Fed termites to infest bond market - Eric Janszen

[doom&gloom]

Re: Fed termites to infest bond market - Eric Janszen

The termites came home today...

[bart]

Re: Fed termites to infest bond market - Eric Janszen

Thank you VERY much for the reply Bart. I am new to this type of thing, so it is wonderful to read some bottom line analysis.

So we can anticipate inflation down the line as a result of this. Any idea in terms of the scope? Seems that 1.2T is around 10% of our GDP. Can we expect 10% inflation as a result?

Also, since we are among the first countries to begin doing this, will this help exports and possibly shorten the recession? Will it also cause import prices to rise? Do commodities normally rise as a result of this type of monetary policy? What happens if other countries also begin this process? Does this mean relative price stability but a lessening of the impact of existing debt?

Lots of questions, I know. Thanks in advance to anyone who can answer them...

Very tough question on inflation, but at least you didn't ask when... and to give you my best guess, I currently expect that actual inflation will hit at least 20% within 18 months and probably sooner.

Since you are new, I'll just refer you to John Williams and his excellent site http://www.shadowstats.com. He has done a great job on exposing how the CPI has many lies in it and actually provides a chart & adjustment to bring it back to the way it used to be calculated in 1982... and by that measure, CPI is about 7% right now so 20% is "only" 13% more than now.

As far as helping exports and possibly shortening the recession, it will appear to if no attention is paid to inflation but in reality it won't.

Import prices of relative necessities will almost certainly rise, as will most commodities like food. Its an absolutely predictable result of creating excess money - as Milton Friedman famously said, inflation is always and everywhere a monetary phenomena.

Other countries have already begun this process, China for example has a monetary growth target this year of roughly 20%. The bottom line result - world inflation. Its also called "competitive devaluation" in the sense that countries try to devalue their currencies faster than others in order to obtain an export pricing advantage.

It does not mean relative price stability, but will help with lessening of the impact of existing debt although both will not be immediate. It takes quite a while for money to flow into and through an economy after it has been created. Referring to Money supply, lags, velocity may help your understanding in the area.

[nero3]

Re: Fed termites to infest bond market - Eric Janszen

George Soros is heavily invested in inflation, atleast in his american portfolio. His two biggest positions are potash fertilizer and petrobras. I really think Soros want more balance between the rich and poor. More to BRIC, eastern europe (especially hungary, asia, even africa and less to the US, this will be the result when a bull in treasuries no longer exist and the US therefore no longer "suck up" the worlds savings. In his book he says the US might face runaway inflation. I think it's possible a number of chain reactions is on it's way as the fed prints more money. The currency cross, USDNOK, seems like to be heading into freefall. I think it's the old commodity bubble that got a hit when bear sterns collapsed, and then got the death knell when Lehman brothers went bankrupt, that's coming back to life.

[Stretch002]

Re: Fed termites to infest bond market - Eric Janszen

Thank you VERY much for the reply Bart. I am new to this type of thing, so it is wonderful to read some bottom line analysis.

So we can anticipate inflation down the line as a result of this. Any idea in terms of the scope? Seems that 1.2T is around 10% of our GDP. Can we expect 10% inflation as a result?

Also, since we are among the first countries to begin doing this, will this help exports and possibly shorten the recession? Will it also cause import prices to rise? Do commodities normally rise as a result of this type of monetary policy? What happens if other countries also begin this process? Does this mean relative price stability but a lessening of the impact of existing debt?

Lots of questions, I know. Thanks in advance to anyone who can answer them...

[bart]

Re: Fed termites to infest bond market - Eric Janszen

Looking at those charts implies there to be very little demand for these treasuries by external parties, so the Fed is now going to buy them in order to keep rates low? Why not let the market dictate rates?

Yes.
The Fed does not believe in free market solutions. It's part of the existing oligarchy.

Are they doing this to prop up asset prices?

Yes, but that's only part of it. They're trying to counteract deflation, debt deflation, TIC flow issues, deficit financing, etc.

What are the ramifications for the dollar?

Down.

Will this affect the housing market at all?

Very little on the short or intermediate term, although it will likely accelerate the arrival of a nominal bottom in house prices. Inflation raises all boats, eventually.

[Stretch002]

Re: Fed termites to infest bond market - Eric Janszen

Looking at those charts implies there to be very little demand for these treasuries by external parties, so the Fed is now going to buy them in order to keep rates low? Why not let the market dictate rates?

Are they doing this to prop up asset prices?


What are the ramifications for the dollar?


Will this affect the housing market at all?

[goadam1]

Re: Fed termites to infest bond market - Eric Janszen

Do we have any choice?

If I were flying the plane into the zirp mountains, I would add more thrust too. If you crash, you crash with style.

[FRED]

Re: Fed termites to infest bond market - Eric Janszen

The U.S. Federal Reserve on Wednesday, in a surprise move, said it will buy up to $300 billion worth of longer-term U.S. government debt over the next six months and expand purchases of mortgage-related debt to help ease credit market conditions.

http://www.cnbc.com/id/29755961

Do we have any choice?

[seanm123]

Re: Fed termites to infest bond market - Eric Janszen

The U.S. Federal Reserve on Wednesday, in a surprise move, said it will buy up to $300 billion worth of longer-term U.S. government debt over the next six months and expand purchases of mortgage-related debt to help ease credit market conditions.

http://www.cnbc.com/id/29755961

[Me]

Re: Fed termites to infest bond market - Eric Janszen

Yes. My contention is that even if the Fed decides to buy across the yield curve they will not be able to do so fast enough to prevent the crash. If however I am wrong then they will be successful but only at the expense of the dollar. As such by shorting bonds and going long gold I am hedged to a certain extent.

Maybe I'm missing something and am hopeful that I can find any flaws to this theory before they become financially painful flaws.

[metalman]

Re: Fed termites to infest bond market - Eric Janszen

This is my first post. So thanks first to all contributers. I find it most stimulating. My understanding and position is that should the Fed move into monetizing long term debt (buying debt issued by the Treasury themselves with money created out of thin air) they will not only put the dollar under pressure but the existing bonds held by foreigners will likely hit the market as foreigners dump those bonds along with the dollar.

To engineer low interest rates in both short and long term debt the Fed will need to mop up some amount of the $11 Trillion out there at present. It is anyone’s guess as to how much of that paper hits the market however I believe that people (in the form of pension funds, government central banks etc) always act in their own self interest. I think it therefore reasonable to expect that those bond holders will not continue to be happy to finance the US Government and its bloated bureaucracy as they send a tidal wave of new paper onto the market thereby diluting the value of existing holdings of those holding US Government bonds.

Looking at the US governments reactions thus far to the crises as it unfolds they have, like any bureaucracy been slow to react. They have been unable to stop the collapsing credit markets and I suspect that they will not be able to stop the coming collapsing bond markets. Even if they are successful they can't be so without simultaneously destroying the currency.

Consider for a moment some numbers as a comparison.
Total Federal debt in 1933 at the height of the Great depression: $360 billion in 2008 dollars. Total federal debt in 1933 as a % of GDP: 40%
Total Federal debt in 2008 Just under $11 Trillion dollars. Total federal debt as a % of GDP: 70%
Now add to that additional debt to be issued in 2009 of just under $3 Trillion dollars bringing total federal debt to around $14 Trillion dollars.
This is not even taking into account current Social Security and Medicare programs now estimated at $53 Trillion.

Long Gold, short bonds. Somethings gotta give.....

great first post, welcome.

can't argue with your 'something's gotta give'.

one addition is that in 1933 the usa was a creditor... now a debtor.

perversely, this ties the usa's hands... it can't just go and crash its bond market ala 1934 by devaluing the dollar 70%.

the idea tossed around here for 10 yrs per ka-poom theory is... a few central banks on the periphery of the global dollar system sell, and the big ones follow. and that's what crashes the bond market.

[Me]

Re: Fed termites to infest bond market - Eric Janszen

This is my first post. So thanks first to all contributers. I find it most stimulating. My understanding and position is that should the Fed move into monetizing long term debt (buying debt issued by the Treasury themselves with money created out of thin air) they will not only put the dollar under pressure but the existing bonds held by foreigners will likely hit the market as foreigners dump those bonds along with the dollar.

To engineer low interest rates in both short and long term debt the Fed will need to mop up some amount of the $11 Trillion out there at present. It is anyone’s guess as to how much of that paper hits the market however I believe that people (in the form of pension funds, government central banks etc) always act in their own self interest. I think it therefore reasonable to expect that those bond holders will not continue to be happy to finance the US Government and its bloated bureaucracy as they send a tidal wave of new paper onto the market thereby diluting the value of existing holdings of those holding US Government bonds.

Looking at the US governments reactions thus far to the crises as it unfolds they have, like any bureaucracy been slow to react. They have been unable to stop the collapsing credit markets and I suspect that they will not be able to stop the coming collapsing bond markets. Even if they are successful they can't be so without simultaneously destroying the currency.

Consider for a moment some numbers as a comparison.
Total Federal debt in 1933 at the height of the Great depression: $360 billion in 2008 dollars. Total federal debt in 1933 as a % of GDP: 40%
Total Federal debt in 2008 Just under $11 Trillion dollars. Total federal debt as a % of GDP: 70%
Now add to that additional debt to be issued in 2009 of just under $3 Trillion dollars bringing total federal debt to around $14 Trillion dollars.
This is not even taking into account current Social Security and Medicare programs now estimated at $53 Trillion.

Long Gold, short bonds. Somethings gotta give.....

[metalman]

Re: Fed termites to infest bond market - Eric Janszen

George Soros has done an excellent historical review of the system, how it works, and how we got here.

Value of George's solution for the future is yet to be seen.

Fred, I would suggest putting a link to this article on Itulip's front page as a very useful primer for the new arrivals, aiding their quick study and comprehension.

mega posted it to news under the title Soros sez we are all F*cked!

to put it back on the front page, add a new post to it.. that'll bump it to the top of the list and put it back on the front page.

[Glenn Black]

Re: Fed termites to infest bond market - Eric Janszen

George Soros has done an excellent historical review of the system, how it works, and how we got here.

Value of George's solution for the future is yet to be seen.

Fred, I would suggest putting a link to this article on Itulip's front page as a very useful primer for the new arrivals, aiding their quick study and comprehension.

[vanvaley1]

Re: Fed termites to infest bond market - Eric Janszen

I don't know if this guys' possible scenerio is too textbook or simplistic or out of sequence to hold any water, but he talks about how unintended consequences of an economic stimulus will turn the tide for US treasuries...........

http://perotcharts.com/2009/01/daily...hru-1-16-2009/



Anyone have a thought on it?

The 'cure' of the Danaides curse. Think plugging the holes in the jugs will hold til the bath is full then the bath will spring leaks. The curse of the Danaides continues. No fair rewriting Greek mythology.