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Monetary Policy And Impact On Assets

Tyler Durden's picture




 

Submitted by Matthew Corso

Monetary Policy and Impact on Assets

The last note briefly addressed the benefits associated with the reverse repurchase facility (RRF). Indeed liabilities have increasingly moved from bank balance sheets to the Fed, freeing lending capacity. One must recall reserves are not fungible outside of the banking system (but can act as collateral for margin). With flow decreasing, the opportunity for small relative volume bids spread over a large quantity of transactions (most instances per unit time) decreased with market prices in many asset markets. Is more downside coming?
 
A cost of QE is high quality debt remains siloed. As previously described, the RRF allows for assets previously purchased by the Fed to serve the market only in a limited capacity. While they are not able to the reused as collateral, they do replace a portion of the demand for high quality assets in the market, leaving relatively more available for reuse. At present, the 5bps paid by the Fed essentially attempts to put a floor under the short-term price for money. The Fed established an overall cap in September, supposedly because MMFs would view the Fed as a more secure counterparty than banks. I take a different view: They Fed is balancing net income from securities lent with the monetary policy goal of keeping rates up. As Stone & McCarthy recently pointed out, demand exceeded the $300 billion cap, limiting the amount paid-out by the Fed at the 5bps rate, with excess bid via Dutch auction. In the recent auction coinciding with quarter-end the low bid hit a price of –20bps (the counterparty receives less than deposited in order to rent the high quality assets from the Fed). While one may count the result as a limited success in controlling the lower bound of short-term interest rates, the Fed controls the cap for the 5bps rate. Interest on reserves (IOR), at 25bps, holds the entire system afloat, where otherwise extreme supply (especially relative to demand) would dictate a lower price; In economic depression even more so. To improve the optics of control, causality is reversed when speaking of the price of money. The interbank interest rate for reserves is set by market forces, and daily, the central bank adjusts reserves to match. Mechanically the Fed’s “target” is just that, and nothing more. Alternatively, with IOR and the RRF, the prices at the each extremis of the corridor are fiat, and impact the Fed balance sheet.
 
Quantity theory posits price inflation follows from base money creation, meanwhile in developed markets we see the opposite. Investment managers and students of economics need to recognize the quantity theory of money passed away gradually as the link to precious metals was severed. A new paradigm began to unfold with the economic performance leading up to 1968. The market demanded portion of base money, coinage and bank notes, follow from price inflation. Causality between increases in base money and rising prices must does not result from the reserve creation. As Peter Stella pointed out recently:

"The extremely inconvenient fact for the QTM regarding the causal power of the bank reserves component of the monetary base is that—to take the US example—the nominal value of bank reserves held at Federal Reserve Banks between end-1958 and end-2007 fell by 19 percent while the Consumer Price Index rose by 612.5 percent. Therefore, the long-run relationship between US bank reserves and US inflation is actually negative."

What then accounts for the loss in purchasing power outside of the core price inflation metric? From Peter Stella's Exit Path Implications for Collateral Chains:

"In 1951, total commercial bank deposits at the Fed were $20 billion larger than they were at the end of 2006.

 

Over the same period, total US credit-market assets rose by over 10,000%"

The result is a consolidated approach must be used to ascertain the quantity of effective money. Austrian true money supply (TMS) best captures one part, and as recently explained by none other than the Treasury Borrowing Advisory Committee, the other part is high quality collateral lent in which further credit is extended against in private institutional markets (including reuse).
 
By using a consolidated view of money the crisis of 2008-2009 can be visualized, where TMS alone is insufficient.
 
Looking forward, the Fed will cease the flow of reserves, and has the capacity for a “ceremonial rate-rise”. A brief overview of the impact on assets follows. With the mechanics now explained, one can see why the end of previous rounds of QE saw long Treasuries and short equity outperform. As previously forecast, we will see this pattern repeat as yield seeking combined with capital preservation desires finds US sovereign debt heads and shoulders above low effective yields in EU or Japanese sovereign debt. Furthermore, the US Treasury is to cut bill issuance trimming ~$60 billion overfunding through end-2015. Less supply, more demand: higher price (and a lower effective yield). The US dollar outperformed as predicted, and the yen may be next on increasing liquidity and capital preservation concerns. Electrical consumption, rail and airline data from China continue to surprise to the downside. Their bubble dwarfs the US housing crisis, and may prove both an even worse misallocation and the catalyst. There will be a rotation as corporate bond excesses unwind along with many REITs and MLPs. Securities representing companies catering to a tapped out consumer, and capital structure safety will prove prudent over longer terms. Generally speaking, US banking system survives a conflagration (due to recapitalization), while some banks in Europe and Canada may not be as prepared. Commodities will bifurcate over time as drought, industrial collapse and war overpower their common dollar denomination. Short the Australian dollar against the US dollar from 1.05 performed well (now .86) and iron ore was previously cited as vulnerable (mid-2013), they remain so. Oil in mid-2014 priced in demand not considerate of recession alongside the return of intermittent supply. Near $110 I recall saying it “can fall anytime now”. Near $85 a barrel now, $75 is likely and results similar to the last crisis are possible. Escalation in war would maintain, or see a return to a more modern price; therefore if drawdown is tolerable over a medium term, oil can be viewed as insurance. In that vein, the precious metals continue to change hands, facilitated as they are apparently viewed only as a Giffen good by western ideology. Lastly, with palladium and platinum demand being mostly absorbed through economic activity, the former is most overpriced of the two.

 

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Sat, 10/11/2014 - 12:08 | 5318248 Bell's 2 hearted
Bell's 2 hearted's picture

ZIRP/QE ... Disinflationary

 

Deflationary when asset bubbles burst (we're at onset)

 

End of Story

Sat, 10/11/2014 - 12:13 | 5318259 CHX
CHX's picture

The question is, what are the CBs monetary policy reactions to a deflationary event ? I think we know that answer. 

Sat, 10/11/2014 - 12:20 | 5318276 Bell's 2 hearted
Bell's 2 hearted's picture

they tried .. they failed

 

They should have taken Door #2 back in 2008/2009

 

Written down debt (ie: taken down a few TBTFs) and have honest price discovery.

 

Would have made THEN much worse.  But we would have survived ... and be much better off today.

Sat, 10/11/2014 - 12:34 | 5318300 khakuda
khakuda's picture

Many here agree with this. Sadly though the powers that be do not at all. They still think that they are right and that they have taken the best course amongst all the bad choices. That is why they won't allow a market clearing event, even now.

There are no good "solutions "once you have the cancer of too much debt and asset/price inflation through excess credit. I would've taken door number two as well. Door number two actually works, it's just not politically popular.

Sat, 10/11/2014 - 12:59 | 5318331 JR
JR's picture

Casey Research writes (Oct 11, 2014):

“The United States of America is not what it used to be. Unsustainable mountains of debt, continuous meddling by the government and Fed to ‘stimulate the economy,’ and the US dollar’s dwindling status as the world’s reserve currency are very real threats to Americans’ standard of living. Here are some opinions from the recently concluded Casey Research Fall Summit on the state of the state and how to fix it.”

Excerpt:

Doug Casey, chairman of Casey Research, legendary speculator, and best-selling financial author, isn’t so optimistic. First of all, he says, we’re in the Greater Depression right now, which began in 2008. He fears it’s too late to repair America, but says if anyone would attempt to do so, the following seven-step program would help:

  • Allow the collapse of “zombie companies” (companies that are only being held up by government handouts and other cash infusions).
  • Abolish all regulatory agencies.
  • Abolish the Federal Reserve.
  • Cut the size of the military by at least 90%.
  • Sell all US government assets.
  • Eliminate the income tax.
  • Default on the national debt.

Of course, says Casey, that’s not going to happen, so individual investors shouldn’t hope for a political solution or waste their time and money trying to stop the inevitable collapse of the US economy. The only way to save yourself and your assets is to internationalize.

http://www.marketoracle.co.uk/Article47700.html

Sat, 10/11/2014 - 13:15 | 5318354 Escrava Isaura
Escrava Isaura's picture

JR,

Were you in DC last night?

Huge IMF event. Bankers from all over the world. City was packed.

 

Heard these Brazilians (12) bankers having diner at Cafe Milano, in Georgetown. Came to their table and asking them: "Why did all come to a broken nation (US), for money?

 

One of them: "Broken? Come to Brazil and you'll see what broken really means."

 

Sat, 10/11/2014 - 13:32 | 5318395 JR
JR's picture

Don’t I wish, Escrava. You make a good roving reporter. Actually, I was taking in Frank Shostak’s comments on how artificially boosted demand destroys wealth. Maybe these guys would have benefited, but then they were out dining on their artificial wealth.

Says Frank, “the artificial boosting of the demand by means of monetary pumping leads to the depletion of the pool of real wealth. It amounts to adding more individuals that take from the pool of real wealth without adding anything in return — an economic impoverishment.

“The longer the reckless loose policy of the Fed stays in force the harder it gets for wealth generators to generate real wealth and prevent the pool of real wealth from shrinking.

“Finally, the fact that the yearly rate of growth of the CPI is declining doesn’t mean that the Fed’s monetary pumping is going to be harmless. Regardless of price inflation monetary pumping results in an exchange of nothing for something and thus, impoverishment.”

Odd, Escrava, you and I seem to be getting nothing for something and the bankers are getting something, i.e., dinner at Cafe Milano, in exchange for nothing.

Time for revolt?

Sat, 10/11/2014 - 14:14 | 5318486 Escrava Isaura
Escrava Isaura's picture

JR,

I hear you! There’s a huge disconnect for what we talk here, at Zero Hedge, and my reality, in DC.

 

Anyway, check Hedges’ excerpts below. The 5th, 6th , and 7th paragraph, I believe, are good summarizations of Washington, DC. Hope you, and Hedgers, will enjoy it.

 

Chris Hedges:

“If I had been downright honest with myself,”…..

Our financial system—like our participatory democracy—is a mirage. The Federal Reserve purchases $85 billion in U.S. Treasury bonds—much of it worthless subprime mortgages

… our corporate oligarchs hoard the money or gamble with it in an overinflated stock market. Estimates put the looting by banks and investment firms of the U.S. Treasury at between $15 trillion and $20 trillion. But none of us know.

The corporate assault on culture, journalism, education, the arts and critical thinking has left those who speak this truth marginalized and ignored

Friedrich Nietzsche in “Beyond Good and Evil” holds that only a few people have the fortitude to look in times of distress into what he calls the molten pit of human reality. Most studiously ignore the pit. Artists and philosophers, for Nietzsche, are consumed, however, by an insatiable curiosity, a quest for truth and desire for meaning. They venture down into the bowels of the molten pit. They get as close as they can before the flames and heat drive them back. This intellectual and moral honesty, Nietzsche wrote, comes with a cost. Those singed by the fire of reality become “burnt children,” he wrote, eternal orphans in empires of illusion.

Decayed civilizations always make war on independent intellectual inquiry, art and culture for this reason. They do not want the masses to look into the pit.

This obliteration of “false hopes,” requires an intellectual knowledge and an emotional knowledge. The first is attainable. The second, because it means that those we love, including our children, are almost certainly doomed to insecurity, misery and suffering within a few decades, if not a few years, is much harder to acquire.

The human species, led by white Europeans and Euro-Americans, has been on a 500-year-long planetwide rampage of conquering, plundering, looting, exploiting and polluting the earth—as well as killing the indigenous communities that stood in the way. But the game is up. The technical and scientific forces that created a life of unparalleled luxury—as well as unrivaled military and economic power for a small, global elite—are the forces that now doom us.

 

http://www.truthdig.com/report/item/chris_hedges_jan_27_column_transcript_collapse_of_complex_societies_2014012

 

https://www.youtube.com/watch?v=uAo7ky1kq-Q“#t=1m50s

 

Sat, 10/11/2014 - 15:22 | 5318608 JR
JR's picture

Good stuff, Escrava, with one exception...

It’s Bolsheviks, Escavara. Are Bolsheviks white? No they are Jews. Revolutionary Jews.

The formation of America was a miracle of freedom. And those miracle workers were white Europeans, Christians seeking freedom for themselves and all mankind.

As the great Rose Wilder Lane explains, until individual liberty was established as the cornerstone of a nation’s government, man’s progress for the more than 60 known centuries had still brought him only to wagon wheels and open fire cooking.  That new nation, the “City on the Hill,” was America.  Here, the rights of man--individual freedom and the opportunity to own property and develop the means of production--exploded into the most successful society the world had ever seen.

But then, in 1913, the Bolsheviks came to America…and that freedom-light that touched the whole world has grown dim to the point of extinction, where in America today “the issue and destruction of money  by the money-lender is not a service, but a weapon which can be and has been used to perpetuate poverty amidst abundance, which renders individuals and nations powerless to protect themselves, and which may even be perverted to serve vast designs for the complete subjugation of the human race to tyranny, exploitation and powers of darkness and evil.”

 And, so, is the world ready to pick up and relight America’s fallen torch of freedom? Are these new financial power centers of the world--Beijing, Tokyo, Dubai, Hong Kong, Moscow-- to be the new Americas, the new centers of freedom to replace the old?  No. If America’s light is finally extinguished, the world will have to take its chances with a billion rooms of darkness.

Rose Wilder Lane’s final point:  Only the few would believe the world…under the criminal greed of dictators…could not return to a world of wagon wheels and open fire cooking for the bulk of mankind, from a world of railroads and motors and airplanes and rocket ships to a world where for six thousand years man walked and carried goods and other men on his back.

Sat, 10/11/2014 - 18:54 | 5319071 SAT 800
SAT 800's picture

I love the way this guy thinks. His solutions are perfect; unfortunately they're politically impossible.

Sat, 10/11/2014 - 13:10 | 5318349 JimS
JimS's picture

They don't think they're right, and they know that what they are doing is wrong. They are making too much money doing what they are doing, and there are no consequences for the actions that they are taking. You are presuming that TPTB are "good" at heart. Dude: you are wrong in that assumption. (but I will give you an up arrow)

Sat, 10/11/2014 - 15:54 | 5318676 RichardParker
RichardParker's picture

"They still think that they are right and that they have taken the best course amongst all the bad choices."

The best course for whom?

 

Sat, 10/11/2014 - 13:05 | 5318326 Escrava Isaura
Escrava Isaura's picture

 

I think this Matthew Corso’s article just showed us how the US financial system has the world, and its commodities, by the balls.

 

Interesting article!

 

Can't wait to read the comments.

 

Isn’t that great to own the global reserve currency… without to having it settled in gold?

 

Sat, 10/11/2014 - 13:03 | 5318338 JimS
JimS's picture

Amen Brother. I tried to explain this concept to a couple of friends on this morning's walk. Didn't work. A quote "what would happen when the Dow would fall to 3000" and I responded that there would be some pain, but we would recover. These are 2 bright fellows, but, alas, finanically ignorant. Capitalism requires consequences to taking risks, but our nation (and the world) has decided that TBTF is above the laws of crime and financial punishment. World-wide we now have socializing losses and privatizing financial gains. This is going to end horribly, and, now, sooner than later. Be prepared for a ugly severe ending. The winds of War are blowing strong.

Sat, 10/11/2014 - 12:28 | 5318293 khakuda
khakuda's picture

Krugman starts smashing windows and Janet fires up the helicopter?

Honestly, I don't know what they do. Maybe they start buying stocks like the Japanese or printing and handing out money on the streets. More QE of the same old stuff? I don't know. You know they will do something though.

Sat, 10/11/2014 - 13:45 | 5318420 yrad
yrad's picture

Ugh, I hate when ZH articles are over my head. This one clearly is...

Any want to give me a 3 sentance breakdown on this one?

--Mortgage Lender

Sat, 10/11/2014 - 12:57 | 5318324 AdvancingTime
AdvancingTime's picture

I have pondered the possibility that we are currently in and going through the "major deflationary period." More and more often we seen Central Bankers forced to pull rabbits out of their hats. When we stand on the abyss central bankers will be forced to print so much worthless paper the money it will act as a cushion to our fall but not change the reality.

Before you discount this possibility consider that hyperinflation paves an easier transition to a replacement currency and a reset of the system. This would include breaking many promises to the masses and those in power rewriting all the rules for the "general good" of the people. Currencies are about to be debased and how individuals fare will depend on how they are invested.

Sat, 10/11/2014 - 14:15 | 5318484 LawsofPhysics
LawsofPhysics's picture

How they are "invested"?  Invested in what, a bullshit "market".  I don't think so asshat.  It will come down to how you are invested in local economies and good people. Especially once all those promises go "bye-bye".

Sat, 10/11/2014 - 12:10 | 5318253 Bell's 2 hearted
Bell's 2 hearted's picture

"A cost of QE is high quality debt remains siloed"

 

Absolutely.

 

Why QE will end ... liquidity problems

Sat, 10/11/2014 - 12:29 | 5318291 nightshiftsucks
nightshiftsucks's picture

But isn't the only way out now is to inflate ?

Sat, 10/11/2014 - 12:52 | 5318319 Bell's 2 hearted
Bell's 2 hearted's picture

i see a reset in the cards (deflation first)

 

everyone likes to talk about "helicopter drops" ... but they must come from the legislature ... Federal Reserve has no mechanism to get $$s to individual households.

 

Anyway, even if a "drop" occurred (i see all the time someone saying "give everyone $10,000") ... what would happen if someone flipping burgers got that money?  ... Quit job ... and spend it ... but where?  ... Everyone else quit too.... Economy would collapse ...

 

 

Sat, 10/11/2014 - 13:01 | 5318334 nightshiftsucks
nightshiftsucks's picture

what would happen if someone flipping burgers got that money?  ... Quit job ... and spend it ... but where?   Now that's just silly.

Sat, 10/11/2014 - 13:18 | 5318364 Bell's 2 hearted
Bell's 2 hearted's picture

i'm dead serious

 

many businesses would have to shut down if most/all labor force disappear.

 

And when the $10,000 (if dumb enough to do it) gone ... then what?

Sat, 10/11/2014 - 14:12 | 5318476 LawsofPhysics
LawsofPhysics's picture

If people are dumb enough to stop eating, they will die, and I say if they make that choice, let them.  Your suggestion that all people would "quit working if they had an extra 10,000" is idiotic.

 

It's about time people (at all levels) experienced real consequences for making bad decisions anyway. 

Sat, 10/11/2014 - 14:41 | 5318534 Bell's 2 hearted
Bell's 2 hearted's picture

You're stupid if you don't think MILLIONS would quit their job

Sat, 10/11/2014 - 14:07 | 5318472 LawsofPhysics
LawsofPhysics's picture

Deflation in anything not required for survival, yes.  Everything else, not so much.  Barring a massive decrease in the population, history is very clear on this.

Sat, 10/11/2014 - 12:14 | 5318261 Bell's 2 hearted
Bell's 2 hearted's picture

"Looking forward, the Fed will cease the flow of reserves, and has the capacity for a “ceremonial rate-rise”."

 

I'm so going to steal that phrase.

 

FFR won't get over 1% for a long long time

Sat, 10/11/2014 - 12:18 | 5318272 thunderchief
thunderchief's picture

Palladium comes out of the ground about 1 to 15 to gold. Like platinum, it is fifteen times as rare and a PM. They are both mined in just a few places, Russia and South Africa...

So the price should be where? And how about silver?

There will never be price discovery until these scams called Comex, LBMA, and CFTC are reduced to paper gambling rackets.

Sat, 10/11/2014 - 12:33 | 5318302 Kirk2NCC1701
Kirk2NCC1701's picture

When will ZH post the OBVIOUS:  Artificially low prices for Commodities, PM and Oil, and the Ukraine sanctions on Russia helps which country the most?

CHINA. They seem to be THE biggest beneficiaries thus far.  More so than the US, EU, the Saudis, etc.  They're quietly laughing their asses off.

Sat, 10/11/2014 - 12:49 | 5318317 JR
JR's picture

Price discovery goes bye-bye because the big banks realize that economic fundamentals are bad for their larceny plan. If Mr. Market gets to be in charge, assets and real interest rates will make the economy honest, and big banks can fail. The big banks prefer themselves to industry, of course, the latter being the essential ingredient of growth., the former a hindrance to growth.

Bernanke and Yellen are hired to save the big banks - that’s the Fed’s raison d’etre - and just now, stable equity indexes (high) and zero interest (low) is needed.

Too bad about the collateral damage. Here’s how badly the Fed thinks it needs the savers’ money. Bernanke acknowledged as much in a 2011 press conference:

We are quite aware that very low interest rates, particularly for a protracted period, do have costs for a lot of people. They have costs for savers. We have complaints from banks that their net interest margins are affected by low interest rates. Pension funds will be affected if low interest rates for a protracted period require them to make larger contributions. So we are aware of those concerns, and we take them very seriously. I think the response is, though, that there is a greater good here, which is the health and recovery of the U.S. economy.”

Dennis Miller, 9 October 2014, writes in Yield-Hungry Baby Boomers Are on a Death March”:

 “The collateral damage inflicted upon seniors and savers is twofold. First, it’s the loss of safe income opportunities. The Fed’s low-interest-rate policies have saved banks and the government an estimated $2 trillion in interest alone. $2 trillion added to the balances of 401(k) and IRA accounts would sure bolster a lot of desperate retirement plans.”

Or as Christopher Rice called it in September:

ROBBING FROM THE POOR TO GIVE TO THE RICH

“Yellen’s zero interest rate policy constitutes massive theft from savers. Applying a normalized interest rate of about 2% to the entire savings pool in the U.S. banking system compared to the actual rate of zero, reveals a $400 billion per year wealth transfer from savers to the banks from the zero rates. This has continued for years, so the cumulative subsidy to the banking system at the expense of everyday Americans is now over $2 trillion. This hurts investment, penalizes savers and forces retirees into inappropriate risk investments such as the stock market. Yellen supports this bank subsidy and theft from savers.”

Money Morning writes Sep 08, 2014:

If banks were allowed to fail, if they were each on their own insignificant enough to the financial system, to the whole economy, that they could fail without doing economic damage, they should be allowed to fail. Small banks are still allowed to fail based on this exact principle…

“If we want to take back America from the bankers and the Wall Street machinery that soaks up economic capital for their paper-pyramiding wealth-minting factories, and disadvantages savers, producers and workers, then we have to kill the Federal Reserve Bank.”– Money Morning

http://www.marketoracle.co.uk/Article47251.html

Sat, 10/11/2014 - 12:56 | 5318325 Bell's 2 hearted
Bell's 2 hearted's picture

good post

Sat, 10/11/2014 - 14:06 | 5318467 LawsofPhysics
LawsofPhysics's picture

Bingo.  When it comes to population growth and the history of civilizations, deflation is fucking myth.  Don't believe me, name one society/currency that collapsed/died because their purchasing power was too strong.

Sat, 10/11/2014 - 12:28 | 5318285 Kirk2NCC1701
Kirk2NCC1701's picture

When you make money from nothing and get your checks for free... You get all the ass(ets) you ever want/need.

Aw, that ain't working, them guys ain't dumb.  That's the way you do it.  I want my money from nothing, and my checks for free.

End of lesson.  Kirk out.

Sat, 10/11/2014 - 12:45 | 5318313 AdvancingTime
AdvancingTime's picture

Recently released minutes from the last Federal Reserve meeting confirmed growing concern about the pressure a stronger dollar is putting on other currencies around the world. Bottom-line is other currencies are under assault because both economies are weak and countries are buried in debt they can never repay at real market interest rates. When investors become unwilling to buy the bonds of heavily indebted nations causing the bond bubble to burst the values of currencies in those countries will tumble.

While there are not many Bond Vigilantes there are a slew of  Currency Vigilantes and they are ready to make their presence known. Recent weakness in the value of the Yen, Pound, and Euro must not go unnoticed. The Currency Vigilantes are acutely aware of when a currency is overvalued or ready to be re-pegged and pounce on the weak currency to tear it apart. The article below questions just how stable the currency markets really are and may be a signal that currency trading is about to get very wild. Please note, this may also be sending a signal that the whole system is unstable and the stock market is about to drop like a stone.

 http://brucewilds.blogspot.com/2014/10/fed-concerned-that-stong-dollar.h...

Sat, 10/11/2014 - 12:45 | 5318314 Rathmullan
Rathmullan's picture

In all of these discussions I rarely hear any talk of the velocity of money. That has been one of the few macro variables I've paid attention to. Right now M2 velocity is at a an all time low (and has been for the last 2 or 3 years since it was first measured back in 1959) And M2 velociy is down an astonishing 31% from its peak in 1997. I'm guessing if ever there were a sustained (3 quarters or more) increase in M2 velocity, Federal Reserve Policy and other macro variables (price levels) would look very diffferent than they do currently.

Sat, 10/11/2014 - 13:02 | 5318337 AdvancingTime
AdvancingTime's picture

When all the money out there starts to move it will be a game-changer.

Sat, 10/11/2014 - 12:58 | 5318328 hardmedicine
hardmedicine's picture

Just for bragging rights I am trying to understand this article. 

Sat, 10/11/2014 - 14:04 | 5318464 JR
JR's picture

The definition of a central bank is you don’t have to be responsible for facts or the economy. You can make your own rules and lie about it. IOW, it really doesn’t matter how much the U.S. spends or produces, only financialization matters; only Fed printing matters.  Until it doesn’t…

The Congress has all these economic problems they say; cutting the budget; now maybe cutting SS… In the meantime, what we need to do is run airplanes every hour, and missiles and all kinds of ammo and bombs (Tomahawks at $1.4 million a pop).  Every hour US taxpayers are paying $365,297 for cost of war in Iraq. Since June, the US has spent $7.5 million per day on military action against ISIS.

But we have to cut Social Security; these entitlement bombs are going to kill us.

Where did all that money come from? As Griffin said, there is no money; it’s air; the bankers are raping the nation of her wealth and putting it in their pockets.

Reread carefully:

“Indeed liabilities have increasingly moved from bank balance sheets to the Fed, freeing lending capacity. One must recall reserves are not fungible outside of the banking system (but can act as collateral for margin). With flow decreasing, the opportunity for small relative volume bids spread over a large quantity of transactions (most instances per unit time) decreased with market prices in many asset markets. Is more downside coming?”

Sun, 10/12/2014 - 00:12 | 5318602 Mediocritas
Mediocritas's picture

Article is essentially about shadow banking.

When the fed conducts POMO (mainly buying TSYs and turdball Agency debt), and various forms of emergency QE (pure turdballs), those assets are put on ice in the Fed's books where they can't be used for credit creation by shadow banks (rehypothecation). Turns out some of the turdballs aren't turdballs afterall and TSYs are never turdballs; shadow banks want to play with them again as they're more profitable than earning IOER when they can't figure out how to replace shadow lending with traditional lending.

To halt the credit crunch crisis, the Fed pumped money into banks (in exchange for turdballs), to provide enough liquidity for banks to face down a bank-run coming through the shadow system (debt defaults -> assets becoming liabilities). Banks swapped their former-assets-now-liabilities to the Fed in exchange for fresh reserves: a free pass. ZIRP provided additional free passes, being a price fixing mechanism for banks borrowing traditional reserves in the interbank market or through the discount window.

The idea was that these fresh reserves (in excess) would embolden banks to expand credit through the traditional system (money multiplier concept) but the very same process kills credit expansion in the shadow system by subtracting assets from the shadow system.

Here are some visual aids to explain more clearly (data is old but they show the history which is instructive enough):

http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2012...

-- shadow credit falls, traditional credit rises. POMO and QE boosts traditional credit at the expense of shadow credit.

http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2012...

-- total credit falls (crisis). Fed stems the bleeding with QE. Difference from peak shows up on the Fed's books. Fed actions to cause traditional expansion are cancelled by shadow contraction post crisis.

The Fed wants to put the world back the way it was before the crisis, with total credit rising (credit IS money in this system, a bank loan is an asset for the lending bank and an equal liability for the receiving bank where money is deposited, hence total liabilities and total assets essentially reflect the same thing: total fairy money, aka debt).

To get totals rising again, the Fed wants to juice shadow banking again. Assets sitting on the Fed's books after QE & POMO are iced and do not participate in the shadow system. The RRF allows these assets to be borrowed for participation again.

The reverse repo is overnight, not enough time to be rehypothecated into credit, BUT it can be booked by the shadow bank as the shadow equivalent of a reserve on a daily basis. The cost of carrying the repo is the shadow equivalent of accessing the discount window and paying the discount rate for traditional reserves.

By booking RRF-sourced assets on a daily basis, the shadow bank can then free up other assets for rehypothecation, that were formerly being iced as a shadow reserve (for prudential reasons).

Why does this shadow channel juice credit more than the traditional channel? Because the traditional channel has a legally mandated minimum reserve requirement, whereas the shadow channel is a total fucking free-for-all (Basel III is supposed to limit it, but keeps getting pushed back).

It's all going to end badly of course. The Fed has no balls to do what actually needs doing, what's right, because it must answer to its shareholders: the major banks and shadow banks. Those banks want to party like it's 2006 again.

Clear as mud?

Sat, 10/11/2014 - 13:03 | 5318339 q99x2
q99x2's picture

Print. BTFD

Sat, 10/11/2014 - 13:26 | 5318373 philosophers bone
philosophers bone's picture

Read in the paper that US and UK are running a "mock" financial institution failure and "bail-in" on Monday and will publish the results.  It won't be based on any particular institution, but it will be an opportunity to prep the public for "what might happen" (LOL).

What is so funny is their promotion of a "bank bail-in" as suggesting that it will avoid taxpayers having to support the financial institutions in the event of a collapse.  This is fucking hilarious for two reasons I can think of (I"m sure there is a long list):

1.   If the "insured" deposits are involved and claims made against the insurance, my understanding is that the amount that the deposit insurance companies will cover is not even close to what might be required to make depositors whole (meaning at some point "taxpayers" will pay for it directly or indirectly); and

2.   Most people are both "taxpayers" and "depositors", so they'll be fucked either way.

Although Point #2 can be mitigated by getting your assets out of the financial institutions.  I can't believe that there are not lines ups for withdrawals.  As we know, when you want "your" money, it will be too late.  [In other words, it ain't yours!]

Sat, 10/11/2014 - 13:43 | 5318415 JR
JR's picture

Jim Grant – “Capitalism without financial failure is not capitalism at all, but a kind of socialism for the rich.”

IE: While Americans live in the richest country in the world, they seem always to be short of money, and now, with the birth of the ECB, the same is happening in Europe -- billions for the bankers, debts for the people. Stanley Fischer has been touting "bail-ins" ever since he picked up the Fed baton; it's his specialty.

And now, this…

ECB Wiping out German Savers With Every Step It Takes

Martin Armstrong, Armstrong Economics, Released on 10/5/14

“The interest rate policy of the European Central Bank has massive redistributive effects within Euroland. With every step it takes, the ECB continues to exploit Germany for the benefit of holding to the Euro by bailing out the rest of Europe. The German savers are been wiped out and sent into extinction as they see the bensts. The low interest rate policy moving negative has cost the private households in Germany since 2010 about €23 billion euros. In absolute terms, the German private households are thus the biggest losers of monetary policy in the financial crisis…”

Sat, 10/11/2014 - 19:04 | 5319088 SAT 800
SAT 800's picture

Ding. I think the Euro is done now, dear, you t ake it out of the oven.

Sat, 10/11/2014 - 14:06 | 5318468 Dan The Man
Dan The Man's picture

Kudos if you understand the first paragraph. I doft my chapeau..

Sat, 10/11/2014 - 14:34 | 5318515 RaceToTheBottom
RaceToTheBottom's picture

This is a very interesting article, but I wonder whether the author is pronouncing new rules such as "Quantity theory posits price inflation follows from base money creation, meanwhile in developed markets we see the opposite."

The economic speculation that is QEn cannot be used as the basis for fact when only the first hald of the game has been allowed to play out, yet.  

Come up with these great theories after you start soaking up this liquidity and taking the top off the good times (to make up what you have done, earlier in the bad times).

Sat, 10/11/2014 - 14:50 | 5318548 gwar5
gwar5's picture

If assets are unstable cash might seem the moar stable choice. That might be an illusion. Choose wisely. It ain't all rigged for nothin'.

Sat, 10/11/2014 - 15:24 | 5318613 CHX
CHX's picture

like some shiny and yellow assets, maybe?

Sat, 10/11/2014 - 15:12 | 5318601 1929agin
1929agin's picture

Wake me up when S&P trades below 1500, otherwise, Fed reserve still Ponzi scheming this pig.

 

Sat, 10/11/2014 - 16:12 | 5318721 1929agin
1929agin's picture

For those that give a crapster about technicals, SP "weekly" 200 day, 1525, 50 day, 1885. "Ponzi" scheme, has long way to go to prove "they" are out of "q e " business...

Now go get the banksters... hahaha

 

 

Sat, 10/11/2014 - 17:08 | 5318831 JR
JR's picture

“But here’s the rub.

“All of this ‘engineering’ has altered the natural cycle. Instead of peaking in 2007, as it should have, the rich have continued to prosper while everyday people have stagnated or declined.

“The thing is, when you fight against nature, you eventually lose. And I believe that all the manipulations and engineering that has distorted the natural cycle will eventually be the Western world’s undoing.” -- Harry_Dent

Sat, 10/11/2014 - 17:26 | 5318866 flow5
flow5's picture

"Therefore, the long-run relationship between US bank reserves and US inflation is actually negative." S&S don't know what the fuck they're talking about. The relationship between RRs and inflation is perfect (since the series was established).

It takes a gullible and stupid motherfucker to believe this bullshit.  The "base" = required reserves.  And only as the weighted arithmetic average of reserve ratios & reservable liabilities remains constant, is a comparison valid.

Sat, 10/11/2014 - 17:37 | 5318894 flow5
flow5's picture

ZeroHedge doesn't know Jack shit.  O/N RRPs drain the money stock (unlike QE operations which were essentially asset swaps). The stock markets recent increase in volatility comes during a period of reduced liquidity (where roc's in MVt are seasonally decelerating). If you don't expand money at least as fast as the production of goods and services - at the "asked" prices, then output can't be sold, and jobs will be lost.

The "Real Bill's Doctrine" is fallacious.  The money supply is not self-regulatory. 

 

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