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[Suresh]

Ostensibly, central banks are not subject to political pressure. But, if the balance sheets of other central banks that are engaging in quantitative easing have the same asset-liability mismatches that the Federal Reserve's balance sheet has, then these other central banks might themselves need recapitalization. The need for recapitalization may cause these central banks to be subject to political pressure, as legislation may be necessary to permit a vehicle for such recapitalization. Any delays in passing such legislation may be intentional to prevent central banks from drawing off excess money supply too quickly, causing economies to slide back into a deflationary recession or worse, a deflationary depression.
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Financial Times: Goldbugs rest assured, inflation will return
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In the inverse of Hemingway’s description of impoverishment, we are going broke all at once, then slowly.
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We are, however, now being set up for the next run in the secular bull market in gold. It won’t feel that way for at least a few months, since the bid will dry up for the metal. Jewellery demand, which is still 70 per cent of the current demand, will continue to be weak. However bumbling the execution, the Treasury’s wall of money is hitting like a slow-motion tsunami.

Even the supposedly tight core European leadership is easing in more ways than meet the casual eye. For example, while the Hungarian prime minister’s plea for a monetary lifeline was turned down, less visible relief is being offered. Apparently, the European Central Bank is considering one of those interesting technical changes (in Article 30 of the ECB charter) that turn out to be more significant than the headline announcements. This involves deciding that the Polish zloty, the Hungarian forint, and the Czech koruna are, really, worthy of being considered reserve currencies, alongside the yen, dollar, and sterling. That may not be unreasonable when applied to the Czech currency, which represents a fairly conservative country, but would require somewhat heroic assumptions in the case of the forint.

Once your currency is in that club, though, you get the same favourable terms for swap arrangements with the ECB as the Federal Reserve or the Bank of Japan. No officious International Monetary Fund auditors or humiliating letters of intent to sign. Just lots of cheap euros that can be, in turn, lent to the commercial banks.

When, though, does all this loose money lead to the inflation the goldbugs need for the next run? For the moment, it is hard to see that on the horizon in the US, since we were talking about the dollar price of gold. However, the Fed has now been reminded very forcefully by politicians and would-be future governors that it cannot withdraw monetary stimulus too quickly. So it will withdraw it too slowly.

Eugen Weinberg, a commodities markets analyst with Commerzbank, shares my short-term bearish, longer term bullish view on gold. “When inflation comes,” he says, “it will come in higher than expected, and persist for longer than expected, because the central banks will not react as they should.”

So enjoy the run in risk with some equities baskets, and buy your gold sometime in the summer.
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

Credit Writedowns: Inflation: The strategy that dare not state its name
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[T]he very purpose of quantitative easing ... is to break the high liquidity preference of private investors by “trashing cash” and lowering the yield on default free government bonds.
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If government yields back up, either because private sector portfolio preferences are shifting toward riskier assets as central banks trash cash and suppress government bond yields, or because fiscal stimulus is helping “green shoots” take root and thereby encouraging riskier portfolio exposures, then mortgage rates are likely to back up as well, confounding any stabilization in housing sales.

Alternatively, if central banks step in to buy Treasuries and thereby contain the back up in Treasury yields, more professional investors are likely to conclude “monetization” is underway and they will try to increase their exposure to inflation hedges. The net result would be a likely rise in the relative prices of energy, precious and industrial metals, “commodity” currencies, and ag products and ag land – all of which, as inputs to final products, would tend to represent an adverse supply shock to the economy. In addition, raising the price of essentials like food and energy is more likely to crowd out consumer spending in discretionary items. Neither of these supply and demand effects are particularly supportive of an economic recovery.
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

When we say that there is no exit strategy for the Federal Reserve's quantitative easing efforts, let's be clear how its actions may play out. The Federal Reserve may for a time stop buying U.S. Treasury debt. The massive and rising tidal wave of Treasury debt continuing to flow into the debt markets then will be met by one less prominent buyer. How prominent? Only last week, we learned that 47% -- nearly half -- of 7 yr notes bought by primary dealers have been bought by Fed! Without such a buyer of last resort in the Treasury markets, yields on Treasury debt will go up. When that happens, the Federal Reserve will reinstate is policy to monetize the Treasury debt. It will continue to play this game so long as money velocity stays under control, that is, until us Joe Six-Packs realize that the debt monetization is crushing our the purchasing power of the dollars we earn.
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Fed to dampen rate hike talk, halt Treasury buying
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Policy-makers are also likely to allow a controversial scheme to buy $300 billion of longer-dated Treasuries to end on schedule in September. But they may discuss extending a separate program to support the flow of credit to consumers and business, with an eye on propping up commercial real estate.

The policy-setting Federal Open Market Committee (FOMC) will meet on Tuesday and Wednesday, and central bankers are expected to hold the overnight fed funds rate in a range between zero and 0.25 percent.
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With no change to rates expected, the most likely action next week will be an announcement that the Fed will allow its program to buy up to $300 billion of longer dated U.S. government bonds to expire on schedule in September.

The campaign, which is in addition to Fed purchases of $1.45 trillion of mortgage debt by the end of the year, quickly become a lightning rod for concerns about future inflation and criticism that the central bank was helping to finance a record U.S. budget deficit, also called monetizing the debt.

"I don't think there is any likelihood it is going to be continued," said [former Fed Board Governor Lyle] Gramley. "With continued worries in markets that at some point the Fed will have to monetize the debt, it is better to not be seen as buying longer term Treasuries under these circumstances," he said.
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

When the Federal Reserve's $300 billion purchase plan for Treasuries began in March 2009, it was scheduled to wrap up in mid-September. If the data suggests to Chairman Ben S. Bernanke that economic activity is leveling out, then why would the Federal Reserve need to extend the program?

Frankly, the data doesn't suggest to me that the economy is leveling out. Moreover, even if the economy were leveling out, such effect would be artificial. The exit of a big buyer in the Treasury market is going to drive up Treasury yields and by extension corporate and personal interest rates. The economy can't continue to level out while debt-servicing burdens rise.
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Bloomberg: Fed Treasury Buying to Slow Before Ending in October

The Federal Reserve plans to slow the pace of its purchases of U.S. Treasuries as the recession eases, and signaled that the $300 billion program will end in October. ...

[According to Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd., with] regard to the Treasuries purchases, “they gave the market an extra one month -- a cold-turkey approach would have been a little too much for the market to take.”
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“What he needs to do is to begin to wind this down” to prevent an acceleration in inflation stemming from the Fed’s injections of liquidity to the banking system, Allan Meltzer, a Fed historian and economist at Carnegie Mellon University in Pittsburgh, said in a Bloomberg Television interview today. “It takes about two years from the time we start reducing money growth to the time we get some benefits” in containing prices.
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“The Fed thinks the economy has bottomed and is looking forward to economic growth in the future,” said Sung Won Sohn, economics professor at California State University-Channel Islands in Camarillo, California. “Monetary policy is changing from being extremely accommodative to kind of gradually pulling back on stimulus.”

The expected expansion won’t translate into imminent rate increases by the Fed, according to the median forecast in a Bloomberg News survey of economists published today. Policy makers are unlikely to increase the benchmark rate until the third quarter of next year, the survey shows.
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

You might want to put your coffee cup down while reading the following.
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FT Alphaville: Über-QE
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[According to] RBC Capital Markets economist Russell Jones[, the] ... results of the unconventional monetary policy so far, ... have been rather mixed. Jones has therefore turned his attention to what other policies central banks could pursue to stave off deflation — and he’s come up with the following (our emphasis):

[Suresh]

If the inflation-adjusted S&P 500 continues to track the Nikkei, we should expect a peak in around 2011, a low around 2014, a peak around 2018 and a low around 2020.
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FT Alphaville: America turning Japanese?

Here’s an interesting thought from RBC Capital Markets US Interest Rate Monthly Atlas.

It relates, specifically, to the differences between — and similarities of — US and Japanese quantitative easing:

[Dave]

In a post credit bubble contraction, the senior currency remains strong because of the demand for dollars to repay debt and because of dollar strength.

In that environment, the Fed will be able to keep interest rates low for years. Our expectation is that interest rates will remain low for 2-3 years and then begin to rise.

AP: Fed's Dudley says soft economy warrants low rates

A tepid economic recovery should allow the U.S. Federal Reserve to keep interest rates at rock-bottom lows for a prolonged period, New York Federal Reserve President William Dudley said on Monday.

Because the U.S. economy faces many headwinds, including an anemic labor market and a fragile banking system, Dudley said, inflation will not become a problem in the foreseeable future.

"The recovery will turn out to be moderate by historical standards," Dudley said in a speech at Fordham Law School. "The banking system has still not fully recovered."

Dudley's outlook for the economy was cautiously sanguine. He touted a rebound in financial markets that has seen major U.S. stock indexes surge more than 50 percent from their March lows, saying a virtuous cycle was replacing the vicious circles that brought the global financial system to the brink of collapse last year.

Dudley, who as head of the New York Fed is a permanent voting member of the U.S. central bank's policy-setting committee, said he believes that forecasts for a 3 percent rate of annualized economic growth in the second half of this year are "reasonable." He said a so-called "double-dip" recession, where growth perks up only to turn negative again, is unlikely, particularly given the strength of many emerging economies.

Dallas Fed President Richard Fisher, speaking on PBS television, agreed that a double-dip recession is unlikely. Various economists have raised fears that the United States could sink into a double-dip recession.

"I don't consider that a likely scenario right now," Fisher said in an interview on PBS's "The Nightly Business Report." "I do think we're going to have to be tolerant with slower growth than we're used to."

The trick for policymakers, he added, is to keep monetary policy at its highly stimulative stance without boosting inflation expectations of consumers and investors.

The best way to do that, argued Dudley, is to make a clear case for the Fed's ability to tighten policy, even with central bank credit to the banking system -- also known as the institution's "balance sheet" -- flirting with record highs above $2 trillion.

Faced with the worst financial crisis since the Great Depression, the Fed sharply ramped up its lending to financial institutions, launching a number of emergency lending facilities aimed at reviving interbank lending.

Dudley maintained that such largess can be easily reversed by new Fed tools like the ability to pay interest on bank reserves. By raising that rate, the Fed can discourage lending if it believes it has picked up to the point of presenting an inflation risk.

If that strategy fails, the Fed is working on other measures -- like reverse repurchase agreements and a term deposit facility -- that could rein in credit in the economy, said Dudley.

A more drastic option is also available, although it would not come without the risk of destabilizing markets.

"The Federal Reserve could always drain reserves the old-fashioned way, by selling assets," Dudley said.
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Dave

Please feel free to agree with or critique the article excerpts and our comments. Alan Greenspan: Gold and Economic Freedom

[Dave]

What is an accommodative policy over an "extended period?" I think its safe to say that an accommodative policy is a policy interest rate below the reported CPI. Since CPI is under-reported, I expect to see low interest rates for a long time and negative real interest rates until inflation is considered the primary problem.

FT.com: Fed begins testing ‘reverse repo’ trades

In a reverse repo – shorthand for a “reverse repurchase agreement” – the Fed sells assets such as Treasury securities to dealers for cash with an agreement to buy them back at a slightly higher price at a later date. In the process, bank reserves are drained from the financial system.

The tests are not a sign that the Fed is about to drain reserves on a large scale. That would require a decision by the Federal Open Market Committee to scale back its generous liquidity support for the financial system. Such a move is not expected before 2010 at the earliest.

In remarks prepared for delivery last night in Washington, Ben Bernanke, Fed chairman, said: “My colleagues at the Federal Reserve and I believe that accommodative policies will likely be warranted for an extended period.”

He added: “At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road.”
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Dave

Please feel free to agree with or critique the article excerpts and our comments. Alan Greenspan: Gold and Economic Freedom

[Suresh]

Bloomberg: Fed Ending Treasury Purchases That Helped Cap Yields

The Federal Reserve will complete its $300 billion Treasury purchase program today amid signs the seven-month buying spree helped stabilize the housing market and limited increases in borrowing costs.

Yields on the benchmark 10-year note, which help determine rates on everything from mortgages to corporate bonds, never rose above 4 percent after the central bank began acquiring the debt. They are less than half a percentage point higher than the day before the program was announced on March 18, even though the U.S. sold a record $1.25 trillion in notes and bonds, more than double the amount in the year-earlier period.
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The Fed is slated to acquire Treasuries maturing between December 2013 and April 2016 at 10:15 a.m. New York time. The central bank has purchased $298.063 billion of government debt securities through today.
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Demand is returning to housing after the industry shaved an average of 1 percentage point from gross domestic product each quarter since the start of 2006. Sales of existing U.S. homes surged a record 9.4 percent in September to a 5.57 million annual rate, the highest in more than two years, the National Association of Realtors in Washington said Oct. 23.

Mortgage Rates

Mortgage rates for 30-year fixed home loans averaged 5 percent in the week ended Oct. 22, down from as high as 6.63 percent last year, according to McLean, Virginia-based Freddie Mac. The rate was 5.05 percent in March.
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

Rolfe Winkler Contingent Capital: Bond Bears: Beware of “crypto QE”

The guys at Variant Perception make a great point. Some reform plans for the banking sector (so-called “narrow banking” being the most extreme) would have banks invest more deposits in government paper in order to keep them safe. To the degree such plans get traction, that could keep a lid on yields despite rising government spending.

[Suresh]

Zero Hedge: The $700 Billion U.S. Funding Hole; Desperately Seeking A Very Indiscriminate Treasury Buyer
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A month ago we observed that in 2010, the supply/demand picture for US fixed income would be very problematic, as there was no immediate apparent substitute to fill the void resulting from the departure of the constant bid provided by the Federal Reserve's Quantitative Easing in both the UST and the MBS markets. The conclusion was that there would need to be a dramatic increase in demand for debt securities across the board, with an emphasis of Treasuries and MBS.

Today, we focus on the most critical segment of debt issuance for 2010 - those ever critical US Treasuries, without whose weekly uptake by various investors, the multitrillion budget deficit will become unfundable. Using estimates from Morgan Stanley for 2010 Treasury supply and demand, the conclusion is that there will be a demand shortfall of at least half a trillion, and realistically $700 billion, to satisfy the roughly $1.7 trillion in net ($2.4 trillion gross) coupon issuance in the upcoming year.
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First, based on Morgan Stanley's expectations, and further corroborated by yesterday's disclosure that the next increase in the debt ceiling by $1.9 trillion net, to $14.3 trillion, would last the country only through early 2011, we present the estimated supply of gross coupon issuance in the upcoming fiscal year (keep in mind one quarter of issuance has already been absorbed and the run-rate validates the projections).


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Where things get tricky is on the demand side.

As we pointed out previously, the number one defining feature of 2009 was the Fed's blatant support of the bond and MBS markets. Bernanke monetized $300 billion in Treasuries, and indirectly will have purchased another $1.4 trillion in bond/MBS hybrids (we say indirectly, because Fed MBS purchases effectively allowed MBS holders to switch their holdings to Treasuries at preferential terms, better known as the "reallocation trade" in essence achieving the same effect as if the Fed has purchased these - see Bill Gross). With the Fed out of the demand picture (at least temporarily), the questionmarks emerge.



Combining the supply and demand for Treasuries yields the following chart. Fact: in 2010, a best case of demand projections, indicates there will be a $400 billion shortfall for total Treasury supply... and a worst case of a stunning $700 billion funding shortfall. This is "just" a little worse than Greece, yet the latter's CDS trades trades nearly ten times wider than the U.S. Logical? You decide.

U.S. Treasury Supply/Demand Chart for 2007-2010
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

The most recent increase in the U.S. debt ceiling to $14.3 trillion by H.J. Res. 45 and was signed into law on February 12, 2010.
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Zero Hedge: US Ends June With $13.2 Trillion In Debt, Adds $210 Billion In Total Debt, On Track To Breach Debt Ceiling In Under Six Months

In case one is wondering why the House Democrats attached a document to the emergency war supplemental bill that "deemed as passed" a non-existent $1.12 trillion budget, which basically allows the ruling party to start spending money for Fiscal Year 2011 without the constraint of an actual budget, here is the answer: on June 30, the US closed the books with just over $13.2 trillion in total debt, an increase of $210 billion in one month, or $2.5 trillion annualized. There is just $1.1 trillion left on the ceiling. As we have long been warning, at the current run rate, the ceiling will be breached in under six months, or just around November 2. More disconcerting is that the monthly debt roll continues to be in the "ridiculous amount" category, hitting a total of $660 billion, of which $583 billion was rolling off Bills
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Tables of Public Debt Transactions
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BP 2010Q3
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

Zero Hedge: America Adds $210 Billion In Gross Debt In August, Rolls $620 Billion In Bills And Notes

As per the August 31 DTS statement, the US ended the month with a new all time record of $13.45 trillion in debt, and increase of $210 billion from the beginning of the month (or $225 billion in public debt, net of intragovernmental holdings). With just 30 days left in fiscal year 2010, the US has added $1.54 trillion in the eleven months ended August 31, a monthly average increase of $140 billion. As a point of reference, the US has received $1.53 trillion in withheld income tax over the same period, confirming that the US continues to issue more than one dollar in debt for every dollar it receives via income tax revenue....

Additionally, the US rolled another $513 billion in [T-bills]: a number which continues to be persistently high, even as the total amount of short term debt as a percentage of total has declined steadily from 30%+ of total to around 20% as we have written elsewhere. Another $106 billion in Notes was rolled as well, with the intramonth cash balance dropping to a dangerous sub-$5 billion.
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For the 11 months ending August 30, the US has paid $180 billion in interest expense in a time of record low interest rates.

At the current rate, we expect that the statutory, and completely irrelevant, debt limit of $14.3 trillion will be breached in the first two months of 2011. At that point total federal debt as a % of US GDP will be roughly 100% in its purest definition, and the inevitable greenlighting by Congress to raise the ceiling then will means that America is fully sliding into a debt-to-GDP ratio of >1.
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.