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The Ultimate Insiders' Take on QE2 and Basel 3--Treasury Encouraged to Issue Debt to Match Fed Purchases
This morning, Treasury released the minutes of the Treasury Borrowing Advisory Committee (TBAC). Why these are important, I've written previously:
Each quarter, representatives from the banking elite primary dealers meet with top Treasury officials to advise an optimal debt issuance strategy. The Minutes of these Treasury Borrowing Advisory Committee meetings and formal Report to the Treasury are a window into their perceptions and insider knowledge, yet they seldom receive notice--even outside the mainstream financial news outlets.
The most recent minutes do not disappoint and are filled with insight on what we can expect from QE2 and the new Basel 3 bank regulations. The highlights:
- QE2 is expected to be $130 billion per month, or $1,560 over the next year
- QE2 will last at least six months and up to two years
- The total amount of QE2 will be data dependent
- Treasury is encouraged to increase coupon issuance (especially in the 30 year maturity) to address "liquidity" shortfalls as a result of Fed purchases
- The Treasury yield curve is expected to flatten in the 5-10 year sector, with the yield on the 30 increasing with inflation concerns and US Dollar debasement
- Implications for the mortage market are that mortgage spreads relative to Treasurys may initially widen, but will ultimately narrow. However, as the 30 year yield is expected to climb, so should mortgage rates (as if the housing market needed another blow)
- A comparison of the scope of QE2 to "the entire combined expected net issuance of Treasuries, Agencies, Agency MBS and Investment Grade Corporates" leads us to speculate the Fed may end up purchasing these very instruments
- The Fed's QE2 "exit strategy" may involve simply selling its holdings in small, predictable increments (no mention of term deposits, IOER or other Fed tools)
- As a result of QE2, investors will be edged out of the 2-10 year range and into very short term (T-Bills) and long term (T-Bonds), and into riskier assets in general
- Basel 3 is being implemented at a record pace (beware of unintended consequences)
- Basel 3 will lead to increased lending costs, causing lending to move outside of the regulated banking system into the non-bank financial system
- Basel 3 will force banks to buy sovereigns ($400 in US Treasurys alone by 2015)
- The Fed is the 800 lb gorilla in the room, and all the other central banks are scrambling to adjust
My full blow by blow may be found here.
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that's right, QE is a trap door and lemmings are falling for it. Look at you, the FED will by all the debt. Wait, wait.. they'll buy MORE debt than exists. Quickly, Treasury print more, doesn't matter how, we don't have enough.
I suspect, the latest QE is a desparate attempt to stay off run on the dollar, or worse, a cynical move to counter party large 'prefered' holder before the whole thing falls apart
I've got pension funds in my office looking to move down the stack. They want HY and some are going to punt on equities just for the hell of it. They only know they can't buy UST and make their bogey. This will end in tears. Pensions will take a hit on the capital side since they suck at managing risk as well as the obligation side, because they suck at measuring their obligations.
It seems as though the biggest beneficiary of public pensions has been the management-fee-charging, securities-underwriting, transaction-generating Wall Street Industrial Complex.
Whose idea was it to have large public pensions funds anyway?
"If a quadrillion trees fall in the forest to print fiat currency and nobody sees, does Ben B have to make a sound?"
Nope. only sound is the printing presses themselves. I hope to hell they are solar powered printing presses, b/c we want to be "green" while we're printing the"green".
Yaz, Yaz, without the Banking Queen as chair of the finance committee, how will they hide all of this?
If a quadrillion trees fall in the forest to print fiat currency and nobody sees, does Ben B have to make a sound?
Here's where Tyler's assertion that we will need to increase Government spending programs in order to create enough supply for the Fed to monetize goes wrong:
We will have gridlock over the next two years, so forget additional Government spending programs. The only supply I see on the horizon is going to come from foreign Central Banks who will exchange their US Treasury bonds for hard assets.
I wouldn't count on gridlock and a freeze on new spending when the lumpenprole take to the streets. However, I do believe we'll see some really large (CB) marginal sellers seize upon this opportunity to lighten up their T load. That's why the 10 yr yield might not go as low as many think. I'd look for an overshoot of the Dec 08 low, then start thinking about shorting the futures.
We can all just imagine whats coming.
Yes, mother nature will take over and wipe out 20% of the world population in the blink of an eye with plagues, famine, tsunamis, earthquakes and volcanic eruptions and confirm a 2012 global economic reset for all its inhabitants. She will do her work even if war gets there first - the two don't coordinate thier actions.
Why?
Because in all their "humanitarian" efforts to level the playing field for mankind and debase the fiat currency the FREAKS ("Fed Reserve, Et Al Kriminal Slavemakers) were wrong in their pontificated good intentions to "share/spread the wealth" because underlying their lie is the biggest unintended consequence to keynesian economics:
The encouragement and support to procreate wildly, beyond the planet's resources to offer balance for all life.
If the FED is no match for the free market's ability to adjust itself in silent protest (default, gaming the system) and eventually, through time, force a truthful free-market price discovery, what makes you think all of humanity could be any match for Mother Nature in her quest and delicate need to balance life and ensure its existence?
That is stupid.
A ponzi scheme is not meant to spread wealth. It is meant to concentrate wealth.
The big issue, the more and more pressing issue today is that the periphery is growing poorer and poorer, rendering the concentration of wealth towards the center less efficient.
As to growing number of population, well, you should brush up your walrasian economics to understand you definitively dont need an increase in population to face an overconsumption issue.
Well, clearly YOUR imagination is quite...vivid.
And I imagine that your pipe was quite full of "Mother Nature" this morning.
I think you contradict yourself a little with supporting free markets and also not wishing for massive growth. Free markets (ie globalism) is a push for endless growth on past wealth..
do the evils of tariffs really outweigh their good?
BTW Ireland will have it's own facebook Dec 7th withdraw money from the banks page as well as a dedicated website possibly this evening.
Not to forget the 'collateal costs':Winning the
war in Afghanistan at 50 millions $ a kill:
http://www.counterpunch.com/arguimbau10282010.html
Short term the dollar will be obliterated,followed by another short term bounce, then, well then its OVER AND OUT! It seems our fellow citizens cannot understand the difference between the banking system and the economic system, the money will stop at the bank, won't be passed on to the consumer, there won't be any lending, whatsoever! We can all just imagine whats coming.
OMFG! If this is correct get yer gold and silver now.
As we said over a month ago, and more explicitly a week earlier: "incidentally, since the "independent" Treasury will be forced to issue more debt to fill all the demand for $2 trillion over the next 12 months, as there is not enough debt in the pipeline
to fill $2TN worth of demand and prevent the entire curve pancaking at
zero (i.e., the 30 year yielding precisely 0.001%) it also means that
the government will be forced to come up with more deficit programs, which also means that primary dealers will now also determine US fiscal policy." Link
And why would we want to keep the curve from pancaking to zero?
To hell with the curve.
So, are you willing to lend me money for 30 yrs. at 0%? No? Well then, that leaves just one "person" that will, Uncle Scam.
The yield curve is a naturally occurring effect based upon the time preferences of individuals within a society. To destroy it, is to destroy society's ability to forecast and plan for the future.
If you want to learn more though, look for the writings of Antal Fekete, who has not only predicted a flattening curve, but has spent years studying it as a tool of wealth transfer. In summary, Fekete lays the scenario out as a method of capital consumption, due a falling rate structure increasing the liquidation value of debt.
Am I willing to lend at 0% probability of default (mind you, I said "default" not inflation)?
Yes, duh, I am. In fact, the entire world's financial models assume in a zero-default rate.
Austrians seem not to understand that it is perfectly logical and reasonable that a "risk-free rate" or, more properly a "zero-default rate" is, in fact, nothing more or less than a "sovereign inflation-risk rate" and always has been and always will be.
The "time preference" theory of return is an absurdity as it is based on an assumption of ideal notion of zero default risk and zero inflation/deflation risk, which NEVER happens. All money always has inflation/deflation risk - always has, always will.
This is why the Fiat Money/Credit Money thesis is far superior. Its underlying assumption is always includes sovereign inflation risk.
Sigh.
^First paragraph of a chapter entitled Time Preference as an Essential Requisite of Action, from Human Action (http://mises.org/humanaction/chap18sec2.asp). Once again you have failed to demonstrate that you have actually read Mises, though it appears that you frequently cherrypick oft-quoted passages from the internet.
Time preference assumes nothing as you have stated. They are, however, factors that will influence an individual's relative valuations between holding cash, gold, bonds etc. with respect to the individual's own personal time preference. Do you prefer to spend your money now, or park it in bonds returning 0% for a few weeks/months/years? Or, is a 0% rate of return enough to induce you to put off satisfying another, more immediate, desire until later and park your wealth in bonds? Your time preference determines how you answer this question, that's it.
Absolutely. I linked to your work after the jump in the relevant section. Here it is:
The member noted that the U.S. Treasury and Federal Reserve are two independent [:)], separate institutions with different mandates. As a result, it was noted that Treasury should not alter its issuance strategy [get ready for a complete 180, no sooner than the following sentence]. However, the presenting member suggested that Treasury could address potential illiquidity issues through additional issuance in sectors impacted by QE [as predicted, though there's still the issue of the pesky debt ceiling].
EB, in the TD piece you linked to, did you once again fail to read this:
On what is this assumption based?
Thank you both for the superb summary.
We will test to see how accurate these guesses are at 2:15 PM EDT today.