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Desperately Seeking $11.2 Trillion In Collateral, Or How "Modern Money" Really Works

Tyler Durden's picture




 

Over a year ago, we first explained what one of the key terminal problems affecting the modern financial system is: namely the increasing scarcity and disappearance of money-good assets ("safe" or otherwise) which due to the way "modern" finance is structured, where a set universe of assets forms what is known as "high-quality collateral" backstopping trillions of rehypothecated shadow liabilities all of which have negligible margin requirements (and thus provide virtually unlimited leverage) until times turn rough and there is a scramble for collateral, has become perhaps the most critical, and missing, lynchpin of financial stability.

Not surprisingly, recent attempts to replenish assets (read collateral) backing shadow money, most recently via attempted Basel III regulations, failed miserably as it became clear it would be impossible to procure the just $1-$2.5 trillion in collateral needed according to regulatory requirements.

The reason why this is a big problem is that as the Matt Zames-headed Treasury Borrowing Advisory Committee (TBAC) showed today as part of the appendix to the quarterly refunding presentation, total demand for "High Qualty Collateral" (HQC) would and could be as high as $11.2 trillion under stressed market conditions.

In short, there is a unprecedented "quality" collateral shortage (for more on what the definition of quality is, read on).

And since the topic of HQC scarcity only emerges when market conditions are stressed, one can ignore the TBAC's baseline case of normal conditions, which see a topline of collateral requirements of "only" $5.7 trillion. Needless to say that if not even the Basel III required asset/collateral creation of $1-$2 trillion was a failure, even the base case requirement would never be satisfied.

The bigger picture however is one of an ever-growing asset-liability mismatch, as happened during the Lehman collapse. Since there is a total excess of shadow money and other liabilities already created that may need up to $11.2 trillion in collateral at any one moment for full book netting (which incidentally is based on SFAS-140 accounting rules which are self-contradicting), the only hope for the financial system is to chug along for the next decade without major risks and tremors, and slowly create the much needed high quality collateral.Or such is the hope.

Furthermore, since the private sector still appears to be in a state of shock from the Great Financial Crisis, collateral creation is all but halted. In the purely physical sense this is further aggravated by the lack of private sector CapEx investment, whereby corporations refuse to spend in order to procure hard assets, which may then be transformed into HQE via assorted lending pathways ending up on bank balance sheets indirectly, and then be further absorbed by the financial system providing even more quality collateral.

Intuitively this should make sense: while private sector companies can create unlimited balance sheet liabilities courtesy of the ZIRP-enforced scramble for yield, which means any and all debt can be issued without limits, it is the use of funds that is critical, and it is here that companies have been failing desperately because as also explained previously, instead of investing the newly created cash in CapEx and PP&E due to the Fed's disastrous policies, management teams use the company as a toll, with the cash promptly dividended out or used for buybacks and other short-term shareholder benefiting transactions, not growing corporate assets in any way, and certainly not creating any secured liabilities, only unsecured. Sadly the liabilities thus created are of such low quality that they can not result in HQC replacement, and instead are merely a levered equity extraction out of the private sector which implies an even greater explicit private sector risk without offsetting asset creation (the matching accounting entry is a reduction in shareholder equity which does nothing for system collateral).

As a result of this unwillingness or inability of the private sector to create quality collateral, which could then become someone else's quality asset and so on up the fractional reserve repo chain, it is all up to the Fed.

The TBAC acknowledges as much when it says that all QE is, is a "transformation of non-cash HQC to cash HQC." Stated otherwise, in addition to all its other practical QE roles, such as monetizing the US debt, and enforcing the wealth effect as Primary Dealers repo out QE reserves and use the barely haircut cash to purchase risk assets (instead of engaging in loan creation), what QE is also doing, via reserve transformation through the monetization of Treasury debt and MBS a topic we have also explained previously, is to inject into the financial system, billion after billion and trillion after trillion, the "safe assets" that banks will need to fall back on if and when the risk flaring episode comes, and there is a scramble for quality assets.

An immediate implication is that should the private sector continue to hold back on collateral creation via such "Old Normal" conduits that feed the shadow money system, such as securitizations and repo expansion, it will be up to the Fed to inject up to the $11 trillion in additional HQC before the financial system is proclaimed safe. This means QE will continue for a loooooooong time.

Another implication is that finally, after years of confusion, someone gets it. Gets what? This:

"Effective money = shadow money + M2"

This is precisely the point we have been making for the past three years in all those posts focusing on the relative moves in the US shadow banking system, i.e., shadow money, and which virtually none of the current monetarists (and by extension Keynesians) seem able to grasp since all textbooks on monetary theory appear to be from the 1980s when shadow liabilities, repo and custodian assets simply did not exist. They do now, and certainly did in 2008 when they reached a record of $21 trillion (give or take, depending on one's definition of shadow money), double what M2 was.

Of course, our definition is more granular and is simply the sum of all credit money liabilities held by the traditional banking system, to which we add the money held in the shadow banking system - money that is literally created in a limbo where "confidence" is really the only collateral, and is why the Fed is, more than anything, terrified about what the next market collapse will do to the shadow banking system which unlike 2008, will almost certainly experience a terminal run on the liabilities as there is no effective collateral!

What all of the above means, is that when considering quality collateral, one has to consider the amount of all liabilities in existence - both conventional and shadow! And it is this shadow delta of $15 trillion that is always ignored and/or forgotten by everyone except those who know quite well that any reminder of the massive delta can lead to an instant deep freeze of confidence in the system.

Because what it means is that as the Treasury's own advisor has said, there is a $11.2 trillion undercapitalization gap in the consolidated financial system, a gap which can only be filled by the Fed over a period of years.... an assumption which means that the market has to not only be priced to perfection for years, but that the Fed will not lose control over not only the US market but that the MIT-BIS diaspora will keep the entire G-7 capital markets in check for the duration of this experiment. Of course, it won't be the first time the Fed and the capital markets have made the fatal assumption that a handful of academics with zero real world experience can contain several hundred trillion in unforeseen consequences.

So just what does the TBAC define by "high quality collateral"? Hint: there is no mention of the word gold anywhere so don't go getting any ideas. Of course, for the Treasury and its advisors, even the mere concept that a barbarous relic may have more "quality" than paper-created "assets" is preposterous. We can only imagine the intellectual bloodbath that would result if any of them were ever exposed to the Exter pyramid...

Anyway: here are is how the "very serious people" in the establishment see "HQC"...

Cash

Money-like assets, with little credit, duration and liquidity risk.

Anything Bernanke says is a high quality asset (until it isn't of course):

 

This one is really funny: "an asset not expected to depreciate" - like housing:

 

Anything that has low haircuts... Just because banks look at where other banks mark them, and a result in 2007 give a 5% haircut on a BBB+ rated CDO tranche just before it blows up with zero recovery.

 

To summarize:

 

Now we get to the important part: what is the total demand for high quality collateral? Based on back of a napkin calculations, somewhere between $2.6 and $11.2 trillion!

 

Demand comes from regulatory requirements such as Basel III (since mothballed, as it became quite clear not even the $1.0 trillion in minimum collateral needed could not be sequestered).

 

Another demand driver: standardized clearing of derivatives which will require a far higher Initial Margin as well as, knock on wood, the end of collateral rehypothecation. Incidentally the latter is precisely why central clearing as designed will never fly, as rehypothecating what passes for safe assets now is the primary source of incremental collateral 'creation':

 

Another demand source: bilateral margin requirements for non-central clearing transactions. The reason why up to $4.1 trillion in additional collateral is needed here is precisely why gross is never net, until it is, and one the weakest link in the bilateral chain of counterparties breaks, forcing immediate gross netting without offsets. A fact so simple, that only the smartest people in the room always tend to forget it.

Finally, the most intangible demand source of all: economic uncertainty, and "flight to quality" - or in other words, the fudge factor for the unpredictable. The $1 trillion estimate provided here is very arbitrary, and the real number may be less, but likely will be orders of magnitude greater as the real life example of the Exter pyramid collapse takes place in shadow space:

 

That takes care of the demand. Now, the far more thorny question: supply. And here is where the Fed comes into play.

Because the safest of safe collaterals in a fractional reserve banking system, in which money creation always falls back to the monetary authority, we have sovereign collateral creation. Yet where would sovereigns be without QE. As the TBAC itself says, in bold, black letters, "QE is a transformation of non-cash HQC to cash HQC" - said otherwise, without the Fed, which is indirectly facilitating the ramping of risk assets as we explained to Steve Liesman before, the Primary Dealers would be unable to buy stocks without the repo transformation of reserves which results in Dealers ending up with risky stocks instead. This is the closest to an admission of the above we have ever seen.

 

What happens next is the magic of rehypothecation. As the TBAC says, once issued, this sovereign "collateral", aka debt, or assets for the buyer, "35% of this amount is reused 2.5 times." This means that depending on the terms of the rehypo agreement: the haircut, the reuse velocity and other metrics, this could be the sole source of collateral if needed, especially when one adds the Fed in the equation.

 

One key aspect of central clearing houses and bilateral margin requirements would mean the end of the kind of rehypothecation that send MF Global into a liquidity tailspin. This means that up to $7.6 trillion in supply would be removed. Alternatively, and this is perhaps that biggest punchline: rehypothecation, which is nothing but the paper shuffling of a security from point A to point B to point C and back to point A again, provides up to $7.6 trillion in Schrodinger collateral: or securities which are there but aren't, and certainly not there if and when everybody demands delivery at the same time!

Remember rehypothecation does not mean the collateral is there. It is merely representing a counterparty can have access to said collateral.... eventually... maybe... possibly... in an ideal world in which no other counterparty has claims to the same collateral.

 

Putting it all together, it means that should the system finally wise up and remove the black box gimmick of rehypothecation which is literally "accounting magic" (and also financial fraud), the Fed and its peer central banks would need to fill a hole as large as $10 trillion!

Still think QE is ending ever?

 

So now that we understand the fine nuances of the impending collateral scarcity? Well, from a policy standpoint it means that as long as asset prices are rising, there is no fear of a collateral crunch. It is, after all, "procyclical"

 

Ever heard of the trivial saying "money is whatever people agree it is" - well, that's great. But problems emerge when one assumes houses are money. As the chart below shows, households chose to hold less cash during the last bubble as the "moneyness of houses rose. Sure enough, "when the moneyness fell, cash holdings rose abruptly." Still confused why the Fed is desperate reflate the housing bubble at any cost? Simple: it is the only lever left for the Fed to force households to not only spend, but to ramp up on credit.

 

So while we are on the topic of money, and in order to tie it all together, let's close the loop and introduce the final variable - Shadow Money. In this context, the TBAC has their own definition of shadow money: the value of outstanding bonds*(1-average repo haircut). In other words, if the repo haircut is zero, the outstanding shadow money stock is effectively double what the Treasury has issued. Confused why bonds sometimes appear like Giffen goods? This is why.

 

A visual example based on the TBAC's definition: there is now some $30 trillion in total public and private shadow money! Still think M2 is the full story?

 

And finally, vindication: proof that all those other 'experts' on money creation really have absolutely zero understanding of what money creation truly is. Putting it all together: Effective money = shadow money + M2.  To wit:

 

The unprecedented amount of shadow money chasing "safe assets" explains one thing: why bond yields are where they are, and why the more bonds central banks issue, the lower yields will go. That is, of course, until the entire shadow world described above comes crashing down.

The one missing link in the above has been the absence of the private sector from collateral creation. The problem is that for the private sector to step up, confidence level has to be so high so as to no longer demand public sector QE-transformed collateral. But therein lies the rub: since the Fed's QE is pushing collateral into the market, not having it pulled, there is little demand for exogenous private sector collateral. And thus we have the close loop where more QE creates demand for more QE, even as the private sector is increasingly more closed out of the marketplace. Of course, for true capital formation, it is the private sector that would be responsible for all collateral. That however would imply risk of failure, and the elimination of a Risk Put, such as the global Bernanke Doctrine. In other words, welcome to the biggest Catch 22 possible (and conceived) in the centrally-planned universe the Fed has created for itself...

 

The next chart should be familiar to regular readers. It shows that when private sector collateral generation broke following the Lehman collapse, the Fed had to step in:

Yup: those who said Zero Hedge noted precisely this in "The Fed Has Another $3.9 Trillion In QE To Go (At Least)" back in September 2012, are absolutely correct.

 

And there you have it. All you have about money creation in textbooks, all fancy three letter theories that purport to explain the creation and reality of "Modern Money" are 100% wrong, because while they attempt to explain a theoretical world of money creation, what they all happen to forget and ignore is one simple thing: practical reality.

And practical reality is precisely what the TBAC had in mind when it wrote the above presentation of stark caution, because no matter what one says, there is a $11+ trillion collateral shortfall at any given second. A shortfall that can and will be triggered the second the central banks lose control of the financial system which every single day rests on a thread of stability.

Because the thought experiment we presented earlier can be extended one further: assume tomorrow the real black swan appears and all the liabilities: traditional and shadow, promptly demand collateral delivery. Well, the $11 trillion shortage would mean that risk values of, for example the S&P, would be haircut by a factor of, say, 75%. Or back to the proverbial 400 on the S&P500.

Still think owning real high quality collateral, not of the paper but of the hard asset variety such as gold, is a naive proposition, best reserved for fringe lunatic, tin foil hatters and gold bugs?

Go ahead then: sell yours.

 

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Wed, 05/01/2013 - 22:59 | 3521090 dr.charlemagne
dr.charlemagne's picture

I borrowed one tomato from a friend, but cleverly, i loaned it to 10 people at interest, now i can retire on the income.

Wed, 05/01/2013 - 22:02 | 3520871 CURWAR2012
CURWAR2012's picture

I am so fucking bullish now I have considered selling my children for SPY and iWM

Wed, 05/01/2013 - 22:10 | 3520911 CURWAR2012
CURWAR2012's picture

Don't ya know that MSNBC is buying kids

Thu, 05/02/2013 - 01:09 | 3520902 sitenine
sitenine's picture

What? Is the ECB not accepting soccer players anymore?

http://www.zerohedge.com/news/football-legend-cristiano-ronaldo-be-used-...

There's also this, "ECB says no collateral shortage in euro zone"

http://ca.sports.yahoo.com/news/ecb-says-no-collateral-shortage-13030414...

I hear unicorn farts are now considered collateral. Is this true?

If so, I see no collateral shortage what-so-ever for the foreseeable future.

Wed, 05/01/2013 - 22:12 | 3520908 SeeNoEvil
SeeNoEvil's picture

I liked it seems like ZH might be on to something . I was told today by my learned friends Gold is just a shinny metal with no real value just wish they had some Au as I would trade some Bernanke bucks for their unwanted worth less Au 

Thu, 05/02/2013 - 06:50 | 3521595 Urban Redneck
Urban Redneck's picture

To Ben- one gold coin is just a shiny piece of metal, but several million shiny gold coins (or even the illusion of such assets) is hardly a barbarous relic, since an ABS can be synthesized to reflect ownership of said barbarous relic and instantly transferred, collateralized, hypothecated, and rehypothecated through the FED's proprietary FEDLine tubes.

 

Wed, 05/01/2013 - 22:32 | 3520952 monad
monad's picture

I know this game. Even if they get their '"high quality collateral" they will just find a loophole to step on it thousands of times and put it up their noses, and then we're back where we started, only with a bunch more zeroes making Guido from the government even more highly motivated to stress test our kneecaps. Whoever came up with this must be deep in the throes of cocaine or methamphetamine psychosis, heavilly armed, with badges with black electric tape covering the number; I bet they have those everywhere. Its bullshit.
"We're sorry, we your elected representatives misspent all your hard earned money, and now you're gonna have to pay it back." - Bill Hicks, from beyond
Keep stacking.

Wed, 05/01/2013 - 22:27 | 3520967 RaceToTheBottom
RaceToTheBottom's picture

That was a really long and technical article to basically say that because we have removed the market driven pain of failure for banks, we need to instill some artificial reserve to mimic what the vaulted "free market" would have provided.

 

Maybe the solution is to remove all guarentees to banksters and provide them instead to depositors in the bankster institions?

Wed, 05/01/2013 - 22:47 | 3521034 Tyler Durden
Tyler Durden's picture

You realize of course that "deposits" are bank liabilities (which once upon a time even used to pay interest), so if you protect "depositors" you protect banks?

Wed, 05/01/2013 - 22:59 | 3521088 sitenine
sitenine's picture

And if you protect the banks, you protect the Govt. Thus, TBTF.

Wed, 05/01/2013 - 23:05 | 3521118 prains
prains's picture

and if you protect the banks you protect God

 

 

Gods work! Glitchez!

Thu, 05/02/2013 - 01:00 | 3521362 resurger
resurger's picture

and if you protect god... you

Thu, 05/02/2013 - 07:37 | 3521636 Pope Clement
Pope Clement's picture

For Squeeky

Il y avait un homme qui s'appelait Dimon

qui n'avait que peu de religion

Il a dit Quant a moi

je deteste tous les trois

Le pere le fils et le pigeon

Thu, 05/02/2013 - 03:17 | 3521472 JR
JR's picture

Maybe the solution is to remove all guarentees to banksters and provide them instead to depositors in the bankster institions?

I agree, RaceToTheBottom. Much confusion of thought is due to the word “deposit” which no longer means depositum but a debt. The confusion is used to intentionally defraud an unsuspecting public. The public thinks when they put a deposit in the bank, it is their money; that the bank is holding it for them. And the government has given the impression that when you put your money with a bank, it is still your money.

If the public understood what Tyler is saying, they wouldn’t use banks. And since Cyprus, bankers are trying to elaborate on this explanation that they are not responsible for bank failure; that the depositors are the risk takers.

In short, our present privately managed debt based monetary system is used by the bankers to their advantage so that ordinary people will surrender their property to the bankers on the basis that banking is no less the work of the law of nature and, in that man did not make the laws of economics, the banker, therefore, as a guardian of God’s money can do nothing else but recognize these bitter laws and confiscate the depositor’s money.

This is nothing less than a banker conspiracy designed by a few great financiers to perpetrate barefaced robbery. The Federal Reserve System is a monetary system that begets flagrant injustice and, therefore, needs to be abolished. It does not follow that what is good for the private owners of the Fed is best for the country. We were forewarned of this ongoing disaster by The Founders.

G.M. Coogan writing in Money Creators in 1937 offered suggestions on how to make national banks safer and to remedy the current oppression.

With regard to the lending of money by privately owned corporations, Coogan suggested that “existing banks should be divided into two separate institutions…

“The first…carrying deposits subject to withdrawal would require 100 percent reserve and no interest would be paid but depositors would pay a bookkeeping service fee.

Secondly, “there would be loan-banks for lending or investing.  These savings-banks would get the money to lend from their own money (capital), from the money received from customers (savings accounts), from the money repaid on maturing loans…”  The only limitation on banks loans would be that no money could be lent unless there was money to lend.

Wed, 05/01/2013 - 22:29 | 3520976 W T F II
W T F II's picture

The system as we now know it is going to undergo a radical re-calibration sooner than we can imagine. They are just about ready to go...A few moths at most, and...pssst, gold will have a partial reserve role....The 'new' system will have BRICS, Korea, etc. in a major shared leadership position as well. The European/U.S. dominance is over. The developed West has blown it and the 'others' are done with this current system.

A new 'special drawing rights' paradigm is at hand. But first, 'risk-off' in order to get everyone's attention and cleanse what should have been righfully eradicated in '08/'09...

Wed, 05/01/2013 - 23:08 | 3521127 Dewey Cheatum Howe
Dewey Cheatum Howe's picture

End of the year, early next year most likely, they need cover to blame it on something else. I suspect that something is going to be Obamacare which if we aren't already in a full blown recession where they can't hide the numbers anymore is going to push the country into a depression because of the onerous burdens on small business and large businesses not including the sticker shock on premium increases for those still working at that point.

Wed, 05/01/2013 - 22:46 | 3521030 Whiner
Whiner's picture

Guns of Navarone?

Wed, 05/01/2013 - 22:47 | 3521046 Bingfa
Bingfa's picture

Poll: 29% think armed rebellion might soon be necessary....

http://tpmdc.talkingpointsmemo.com/2013/05/armed-rebellion-poll.php

"The survey, aimed at measuring public attitudes toward gun issues, found that 29 percent of Americans agree with the statement, “In the next few years, an armed revolution might be necessary in order to protect our liberties.” An additional five percent were unsure."

So it's probably twice that....

Wed, 05/01/2013 - 22:47 | 3521051 electricgorilla
electricgorilla's picture

Excellent article! This is why I continue to read Zerohedge. The in depth analysis of financial markets. So what I take from this is; as long as asset prices are rising there will hopefully be no fear of a collateral crunch. It is of the upmost importance that a collateral crunch does not happen because the 'system' is looking at a 10 trillion + shortfall due to rehypothecation. The FED must keep asset prices (i.e S&P 500) rising at all costs or deal with a collateral crunch of epic proportions. Also, shadow money+M2=effective money. Great concept of the 21 century idea of money. Great read

Wed, 05/01/2013 - 22:53 | 3521058 Rathmullan
Rathmullan's picture

But by God we'll let those near bankrupt banks pay common stock dividends out of the cash flow that current and future taxpayers have gifted to them.

Wed, 05/01/2013 - 22:55 | 3521067 Theos
Theos's picture

Despite all your analysis, plenty of people with lots of money have no idea what you're talking about, or have any idea that you even exist. They're going to buy buy buy cause some douche talked about his NFLX holding over the past few months over steak tartare.

 

If only i'd bought the spy when i started reading the hedge.

Wed, 05/01/2013 - 22:59 | 3521093 Yes_Questions
Yes_Questions's picture

 

 

I've got a trusty 1998 F150 w/~160k miles on her.

Trade you a $trill for the title.

 

Then again, nevermind, electromoney can't go through 2 ft of winter snow and I can't snort that much off the ass of a hooker anyway.

 

lobster claws.

Wed, 05/01/2013 - 23:05 | 3521116 Dewey Cheatum Howe
Dewey Cheatum Howe's picture

Great article all politics and ideology aside this is the sort of eye opening enlightening information that really makes this place shine.

Wed, 05/01/2013 - 23:09 | 3521131 Rathmullan
Rathmullan's picture

So it really is about the fed saving the banks. Except that the banks don't even want to save the banks because its back to normal and normal is skimming big bonuses (hqc) out of bogus and temporary profits and paying dividends (also hqc) out of bogus and temporary earnings to keep the shareholders happy so they can invest the cash in falling knife apple stock.

Wed, 05/01/2013 - 23:19 | 3521153 ak_khanna
ak_khanna's picture

There has been no economic recovery after the 2008 crises. Central Bankers and the Government­s around the world just threw good money after bad without doing anything to solve the real reasons of the crises (excessive debt, speculatio­n and out of control derivative­s). Their only goal was to push the can down the road which would be dealt by their successive leaders even though the problems in the future would be multifold.

http://www.marketoracle.co.uk/Article40231.html

Wed, 05/01/2013 - 23:29 | 3521168 andrewp111
andrewp111's picture

When the Fed does QE, they inject new reserves as high quality collateral, but they also remove an equivalent $ value of Treasuries from the private sector, reducing HQC by the same amount. The net effect on HQC in the private sector is zero.  It is actually worse than that, because QE removes interest bearing assets from the private sector in exchange for immediate profits. Essentially, they are pulling all future interest income from those Treasuries backward in time to the present. This makes banksters happy today, at the expense of a mega deflation at a later date.

The QE engineered shortage of income producing assets makes stocks go up - for now. But moar and moar QE is required to get the same effect on stock prices. Diminishing returns in action, right before our eyes. Eventually, it stops working altogether.

Thu, 05/02/2013 - 03:07 | 3521466 USGrant
USGrant's picture

Those treasuries don't come from the private sector as the 45 billion a month in new money printing is the appoximate US deficit covered by new Treasury issuance. The 40 billion/month to buy the dodgy MBS does remove debt from the "private" sector but those securies which harvest the mortgage payments from empty, forclosed homes or non paying forclosures in the que didn't yield anything anyway so there may be the substitution of "HQC" for low quality collateral.

But from an Austrian Economics perspective the entire article doesn't make a lot of sense to me. Money is only that which can immediately extinquish a debt. Currently the FED issued money by whatever measure one chooses M2 or TMS2, etc. is the gate through which counting must occur. Looking into the pen and counting things that haven't made it through the gate is double counting.

Debt itself functions like a captial good. A machine, a capital good, that produces widgets that returns 5% to the owner is approximated by a bond that returns 5%. But the bond would be termed a parasitic capital good since its return can only come from profits that actually accue in the private sector. At the boundary where there are no real capital goods that produce real income but only bonds or debt, return on debt must be reach zero and everyone starves much like the situation when the parasite overwhelms the host. If the percieved value of the FED issued money remains constant along such a curve the yield of the debt instrument gradually declines to that boundary condition. I don't think any other explaination is necessary for the observed decline in debt yield.

Wed, 05/01/2013 - 23:44 | 3521230 jomama
jomama's picture

tremendous work, thank you TD(s).

Thu, 05/02/2013 - 00:05 | 3521270 Misean
Misean's picture

Of course, the printing of HQC only cheapens the value of the other paper HQC....sooooo....the more they print the more they need to print. And the rate at which they print it as well. Which further dampens private sector activity as the ability to calculate is further damaged.

This ain't gonna be fun to watch when the paper tsunami hits. I'd be careful gathering the seemingly helpless fish flopping on the newly expanded coast line at the moment.

Thu, 05/02/2013 - 00:05 | 3521271 semperfi
semperfi's picture

they know where to get (steal) about $15 Trillion right now - 401k's  and  IRAs - Corzined overnight - maybe you wake up tomorrow and your IRA is $0

Thu, 05/02/2013 - 01:31 | 3521383 22winmag
22winmag's picture

Listen to the way this dude says "They're printing more money lacking any collateral at all."

 

http://www.youtube.com/watch?feature=player_detailpage&v=4Z9WVZddH9w#t=8...

 

... and just understand this is the no-win position the NWO-Bankster-Traitors are in:

 

http://www.youtube.com/watch?feature=player_detailpage&v=4Z9WVZddH9w#t=9...

Thu, 05/02/2013 - 02:07 | 3521426 Sandgroper
Sandgroper's picture

Australian Banks enter new bubble zone - Australian Financial Review 2 May 2013

http://www.afr.com/p/business/companies/banks_enter_bubble_zone_analysts...

Thu, 05/02/2013 - 02:15 | 3521435 q99x2
q99x2's picture

Great ZH article. I'm writing a book. So uh how long do I have?

Thu, 05/02/2013 - 02:59 | 3521462 Youri Carma
Youri Carma's picture

The global credit crunch has cost governments more than $10 trillion, the International Monetary Fund (IMF) says http://news.bbc.co.uk/2/hi/business/8177814.stm

Governments are likely to recover most of these sums when the world economy recovers (YEah ahahaah) , but big deficits will stay.

Thu, 05/02/2013 - 03:46 | 3521492 Floodmaster
Floodmaster's picture

fringe lunatic, tin foil hatters and gold bugs are wrong since 2011, gold was a good investment in the Greenspan days. Velocity ? deleveraging ??demographics ??? Technology???? ... Stop reading Milton Friedman, most reaganomics supporters are science-denying Idiots.

Thu, 05/02/2013 - 04:06 | 3521508 Sanksion
Sanksion's picture

Great article, thanks.

Thu, 05/02/2013 - 04:54 | 3521530 Colonial Intent
Colonial Intent's picture

"And with the bowels of the last priest,
Let us throttle the last king"

Thu, 05/02/2013 - 05:15 | 3521540 Dr. Sandi
Dr. Sandi's picture

...said the next provisional governor.

Thu, 05/02/2013 - 05:36 | 3521550 Shevva
Shevva's picture

What's that sound I hear. might be the sound of large defaults. Reggie it's started.

http://www.dailymail.co.uk/news/article-2317872/Bank-Ireland-doubles-tra...

Thu, 05/02/2013 - 06:25 | 3521579 InvestmentMind
InvestmentMind's picture

I've been saying for years that the worse thing Obama did to the economy, and its potential recovery, is run over the GM bondholders.

How can HQC be generated when no one knows how the claim will be determined in a bankruptcy proceeding?

So what do you get?  You get A credits borrowing huge sums of money at near zero rates that will never be employed into productive capital and no lending to B or C credits at any price (PIIGS being the exception).

If you're a lender you have to price default and recovery risk into your cost.  If you have no idea what recovery is, then you can't take any default risk.

The economy was destroyed in 2009 by the idiot-in-charge.  The Fed is just trying to paper over the problem.

 

Thu, 05/02/2013 - 07:58 | 3521667 Dan Duncan
Dan Duncan's picture

When trying to explain QE, it's probably best to simply refer to money laudering. From Wikipedia which quotes "Chasing Dirty Money":

Money laundering often occurs in three steps: first, cash is introduced into the financial system by some means ("placement"); the second involves carrying out complex financial transactions in order to camouflage the illegal source ("layering"); and, the final step entails acquiring wealth generated from the transactions of the illicit funds ("integration"). Some of these steps may be omitted, depending on the circumstances; for example, non-cash proceeds that are already in the financial system would have no need for placement.

If one were to write a book about QE it would be called "Chasing Digital Money"


Thu, 05/02/2013 - 08:13 | 3521715 sudzee
sudzee's picture

Demand "cash" from you employer, not an electronic entry at a bank.

Sun, 05/05/2013 - 17:40 | 3532763 bill40
bill40's picture

Fuck this, everytime I think I'm starting to understand money an article like this comes along.

Junk everything you thought you knew bitchez

Sun, 06/23/2013 - 09:00 | 3683484 WhiteNight123129
WhiteNight123129's picture

it is confusing because the author confuses money and currency. m2 is mostly currency and left side of commercial banks while m0 is money and is right side. currency deposits can be created against money if you deposit a benjamin a the bank or against circulation related credit (good bills) or against lond duration not self liquidating debt (the usual problem). in the old days gold is money the form of payment not failing . Today it is central bank notes in yourpocket. currency deposits at the bank are not money because theh can fail (Cyprus). All the thing created against collateral is currency by regular banks, the only bank whjch creates money is the central bank they others create currency only.

Mon, 05/06/2013 - 07:32 | 3533678 dragoneyes74
dragoneyes74's picture

This 11 Trillion collateral article is amazing.  Very thorough.  You should make a chart that combines this projection in the Fed's balance sheet with the article about when the Fed starts losing money every month with several lines that show how much they would be losing along the way at a few different interest rates.  

Fri, 05/10/2013 - 21:53 | 3550463 nofluer
nofluer's picture

"...it is the use of funds that is critical."

"It's not about jobs, It's Not About spending"

michaelepicray.com/2012/08/15/its-not-about-jobs-its-not-about-spending/

Sun, 06/23/2013 - 08:34 | 3683441 WhiteNight123129
WhiteNight123129's picture

stop confusing money and currency please. currency is created against money (excess reserves or your benjamins you deposit at fed or credit. And then there is the circulation related credit (good bills) which is not a problem vis a vis creating currency gainst it and then we have long dated long duration credit against which currency is creating. What you are saying is that we still have too much of those backing currency (not money please)

 

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