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A New Keynesian Low - Levered FX Intervention: Brazil To Buy Dollars With Proceeds From Bond Sales

Tyler Durden's picture





 

When a central bank says it is effectively LBOing Keynesianism, you know it is over. Which is precisely what Guido Mantega, Brazil's finance minister has promised to do. The Latin American country which has been caught in the crossfire of developed world central bank wars, in which it is every last man for himself and he who defects first wins, has just stated it is about to defect (and just in case it is unclear, Mantega clarified that "Brazil's would act on the currency, not just a promise"). And to confirm he means business, Mantega also added that the Brazil Central Bank has no limit to buy dollars. But here's the twist - as reported by Bloomberg, Mantega, speaking to reporters in Brasilia, said the Treasury can sell more debt to increase liquidity to buy dollars.  You heard that right: debt-financed currency intervention. At least the trade surplus countries use capital generated from excess exports. Brazil is threatening to do something never before seen, which is to lever up in its FX intervention. Surely, this has to be the last boundary of Keynesian insanity.

 


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Wed, 09/22/2010 - 10:40 | Link to Comment Mad Max
Mad Max's picture

People with no moral qualms will lever up shortly before declaring bankruptcy and stiffing their creditors.

Just saying.

So how much is the US borrowing lately?

Wed, 09/22/2010 - 11:25 | Link to Comment RockyRacoon
RockyRacoon's picture

Where is the THUMBS UP button?  Great correlation between actions of nations and individuals when in dire straits.

Wed, 09/22/2010 - 11:38 | Link to Comment doolittlegeorge
doolittlegeorge's picture

the "Federal government" need not "do this" just keep interest rates so low across the curve that banks are forced into "forced savings."  this is a VERY scary prospect since "hey, government wackball--your banker is the only friend u gotz" and "sure you're gettin' your jolly's telling Big Daddy Warbucks to smell the glove" but at some point that price of gold "gonna make you pay, beach."  An "new era of responsibility."  hahahahahahaha.  yeah, right.  "screw your banker and nation build afghanistan"?  hahahahahahaha.  POUND SAND Obama economic team.  you've might have us for now cockfucks but these planets rotate on an axis beach so i hope your ready for a little workover cuz it sure looks like it coming soon rather than later.

Wed, 09/22/2010 - 12:57 | Link to Comment Xedus129
Xedus129's picture

POUND SAND!  +dy/dx=99x

Wed, 09/22/2010 - 11:47 | Link to Comment scratch_and_sniff
scratch_and_sniff's picture

There is nothing morally wrong with ripping off a bank (already did my old bank)...two negatives make a positive; when they were ramping up the price of rice in a third world country and slapping huge fines on my account because my student loans arrived late, i was writing and cashing cheques to fund my music career and bar tab. Ran up a tidy little sum to...ahem, not enough to get my music career off the ground though.

Wed, 09/22/2010 - 17:53 | Link to Comment Sokhmate
Sokhmate's picture

For variation on the theme;

1- replace bank with credit card company (on second thought, there is no difference - amex, chase, etcare now banks).

2- replace music career with high end photography equipment and glass (good investement actually)

Wed, 09/22/2010 - 10:45 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

 Brazil is threatening to do something never before seen, which is to lever up in its FX intervention. Surely, this has to be the last boundary of Keynesian insanity.

Sadly Tyler, there are many more steps of escalating insanity left to climb. Many more steps. Just when you think we've reached our upper limit of insanity, the psychopaths come up with a new twist. The party's only started. They're taking this to the moon Alice.

Oh, and don't call me Shirley. Unless that lump in your pants is a roll of Gold Eagles for me. :>)

Wed, 09/22/2010 - 11:30 | Link to Comment Caviar Emptor
Caviar Emptor's picture

+10

Wed, 09/22/2010 - 14:06 | Link to Comment Ripped Chunk
Ripped Chunk's picture

Nice CD !!  Agreed, we have not yet glimpsed the upper limits of insanity yet.

Wed, 09/22/2010 - 14:55 | Link to Comment midtowng
midtowng's picture

We appear to be reaching, not the end of Keynesianism, but the end of the global fiat currency system.

Wed, 09/22/2010 - 10:42 | Link to Comment scratch_and_sniff
scratch_and_sniff's picture

humm, might find themselves in a little bit of trouble down the road.

Wed, 09/22/2010 - 10:44 | Link to Comment Catullus
Catullus's picture

From: Treasury Department

To: State Department and Department of Defense

Subject: Upcoming Budget Forecasts

All,

It's time to cash in our 100 year investment in military intervention services. Our financing partners, the Fed, have agreed to pressure our colonies in South America to take out loans to purchase Treasury bonds.  Please inform your future military and intelligence contractor employers that the funding bottleneck will end shortly.

R/

Timmy

Wed, 09/22/2010 - 10:44 | Link to Comment SDRII
SDRII's picture

This is a nice compendium article to this am Bloomberg take on how the Finance Min is playing chicken with inflation and hence the equiv TIOP spreads are widening

 

Just anther day in the Politburo

 

http://www.bloomberg.com/news/2010-09-22/-lenient-meirelles-sparks-rally-in-inflation-linked-bonds-brazil-credit.html

Wed, 09/22/2010 - 10:45 | Link to Comment SDRII
SDRII's picture

Speaking of Latam/resource wars - watch the Falklands

Wed, 09/22/2010 - 10:58 | Link to Comment hedgeless_horseman
hedgeless_horseman's picture

Resource wars?  Falkland Islands?  LOL. 

It is funny for me to watch the bush-league English and Argentinians attempt to play the neo-colonialism game.  Big League players China and the USA do it right by buying Australia and Africa, or invading Iraq, respectively.

Wed, 09/22/2010 - 10:57 | Link to Comment Mad Max
Mad Max's picture

Ooooh!  Oooooohhh!!! A rematch of bankrupt empires!  It will be like watching crippled midgets fighting on a greased floor with rollerskates on their feet and both hands tied behind their backs!

(On a gloomier note, at what point will proud but desperately bankrupt nations start using the tactics of small terrorist groups, for want of any conventional military might?)

Wed, 09/22/2010 - 11:04 | Link to Comment SDRII
SDRII's picture

http://globalguerrillas.typepad.com/

 

Well documented here. but but but Tom Barnett says the US is the Sysadmin

Wed, 09/22/2010 - 12:14 | Link to Comment carbonmutant
carbonmutant's picture

Watch the Arctic!

The Great $Trillion Mineral Rush to develop the Arctic reserves.

Wed, 09/22/2010 - 10:48 | Link to Comment Ragnarok
Ragnarok's picture

OT: Silver and Gold are way up, but SLV and GLD are flat.

 

Comex/LBMA delivery and paper burns bitchez?

Wed, 09/22/2010 - 10:59 | Link to Comment Not For Reuse
Not For Reuse's picture

ETF change measured from stock market close, not metals market close

Wed, 09/22/2010 - 11:05 | Link to Comment EscapeKey
EscapeKey's picture

Nah, the futures markets close earlier than the NYSE where the ETFs are registered.

So the sizeable moves in PMs were included in the price at close yesterday.

Wed, 09/22/2010 - 10:48 | Link to Comment Dagny Taggart
Dagny Taggart's picture

hmmm... Brazil... Soros... currencies...

Wed, 09/22/2010 - 10:49 | Link to Comment alien-IQ
alien-IQ's picture

looks like Brazil decided to go full retard.

Wed, 09/22/2010 - 10:56 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

I suspect that in a year or two, full retard will be defined on a sliding scale with no upper limit.

Full retard, super retard, full super retard, nuclear retard, full nuclear retard, thermonuclear retard etc. You get the picture, the permutations are endless. I look forward to a few belly laughs and some projectile vomiting along the way.

Wed, 09/22/2010 - 11:00 | Link to Comment Mad Max
Mad Max's picture

Which comes first, unnilhexium retard or vacuum-energy retard?

Wed, 09/22/2010 - 11:40 | Link to Comment doolittlegeorge
doolittlegeorge's picture

they called my retarded brother retard.  your gonna pay for that.

Wed, 09/22/2010 - 10:54 | Link to Comment whydtinogo
whydtinogo's picture

Assuming that Mantega was speaking in Portugese and allowing for the fact that he may well have been badly translated, but issuing more debt after they have purchased dollars is simply sterilizing the intervention, no?

Wed, 09/22/2010 - 11:35 | Link to Comment Caviar Emptor
Caviar Emptor's picture

Calle La Boca Mantega!

Wed, 09/22/2010 - 18:38 | Link to Comment lewy14
lewy14's picture

Um, yeah, that's exactly what I was thinking.

There is no need to "lever up" FX intervention - the concept doesn't even make any sense.

Central Bank creates local currency ex nihilo to buy dollars. Like the SNB did creating swiss francs to by EUR.

The only time sovereign debt enters the equation is to mop up (sterilize) the local currency reserves thus created.

Wed, 09/22/2010 - 10:55 | Link to Comment egdeh orez
egdeh orez's picture

get your popcorn ready.

34 * (-18)... these math questions are getting harder and harder!

Wed, 09/22/2010 - 10:58 | Link to Comment HelluvaEngineer
HelluvaEngineer's picture

Guido Mantega?  I think I put a spoiler on that dude's van.

Wed, 09/22/2010 - 12:17 | Link to Comment Arthor Bearing
Arthor Bearing's picture

Yes!

Wed, 09/22/2010 - 11:09 | Link to Comment JR
JR's picture

Today’s Quotes

Nate on Nathan’s Economic Edge: “Somebody’s going to lose this [devaluation] competition, and I have a feeling it’s everyone in the middle-class in all the debt saturated countries.  Should this go to extremes, which is highly likely, we could see the cost of needs like food skyrocket while wages fail to move.  Not good, and our own immoral  system is the ship that brought us here.  We need a new ship, and changing sleepy Larry Summers out for another Keynesian isn’t going to do it—not that I’m unhappy to see that national disgrace leave.  Bring in that other fine piece of work, Paul Krugman, and you best own a bunch of gold, as that Nobel Laureate is as clueless as the day is long.”

http://economicedge.blogspot.com/

Or, as Albert Edwards says today “On Terminal Competive Devaluation, The Nuclear Option, And How the Fed’s Polcicies May Start an All Out War,” [B]y pursuing policies…that allowed the rich to acquire virtually all of the gains in GDP growth…in the process of robbing the middle classes and now still attempting to keep asset prices artificially high, they are also robbing our children…we are getting to the point where absent a dramatic intervention in the Fed’s all or nothing gamble on preserving Keynesianism will almost certainly result in armed conflict.

“And if those who know and understand this do not act, nobody else will.  The ability to postpone that most critical intervention in this generation’s lifetime is ending.”

Wed, 09/22/2010 - 11:51 | Link to Comment nonclaim
nonclaim's picture

More to this story: there's a huge share offering to capitalize the national oil company, Petrobras (NYSE:PBR)... that, if successful, will bring over $60 billion of new money to the country. That will make the local currency too strong and the trade balance worse than already is.

In trying to mop up the dollar liquidity and hold the local currency steady, the country will issue debt and pay higher coupon than the dollar deposit. Compounding stupidity beyond belief.

Plus, watch out for the presidential elections in two weeks and the possibility of civil or organized crime unrest.

[More news, PBR is to invest part of the newly acquired capital in Brazilian Government Bonds... something really crazy going on...]

Wed, 09/22/2010 - 12:13 | Link to Comment Bubble Shooter
Bubble Shooter's picture

Every day that US$ gets to R$1,70, our BC buys it in Billions.

 

I see PBR shares offering as my best deal as a bear, ever. It may go up a little, but will sink. PT (workers party) names the company's directors and take the profits to their accounts and country's useless + lazy crowd.

Don't worry about the elections, the Terrorist lady will take over for the next 8 years and everything will continue the same. PT will keep reigning up to Lula's death...

Wed, 09/22/2010 - 13:42 | Link to Comment zaknick
zaknick's picture

There was a bankster/CIA ordered coup in Brazil (like pretty much every other country in SA) and they tortured, disappeared and murdered thousands.

 

Who the fuck is the terrorist now motherfucker??

Wed, 09/22/2010 - 11:41 | Link to Comment doolittlegeorge
doolittlegeorge's picture

don't forget the Olympics.  Always remember Young Grasshopper:  "go for the Gold."

Wed, 09/22/2010 - 11:48 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

The sign that PMs have hit the peak will be when news reaches the masses that former winners of Olympic Gold and Silver medals are melting them down for the extremely valuable metal content.

That will be the top. But don't despair. We're a long way off.

Wed, 09/22/2010 - 14:17 | Link to Comment knukles
knukles's picture

You mean I melted my little Dubai brother's special olympic wolfram coin too early?  Damn.

Wed, 09/22/2010 - 12:10 | Link to Comment barwar
barwar's picture

The vicious cycle has already started in Brazil.  Credit is flowing massively on two fronts, to consumers and businesses (think the USA from '03 - '07) from the govt using its state banks like Banco do Brazil, Caixa Economica and the BNDES.  The cycle works like this:

1.  The left-wing govt in Brazil is increasing subsidized credit to businesses and consumers.  The govt is also increasing its own spending.  State subsidized mortgages for low income consumers (yes, you heard that right, it's called Minha Casa Minha Vida), loans backed by an individual's paycheck and credit cards are flowing to individuals.  The BNDES is loaning money all over the country to practically every business that exports anything.  Consumer spending is therefore increasing while debt is rising.  Sound familiar?

2.  This increase in spending and credit is causing inflation.  Currently CPI is officially about 5% but if you've been to Sao Paulo or Rio in the last year, you know that real inflation is probably closer to 15-20%, even with nominal interest rates in the double-digits.

3.  This increase in inflation is causing the Brazilian central bank to raise rates.  They have raised the short-term SELIC rate from 8.75% in July 2009 to 10.75% today.

4.  Since Brazil has an investment grade rating, this increase in rates is attracting more foreign capital than ever before as fixed income accounts seek yield.

5.  This foreign buying interest is causing the BRL to strengthen.  The BRL currently trades around 1.75 having moved from 2.46 in November of 2008.

6.  A strengthening BRL causes Brazilian exports to become more expensive and less competitive on a global basis, thus hurting local exporters and consumers.

7.  The slowdown in exports coupled with global de-leveraging is forcing the govt to increase subsidized credit to businesses and consumers and to increase govt spending.

8.  Rinse, wash, repeat...

With the country on the verge of electing a hard-left ideologue in the form of Dilma Rousseff, it is unlikely that the populist, pro-government strategies that Lula has enacted since 2008 will be reversed.  In fact, quite the opposite.  Dilma has voiced much support for all of the state banks and wants to see their role in Brazil's economy increased.  For those of you thinking you can avoid the stupidity of the US policies by investing in the B of BRICs, I wish you all the luck in the world.  The joke about Brazil is that it's the country of the future... and always will be.

Wed, 09/22/2010 - 13:39 | Link to Comment zaknick
zaknick's picture

Hard left ideologue? I think not. She is Lula's (the most popular politician in the world) chosen replacement. Besides, the other option is Brazil's version of the Washington neo-con scum who wants to invade Bolivia for "drug trafficking" when as Bolivian president Morales and the whole of the Southern Cone knows that the CIA and Roberto Suarez started the cocaine business.

 

Neo-con, drug trafficking, money laundering, bankster scum.

Wed, 09/22/2010 - 13:00 | Link to Comment Buzz Fuzzel
Buzz Fuzzel's picture

"Surely, this has to be the last boundary of Keynesian insanity."

Don't count on it.  It ain't till it is over and you will see it in the streets.

 

Wed, 09/22/2010 - 13:31 | Link to Comment bugs_
bugs_'s picture

Keynesianism without borders.

Wed, 09/22/2010 - 13:31 | Link to Comment Magua
Magua's picture

Might want to start selling your emerging country equity positions as a weak dollar does no good for Brasil, India, etal. Also might want to touch up your gold and silver positions, as gold is the antidollar.

Wed, 09/22/2010 - 14:17 | Link to Comment YouAreBliss
YouAreBliss's picture

Wonder what China is borrowing to hold the peg?  Let the world finance our largesse now that our credit card is maxed out.  Oh you  have to love the Seniorage of a reserve currency.  Can the entire nation live off it?  Certainly the Banksters are.

Wed, 09/22/2010 - 14:29 | Link to Comment bankonzhongguo
bankonzhongguo's picture

Year Zero Hypothesis.

How will a post-Keynesian world happen?

Will all personal debt in America be wiped out?  Let us take some average sampling of Americans.  Non college families with rent-a-center debt and a big loan on a truck.  30 somethings with $100,000 in household student loans plus a upsidedown mortgage. 40-50 somethings never to have a better job again, upsidedown and waiting for their parents to die to inherit whatisleftover? Wages are frozen and real under-unemployement is 30%.  Paying lawyers to file bankrupcty only to emerge with the debt still there.  How to get out of this debt serfdom?

A service based society, where your wages can't service the debt you got into, nor service the tax base to service the money being printed either?

I think we have driven off a cliff and just do not know it yet.

Why (how can) anyone really seek to pay anything off at this point?

 

Wed, 09/22/2010 - 14:58 | Link to Comment Haywood Jablowme
Haywood Jablowme's picture

 

Emergency evasive.  Mr Sulu, send printing press to warp speed.

 

 

Wed, 09/22/2010 - 15:44 | Link to Comment YouAreBliss
YouAreBliss's picture

Print, Print, Print!!!

 

Buying condos in Naples, Fl - 25 cents on the dollar.  50% of replacement cost.

Net rental income 10% a year cash on cash.

Class A Units that sold for $360,000 now $100,000.  What will these be worth after the printing orgy?

 

Wed, 09/22/2010 - 17:22 | Link to Comment sbenard
sbenard's picture

Even when I read this over and over again, I find it hard to believe this is reality.

How about a new movie:

Currency Wars - The Race to the Bottom!

Wed, 09/22/2010 - 19:58 | Link to Comment Buck Johnson
Buck Johnson's picture

This is one of the cracks in the dam.  They are making a run for it before everybody else sees this financial game is done and run also.

Wed, 09/22/2010 - 20:15 | Link to Comment nmewn
nmewn's picture

Guido...of course, naturally.

Hey...dis is a nice place ya gots heeya...LOL.

Wed, 09/22/2010 - 20:47 | Link to Comment gwar5
gwar5's picture

Well, there it is. The USD is in the bread line. I thought Brazil didn't like us anymore. Must have been the $2 billion for offshore drilling that did it.

Sat, 09/25/2010 - 23:06 | Link to Comment CL1
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