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Wednesday, October 29, 2008
Fed "Food-for-thought"
Attached link provides some food for thought - as we all ponder and the Fed implements further rate cuts today: ZIRP: Our Future
Denninger said yesterday that Bernanke has used 4 of his 5 tools and the last one is "insanely inflationary":
"By the way, to those in Congress who might be reading this, you may wish to note that Ben has committed four of his five "how do I stop a deflation" ideas already - and has failed to stop the deflation. The four are, in short:
1. Buy assets (Bear Stearns debt, et.al.) 2. Low fixed-term loans (e.g. TAF, TSLF, etc) 3. Acquire real or financial assets (TARP anyone?) 4. Treasury issues debt which the Fed then purchases with newly-minted money (Fed Balance sheet doubling anyone?) 5. Announcing an explicit ceiling on long-maturity Treasury debt.
Why is this last one important? Because all of this coupon printing (Treasuries) along with 1-4 is extraordinarily inflationary. I know, Ben said its not in his Congressional testimony. He's lying. It is. You doubt that? Go look at the price of 30 year mortgage money and what has happened to it in recent weeks. Longer-term debt is very sensitive to potential future inflation and will turn upward long before the inflation actually appears, because the lender is stuck with the note for the entire period.
So how do you stop long maturity Treasuries from shooting the moon on yield?
You announce that you are capping the yield through unlimited purchases of same.
That is, you'll buy as many as you need (printing as many dollars as necessary) to hold the price high and yield low.
There is one problem with this - it is insanely inflationary, especially when the government is running a fiscal deficit.
In fact it virtually guarantees a "feedback" cycle that ultimately will destroy both the government and the monetary system...."
1 comment:
Denninger said yesterday that Bernanke has used 4 of his 5 tools and the last one is "insanely inflationary":
"By the way, to those in Congress who might be reading this, you may wish to note that Ben has committed four of his five "how do I stop a deflation" ideas already - and has failed to stop the deflation. The four are, in short:
1. Buy assets (Bear Stearns debt, et.al.)
2. Low fixed-term loans (e.g. TAF, TSLF, etc)
3. Acquire real or financial assets (TARP anyone?)
4. Treasury issues debt which the Fed then purchases with newly-minted money (Fed Balance sheet doubling anyone?)
5. Announcing an explicit ceiling on long-maturity Treasury debt.
Why is this last one important? Because all of this coupon printing (Treasuries) along with 1-4 is extraordinarily inflationary. I know, Ben said its not in his Congressional testimony. He's lying. It is. You doubt that? Go look at the price of 30 year mortgage money and what has happened to it in recent weeks. Longer-term debt is very sensitive to potential future inflation and will turn upward long before the inflation actually appears, because the lender is stuck with the note for the entire period.
So how do you stop long maturity Treasuries from shooting the moon on yield?
You announce that you are capping the yield through unlimited purchases of same.
That is, you'll buy as many as you need (printing as many dollars as necessary) to hold the price high and yield low.
There is one problem with this - it is insanely inflationary, especially when the government is running a fiscal deficit.
In fact it virtually guarantees a "feedback" cycle that ultimately will destroy both the government and the monetary system...."
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