This page has been archived and commenting is disabled.

Doubling Down To (DXY) Zero: Has The Fed, In Its Stealthy Synthetic Bet To Keep Long-Term Yields Low, Become The Next AIG?

Tyler Durden's picture


When looking back at the Great Financial Crisis of 2008, the primary catalyst the pushed the system over the edge and required central banks around the world to institute a global bailout of unprecedented scale was one simple thing: the layering upon layering upon layering of bets (using "other people's money" and courtesy of recently unleashed "financial innovation" in the form of virtually margin-free securities such as credit derivatives, demonstrated best by this chart) that interest rates would keep dropping, primarily in the form of exponentially tiered credit structures such as synthetic CDOs (all the way to the cubed degree) together with CDS sold on such layered synthetic derivatives. Of course, when the black swan event occurred and rates surged, this relentless leveraging of wrong-sided bets promptly resulted in the liquidation of any institution that was on the wrong side of such bets. Most notably AIG. In essence, AIG took the "logic" that since a rate blow up would likely result in the collapse of the US (and thus worldwide) funding structure, it would invoke the biggest central bank Put of all: either the Fed would rescue the world, or capitalism as we knew it would end.

As it turned out, AIG was right, and following the sacrifice of Lehman Brothers, every other institution on the wrong side of the levered "rate" trade was saved by the Fed. But at what price? Simply said, the Fed, in bailing out the world (a meme that has only now received popular acceptance following the release of formerly classified Fed documents, despite our claims precisely to that end from back in October 2009) has become the world's largest hedge fund and with a DV01 of over $1.5 billion by now, has taken on virtually unlimited interest rate risk (a topic discussed back in April 2010). As such controlling inflation expectations, or more specifically, Long-Term rates (the part on the curve that Quantitative Easing is powerless to control) is the most critical aspect of the viability of the monetary system. Stunningly, today we learn that to keep long rates low, the Fed may have resorted to nothing short of the same suicidal trade that destroyed AIG FP and brought the entire system to its knees. Namely, Ben Bernanke is now quite possibly the second coming of Joe Cassano, since in order to keep rates low, Bernanke is forced to a last resort action of selling billions upon billions of Treasury puts to "pin" rates low contrary to natural supply-demand mechanics. If so, the Fed is now basically AIG Financial Products, although instead of being synthetically long mortgages (and thus betting on a rate decline) and selling hundreds of billions in CDS to amplify its bet, Bernanke has done the same thing, only this time with Treasurys. Of course, Ben has the printing press on his side apologists will claim. Alas, that will have no impact whatsoever, if indeed the Fed has been reduced to finding ever fewer counterparties to a synthetic bet to keep long-term rates low, as very soon, with inflation ticking up, all hell may break loose in an identical replay of what happened to AIG once the Fed's put is called against it. Only this time there will be nobody to bail out the ultimate backstopper, resulting in the long overdue end of the current failed monetary system experiment.

Some may recall that over a year ago we made a curious discovery: by looking at the composition of securities held in the Fed's Maiden Lane I portfolio (than inherited from the collapse of Bear Stearns, which not even JP Morgan wanted) we uncovered that as part of the portfolio of toxic assets, which most recently was valued at $25.6 billion, the risk managed in charge of the book BlackRock had also put on a variety of synthetic hedges: "the FRBNY holds 5000 TYM0 puts, 3825 TYH0 puts, short 4000 FVH0,
short 7828 TYH0, short 2240 USH0, and is short a bunch of eurodollar
positions." The issue as we correctly specified, is that "while the Fed is pretending to care about interest rate concerns in an increasing rate environment and is hedging ML1, it has one billion DV01 risk for its house bailout package...
This is a stunning number: the second rates commence
creeping higher, you can kiss all that profit on TARP and what not not
only goodbye, but the losses on the SOMA books will likely destroy
America." We then concluded: "the Fed has decided to protect against a major hike in rates [in the Maiden Lane I portfolio]. Yet
that which is truly relevant, the Fed's nearly $2.4 trillion in holdings
of MBS, Agency and Treasuries is completely unhedged [the number is now $2.7 trillion and will be nearly $3 trillion by the time QE2 ends]. Good luck finding
the counterparty that would be willing to put on a $200 trillion gross notional interest rate swap with the Fed." In other words, we were wondering why is the Fed not actively hedging its multi-trillion SOMA portfolio (including MBS, Agencies and Treasuries) if it was willing to do so with the far smaller Maiden Lane I subsegment of its holdings. Naturally, it may well have been doing so as there is no place in the Fed's weekly report (H.4.1) update that lists explicit derivative positions (more on this in a second). Ironically, it seems that we had the entire situtation backwards: it appears that far from being worried about hedging its SOMA book synthetically, the Fed may well have be constantly doubling down on its risk exposure in the form of off-book derivative contracts in order to "pin" Long-Term rates (read the 10 Year) by constantly selling Puts on Long Dated Treasurys at opportune times when there is no incremental buying of the underlying security, yet when, as the CDO and upcoming ETF debacles have so well demonstrated, the price of the derivative actually impacts the price of the underlying!

The missing sequential link in (lack of) logic comes from a report by Market Skeptics' Eric deCarbonnel who has combed through the June 24-25, 2003 FOMC minutes to find what could well explain the ongoing paradoxical flatlining in long-term rates even despite the threat of an end in QE2, which implies the removal of a buyer of some 83.4% of net Treasury securities, as well as the ongoing inflation threat so well described by James Grant earlier. What deCarbonnel has found is that as per then Fed secretary and economist, Vince Reinhart, and SOMA manager Dino Kos, the Fed has explicit authority and has in the past, sold puts on securities in order to bring various parts of the curve in line with "market expectations." The fragment from Dino Kos' transcript which implies that the Fed is likely actively pursuing a derivative feedback loop to keep long-term yields low (and thus prices high), is the following. Below, Kos discussed the "alternative approaches that would involve changes to how the Desk operates" in order to achieve the "conduct of monetary policy at very low short-term interest rates."

To wit:

The alternative approaches that would involve changes to how the Desk operates are summarized in exhibit 4. The alternatives that could be adopted while changing only the composition of the balance sheet are listed in the top panel. These include (1) extending the average maturity of the outright holdings in the SOMA, (2) setting explicit ceilings on longer-term Treasury yields, and (3) using derivative instruments.

As deCarbonnel points out, 1 and 2 have already been either explicitly or implicitly utilized by the Fed in order to prevent the yield curve from exploding, due to the fundamental dichotomy of Fed operations: the Fed can keep short term rates at zero easily, it is the long-term ones that are a key threat to tipping the Fed's unhedged book over.

Which leaves only option 3: "using derivative instruments" to keep LT rates low.

And this is where it gets both interesting... and very disturbing.

Going back to Dino Kos' speech:

The Committee could sanction the use of various derivative instruments on conventional Desk operations as a way to influence longer-term yields, which is outlined in exhibit 8. Options of some form are a possibility, as are forward operations. For example, we could sell a sequence of options on term RPs, covering interlocking time segments that collectively extend as far into the future as desired. In this way, longer-term yields could be influenced and a visible signal of the Fed’s desired path of interest rates could be demonstrated. Forward operations in term RPs could be structured in a similar fashion.

And the stunner:

Alternatively, we could sell put options on longer-term Treasury securities at strike prices associated with desired longer-term yields. Of course, the operating objectives set for the sale of derivative instruments would determine their proper structure and should be carefully formulated first.

At this point the lightbulb should slowly be starting to glow:

The sale of any options, or forwards for that matter, would not affect the domestic portfolio immediately and, in the case of options, may never do so. Auctioning derivatives is something we already have experience doing. In the event that options were ever exercised, the impact on the portfolio would be profound, assuming that more than just a symbolic amount of contracts were sold. Simultaneously controlling the funds rate means that any reserve effect would need to be immediately sterilized. The volume of options sold might be limited because of this concern. Alternatively, options contracts might be configured to make a net cash payout if exercised, perhaps by structuring them as interest rate caplets or pairing them with offsetting trades with the Desk at then-current market prices. This would insulate the size and composition of the balance sheet, but the payouts would appear very visibly as losses on the income statement.

Summary: not only does the Fed admit that it has already sold off asset derivatives as a means of controlling short and/or long-term rates, but the Fed in essence is willing to do with rates derivatives what Warren Buffet did with equities in the form of his gargantuan index put sales, and Joe Cassano has done with CDS sales on his CDO holdings.

Here the Fed, as any rational investor seeking to manipulate the price of an underlying instrument, although with the benefit of having a printer, expresses the logical concern: what happens if options are excercised, or in other words, what might happen if the "pin" bogey on the underlying is crossed and the Fed suddenly finds itself in a losing "In The Money" position:

Of course, a successful program would be one in which any options sold would never be exercised. Achieving this result, just as with interest rate ceilings, would depend on how well the characteristics of the options—the strike price and the expiration dates—corresponded to market expectations for future rates.

Ironically this is precisely what Jos Cassano thought... Until of course Goldman changed the rules in the middle of the game, hiked collateral requirements and forced a toxic feedback loop whereby AIG had to undergo a liquidation waterfall putting it deeper and deeper underwater, until ultimately it was so far undercapitalized it had to be bailed out by taxpayers.

Kos logically realized that it is far easier to manipulate short-term rates than long-term and as such advocated initially merely dabbling in repurchase options, which only impact ultra-short term rates: i.e., those critical to bank functioning whereby banks can borrow cheap and lend rich.

In this regard, options on RPs with the Desk have a strong advantage over, say, options on Treasury yields because the policy rate over which the Committee has direct influence could be more directly linked to shorter term RPs than to longer-term Treasury yields. For these same reasons, options on Desk RPs could be structured to correspond directly with a policy commitment on the path of future short-term rates, and they could be effective through one of several channels.

We get even warmer:

First, even a relatively small program would undoubtedly add symbolic weight. Second, they would represent a monetary cost to the Federal Reserve of deviating from the implied path of future short-term rates, which might be seen as further binding the Committee to that path. For this effect, the more options sold the better. Third, a large volume of options sold could reduce risk premiums embedded in longer-term rates, independent of the level of credibility about any policy commitment. Here too, the more sold the more effective. As with interest rate ceilings, the question could be asked how effective the sale of options, either on Desk RPs or Treasury securities, would by itself be in reducing longer-term yields.

Kos' verdict: the Fed would need to sell a huge amount of Treasury puts to regain credibility that it would continue to sell even more puts should the situation require it: i.e., be the seller of only resort, and calm a Treasury liquidation wave by the market.

[The] ultimate success would hinge on the quantity of options sold—that is, how big a bet the Federal Reserve were willing to make. The more options sold, the greater the chance they would have the desired effect on longer-term rates even if not associated with any policy commitment, either by raising the costs to the Fed associated with options being exercised, or by lowering risk premiums on longer-term rates.

To be sure, Kos appreciated the downside risk associated with going all in on a losing bet, and then leveraging some more:

[O]f course the risks to the portfolio, to reserve levels, and of capital losses would rise in equal measure. And an exit strategy for options may not be as straightforward as it seems, even apart from the possibility of their being exercised. Of course, the Desk could stop auctioning new options at any time. But a decision to stop selling more options or not to issue new contracts with later expiration dates as time passes likely would be interpreted in the market as a statement about future policy intentions. The resulting rush to unwind market positions would likely be very disruptive and send yields sharply higher.

And that is the kicker. In essence the Fed may well be undergoing a program whereby via one of its Primary Dealers, most likely JP Morgan due to the banks key position as one of only two clearers of the repo system, it is selling Treasury puts, which would have an impact of pushing Treasury prices higher, and thus yields lower, contrary to all expectations in order to pin rates to specific levels. And as Kos admitted, the more long-term yields would run up, the more puts the Fed would be forced sell.

Since derivatives have little to no initial (or maintenance) margin requirements, especially not with a counterparty such as the Fed which can just print money any time there is a margin call, the Fed would be able to virtually print an endless amount of Treasury puts to keep underlying, and very much delta hedged, position, read THE YIELD ON THE 10 YEAR precisely where it wants it! The Fed says as much in Exhibit 8 to the June 24-25, 2003 minutes:

And before skeptics say the Fed would never do this in reality, Vince Reinhart admits that the Fed did very much that just over a decade earlier:

The System has also been willing to put its balance sheet at risk to encourage appropriate expectations about interest rates or to calm fears about funds availability. As plotted at the top right, the Desk sold options on RPs for the weeks around the century date change that totaled nearly $0.5 trillion of notional value. Given that the Desk already operates in all segments of the Treasury market, we wouldn’t have to move up a learning curve if instructed to increase purchases of longer-dated issues.

With lack of data availability one can only speculate how much options, most likely in the form of swaptions, the Fed would need to sell currently to keep 10 Year yields low, although if past is any indication, if the SOMA desk sold nearly $250 billion in repo puts back in 2000 when the Fed's balance sheet was a fraction of what it is now, it is safe to assume that a comparable amount currently would have to be in the trillions, if not tens or hundreds, considering the far lower notional impact on a security with material duration compared to one to impacted (and impacting) by merely ultra-short term rates.

As for the Fed's justification to impact the market in such a covert and off-balance sheet manner some might say, it provides the following justification:

The Federal Reserve has always appreciated the importance of correctly aligning market expectations about the economy.

Of course when the Fed sees the economy as the market, such as now, it is critical that the Fed do all in its power to prevent an efficient price discovery process from occurring.

For those for whom this is still unclear, basically what the Fed may well have done (and has admitted to doing in the past) is what the market does each and every day, when ETF buying results in a long/short gamma trade that pulls or pushes component securities higher or lower. There is a reason why the SPY and the ES are the two most liquid securities in the market: control these, and what happens to the underlying stocks is irrelevant. In very much the same way, the Fed which still continues to load up on Treasury securities (albeit far less so as the longer-end of the curve), is now most likely pursuing a goal of keep the curve as flat as possible and not losing the long end.

As a reminder, during QE Lite/QE 2, the Fed has practically forsaken the 30 Y sector of the curve, or the part the most reliant on long-term inflation expectations. Why would the Fed do this in the cash market unless it had some other way to definitively impact demand via synthetic instruments?

A synthetic off-book short put position also explains the confusion of those such as Bill Gross: when the Fed supposedly exits the monetization game, regardless for how short, rates would traditionally be expected to rise. Yes... but only if the Fed was not concurrently selling massive amounts of volatility. And while the actual buying and selling would remain hidden from public view, the aftermath would be visible in downstream market effects. Indeed, this is precisely the case. As can be seen on the below chart which maps the yield on the 30 Year during various QE regimes, and the level of the MOVE Treasury volatility index, during times when the 30 Year appears poised to break out higher in anticipation of a QE end, yet merely trades rangebound, the level of MOVE plummets.

Obviously, plunging vol ends up having an offsetting impect on prices. Were the vol not to drop so materially, the upward drift in Long-Term yields would be very pronounced, and result in the 30 Year breaking out north of 5%, after which the Fed would likely lose all control of the curve. The question then becomes: who is selling all this vol ahead of such a risky event as the end of a Quantitative Easing episode. Our bet: none other than the current Manager of the System Open Market Account: Brian Sack.

This however leaves open the question of just where on the Fed's books would Sack et al keep a record of how much the Fed has in Treasury yield exposure?

Enter Exhibit A: Federa Resere "Other Assets", which as we have been disclosing for quite some time is now a not too negligible, and very much record, $125 billion!  That's right, the Fed has $125 billion in other assets, whose definition is so broad they could well be anything and everything, and which we have a sinking suspicion could well include among them the "net" exposure the Fed currently is booking on its swaption book.

Naturally, the specific booking of these "assets" would depend on the format under which the Fed has contrived to make its synthetic but on higher Long-Term prices: whether these are outright puts, or, as was disclosed previouly when looking at Maiden Lane I, in the form of curve swaptions (and thus payers or receivers).

Recall that as per the latest breakdown of Maiden Lane I assets, the actively managed book includes, among other things, $675 million in net notional swaption exposure (gross could be anything), as well as ($3.3) billion in Interest Rate Swaps. Is this the same open market tactic that the Fed is applying to the broader Treasury curve? If so, keep a very close eye on abnormal activity in the swaption market, especially that originating from JP Morgan.

Which leaves open one question: with the Fed selling Treasury Puts, who is buying them? Well, the answer could be anyone. While nobody in their right mind would every transact directly with a Fed selling insurance on its own books, many Primary Dealers, and foreign institutions are certainly eager to hedge their surging Treasury exposure, courtesy of the trillions in new issuance each and every year. In this scenario, JPMorgan, the Fed's proxy, would all day, every day, especially on key inflection date such as ahead of the termination of a quantitative easing period, flood the market with an overabundance of Long-Term volatility (i.e. selling puts), which as shown above, would push the MOVE index lower, and result in a strengthening of 10 Year rates.

Yet what observent readers will realize is that those buying protection from the Fed would be analogous to those who would have been buying protection from AIG on its CDO books. However, unlike back then, when entities like Goldman were sure to be bailed out on their collateral exposure to Joe Cassano, this time around if the Fed does lose control of the long end, and the Fed ends up experiencing first tens, then hundreds of billions of P&L losses should rates jump by 1%, 2%, 3% or more, then all bets would be off, and everyone left holding Treasury protection, i.e., the bet opposite to that of the Fed, would end up with with a big, fat nothing as the monetary regime finally fails, fiat is dethroned, and alternative monetary systems are implemented.

If indeed the Fed is the primary driving force behind the long-end's continued resilience, one should first inquire whether or not this is an action that the Fed is misrepresenting as performing - after all in its description of activities performed under US Foreign Exchange intervention, the Fed clearly states "The Fed historically has not engaged in forward or other derivative transactions" - is this blanket statement true only for Fed's FX intervention regime or for everything, because as Reinhart has confirmed, if so, the Fed is engaging in activity that is not previously disclosed as performing. Second, if the bulk of Treasury put buyers were to realize that their ultimate counterparty, under the guise of various Primary Dealers, and especially JP Morgan, is indeed the Federal Reserve, they will promptly abandon the Treasury Derivative market, forcing the Fed to lose this key lever of reverse market influence, resulting in chaos when it comes to controlling the long-end, and leaving the Fed with a curve that is at or near zero on the short end and surging in the 10 Year and over spot, which would result in complete loss of control by the Fed regarding inflationary expectations, the collapse of the dollar (yes, even more than to date), and an explosion in commodity prices as the nation finally careens over to its Weimarian endspiel. Lastly, a key question to demand of Bernanke, if it is confirmed that the Fed is shaping the yield curve using derivatives, would be just how great the Fed's blended risk is currently over and above the DV01 on merely its underlying physical instruments, and just how the Fed will hedge not only its massive ~$3 trillion paper exposure, but possibly its multi-trillion synthetic exposure should inflation surge, and the Fed's SOMA desk finally lose control of the long end.

While there are many questions embedded in the assumptions presented above, we are confident at least some unconflicted reporter will inquire Ben Bernanke on April 27 whether any of the above is in fact true.Which if confirmed, will be the biggest admission of market manipulation by the Federal Reserve in history.

Those who wish to follow deCarbnnel's thoughts on the matter can do so below...

And for those curious to see just how the Fed predicted this very course of action as long as 8 year ago, we urge you to read the following exhibit from the Fed June 2003 minutes in its entirety - link

What is most ironic, is that Mr Reinhart was kind enough to leave us with the Fed's next steps for when the SOMA manager finally loses control of the curve. From Exhibit 8 to the June 2003 minutes (presented below in their entirety):


h/t Dnarby





- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Sat, 04/16/2011 - 18:39 | 1176568 ZeroPower
ZeroPower's picture

Exactly right re questioning the current "strong" dollar system.

The end of QE will overshoot to the downside (deflation) so greatly, that by the time Bernank finds his head out of his ass to start the ultimate round of QE (probably to the tune of trillions this time) the dollar will be well on its way to zero (DXY 40? 30? Who knows).  Geniuses will work out a new form of monetary system. Hopefully having something to do with being backed by gold or oil, though since neither of those are infinite, it will still unfortunately be only a short term answer.

Sat, 04/16/2011 - 18:28 | 1176593 bob_dabolina
bob_dabolina's picture


You are perfect in your assessment.

Sat, 04/16/2011 - 18:34 | 1176612 Eternal Student
Eternal Student's picture

Throw this in to the mx:

Keep in mind that this was at Soros' new Bretton Woods, and every single rocket scientist there (who never saw the crash of 2008 coming) said that Goldman Sacks would not be allowed to fail.

Yeah, right. Not one apparently thought through the consequences of trying to keep the zombie Banks propped up.

Combine this with the dollar destruction which you highlighted. All I can say is Dear Sweet Gods.

Sat, 04/16/2011 - 18:42 | 1176622 SWRichmond
SWRichmond's picture


The Fed was the last bank who was able and willing to lever up.  Since the only way to fight a deleveraging is to re-lever, and since there was no one else to do it...

Sat, 04/16/2011 - 19:36 | 1176697 Trillax
Trillax's picture

Normally Trav I disagree with you quite regularly.  However, after a few hours to digest this and actually do some back research my ideas are *similar* but not identical to yours.  However, the point I am still not clear on:

"Imagine trying to sell dollars to delever in dollars..."

.. is where I draw my confusion.  Is this an instance where one cancels the other out and the net gain is zero -- or in some parallel factoring something is actually gained? That's where I am confused.  Any light you could shed would be welcome.

Regardless it just goes to strengthen my belief this has been architected and conceptualized (even if this is not the game plan) since day one.

Sat, 04/16/2011 - 20:07 | 1176747 trav7777
trav7777's picture

you borrow from the Fed in dollars to buy Treasuries which are dollars.  They pay dollars as a coupon.  If you sold treasuries hard, there goes the dollar, but when you delever the trade, up goes the dollar?!?!

How do you then stampede out of Treasuries?  You have puts on those treasuries anyhow, so the Fed has to pay dollars.  If the UST collapses; it IS the dollar, so to speak, as much as the FRN is.  How could we have a strong FRN but a UST complex that has collapsed?

I don't see it as possible that the UST could collapse but the FRN is more worthful.

The end result of the Fed both buying the UST complex but at the same time writing puts on it would seem to be the dollar has to get vaporized.  The government would be in a funding spiral if USTs crashed at the same time as the Fed was making dollar good on massive levered bets against them.  How can this not crash the currency?

This would seem to make possible an outcome where credit outstanding started to collapse even as Fed obligations to pay dollars (but not lend) went ballistic.

Sat, 04/16/2011 - 22:07 | 1177040 cswjr
cswjr's picture

Nice analysis.  I've been thinking about this for awhile, and think you've nailed it.  Hyperdeflation in real terms, hyperinflation nominally.  This article just fills in way too many holes; I've read it three times now, and think it's the scariest article I've read on ZH.

Sun, 04/17/2011 - 22:58 | 1179061 trav7777
trav7777's picture

hyperdeflation in CREDIT (which was money) and inflation in unlent FRNs (payout on puts).

If the Fed is writing puts, there is nobody borrowing these FRNs.  They have to be conjured.

If the Fed wrote puts on all these credit instruments, they could vaporize the credit base and replace it with unlent FRNs.

Sat, 04/16/2011 - 23:49 | 1177231 edwardscpa
edwardscpa's picture

I've been drinking a bit, so bear with...


Write down the three parties... you, the Fed, and the Treasury.  Use lots of arrows.

1) You borrow $100 from the Fed and give a $100 IOU.

2) You buy $100 in Treasuries from the Treasury w/ the $100 cash.

3) You buy a 100strike put from the Fed.

4) Shit happens.

5) You exercise your put and sell Treasuries now valued at $60 to the Fed for $100 cash.

6) You pay back your IOU to the Fed w/ the $100, closing out #1 above.


a) You're out even.

b) The Treasury has $100 to fund its operations, and owes $100.

c) The Fed is underwater $40 on its position, but HTM expects to collect $100 from the Treasury.  The alcohol is kicking in, so I'm struggling to understand the chain of events that would lead to us caring about this outcome.  It doesn't seem much different than outright monetization.  Perhaps this is where FAS 159 kicks in and the Treasury gets to book a $40 imputed gain on the potential distressed repurchase of its own liabilities.


Sun, 04/17/2011 - 00:44 | 1177321 Sunshine n Lollipops
Sunshine n Lollipops's picture

Where's Chauncey Gardner when you need him?

Sun, 04/17/2011 - 12:28 | 1177870 cswjr
cswjr's picture

... The Fed is underwater $40, but HTM expects to collect $100 from Treasury.  Treasury borrowing costs have gone up, as have maintenance requirements on the Fed's outstanding puts (both directly, and through higher MOVE).  Fed can do their mark-to-unicorns thing on their underwater puts vs. HTM expected receipts, HOWEVER, they have to come up with real money for their maintenance requirements.  They print.  Treasury issues a lot more debt at higher rates, which Fed monetizes -- more printing.  Value of USD plummets at the very same time that people start bailing out of Treasuries which causes a positive (but adverse) feedback loop.  Normally, higher rates would endogenously lead to higher USD, but this is a 2nd order effect compared to 1st order impact of massive printing.  Treasuries implode, USD implodes... United States of America implodes... global economy implodes into brown-dwarf-density pile of _____.

Sun, 04/17/2011 - 16:45 | 1178444 edwardscpa
edwardscpa's picture

So by printing to supporting Treasuries, they tank the USD; if they stop doing that to try to support the USD, they'll tank the Treasuries because the gov't would quickly run out of cash.

My issue with this is that folks on this site tend to focus a lot on what ought to happen versus what is happening.  I'm one of those folks too, so I identify with Jim Grant's depiction of the guy watching his idiot neighbor buybuybuy and get rich.  Should we have had complete economic armaggedon in 2008?  Yes.  Did we? No.  Should all the things above happen?  Probably.  Will they?  ...see, that's where I start eyeing Charles Hugh Smith's thesis on the Con of the Decade.  What's the angle we're missing?

Sun, 04/17/2011 - 18:35 | 1178615 cswjr
cswjr's picture

Fair point, and I think that Charles Hugh Smith's thesis has merit, actually.  Ultimately, though, that con depends on the ability and willingness of the taxpayers to fund the bond payments after extreme austerity.  That's an awfully big assumption.  Furthermore, the UST complex hardly compares to third-world sovereign debt; there are lots of other powerful players here who aren't going to tolerate getting taken advantage of.

Sun, 04/17/2011 - 23:24 | 1179094 edwardscpa
edwardscpa's picture

There's been an aweful lot of bad stuff going on in DC over the last decade, and people who get it complain online, but the masses are ignorant and complacent.  They get upset and vote for the other party.  The "powerful players" you mention will likely win out over the sheeple when it comes to deciding the course of our budget and whether or not the debt gets paid.

There's an aweful lot of folks here who think of debt obligations as moral obligations, while ignoring pesky things like solvency. The longer we run annual deficits, the more obvious the situation will become.  But if someone runs for election with popular sentiment saying that we need to have adult conversations about our spending, and how we need to tighten our belt and right the ship and pay down the debt, blahblahblah, well, it could get interesting. 

Sun, 04/17/2011 - 18:44 | 1178622 TruthInSunshine
TruthInSunshine's picture

Purchasing power and expenditures on discretionary goods are stall falling at a fast clip, and deleveraging is not only continuing, but by many measures increasing (it's even becoming popular in the cultural vernacular of Americans; 'downsizing,' or 'scaling back').

Nothing is going to stop this locomotive. Not even The Bernank can reverse this runaway deleveraging train.

The economy is literally being managed by the Government and the Private Federal Reserve. They're directing deficit fiat towards the areas of the wall the consumption wall that need patching, but the holes are appearing faster than even they can repair them - such is the nature of the task of trying to fight the force of real markets. The government can never come close to matching its awesome force.

Sun, 04/17/2011 - 09:54 | 1177658 Trillax
Trillax's picture

Interesting. Thanks.

Sun, 04/17/2011 - 11:57 | 1177812 redpill
redpill's picture

The questions remain how fast will it happen, and of course when.  Is it possible a sustained divergence between paper & physical PMs could be a leading indicator?  Would the "first to know" start piling into physical PMs when the trade begins to unwind to ensure they have a skin in the game for the next "system"?

Sun, 04/17/2011 - 12:30 | 1177867 narnia
narnia's picture

You are assuming the Fed is just going to play by the rules.  What if they settle this trade (by threat of mutual distruction) with non-negotiable long term Treasury ARMs (demanding the Treasury take the hit greater than the option price), toxic MBS or nothing? The majority of these positions are with foreign creditors anyway, who understand the consequences of the Fed expanding its balance sheet for this.  If the Fed just honors these puts with $ straight up, they are quitters.  I don't expect them to go down this easy.  

Sun, 04/17/2011 - 13:03 | 1177921 TruthInSunshine
TruthInSunshine's picture
by trav7777
on Sat, 04/16/2011 - 20:07

you borrow from the Fed in dollars to buy Treasuries which are dollars.  They pay dollars as a coupon.  If you sold treasuries hard, there goes the dollar, but when you delever the trade, up goes the dollar?!?!

How do you then stampede out of Treasuries?  You have puts on those treasuries anyhow, so the Fed has to pay dollars.  If the UST collapses; it IS the dollar, so to speak, as much as the FRN is.  How could we have a strong FRN but a UST complex that has collapsed?

I don't see it as possible that the UST could collapse but the FRN is more worthful.

That's a massive, basic misnomer.

U.S. Treasury notes are NOT federal reserve notes. Even if one assumes that our money is debt (counterparty), U.S. Treasury Notes are promises to pay dollars + an interest component with a set maturation period at a future date -  BACKED BY THE FULL FAITH & CREDIT OF AGGREGATE U.S. TAXPAYERS (regardless as to how one views the soundness of that institutional pledge), while federal reserve notes equal instant currency/legal tender, payable immediately upon all debt.

FRNs are completely liquid, while Treasuries are not and can't be until they reach maturity (even if some parties may now treat them as such - which is not legally obligatory).

Treasuries could theoretically reserve value even if federal reserve notes theoretically went to 0,  because there is a time component baked into treasuries, whereby even if the underlying FRNs that form the basis of repayment goes to 0 at any one point in time, there could be a bounce off of 0, and theoretically, there could even be a massive one, given other financial/geopolitical events prior to maturity.



Sun, 04/17/2011 - 13:41 | 1178011 narnia
narnia's picture

You have this backwards.  A Treasury security is a receipt of FRNs for a promise to pay in FRNs at some future maturity with a coupon in FRNs.  

If the FRN has no value, the Treasury security has no value.  If the Treasury has no value because the Treasury defaults on its obligation volutarily or involuntarily, it does not necessarily mean the FRN has no value.  It's possible the FRN explodes in value in that instance, actually.

Sun, 04/17/2011 - 13:57 | 1178086 TruthInSunshine
TruthInSunshine's picture

A treasury note is a demand note, plain and simple, but the time of demand on repayment is variable based on maturity date expressed on face of the instrument.

A Federal Reserve Note, whether denominated in 1 USD or 100 USD is immediately and instantaneously redeemable bearer paper that must be accepted to extinguish public and private debt.

It is possible for a Federal Reserve Note to have a current worth of 0, while a Treasury Note has a value higher than 0, due to the fact that the maturity date on the Treasury Note only makes that instrument redeemable at a future time (whether 1 minute or 30 years from present), during which time the Federal Reserve Notes it is paid via may theoretically bounce off of 0.

The converse is not true. If a Treasury Note goes to 0, losing all principal and interest value, it will never be redeemable for anything of value at any future date.

Sun, 04/17/2011 - 14:20 | 1178184 narnia
narnia's picture

It is not possible for a currency that reaches zero to recover any value.  That is the same thing as death.

This really isn't rocket science.  A contract cannot be worth more than the compensation in that contract is worth.  A financial instrument to receive a 1 oz. piece of gold in the future can only be worth less than 1 ounce of gold.  

Sun, 04/17/2011 - 14:29 | 1178197 TruthInSunshine
TruthInSunshine's picture

It is not possible for a currency that reaches zero to recover any value.  That is the same thing as death.


Again, we are speaking in theoretical tone here.

Why couldn't a currency hit bottom, yet a re-jiggering of the system by a central bank or consortium of central banks step in and re-inject nominative value into that currency, either in current form or through some sort of alternate structure?

Sun, 04/17/2011 - 16:37 | 1178388 narnia
narnia's picture

What I'm saying is an identity, not a theory.  What you suggest could happen.  A currency could get crushed & appreciate.  Currencies go up and down.  The point is, the US Treasury security is never worth more than the total FDR called for in the instrument.  It can only be worth less.  It could be worth much less if the Treasury decides not to perform.  



Sun, 04/17/2011 - 23:05 | 1179071 trav7777
trav7777's picture

nonsense, as stated below.

A UST does not magically get value at maturity, dude.  It has a market price today and every other day.

Its price is based upon the NPV of all the FRNs it will pay over its lifetime.

The Treasury is inseverable from the FRN; in fact there is no such thing really as "cash" anymore.  All deposits get swept into shit like USTs.

The FRN can't go to zero and the UST have value in FRNs.  Likewise the UST can't go to zero and the FRN just skate through unscathed either.  The two are one and the same.  You buy USTs with FRNs and they pay FRNs as coupon and maturity.

Mon, 04/18/2011 - 00:17 | 1179168 TruthInSunshine
TruthInSunshine's picture

A UST does not magically get value at maturity


A treasury note is only liquid to the degree that there are secondary market buyers willing to arbitrage.

You may say that has been always and will be always due to the nature of arbitrage, but that does not change the fact that a treasury note only becomes legally redeemable by law upon maturation. In the event of frozen secondary markets, one would have to wait upon the grace of the United States Treasury Department to "gets paid" on a treasury note, and only upon maturation.

The exact opposite is true of federal reserve notes.

The FRN can't go to zero and the UST have value in FRNs.  Likewise the UST can't go to zero and the FRN just skate through unscathed either.  The two are one and the same.  You buy USTs with FRNs and they pay FRNs as coupon and maturity.

They are not "one in the same." They're quite far apart from being so. See above.

Thu, 04/21/2011 - 02:09 | 1191414 narnia
narnia's picture

They are not one in the same. The Treasury could elect to just flat out not honor the UST (it's not like any court would give a creditor the white house or something).  If the Fed didn't print any more FRNs, we'd have massive deflation in which FRNs would be very valuable.  

Sun, 04/17/2011 - 08:14 | 1177571 Urban Redneck
Urban Redneck's picture

Damn Finagle's law - the weather is beautiful today, and a breeze in the oil markets is changing.

It's been a decade since I did anything other than steal, bribe, or beg for fiat at a cap markets desk so I will have to think about this further next week, but several things jump out at me-

The key piece of data we do not have at this point is the identity of the counter-parties to any FED derivative transactions.

Counter-parties can be speculators or hedgers, but the universe of treasury holders is shrinking towards GOV, FED, Regulated FIs.

CB's favorite pasttimes include bailing out bankers and pretending to "sterilize" their market molestations.

I wonder if the brainfarts up the road at BIS have written any papers on mechanisms for (self-)sterilizing sovereign derivatives issuance, since they are such cheerleaders for eliminating the risk and outstanding notional value of derivative contracts through internal and external counter-party match-making.  


Sat, 04/16/2011 - 17:58 | 1176559 ms84124
ms84124's picture

This all remains a speculation, until confirmed. And if true, it is quite likely that the conclusion is to buy Treasuries since it will be defended to the end (that may or may not come).

Sat, 04/16/2011 - 17:59 | 1176561 redpill
redpill's picture

After I read posts like this here it makes me think how little of a surprise it would be to visit zerohedge one of these days and find it has been shut down by the government.

Nice work, Tyler & Co.

Sat, 04/16/2011 - 18:01 | 1176562 emsolý
emsolý's picture

The Fed could always use its "other assets" category to bail itself, the US, and the world out, as that one has been performing rather well recently. And easily launch a space program to Mars with the leftover funds.

Sat, 04/16/2011 - 18:49 | 1176631 flattrader
flattrader's picture


Sat, 04/16/2011 - 18:50 | 1176634 flattrader
flattrader's picture

Yeah, I thought the same thing too about 3/4 of the way through the post.

Most likely someone will get a phone call or a visit first.

Sun, 04/17/2011 - 12:23 | 1177854 redpill
redpill's picture

Board is buggy, for some reason it insists on putting your reply here instead of to the comment above.  Weird.  I blame Big Sister Janet.


Sun, 04/17/2011 - 12:18 | 1177844 redpill
redpill's picture


Sun, 04/17/2011 - 12:19 | 1177848 redpill
redpill's picture

Oh forgot to add that this site simply must be considered as a "unique form of domestic terrorrism" at this point.

Hopefully Mr. von Nothaus has internet access from the clink.

Sat, 04/16/2011 - 18:02 | 1176567 magpie
magpie's picture

Uh, do US tax numbers from tomorrow figure in this at all ?

Sat, 04/16/2011 - 18:05 | 1176569 andilinks
andilinks's picture

"What" I've known for a few years. "How" I just learned. "When" remains the mystery.

Sat, 04/16/2011 - 18:05 | 1176573 falak pema
falak pema's picture

Watch China try and convince the BRICs this week end to walk away from USD as reserve. asap!

Sat, 04/16/2011 - 18:09 | 1176574 magpie
magpie's picture

They can even play "USD discount window" with themselves, it seems.

Sat, 04/16/2011 - 18:17 | 1176584 Brokenarrow
Brokenarrow's picture

A failure in world confidence=worthless $$=war for goods and services=cyber war, at best.

In case all you jokesters on thos thread havn't thought about it--your e-tade accounts, and bank balances will be worthless.

Your best next "investment" may be a Glock .40.

Tell all the slaughtered Jews in Europe that "this could never happen."

Sat, 04/16/2011 - 18:45 | 1176630 SWRichmond
SWRichmond's picture

IMO the cyber war began in earnest quite some time ago, but it does seem to be ramping up, doesn't it?

Glocks suck; .40 sucks; ==> glock .40's really suck. 


Sat, 04/16/2011 - 20:38 | 1176820 trav7777
trav7777's picture

glocks most certainly do not suck and neither does .40.

There are definitely better arms out there (1911 is NOT one of them) but Glocks are ubiquitous and spare parts are available for these.

Also, .40 is a decent power round, not the best, not the worst, but again, ubiquitous as all the LEOs are pretty much carrying .40s now and Glock is the most common maker.

Sat, 04/16/2011 - 20:58 | 1176871 SWRichmond
SWRichmond's picture

So your ammo backup plan is to get it from cops?  Let me know how that works out for you.

Sun, 04/17/2011 - 00:58 | 1177341 wisefool
wisefool's picture

I know an ex cop and he tells me that the .40 round is akin to the 10mm. Thier training will put 3 shots on target but the single 10/40 round is deficient. (do you taxes you idiots, or an idiot will show up)

I will give up all my ZH inpired PMs if somebody can come up with a balistic round that makes sense. Does Ben have daughters? Are thier names jennifer lopez?

Sun, 04/17/2011 - 02:03 | 1177402 savagegoose
savagegoose's picture

you want the fastest bullet that leaves all its energy inside the target.

Sun, 04/17/2011 - 14:07 | 1177418 TruthInSunshine
TruthInSunshine's picture


Sun, 04/17/2011 - 14:03 | 1178120 Ostapuk Ivano
Ostapuk Ivano's picture


Do you still write on seeking alpha? I enjoyed your postings from a while back.

Sun, 04/17/2011 - 22:57 | 1179060 JR
JR's picture

Your spell binding article on Seeking Alpha puts Tyler’s article into complete perspective and underscores, as does Tyler’s, why this time it’s different.

The specific point you make on Seeking Alpha, that politics and economics are bed fellows, has a profound significance when associated with articles of this depth.  To project the outcome of the Fed’s and Washington’s methodical and increasingly reckless Fed policies is one thing; but it will be politics and the American people’s back lash against the political class that will determine, in fact, whether the Fed even survives.

For it’s not just savers and the middle class that Bernanke is destroying; he’s destroying sound money. Debasing the currency as deliberate policy is economically destructive beyond measure and has undermined, as you point out, the entire fabric of our Constitutional Republic.

At the same time, Bernanke and his central planners are facing a world of socialism that they’ve created, a world they can’t pay for. Both the Fed and its captive politicians in Washington may want to use fiat printing to ease into their new Keynesian Dream World, but neither entity understands why America has, until now, survived all their socialist economic moves since WWII. It is only now that the reserves built-up by America’s capitalist miracle have begun to erode.

Real properity requires work and savings.

You are a powerful journalist, SWRichmond; first class all the way.

Sat, 04/16/2011 - 22:16 | 1177054 WaterWings
WaterWings's picture

Unusual server behavior for a Saturday night...

Sat, 04/16/2011 - 22:12 | 1177055 WaterWings
WaterWings's picture

Pistols are only good for concealed self-defense. If you know the fight is coming to you make it a .308.

Sat, 04/16/2011 - 18:21 | 1176590 bob_dabolina
bob_dabolina's picture

"but the losses on the SOMA books will likely destroy America"


Sat, 04/16/2011 - 18:24 | 1176596 cswjr
cswjr's picture

Wow.  I didn't think it was possible to be more screwed than we already are.

Sat, 04/16/2011 - 18:29 | 1176602 Yield2Greatness
Yield2Greatness's picture

Do not fear, Prince William and Kate M. are getting married on the 29th of April.  Nothing else matters!  NOTHING!!!

Sat, 04/16/2011 - 18:45 | 1176613 baby_BLYTHE
baby_BLYTHE's picture

WHY WON't THE POLITICANS WAKE UP?!!? Tea Party? Where are you!

What part of we cannot continue to tax and spend and then tax and spend the country into bankruptcy and place upon two and three or more generations of yet unborn citizens a debt which represents the ultimate TAXATION WITHOUT REPRESENTATION do the dimlibbers not understand?

Evidently they don't understand any part of it and worse they simply do not care.

we're doomed

Sat, 04/16/2011 - 18:51 | 1176641 impending doom
impending doom's picture

They'll wake up as soon as you learn to shut the fuck up. AKA never. Welcome to the 25% unemployment your generation is enjoying upon graduation, bitch.

Sat, 04/16/2011 - 19:41 | 1176707 Trillax
Trillax's picture

So much angst and anger? Are you sure there isn't something that's prompting this -- and please, do tell what caused you to lash out? Oh I know; the BMW 750i in front of you on your way to lunch at 'Hot Dog on a Stick' at the local mall had a hotter chick in the passenger side than your leather-skinned hooker that you conned into an 8-ball in exchange for 'sucky sucky' on your 4"-er raised her prices due to price increases on 'Kimono' condoms.

Inflation is a bitch.

You poor sod.

Sun, 04/17/2011 - 00:51 | 1177319 baby_BLYTHE
baby_BLYTHE's picture


haha, drop dead. 

kind regards

Sun, 04/17/2011 - 01:14 | 1177358 Oracle of Kypseli
Oracle of Kypseli's picture

@ Baby Blythe

Politicians, (yes all of them) already know there is no way out. "Inflate or die." They hope that the "die" part will be after they either loose the elections or depart this earth for good.

If you read ZH you know what you must do for your sanity and your survival. But keep having as much fun as possible in the meanwhile, just in case nothing happens during your tenure. 

Sun, 04/17/2011 - 01:49 | 1177386 Yen Cross
Yen Cross's picture

It's about time Ladies! I was loosing Faith in Femdom!

Sat, 04/16/2011 - 21:41 | 1176974 Yen Cross
Yen Cross's picture

Baby oh Baby! I love you Baby. Don't give up. You whimp!

Sun, 04/17/2011 - 11:45 | 1177799 Diogenes
Diogenes's picture

They are not taxing and spending. They are just spending. And, evidently they CAN get away with it. At least, so far so good. Too bad about the poor people. They will come up with another givaway program next week to fix that.

Sat, 04/16/2011 - 18:33 | 1176616 Eternal Student
Eternal Student's picture

Tyler: Superb article. Thanks.

Sat, 04/16/2011 - 19:42 | 1176702 kaiserhoff
kaiserhoff's picture

+ 14 Trillion    I hope this is wrong, because if it's right we have a full blown constitutional crisis in the works...   On the other hand, it sure would explain a few things about long rates that have bewildered many of  us.

Sat, 04/16/2011 - 18:40 | 1176619 Muir
Muir's picture


Read most of the comments.

So, this could be the ushering of a deflationary cycle, then again, long term, who the hell knows.

p.s. great article!

Sat, 04/16/2011 - 19:42 | 1176706 Rusty Shorts
Rusty Shorts's picture

no worries. to see the future, look to the past. everything returns to its mean average. only 4 economies in the entire history of mankind.

1) hunter gatherer economy - direct access to food

2) agriculture economy - semi-access to food

3) manufacturing economy - indirect access to food

4) service economy - food supply chain is far far away


 - what could ever go wrong?

Sat, 04/16/2011 - 21:01 | 1176874 Bringin It
Bringin It's picture

Currently, I'm at about 1.8 on the chart.

Sat, 04/16/2011 - 22:06 | 1177029 Yen Cross
Yen Cross's picture

Lets get tectonic!

Sat, 04/16/2011 - 22:03 | 1177038 Yen Cross
Yen Cross's picture

Rusty you forgot the gRAVITY Defying ET's that pulled all the rocks up! Stonehenge shit.

Sat, 04/16/2011 - 22:59 | 1177130 Rusty Shorts
Sun, 04/17/2011 - 01:17 | 1177365 Oracle of Kypseli
Oracle of Kypseli's picture

Yen cross,

The new definition of gravity is: "The earth sucks" 

Sun, 04/17/2011 - 01:55 | 1177391 Yen Cross
Yen Cross's picture


 The Earth is what (YOU CHOOSE)To make of it! I'm proud of you Don't make me educate your worthless ass!

Sat, 04/16/2011 - 18:42 | 1176623 RobotTrader
RobotTrader's picture

Bottom line is this.

The Fed can monetize to infinity, basically they can buy bonds hand over fist by creating a continous tsunami of electronic digits.  They don't have to "pay cash" for the bonds, nor raise capital.  All they have to do is hit a few keystroke macros and voila!!!  Bonds bought electronically.

And nobody is going to audit the Fed.

And while the Fed balance sheet holdings go up like a hockey stick, nobody will care.

Because certain cult stocks will likey go up just as fast or even faster, and the PigMen on Wall St. making insane profits from stocks will muffle all the critics.

If this game continues to play out, anybody who is not fully invested in common stocks will miss out and fall behind.  Especially the "savers".

Any wonder why so many "widow and orphan" stocks like KO are skying?

If we see the utility stocks start taking off, then you know it is "game on" for the continuatoin of one of the greatest stock market rallies of all time.

And if gold keeps going up and takes out $1,650, then the Dow will be headed towards 15,000, and Investors Business Daily will have to expand the Top 50 to the Top 250 because there will be so many "growth stocks" with hockey stick charts.

Sat, 04/16/2011 - 19:14 | 1176659 Caviar Emptor
Caviar Emptor's picture

Here's the flaw in your logic: if the Fed "monetizes to infinity" then a stock worth a million won't buy you a banana. We'll be walking around with trillion dollar bills to buy groceries. And in an environment like that nobody will want money to be in paper assets because they lose value faster than groceries appreciate. During Weimar Germany, gold prices in Marks rose 1,000 times faster than the value of the stock market. Once again, PMs win.

Sat, 04/16/2011 - 19:56 | 1176727 kaiserhoff
kaiserhoff's picture

Yes, a ton of worthless fiat has nothing to do with purchasing power.  I usually see this nonsense applied to commodities.  RT seems to believe that the greater fool theory works just fine, as long as the Fed is willing to play the role.  Good luck with that.

Sun, 04/17/2011 - 15:01 | 1178275 akak
akak's picture

LobotTrader: Moth

Stock Market: Flame; we all know

how that story ends.

Sat, 04/16/2011 - 21:33 | 1176957 razorthin
razorthin's picture

Right.  And good luck getting a wage raise.  I can foresee a popular revolt even in this, the fat and lazy US if the equity and commodity markets DON'T go down.  The two distinct and divergent universes cannot go on indefinitely.  Did someone mention Glocks?

Sun, 04/17/2011 - 15:08 | 1178294 idoubtit
idoubtit's picture

The commodity induced inflation in the last year has been because of public perception of QE2.  The amount of credit in the economy is contracting outside of student loans.  What that means is that the increase in inflation is due to perception instead of actual more dollars chasing goods.  If anything, there is a massive shortage of dollars in the real economy.  Without credit increase this "inflation" will only bring on deflation quicker as people have even less money to spend.   If the Fed did all QE1 and QE2 in secret, there would be NO commodity inflation as nobody would be incorrectly believing their purchasing power was being eroded.  All this talk about people walking around with a trillion dollars is ridiculous.  You got a trillion dollars?  Bring it over and I'll buy you as many groceries as you want.


Point is that the Fed will NOT get busted on the wrong end of the trade.  EVER.  Would you ever bet against somebody that had an infinite amount of dollars to keep buying the other side?



Sun, 04/17/2011 - 22:45 | 1179039 Squid-puppets a...
Squid-puppets a-go-go's picture

I'm not convinced of the merits of yr 2nd paragraph, but does anyone have a credible retort to idoubtit's 1st?

We talk of the Fed turning on hte 'printing presses' - but that's a term that comes from pre-computer era


if the literal printing presses arent turned on and the bail-outs and QE's are only electronic credits attempting to cork an electronic defationary abyss - is inflation still unavoidable (resultant volatility and erosion of faith and fairness aside) ?

Mon, 04/18/2011 - 01:33 | 1179287 Bringin It
Bringin It's picture

Nothing is sterilized.  The "animal spirits" of those holding the for Ben is unconstrained.

But I do see what you are saying as a sellable line for QEx, so bring it on.

Mon, 04/18/2011 - 07:20 | 1179511 Squid-puppets a...
Squid-puppets a-go-go's picture

Old paradigm thinking. animal spirits only prevail in a stock market that isnt manipulated to the core


Mon, 04/18/2011 - 08:10 | 1179633 Bringin It
Bringin It's picture

SPA - "animal spirits" is greed and fear in the case of markets.  Greed causes leaks, causes no sterilization.

Sat, 04/16/2011 - 19:41 | 1176701 cosmictrainwreck
cosmictrainwreck's picture

Far be it from me to defend the Robot, but to clarify.... I think he's talking relatively short-term (before SHTF, or early-stages). Not out of line with those who espouse a Minsky melt-up as the "sign". Plausible scenario, IMO. Roll the dice on any given "predictions" on ZH or anywhere......

Sat, 04/16/2011 - 22:25 | 1177070 Hulk
Hulk's picture

Bottom line is this Robo: This is going to end badly...May seem now like it can go on forever, but that is an illusion...

Sun, 04/17/2011 - 02:33 | 1177430 TruthInSunshine
TruthInSunshine's picture

1999 and the Greenspan 'put,' and 2008 and the Bernanke 'put' are but a distant memory in the RoboTwat's eyes.

Never mind that it's worse now, as fiat ain't got nothing on dilutive stock certificate toilet paper.

Sun, 04/17/2011 - 01:17 | 1177363 Hephasteus
Hephasteus's picture

"They don't have to "pay cash" for the bonds, nor raise capital.  All they have to do is hit a few keystroke macros and voila!!!  Bonds bought electronically."

Well then we are just going to have call down the holy electrical surger and burn their computers to dust.

I'm rich bitch.

Ya you are. Where do you keep it. In a vault.

Na it's stored on my computer. LULz.

Plus I keep off site backups of my wealth.

So you created the entire IT revolution to create an alternate mythical wealth storage facility?



Sat, 04/16/2011 - 18:43 | 1176625 poydras
poydras's picture

Push comes to shove, the Fed can buy all the Ts at the long end.  The Fed is likely to own a large portion of the T complex at some point.  There is ulitmately no solvency crisis for the US government.  The Fed can clamp down on rates after devaluation.

Sat, 04/16/2011 - 18:44 | 1176626 Banjo
Banjo's picture

Great article. Bookmarked and will requrie much review for this information to sink in. Thank you.

Sun, 04/17/2011 - 14:43 | 1178231 Highrev
Highrev's picture

Same thing here.

Sat, 04/16/2011 - 19:05 | 1176657 Seal
Seal's picture

"An increase in the quantity of money or fiduciary media is an indispensable condition of the emergence of a boom. The recurrence of boom periods, followed by periods of depression, is the unavoidable outcome of repeated attempts to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved....."  von Mises

Sat, 04/16/2011 - 19:06 | 1176661 Strategery
Strategery's picture

Somebody please send a copy of this to special counsel for the House Banking Committee as well as to Congressman Paul. This article makes it clear that the Fed is playing roulette with this country.

Sat, 04/16/2011 - 21:25 | 1176926 Zero Govt
Zero Govt's picture

+1  ...Russian roulette!

Sat, 04/16/2011 - 19:07 | 1176663 ArkOmen1
ArkOmen1's picture

I think we are forgetting something here... Recently there was some chatter and rumors that the Fed could go "bankrupt". That bogeyman was quickly zapped by the Fed. They quickly made up a new "rule" which states that anything they have bought that turns into a losing bet can be exported off of their balance sheet and transferred onto the balance sheets of the Federal Reserve member banks. Those losses can, at the member banks' discretion, be exported and transferred onto the balance sheet of the US Treasury. Then, to eventually "offset" those losses, the Fed will utilize winning bets on asset purchases to ensure that the taxpayer is protected and that the Federal Reserve's balance sheet is not compromised long term. Problem solved. No inflation here either serf!

Sun, 04/17/2011 - 17:59 | 1178551 Bohica
Bohica's picture

Any details on that fed 'rule'?  I have been wondering about that very possibility for some time.

Sat, 04/16/2011 - 19:12 | 1176667 QEsucks
QEsucks's picture

Wish I could be transported back to Skipper's circa 1987...there's no place like home, Dorothy.

Sat, 04/16/2011 - 19:18 | 1176674 jmc8888
jmc8888's picture

Yep, none of this was legal until Glass-Steagall was (weakened/repealed)

What could make this illegal, and zero out all of these? Glass-Steagall

We will not have a monetary system next go round, it will be a credit system, the true american system, the Hamiltonian credit system.

Glass-Steagall, or else such bullshit will always be 'engineered' for 'bonuses'.  This is what 'monetarism' allows.


Sat, 04/16/2011 - 19:22 | 1176677 Burnbright
Burnbright's picture

I do not understand why so many people think interest rates have to rise even though we all know that the Federal Reserve purchased what was it... %70 of Government bonds last quarter. 

The Fed is selling insurance that the government won't default because the Fed can purchase all of its debt, seems simple enough to me. 

Sun, 04/17/2011 - 03:38 | 1177449 ZeroPower
ZeroPower's picture

They have to rise because the world (i.e. America) can't run on 0-0.25% rates for an extended period.

Sun, 04/17/2011 - 23:14 | 1179083 Burnbright
Burnbright's picture

I would call the last few years an extended period. I agree that it isn't without consequence. But what I am saying is that the Fed CAN continue to keep rates their if they want to. Rates do not have to rise, they would if the FED wasn't manipulating the yield curve but this whole post proves that the FED commits fraud and does it on a daily basis, so ... I don't see any reason for rates to rise unless the FED pulls the rug out from under the bond purchases. 

Sat, 04/16/2011 - 19:38 | 1176699 HCSKnight
HCSKnight's picture


What I find most interesting, especially from a group that took it's inspiration from Fight Club, is I have yet seen the consideration of the following...

  1. A cabal sees a market system clearly under the influence of a very very small number of... people.
  2. The actions and plan of this small group has created increasing tension and dependency; in short the market and economic system has hung its hat on the plan of a man.
  3. The Atlas answer is obvious.
  4. Put on a mother of a short and get long gold.
  5. Give the kill command, of said key maestros, while one’s pinky finger is conspicuously close to the corner of one’s mouth  

Ahhh, too many evenings with 1970s James Bond movies…

But the serious point remains.  When Nixon moved off the Gold Standard he set in motion the inevitable.  An economic system that becomes controlled, not by free market mechanisms and boundaries, but rather the winner of an FX poker game.   And who wins that game?  The king with the most economic chips, the largest economic base, of course inevitably be China. 

The resulting reality of this path is guaranteed.  Jefferson stated it with the clarity and confidence that comes from knowing history and deeply understanding man’s human nature.

China is by western standards/morality, amoral…. One does not have to wonder long before the inevitable reality becomes clear.

On the current path the real concern is not merely the amount of debt our grandchildren will owe, but rather what the holders of that debt, who will be ruling the economic system via a new printing press, are willing to do to ensure they are paid in full.

This is the blindness of men who come from Ivory Towers, been indoctrinated into an ideology of Keynesian Socialism, and have never been forced to serve in some 3rd world, anti-Christian, country while in the military or Peace Corps.



Sat, 04/16/2011 - 20:31 | 1176802 Pepe
Pepe's picture

without foretelling and at the present moment it seems to me that the US by western standards or any other standard is the amoral one

Sat, 04/16/2011 - 22:50 | 1177117 wisefool
wisefool's picture

Wrong. in a lex luthor sense. (youtube) Lex Speaks mandarin, so does Rhas Agul. WB7 is a fantastic artist and I sense that tyler only pays for our bandwidth to get through some sort of misappropriated guilt. We ZH tinfoil hatters buy PMs. And it should be known that if you are a PM type, you need to go all the way. Farady would have loved to have a gold helmet, as would have madam curie loved to have had the time and money to wear a lead apron.

The reason this matters is because X-ray techs (a.k.a. Econ PhDs/Rosthschilds) are expendable. The Bernake has a PhD in Econ, but he does not have and LLM in taxation. His parents were too poor to get him to that next level.

Simply put. The next president of the US and/or Fed Chair must have an advanced degree in taxation if we expect the chinese to buy our debt.

Sun, 04/17/2011 - 10:42 | 1177706 HCSKnight
HCSKnight's picture

Yes Pepe, it is.  Hence why "nations die". 

But I'm fairly sure you know this already.

Sun, 04/17/2011 - 18:06 | 1178562 Bohica
Bohica's picture

Screw China.  They can't afford to stop buying our debt, let alone dump it.

Sat, 04/16/2011 - 19:42 | 1176709 buzzsaw99
buzzsaw99's picture

Interest rates on the long end will not be allowed to rise. Period. If they did all that free money on the short end would move out causing interest paid on the debt to skyrocket. It would also be detrimental to the housing market aka the banks. Not. Gonna. Happen. Lie cheat steal phony accounting whatever will continue.

Sat, 04/16/2011 - 19:57 | 1176732 Yen Cross
Yen Cross's picture

You looked at the curve. Please tell me you looked @ the curve. You saw ISM. You saw core, and non core? You see the GAO disfunction In CPI ?

Sat, 04/16/2011 - 20:09 | 1176759 buzzsaw99
buzzsaw99's picture

What curve? It looks flat to me. Wake me up when the 30y hits double digits.

Sat, 04/16/2011 - 21:29 | 1176938 Yen Cross
Yen Cross's picture

Swing that trade.

Sat, 04/16/2011 - 19:55 | 1176731 bugs_
bugs_'s picture

merry go round spinning faster

to keep the system alive they have to spin it faster and use up their amazing tricks

while they may have an infinite supply of fiat they do not have an infinite supply of tricks

not much traffic on the roads today (almost $4)

Sat, 04/16/2011 - 20:13 | 1176765 Zero Govt
Zero Govt's picture

AIG was brought down and bled dry by Goldman Sachs and JP Morgan so i suppose the Fed is their next target ...they've already bled the taxpayer dry via the 'accomadative policies' of Washington afterall 

Sat, 04/16/2011 - 20:12 | 1176771 Dejean Splicer
Dejean Splicer's picture

I'm looking for a few equity partners for a new business.

I'm developing a Very Low Frequency Ionospheric Auroral Research Program (VLFIARP).

Our mission statement is:
To analyze the ionosphere and investigate the potential for developing ionospheric enhancement technology for radio communications and surveillance purposes, /cough/, or maybe other purposes.

We have secured James Gandolfini as the director of the steering committee cause we need a good negotiator for the family, capiche?

Your equity stake would give you a percentage of ownership in a 'research program' intended to influence sovereign nations or VLI(very large industries).

Ex: "Pay us by Friday or you will get a taste of our ionospheric enhancement, OH!".

We plan to have out antenna array up by mid July and under full power by August 15.

Are you ready to play in the big leagues? Come join us, leave me your email address and I will be in touch. Let's get this built and join the game.

Sat, 04/16/2011 - 20:50 | 1176858 Miss Expectations
Miss Expectations's picture

Someone on your staff must have turned it on when you went out to lunch on Thursday 4/14:


Sat, 04/16/2011 - 21:11 | 1176882 Zero Govt
Zero Govt's picture

Dejean  -  sounds like you need the skills in investment management of T. Boon Pickens i saw on CNBC Thursday. Forget billionaires getting a gas company up and going out of their own pocket, all on their lonesome like the good old free market days (remember those?) where you take risks and could lose your money.

Nope just not the way its done anymore. T. Bone Pick'em just goes straight to Congress for a large (largesse) dose of taxpayer money. He's positive he's got Congress aboard (in his pocket) and already chatted to Sen. Harry Dean (well known expert in project finance and energy) in the Senate and it's only a matter of Obumma signing it off (he hasn't had a chat yet or so he says but opinions "Why wouldn't he")

So like the US healthcare market, US property and US lots of other markets we're heading for the public-private energy market (there already for decades in truth). 'Success' in all these markets is assured (healthcare and property bankruptcies is just a 'blip' in the public-private success story)

So there you go, try tapping Congress for funding and get T Bone aboard your public-private (public loss, private profit) suicide mission. God Bless America 

Sat, 04/16/2011 - 23:46 | 1177230 Yen Cross
Yen Cross's picture

I guess the kiddies are in bed. That was FUCKING funny!

Sun, 04/17/2011 - 04:04 | 1177462 bothsidesnow
bothsidesnow's picture

+ 1 

Sat, 04/16/2011 - 20:21 | 1176789 agrotera
agrotera's picture

Tyler, you are so brave and a great hero!!!!!...

and i weep

Sat, 04/16/2011 - 20:23 | 1176791 Pepe
Pepe's picture

Tyler said recently:"What is known, however, is that the world’s largest futures exchange has made it possible for any entity to enter into Euro-denominated oil trades." 

It just occurred to me that soon we will have DollarEuro bonds, instead of EuroDollar Bonds

Sat, 04/16/2011 - 20:38 | 1176827 jm
jm's picture

This is a terrific article. 

The Fed isn't alone.  The Spanish government has been selling CDS on its itself, but at least they are taking some steps to drive spread compression.  Too bad the US is as hopelessly broke as Greece.

Been thinking about what this implies.  If I was the Fed I would sell balance sheet to settle up, keeping treasuries for last.  This may not ensure a flight to liquidity bid stick, but the dollar won't go, at least immediately. Not sure if the curve will go vertical, or funding will be impossible and the short end will blow up making a sky-high flatline. 

Probably the biggest "other asset" category is gold.  Not sure if they would sell it, depends on consult with foreign Treasury holders.  They could buy puts in a heartbeat. 

Either way, Fed can't show this put selling and the rest, so they use a clearing proxy or proxies that can put the pieces together and figure out what is up. They are vaulting gold or are receiving cross-currency float, or some other Black Swan type of thing.


One little gripe, though.  Why is Goldmans Sachs to blame?

Goldman changed the rules in the middle of the game, hiked collateral requirements and forced a toxic feedback loop whereby AIG had to undergo a liquidation waterfall putting it deeper and deeper underwater, until ultimately it was so far undercapitalized it had to be bailed out by taxpayers.


How did they hike collateral requirements any more than every other counterparty?  Even before AIG was unwinding their CDOs, every bank involved knew they were under stress and demanding daily collateral settlement.  Goldman did request that the collateral posted be marked to market, which AIG stupidly agreed to do. 


Sun, 04/17/2011 - 02:16 | 1177412 chindit13
chindit13's picture


Spain selling CDS on itself? I believe that is what is known in financial circles as The Cleavon Little Trade, taken from the scene in Blazing Saddles where Cleavon’s character, faced by an angry mob of white folk, puts a gun to his own head and says, “Nobody moves or the nigger gets it”.

This might be apocryphal, but I remember reading of a US firm who, when faced with a bond payment it lacked the funds to make,  sold CDS on its own bonds, thereby getting the funds necessary to make the payment. 


Sun, 04/17/2011 - 09:06 | 1177612 jm
jm's picture

I hear Spain sold CDS on the Cajas paper they have guaranteed.  Spain's may seem arguably nuttier than the US, they probably had to offer protection to China at a nice quote.  

At least China is "all in" on mutually assured destruction now too.  Nobody gets out of here alive.

Still not sure how that firm got away with showing such open weakness and survived.





Sat, 04/16/2011 - 20:49 | 1176857 Darth Silver
Darth Silver's picture

excellent piece and comments.  to add the extra piece to truly tie in the AIG analogy together is who is on the hook for the JP Morgan silver short?  Is it The Morgue or The Fed.  Since The Morgue has not recognized a silver exposure in their SEC filings, I fear it is the latter. 

Damned if we win, Damned if we lose.

Sat, 04/16/2011 - 21:06 | 1176868 Rupert
Rupert's picture

Triple mandate, QE3 bitchez!

Sat, 04/16/2011 - 20:57 | 1176872 hardcleareye
hardcleareye's picture

I have read the article twice now, I'll come back and read it again tomorrow morning. 

My understanding must be wrong, they, the federal reserve, has taken on so much "contingent liability", via  " off-book derivative contracts" that if the long term interest rates raise the US tax payers become insolvent?  Why would they do something that insane?  How could this end up benefiting the "Prime Dealers"/Federal Reserve?

Sun, 04/17/2011 - 03:23 | 1177447 Dan Alter
Dan Alter's picture

Well said. The answer of course, is that it will not benefit them, we are going to put them in jail I expect.

Essentially as you point out, they put we taxpayers into a margin call on all our treasury debt. Instead of having 30 years to pay, we have until close of business. Since that is impossible, interest rates will rise catastrophically. That must mean our idiot bankers will be forced to shut down the markets closely followed by by a bank holiday. The Fed is just kiting checks. The banking holiday  will give the suckers, otherwise know as the large majority of American citizens the time to wake up to what has happened and actually hold our theiving lying leaders legally accountable with some serious speedy justice.

We must hold our leaders accountable pronto or give up ever becoming a honest civil society. We created the mess, we can get out of it by using the No 1st Cost List.


Sat, 04/16/2011 - 21:00 | 1176875 Eric L. Prentis
Eric L. Prentis's picture

Wow, congratulations to Market Skeptics' Eric deCarbonnel for a masterful piece of investigative financial journalism. This adds a vital piece to our understanding how the Fed's manipulation of the long end of T-bonds ties together with Bill Gross going short treasuries. Eric and Tyler Durden, thank you for connecting the dots on such an important piece of the financial puzzle. Bernanke truly has made a pact with the DEVIL.

Sun, 04/17/2011 - 22:56 | 1179059 Squid-puppets a...
Squid-puppets a-go-go's picture

many commenters here seem to think that there's something revealing of the true mysterious motives of the Fed

What if the whole thing has become so complex and unweildy that Bernanke and his staff are only bluffing that they actually know what's going on and what the repercussions of their various trades are?

When you're tentatively placing the card roof on a house of cards, do you really know which part of the foundation is likely to buckle ?

Sat, 04/16/2011 - 21:08 | 1176889 Ned Zeppelin
Ned Zeppelin's picture

In terms of fiat, the Fed exists both in the fiat realm and beyond the event horizon.  The reserve currency is the reason it can exist in both realms, and I think in the end the holders of the financial assets will support the FRN.  No hyperinflation.  Inflation, stagnation, and tax increases to support debts no honest taxpayer can pay. They will force this on us, and the only solution will be an armed, New American Revoltution.  The good news is, the authors of the Federalist Papers saw this coming. But that is where this will end up: pay interest to bondholders, or revolt.  Forget this notion of system collapse.  It will come from the other direction. System compliance will be enforced

Sat, 04/16/2011 - 21:53 | 1177007 WaterWings
WaterWings's picture

I could see a majority portion of the US being "pacified".

Guns for food programs will be a hit.

Only foreign attack will change the game.

Sat, 04/16/2011 - 22:02 | 1177012 WaterWings
WaterWings's picture


Purges have always been popular with gov'ts. That's guaranteed as well. Nimble, nimble.

Sun, 04/17/2011 - 11:42 | 1177791 sschu
sschu's picture

System compliance will be enforced


How the people react to this is the key.  Right now SEIU, Acorn and other "community organizations" are far ahead of common folk and would win this struggle IMHO.


Sat, 04/16/2011 - 21:10 | 1176891 lieutenantjohnchard
lieutenantjohnchard's picture

i think many of us suspected (knew) the fed was up to no good. we just didn't have proof or the ability (time) to uncover the mischief. i for one will not be surprised at anything that surfaces about their shenanigans. i can spot a cornered rat when i see one.

Sat, 04/16/2011 - 21:13 | 1176894 ebworthen
ebworthen's picture


The best analogy I can think of is Hearts and Shooting the Moon.

The FED is throwing out high cards in other suits to flush out the Aces and trying to find out who has the King and Queen of hearts before they start laying any hearts down.

Once they lay hearts they have to go whole hog and they either fool everyone or lose spectacularly.

The only problem is that the FED and Central Banks are backed by CONgress, the Executive Branch (e.g. - military), and the Judicial Branch of government.

What happens to Precious Metals if enough money is in them?  (U of Texas Story).

What happens to precious metal stocks?  My precious metal stocks are down -5% or so year to date while gold and silver are spiking; what's up with that?

Earthquakes and floods in mining regions or a lag?

Excellent article and information here; thank you!


Sat, 04/16/2011 - 21:20 | 1176910 AldousHuxley
AldousHuxley's picture

FED has allowed US government to essentially nationalized failed financial institutions.

Sun, 04/17/2011 - 11:53 | 1177809 bruiserND
bruiserND's picture

"FED has allowed US government to essentially nationalized failed financial institutions."

Or "failed TBTF institutions" have privatized the fed and declared themselves massive taxpayer paid bonuses for the Coup d' etat.

"Regulatory arbitrage"



Sat, 04/16/2011 - 21:19 | 1176918 jal
jal's picture

"Only this time there will be nobody to bail out the ultimate backstopper, resulting in the long overdue end of the current failed monetary system experiment."


If the IMF is given a printing press, then the music keeps on.


Sat, 04/16/2011 - 21:26 | 1176937 vast-dom
vast-dom's picture

Excellent work Tyler. Very interesting times. I like my TBT position that much better now.

Sat, 04/16/2011 - 21:30 | 1176942 Bansters-in-my-...
Bansters-in-my- feces's picture

The Bernank is delusional.

Would someone take care of him....PLEASE...

Sat, 04/16/2011 - 21:33 | 1176950 AldousHuxley
AldousHuxley's picture

I Fed is smart this is when they bring back deflation. They are either idiots or just have no other choice than to be controlled by the White House.

Sat, 04/16/2011 - 21:46 | 1176983 razorthin
razorthin's picture


Sat, 04/16/2011 - 21:54 | 1176988 razorthin
razorthin's picture


Sat, 04/16/2011 - 23:10 | 1177153 Rusty Shorts
Rusty Shorts's picture

bringing in the sheaves

Sat, 04/16/2011 - 23:54 | 1177238 Yen Cross
Yen Cross's picture

The grim reaper spells it Scythe.

Sat, 04/16/2011 - 23:54 | 1177239 Yen Cross
Yen Cross's picture

But then again it's semantics. End of days is pretty much ( Letting the Fat lady sing)

Sat, 04/16/2011 - 21:50 | 1176982 max2205
max2205's picture

The pin is very near the balloon Since the CIA blew up oil and killed Russian economy for invading Georgia I suppose Russia might do something soon too finish us off financially. Buy bunkers!!

Sat, 04/16/2011 - 21:47 | 1176985 duncecap rack
duncecap rack's picture

I don't understand all of this. The MOVE thing is definetly beyond my ken. The parts I do understand make this the scariest article I have ever read on zerohedge. This would be very much like the JPM silver position but if this one blows up there would be no transfer of goods in the economy any more. The medium of exchange would vapourize in an instant. Is it really possible a mild mannered Ivy League prof could do this? I have thought for a while he was misguided but this is malignant. I guess one positive thing is the debt wouldn't be an issue anymore. If he had to print enough to settle those puts and if that money chased real assets in a panic $14T would be chump change.

Sat, 04/16/2011 - 21:50 | 1177005 ihedgemyhedges
ihedgemyhedges's picture

TD said "Simply said, the Fed, in bailing out the world (a meme that has only now received popular acceptance following the release of formerly classified Fed documents, despite our claims precisely to that end from back in October 2009) has become the world's largest hedge fund"

One question since the Fed is a hedge fund: Do they charge 2 and 20?  Because if I can get a special deal......................

Sat, 04/16/2011 - 21:57 | 1177018 topcallingtroll
topcallingtroll's picture

I am very unhappy that they chose this path.

If they had let the banks fail and senior bond holders became the banks' new owners with a whole new management team we could have had a quick two year depression, a real estate crash to affordable levels again, and we would still be at this improving rate of unemployment by now.

We could have gotten to this point without all the moral hazard of bailouts and subsidies.

Neverthless to think fiat repudiation will occur is a stretch.

This is just another twist on the same theme. I will ultimately bet ahainst collapse when everyone is scared as shit. I think i will be the one end up.with more wealth that way.

I will sell you my last silver at 50.

Sat, 04/16/2011 - 21:59 | 1177019 zero intelligence
zero intelligence's picture

See how many long posts there are that have nothing to do with the topic at hand? These are paid government disruptors. Now THINK about why there are so many paid government disruptors on this topic.

Do NOT follow this link or you will be banned from the site!