problem. It's only scare tactics used in a Problem-Reaction-Solution (http://www.itulip.com/forums/showpost.php?p=48849&postcount=30) scenario, which is masterfully applied to us.

2) why sensible comments like why don't we just re-capitalise the banks a la Sweden don't seem to gain any traction
All this phony "catastrophic" threat is nothing else that a cover for the real intention of the Illuminati (http://www.itulip.com/forums/showpost.php?p=48883&postcount=35) - which is to .... flood the international financial system with treasuries.

This is all what they care about. That's why they don't care about any sensible comments.

That's why until recently they were saying that "Deficits don't matter"- and they were right: if your real intention was to flood the markets with treasuries, deficits would not be an issue.. by the contrary .. the more the merrier.:D

Remember it's all phony... it's all Problem-Reaction-Solution

[c1ue]

The problem we have right now is very straightforward.

As EJ and others, including myself, have been saying for a long time - the basic function of FIRE institutions has been corrupted into a Ponzi scheme.

Others more radical, including myself, have been saying that the entire US financial system/FIRE economy is net insolvent.

However, due to the use of various accounting tricks, the actual insolvency has been concealed.

This past 3 weeks has seen the first domino of credit default swaps falling, and with it the ability to conceal is significantly reduced.

Furthermore said first domino falling has now started additional dominos: MBS crap actual market value, bank capitalization ratios after CDS/MBS/CDO actual market values entered, debt dependency for operational survival for 'industrial' companies, etc.

The Fed has been trying hard to forestall this occurrence - but again as has been noted: The Fed can provide liquidity, but cannot lend solvency.

The bailout plan is intended to address this second part.

What really annoys me is that any effort to deviate from the 'Paulson Plan' is being treated by those minions of the financial world as being somehow a Samson bring down the temple effort. And these minions are legion: many of Minyanville's writers, John Mauldin, Krugman, etc.

Certainly it is true that trouble is upon us. But where were these big mouths when the trouble was brewing? This present circumstance is NO surprise to anyone spending much time at iTulip.

The House Republican counter plan is also not ideal, but it is a step in the right direction: one where all possibilities are evaluated according to everyone's merits and the best one chosen. It certainly is motivated by less than altruistic reasons, but nonetheless that is the exact reason why democracy is supposed to work: in the clash of prerogatives, that only the common good is acceptable.

[we_are_toast]

The bailout plan is intended to address this second part.

What really annoys me is that any effort to deviate from the 'Paulson Plan' is being treated by those minions of the financial world as being somehow a Samson bring down the temple effort. And these minions are legion: many of Minyanville's writers, John Mauldin, Krugman, etc.



The House Republican counter plan is also not ideal, but it is a step in the right direction: one where all possibilities are evaluated according to everyone's merits and the best one chosen. It certainly is motivated by less than altruistic reasons, but nonetheless that is the exact reason why democracy is supposed to work: in the clash of prerogatives, that only the common good is acceptable.


1) Krugman opposed the Paulson plan.

2) The Republican plan was designed to be unworkable and is a thinly veiled attempt to let the basic philosophy of "unregulated markets know best", the same philosophy that got us into this mess, take us into the future.

3) The Paulson plan is dead! There is no Paulson plan anymore. Whatever comes out of the congress will be a combination of the administration/congressional leaders ideas.

Doing nothing as the Republicans want means a certain and immediate crash. Doing something, may mean a delay in the crash and buys me more time to get prepared.

[phirang]

1) Krugman opposed the Paulson plan.

2) The Republican plan was designed to be unworkable and is a thinly veiled attempt to let the basic philosophy of "unregulated markets know best", the same philosophy that got us into this mess, take us into the future.

3) The Paulson plan is dead! There is no Paulson plan anymore. Whatever comes out of the congress will be a combination of the administration/congressional leaders ideas.

Doing nothing as the Republicans want means a certain and immediate crash. Doing something, may mean a delay in the crash and buys me more time to get prepared.

Prepared for what? Buying more gold? Can gold retain relevance in a world where American consumption props up the vendor BRIC's and OPEC? This is the real question I have: after the next rate-cut, what's the reason to hold gold? The only catalyst for gold we've seen has been banking/brokerage crisises such as BSC and this past week in the money markets.

I think commodity reflation will occur if we do get this bailout, i.e. oil > 100, but again, that's because we're now financing our consumption by forcing foreign treasury holders to repatriate their wealth: this will piss them off, but their governments are such shit that they have no recourse.

The commodity reflation though does not imply a high gold price... I need help on the gold thesis aside from "systemic banking chaos", which is plausible yet not terribly helpful for those seeking positive real returns.

[raja]

Prepared for what? Buying more gold? Can gold retain relevance in a world where American consumption props up the vendor BRIC's and OPEC? This is the real question I have: after the next rate-cut, what's the reason to hold gold? The only catalyst for gold we've seen has been banking/brokerage crisises such as BSC and this past week in the money markets.

I think commodity reflation will occur if we do get this bailout, i.e. oil > 100, but again, that's because we're now financing our consumption by forcing foreign treasury holders to repatriate their wealth: this will piss them off, but their governments are such shit that they have no recourse.

The commodity reflation though does not imply a high gold price... I need help on the gold thesis aside from "systemic banking chaos", which is plausible yet not terribly helpful for those seeking positive real returns.
phirang,

I'm not in your league as far as understanding financial matters, but I can tell you why I'm invested in gold, FWIW . . . .

When fear builds as the recession induces in a downward spiral of economic collapse, the stock market crashes and more banks fail, people will think, "This ship's going down -- where can I put my money to keep it from turning to dust?" The first safe harbor will be Treasuries.

Treasury rates will stay low for awhile, but people will soon see inflation skyrocketing and the value of the dollar diving, so they will turn to PM as the last remaining refuge to protects their vanishing assets. What other choice do they have?

[c1ue]

1) Krugman opposed the Paulson plan.

2) The Republican plan was designed to be unworkable and is a thinly veiled attempt to let the basic philosophy of "unregulated markets know best", the same philosophy that got us into this mess, take us into the future.

3) The Paulson plan is dead! There is no Paulson plan anymore. Whatever comes out of the congress will be a combination of the administration/congressional leaders ideas.


http://www.nytimes.com/2008/09/26/opinion/26krugman.html?_r=1

Yes, Krugman didn't like the Paulson plan.

But he does believe in a bailout:

Maybe we can let Wall Street implode and Main Street would escape largely unscathed.

But that’s not a chance we want to take.
So the grown-up thing is to do something to rescue the financial system.

For all Krugman's supposed economics background, he's devoted far more articles this year to the upcoming election than the equally upcoming (and perhaps now, here) Ponzi scheme unraveling.

Why is it someone with a Ph.D. in economics - specifically trade and finance - cannot come up with a proposal? Instead must hide behind critiques of others'?

As for the Republican plan - I totally agree it is equally vague and has another agenda in mind. But at least it isn't a blank check.

As for Paulson - I very much doubt it was Paulson's original intention to have his plan go through as is.

The way executives work, you put something forward which is everything you'd like in your wildest dreams. It has components which you will be willing to give up, ideally with parts specifically tailored to trade for items you know you're going to get hit with as quid pro quo.

We don't know what Paulson's real plan is.

[tombat1913]

It is my, tinfoil hat, opinion this is actually done on purpose, in order to change the internal distribution of the liquidity pyramid. I described before in detail, my screwball theory, called the Fed's Hammer Drill.

Not sure I can agree with that. IMHO this is not a real crisis at all it's completely phony, from the beginning to the bailout(s).
You can call it a very serious crisis, an extremely grave one, but it's not real, as I've tried to explain here.

There is no urgency whatsoever because there is no real problem. It's only scare tactics used in a Problem-Reaction-Solution scenario, which is masterfully applied to us.

All this phony "catastrophic" threat is nothing else that a cover for the real intention of the Illuminati - which is to .... flood the international financial system with treasuries.

This is all what they care about. That's why they don't care about any sensible comments.

Remember it's all phony... it's all Problem-Reaction-Solution
Wow, Captain Conspiracy Theory!

You apparently believe in this conspiring oligarchy of money masters who seek to gain world dominance through political and financial means. Ok fine, I believe there is plenty of evidence to support your theory.

You apparently believe that this group of megalomaniacs is willing the conspire against the world economy on such a grand scale as this recent financial emergency and lie to billions of people about it. Wow that takes some cajones.

All fine and dandy by my standards so long as you have good reason to believe so.

But here's what I don't understand in the least. Regarding a certain event which occured about seven years ago this month and a certain thread which no longer exists, what makes that event any different? You honestly believe that they would play games with billions of peoples pocket books but wouldn't kill a couple thousand to accomplish the same ends. You talk about problem-reaction-solution in regard to economics so matter of factly, but in this other instance it's out of the question? What the $#* gives buddy? You're obviously open minded enough to accept that this group of people exists, and is devious enough to affect peoples lives on a massive scale. Are you afraid to swim out to far into the truth pool?

I could be completely wrong about this, but it seems to me that you haven't even bothered to look into that subject in any real depth. Furthermore, I believe if you truly spent some time and looked into the subject you would change your mind. There is a movement of intelligent professionals who are speaking out, and it's growing larger by the day. It needs more intelligent people like yourself to look at the facts.

Tom

[Joy]

Oddlots,

My understanding is this is related to the AIG funding and the LEH bankruptcy. Both required immediate money creation by the FED. Of course, with this kind of money creation we should expect a lower funds rate given the extra money in the banking system. In fact, in the past 10 days the effective funds rate has been significantly below target.

The treasury has in the past few days issued enormous amounts of T-Bills to mop up this extra money. I would expect the monetary base to go back down soon.

Of course, if it doesn't this is inflationary.

[we_are_toast]

Yes, Krugman didn't like the Paulson plan.

But he does believe in a bailout:


Does he? The bailout term was originally applied to Paulson's plan and the plan the Krugman supports doesn't resemble the original.

To over simplify Krugman;
Equity in company for buying crap MBS. Since MBS isn't worth anything anyway, the government is basically buying an interest in the company to keep them afloat. Very much like an additional stock offering by the company. Also caps on exec salaries. Maybe a risky adventure, but not anything like the Paulson bailout.

For all Krugman's supposed economics background, he's devoted far more articles this year to the upcoming election than the equally upcoming (and perhaps now, here) Ponzi scheme unraveling.Krugman has spoken often of infrastructure investment as economic stimulus but you are right that he is concentrating on politics. Politics is the reason we are in this mess, and we have no chance of getting out if we remain with the same political philosophy. Why bother proposing an alternative that is fundamentally contrary to the current political philosophy and would have 0 chance of passing in a McCain administration. He is correct to concentrate on the politics 1st and work on the plan for fundamental change later.

As for the Republican plan - I totally agree it is equally vague and has another agenda in mind. But at least it isn't a blank check.You are correct. They did have another agenda and that agenda was simply to do nothing and let the wild, chaotic, unregulated pilliging continue. A plan that is known to be incapable of passing is no plan at all.

As for Paulson - I very much doubt it was Paulson's original intention to have his plan go through as is.

The way executives work, you put something forward which is everything you'd like in your wildest dreams. It has components which you will be willing to give up, ideally with parts specifically tailored to trade for items you know you're going to get hit with as quid pro quo.

We don't know what Paulson's real plan is.I agree that you typically ask for more than you think you can get. But NO treasury secretary, not one, zilch, 0, none, has ever come before the congress and asked that the constitution be suspended, that he be given 700 billion dollars, and that he be allowed to spend it without question! This isn't some bargaining tool! This is an administration that thinks it's above the law and can do any thing it damn well pleases.

[Jay]

Corollary, if Ben finds a cork for himself, and the dumping of treasuries stops completely, but he smooches the rate with skill and art, he can put a load of those frozen derivatives in Wall Street's microwave ....and guess what ?... the derivatives (red) area of the triangle expands fast and we may have an inflationary shock with no bailouts and no treasuries river flowing from Hank.
Could you expound on this a bit?

[oddlots]

RE: #$* comments (sorry, never figured out the threads thing)

I appreciate the long explanation of your position and sorry for the delay - its taken a long time to think it through and respond. I'm still trying to get my head around it on a fundamental basis. To me the apparent strength of your argument is that it appears to give a structural explanation as to how Dollar Hegemony is actually strengthened by crisis rather than weakened (the latter point of view being my assumption and I think that of the itulip thesis.) I really want to understand it as anything that plausibly contradicts my basic thesis freaks me out these days...

The central 12 Step Hammer drill process is clear enough and should be very familiar to all of us as it bears a very strong resemblance to Hudson's Dollar Hegemony argument. (Differences are interesting - I'll get to that.) Itulip takes a very similar tack. And in fact Hudson constantly reminds us that the world has failed to come up with a response to America's exploitation of the "exorbitant privilege," which suggests that we shouldn't be too optimistic or fearful (depending on your point of view) that the rest of the world is going to free itself from this hamster wheel anytime soon, which is similar to your point of view. In contrast, the itulip thesis seems to take the point of view that Dollar Hegemony will be weakened by the "crisis" (phony or otherwise) as reflected by inflation through currency debasement and a painful process of re-industrialisation. Your position is actually quite distinct: the crisis is in fact the zenith of dollar hegemony. That's intriguing to say the least. Let's see if I understand you.

The key departure between itulip and yourself seems to me to come when the crisis comes to a head and the US is forced to create a lot more debt (treasuries) to fund "reflation." Let's suppose that the Fed's balance sheet "crisis" (no treasuries left with which to further liquify the system, as described by London Banker above) is real. Up to this point the Fed could trash its balance sheet but presumably it reaches a limit where they have to break cover so to speak and gain some breathing room by authorising some new debt. Or as London Banker put it: "The Paulson Plan would have allowed the banks to unwind the repos putting the Treasuries back in the Fed, get cash for the crap MBS, and get more Treasuries from the issues financing the $700+ billion funding of the Plan." In the itulip thesis (go easy on me Fred) this is the beginning of the end. A limit of forebearance is reached here or close to it and the sheer size of the debt required to keep economic activity going becomes impossible to ignore for holders of US $ reserves especially in the face of diminishing returns due to a tapped out US (OECD?) consumer.

In extreme contrast in your scenario this is sort of the beginning of the "gotcha phase." As you very elegantly point out, "With negative interest loans, the more you loan [borrow?] from a bank the bigger profits you get - it's the prefect investment." In other words, the more the ROW ("Rest of the World") strays away from the dollar reserve system the lighter the US's load becomes in "real" terms (inflation / debasement aids the debtor.)

That may be true but at least this far I'm not convinced. The problem for me is that I don't see this quite yet as check-mate. (Your argument seems to claim this kind of logical finality which might be its weakness.) I'll give you two examples of economic / strategic moves that seem to draw their power from a more fundamental economic truth than the admittedly powerful "our dollar / your problem" paradox. One is the fact that, as I understand it, China and Russia have bought out some of the US $ denominated loans due from South America and converted the debts to the South American domestic currency. A similar process seems to be underway in Africa where China has made development deals whereby they secure access to natural resources through a sort of payment-in-kind deal to supply infrastructure and development. (My point here is not to say these were Russian / Chinese strategic successes and, conversely, the West's strategic blunders - though I think that's true - but simply to point out that there are moves available on the chessboard that seem to offer alot more freedom from Dollar Hegemony than your analysis allows for.)

Importantly you offer a mechanism for this kind of noose-tightening action that is more pointed than simply the "our dollar / your problem" bind. Much more pointed: the suggestion is that the derivative behemoth that sits above both the simple securitised debt layer (shadow banking sector) and credit (m3) acts as a mirror image of "power money." The only salve for a collapsing derivative structure is an increasing supply of power money (treasuries.) The result is the opposite of the itulip thesis: far from being the moment of weakness this is actually the moment of US strength where the greatest value is exchanged between Soros's periphery and the centre. But I'm still a bit mystified by why this is. I sense a missing premise. Is it that treasuries are the sine qua non of collateral when it comes to OTC derivatives transactions? In other words they get a second lease on life in the OTC world as the "spit in the handshake" (in which case, let the Iranians and Russians sell oil in Zlotys for all we care... except that the derivatives market is collapsing.) I think Warburton makes a case for this when he talks about the false market in treasuries that has supported deficit spending for a generation in the west. But still I don't see you making this explicit. To me it has to be 1) more powerful than the our dollar / your problem argument as that seems vulnerable to either a) work-arounds or b) diminishing returns arguments.

Maybe you've made it clear but I didn't get it. What was the point about derivatives and treasuries. I know you've said that collapsing derivatives offers cover for increasing treasury debt - plausible FWIW - but why does this force other nations to keep playing the losing-game exactly?

Finally, I find your recourse to the David Icke action-reaction... whatever a little troubling. I think the phrase is "a night in which all cows are black." In other words, that kind of argument can turn a charge of incompetence (think BB and HP perhaps) into a charge of the worst kind of corruption while bypassing any critical judgement at all.

I'm sympathetic. I do think that the republican strategic signature is to create-a-crisis-to-which-we-happen-to-have-a-pet-solution, starting with the government destroying fiscal deficits of the Reagan years. But I really don't think they're up to the task of upstaging the last 80 years of financial history with a grand finale like this - Bush's Sendoff: Global Market Meltdown!!!!

[oddlots]

Thanks Joy. That's re-assuring. What's that fair-ground organ called? A Calliope? When economic charts start looking like a calliope sounds I get a little rattled. But surely one of these crazy charts is going to mean something. I just want to make sure I save that one as a memento. :)

[c1ue]

Equity in company for buying crap MBS. Since MBS isn't worth anything anyway, the government is basically buying an interest in the company to keep them afloat. Very much like an additional stock offering by the company. Also caps on exec salaries. Maybe a risky adventure, but not anything like the Paulson bailout.


Toast,

You're missing the part about the government providing the insurance against said bonds failure - at least that's the other option on the table now (from the Goldwater Repubs).

That's better than the buying of the bonds outright, but not that much better.

The purchase of preferred stock in the troubled financial companies is what Hussman wrote about in his letter; no one in the negotiation process is even mentioning that.

Because that would mean the debt holders in the FIRE companies would get spanked since the government stake would be the very last one to be hit...and there's just SO much pain to go around.

What's annoying me about this entire process is how - in the interest of 'saving the system' - all of the usual parasites are lining up to cover their own...interests...

A bailout by any other name...

[Tulpen]

The purchase of preferred stock in the troubled financial companies is what Hussman wrote about in his letter; no one in the negotiation process is even mentioning that.

Not true, it actually is on the negotiation table and may show up in the final package!

[c1ue]

Tulpen,

What's on the table is the US to gain an equity stake in the companies being bailed out. This is what the House Repubs are holding back on, among a few other things: that the government can gain should everything get better as opposed to being a profitless subsidizer.

However, the substance of the plan is still the same, the government to eat the bad debt.

Hussman's plan is completely different: no explicit purchase of said debt. All the government will do is add its money in the form of preferred stock purchases to troubled financial institutions.

The bad debt is still bad, but instead of driving capitalization ratios under legal limits and forcing confession of insolvency, the injected capital from the government would forestall the legal confession.

Why is this different? Because under Hussman's plan, everyone including many classes of existing bond holders gets what they deserve: a great whacking writedown on their bond/stock stakes.

The present government plan in contrast is a cleaning of the slates at the financial companies.

This is a corruption of the entire process: historically the cleaning of the slates is something which balances out the debtor/creditor relationship.

But instead, this time the cleaning of the slates is only on the creditor side.

Or to put it in simpler terms: All the bad debt (i.e. unpaid/unpayable) will be replaced with cash by the government. All the good debt (i.e. being paid/payable) will continue to be the monkey on the consumer's back.

You'll note mortgage modification is again being bandied about: this is an insult to everyone who refused to load down on debt in the past decade.

What this is saying is that everyone who saved their money, who was prudent financially, who didn't lie on their mortgage applications, who didn't buy monstrous McMansions and dual Mercedes, is an idiot.

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Oddlots thank you for your reply. I'll try to answer your question as briefly as possible (without another mile long post)


Your position is actually quite distinct: the crisis is in fact the zenith of dollar hegemony.
If they succeed indeed to eliminate completely gold as a bank-reserve (power money) class it will be very close to the zenith of dollar hegemony.

The key departure between itulip and yourself seems to me to come when the crisis comes to a head and the US is forced to create a lot more debt (treasuries) to fund "reflation."
Basically yes. I actually don't believe US was "really" forced to do nothing (I've explained before the "real" misnomer)

Let's suppose that the Fed's balance sheet "crisis" (no treasuries left with which to further liquify the system, as described by London Banker above) is real.
I don't believe there is a "real" risk of Fed becoming illiquid. There is one more interesting detail I've red in a post made by Bart,which is an indirect confirmation for this idea:
http://www.itulip.com/forums/showthread.php?t=5518

But for now let's stay on the track.

In other words, the more the ROW ("Rest of the World") strays away from the dollar reserve system the lighter the US's load becomes in "real" terms (inflation / debasement aids the debtor.)
No. For US is a win-win game. More debt results in more negative interest loans to formal or covert peggers. Less absorption of US debts can break the peg and a collapse/downturn in the economies with huge dollar reserves. That's why the most aggressive peggers can't stop eating more and more US debt. Damn if you do, damn if you don't. It's a perfect trap that leads in the end to steps 7-8-9. Look what happens lately with China.

One is the fact that, as I understand it, China and Russia have bought out some of the US $ denominated loans due from South America and converted the debts to the South American domestic currency.
This is old COMECON tactics. This is exactly how Russia and the Eastern Block lost billions in unrecoverable debt to third wold countries when the communism crashed. The same with China's move. This is an inefficient disguised protectionism.

simply to point out that there are moves available on the chessboard that seem to offer alot more freedom from Dollar Hegemony than your analysis allows for.)
Not sure about that. We can look at the situation form a different point of view. If China is forced to maintain a very narrow currency exchange window (yuan too high economic growth stops/too low inflation and losses in subsidies and raw materials import) and they have also $2 trillion in dollar reserves, in fact one may say that China is hostage to the dollar. China is in fact dollarized on the cheap. The red 100 yuan note where Mao smiles on one side and the Great Hall is on the other is nothing else than Chinese ETN dollar certificate.


Much more pointed: the suggestion is that the derivative behemoth that sits above both the simple securitised debt layer (shadow banking sector) and credit (m3) acts as a mirror image of "power money."
Not really. The liquidity crisis cannot be treated in simple terms of the M Brothers.


"The only salve for a collapsing derivative structure is an increasing supply of power money (treasuries.)
Nope. Nobody is "really" saving anybody. The vanishing volume of derivatives form the liquidity pools (paper becoming illiquid) creates more of a back draft effect that allows for more treasuries to be pumped in the global financial system. The liquidity shock is used by the Fed to lubricate the penetration of another load of treasuries.


The result is the opposite of the itulip thesis: far from being the moment of weakness this is actually the moment of US strength where the greatest value is exchanged between Soros's periphery and the centre.
Actually I believe It's more than that, the most important aspect is the agenda to push more and more treasuries in the international financial system. The rest is secondary.


I know you've said that collapsing derivatives offers cover for increasing treasury debt - plausible FWIW - but why does this force other nations to keep playing the losing-game exactly?

It's the addiction to power money. Treasuries are now the new gold and soon they will become the only gold.;)

But I'm still a bit mystified by why this is. I sense a missing premise.
That may be my fault because I've never explained the last piece of the puzzle. Today we have a binomial standard for power money (treasuries and gold). In the 19th century Bank of England was also on a binomial standard (gold and silver). Now remember what BoE did to get rid of silver in order to impose a gold standard and imagine the same move made now by the Fed to get rid of gold and impose a treasury (completely fiat) standard:

http://www.atimes.com/atimes/China_Business/JI26Cb01.html

History of monetary imperialism
By Henry C K Liu

Over the course of the 19th century, enough gold was known to have been accumulated by Britain to make it credible for the British Treasury to introduce paper currency backed by its gold to force the demonetization of silver in Europe to advance British monetary imperialism.

Many historians inaccurately ascribe to 19th century mercantilism as the policy of accumulating gold for a country through export of merchandise. The fact is that gold accumulation can only be achieved by a purposeful policy of monetary imperialism. Mercantilism under bimetallism gave a trade surplus country both silver and gold. Only monetary imperialism could cause an inflow of gold with an outflow of silver.

In reality, Britain earned gold in the 19th century not from export of merchandise because buyers of British goods had a choice of paying in silver or gold under bimetallism. In reality, Britain accumulated gold by overvaluing gold monetarily all through the 19th century. This allowed Britain to force the world to demonetize silver and to replace bimetallism with the gold standard after enough of the world's gold had flowed into Britain to enable the pound sterling, a paper currency backed by gold, but essentially a fiat current without bimetallism, to act as a reserve currency for world trade with which to finance Britain's role of sole superpower after the fall of Napoleon.

With the pound sterling as reserve currency, British banks, operating on a fractional reserve system backed by the Bank of England, the central bank, as lender of last resort, could practice predatory lending all over the world, sucking up wealth with boom and bust business cycles instigated by her predatory monetary policy of fiat paper currency.

The strategy worked for more than a century until the end of World War I. Between 1800 and 1914, the main British export was financial capital denominated in fiat pound sterling disguised by the gold standard to be as good as gold. The factor income from banking profits derived from pound sterling hegemony paid for the wealth and luxury that Britain enjoyed as the world's preeminent power in the century between the fall of Napoleon in 1815 and the start of First World War in 1914.

The demonetization of silver stealthily turned the gold standard into a fiat paper money regime through the officially gold-backed pound sterling because the gold backing it was no longer priced in silver at a fixed rate, or any other metal of intrinsic value for that matter. Gold and only gold became a fiat unit of account set by the British Mint, a fact that made Britain the monetary hegemon of the age.

No transactional meaning
An asset that is priced by or in itself has no transactional meaning, even if it is gold. This is because a transaction must involve at least two assets of different value, expressed with different prices in exchangeable currencies. And there must be an agreed-upon exchange ratio at the time of the transaction to effectuate a transactional outcome. Even in barter, an exchange ratio between the two assets to be exchanged needs to be agreed upon. For example, an ounce of gold can be exchanged for 15 ounces of silver. An ounce of gold that can be exchanged for another ounce of gold carries no information of transactional value.
Thus the pound sterling, even when backed by gold, was in fact a fiat paper currency because the monetary value of gold is set by fiat devoid of any relationship to any other thing of intrinsic value beside gold itself. Without bimetallism, specie money cannot have any meaning of transactional worth. Currency backed by gold turns into a fiat currency if it can be redeemed at its face value only in gold. The monetary value of gold is not separate from the commercial value of gold. Gold then can fluctuate in purchasing power due to any number of factors, including government policy, but is not fixed to any other metal of intrinsic value at a universally agreed upon ratio.

That a pound sterling is worth another pound sterling is no different than an ounce of gold is worth another ounce of gold. And the market price of gold can be manipulated by the government that is in possession of more gold than any other market participant. This means that any unwelcome speculator can be quickly ruined by the government. This is of course how central banks nowadays intervene in the foreign exchange market for fiat currencies. Central banks with sufficient dollar reserves, a fiat currency, can drive speculators against their national currencies toward bankruptcy.

Before silver was demonetized, the silver/gold ratio was set monetarily at 15.5/1 in England and 15/1 in France, motivating speculators to buy silver with gold in England and buy gold with silver in France for an arbitrage profit of half an ounce of silver for each ounce of gold so transacted in the two countries. This caused a continuous flow of gold to England independent of international trade flows in other commodities. Even when Britain incurred a trade deficit, gold continues to flow into Britain because of the monetary hegemony of the pound sterling.

After silver was demonetized, gold could be exchanged at the British Treasury only for pound sterling notes at the rate of 21 shillings, or one pound one shilling, per ounce of gold fixed in 1717. The commercial price of gold in England was set by the British Treasury on par with its monetary value because the gold price was denominated in pound sterling. The commercial price of silver or any other commodity in England was also denominated in pound sterling, which had a monetary value in gold set by the British Treasury by fiat.

After the demonetization of silver, no one knew how much silver was worth as money because it was no longer used anywhere as money. Thus there could not be any discrepancy between the commercial price of silver and its monetary value because silver ceased to have a monetary value. Silver then became a commercial commodity like any other commercial commodity, while only gold remained a monetary unit of account accepted in the British Treasury and in other treasuries of countries which observed the gold standard. Countries that refused to join the gold standard saw their currency kept out of international trade and had to pay a penalty of high interest rates on loans denominated in their non-gold-backed currency.

The Bank of England could issue more pound sterling notes by fiat based on the fractional reserve principle in banking. She only needed to keep enough gold to prevent a run on pound sterling notes for gold at the Bank of England. And since England was in possession of more gold than any other country at the time, Britain under the gold standard became the monetary hegemon, with more money at her disposal than justified by the amount of gold she actually held. Other gold standard countries had to maintain a much higher fractional reserve in gold than Britain and therefore had less money with which to participate in international capital markets. The monetary hegemon could sustain a trade deficit with an inflow of gold caused by monetary policy.

Without a fixed exchange-rate regime, each nation could adopt a gold standard unrelated to other nations' gold standard. For example, the US at $20.67 per ounce of gold and Britain at three pounds, 17 shillings and 10 pence per ounce of gold would let the exchange rate between the dollar and the pound sterling work itself out mathematically. This is what a fiat currency regime does, except instead of being valued by a gold standard based on the amount of gold held by the issuing government, the exchange rate of the currency is valued by each country's monetary policy implications and financial conditions, such as interest rates, balance of payments, domestic inflation rate, fiscal budgets, trade deficits, and so forth.

The United States, though formally on a bimetallic (gold and silver) standard, switched to gold de facto in 1834 and de jure in 1900. In 1834, the United States fixed the price of gold at $20.67 per ounce, where it remained for a century until 1933, when president Franklin D Roosevelt devalued the dollar to $35 per ounce of gold, but made it illegal for US citizens to own gold in amounts worth more than $100. There are some important tactic differences between the simple approach of the BoE in the 19th century and the sophisticated mechanism used by the Fed today, but the big picture should be obvious.

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One more thing oddlots... this is fresh from Bloomberg:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aD8ILDu0nEkE&refer=home


The Federal Reserve will pump an additional $630 billion into the global financial system, flooding banks with cash to alleviate the worst banking crisis since the Great Depression. The Fed increased its existing currency swaps with foreign central banks by $330 billion to $620 billion to make more dollars available worldwide. The Term Auction Facility, the Fed's emergency loan program, will expand by $300 billion to $450 billion.

Yup.. can you believe that??? Ben is flooding the global financial system with more treasuries!!! ... Isn't that surprising ? http://www.itulip.com/forums/picture.php?albumid=7&pictureid=29