Wednesday, March 7, 2012

It's All In The SPIN, Baby!

                                                       'Tis but thy name that is my enemy;
                                                       Thou art thyself, though not a Montague.
                                                      What's Montague? it is nor hand, nor foot,
                                                      Nor arm, nor face, nor any other part
                                                      Belonging to a man. O, be some other name!
                                                      What's in a name? that which we call a rose
                                                      By any other name would smell as sweet;
                                                      So Romeo would, were he not Romeo call'd,
                                                      Retain that dear perfection which he owes
                                                      Without that title. Romeo, doff thy name,
                                                      And for that name which is no part of thee
                                                      Take all myself.   (is a citation necessary? lol)
 
The spinmeisters at the Fed and in the media have put some new spin on money printing. It was released today through the Fed's chosen outlet, Wall Street Journal monkey Jon Hilsenrath, that the Fed is considering a "new" way of putting "credits" (printed money) into the system using a method of "sterilization."

Funny thing, it says right in the text that Fed "prints" the money in order to implement the operation. The "spin" on it is that the Fed swaps "electronic credits" - aka printed money - for Treasury and mortgage bonds sitting on bank balance sheets. This would be not much different than the Fed coming to you and saying, "hey man, put up your IRA as collateral and I'll put some money in your bank account that you can spend."  This IS Bernanke's famous "drop money from helicopters" speech from 2002 that helped him pave his way to the FOMC Chairman appointment.  This is IT in action.

The Fed effectively creates "bank reserves," and calls it electronic credits that are "sterilized" because the Fed has taken a "similar" asset off the bank balance and simply replaced it with cash. The obvious reason for this is that the bank can spend the cash more readily than it can spend a 5yr Treasury bond. Recall I was was wondering aloud just last week how the Fed would make sure Treasury auctions were funded w/out driving rates through the roof and without printing: 
Many Fed officials believe strongly the bank reserves it has created as part of this money creation aren't an inflation threat. But they are acutely aware of a popular perception, also held by a few inside the Fed itself, that the money the Fed has created could cause an inflation problem down the road. An approach that limits the amount of new money flowing into the system—through another Operation Twist or a sterilized operation—could help them manage that perception.
Here's the LINK (if you copy the title into a google browser and click on the WSJ link that comes up, you can get a free copy of the entire article).  The key phrase in this article is "manage that perception."  Put the right spin on this and the market will swallow it hook, line and sinker and go back to watching the Peyton Manning news conference...

Think about that description of what the Fed is doing for a moment and then think about the actual flow of funds through the system that is created by this. 1) the Fed uses "electronic credits" to replace the longer term Treasuries/mortgages sitting on bank balance sheets. This is no different than printing money. The perception difference is that this is "sterilized" because the Fed is just exchanging bonds for "credits," which is the same as cash. Here's why. This maneuver now allows banks to first, go takedown more Treasury paper, thereby financing the Government deficit spending; and second, to a much lesser extent, gives the banks capital ratio room to issue more credit card debt and mortgages.  If banks had to sell outright existing Treasuries in order to buy new Treasuries, in other words if the free market we allowed to function properly, it would drive interest rates up by a significant amount.  The creation of "electronic credits" prevents the widespread selling of existing Treauries.  The Fed's balance sheet thereby becomes nothing more than a junkyard of Treasury bonds funded by "electronic credits." 

Let's look at both of those combined, but keep in mind that the primary reason for this is to finance new Treasury issuance. The Fed does the above, and then the banks turn around and buy more Treasuries at auction, likely financing close to 50% of all new auctions. The Government then gets the "electronic credit" moved to its bank account and can go and spend it like it's cash. Someone please explain to me the difference between that outright printing? Please.

Essentially what all this "sterilized" QE does is give the Fed a different "spin" on financing Government deficit spending and injecting a meaningful amount of cash stimulus into the system. In perfect Orwellian fashion, the Fed throws up a semantic smokescreen by calling it "sterilized" QE.

How many of you out there think the Government will start reducing its debt load within the next 3-5 years. Anyone? The only difference between equity (cash/"electronic") and debt is that debt has to be repaid. In other words, debt repayment is "sterilization" of cash creation because at some point the borrower - in absence of printing - has to go get the cash from the system and repay the debt. No new "credits" were created to take care of the debt repayment. Defaulted debt - assuming the Fed refuses to print to avoid default - is the same thing as printing up the original cash that was circulated from the debt issuance because that cash is never removed from the system in order to reduce the debt. Capito?
 
Bottom line is that this nothing more than money printing in disguise.  I'm sure somewhere Shakespeare is cringing because of my associating his writing with Fed "spin" language, but Orwell has a big grin on his face...

20 comments:

  1. G-day Dave..I can sum this up for us all

    Ludicrous

    lu·di·crous/ˈlo͞odəkrəs/

    Adjective:
    So foolish, unreasonable, or out of place as to be amusing.

    Synonyms:
    ridiculous - laughable - absurd - funny - comical

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  2. Good stuff Dave

    so when the gov't gets these credits, presume then some/most of these eventually make its way into cash via account payable ie salary...

    and when the gov't has to repay the bonds (along with interest) they just borrow more...but while interest is paid to banks for buying bonds, the debt just gets rolled over....

    And this is outright debasing the currency as base continues to expand...

    And in the meantime, the price level continues to be managed in order for the game to continue...including metals prices...

    So the real value of metals is obstructed by the management of perception....

    Ironic they used essentially the same term as SInclair essentially created (mope)...

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    1. Thanks! Debasing by any other name is still debasing.

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  3. hey Dave,

    thanks for noting the refueling of the helicopters. :) what a joke huh?

    any ideas you can to share that you're accumulating now?

    in a non advice way, what do you think of rgld and slw as metal proxies for taxable accounts?

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    1. waiting for when i think this pullback is done and i'll take the profits from our partial hedges and roll them back into the current holdings. Physical gold, silver and some select stocks. I like Wildcat Silver and Rye Patch Gold and Eurasian Minerals and Golden Minerals for juniors. I like AEM, GG, HL for seniors. I have other names I like but I keep those proprietary so as not to affect the relative liquidity when I want to buy or sell them.

      Delete
  4. Monetary Double Talk Beyond MOPE

    "This would be a hat trick because it assumes the Fed would borrow back funds they have created by good ole debt monetization. It assumes there is no purpose to QE in the first place. It is monetary double talk beyond MOPE or maybe MOPE at a spiritual level. It is an attempt to intellectually cloud the process and to give plausible believability to PR lies.

    Once you buy the bond via monetization the deed is done. It ends there. If you drain then you have done the reverse.

    This is a statement that says we will step on the gas and then equally apply the brakes which means you go absolutely nowhere. It is a statement that is total gobbledegook to deflect the fact that QE is going to infinity. It is a statement that only those who do not understand monetary science might give credibility to.

    This is a damned lie which belongs more out of intelligence agencies than a body claiming transparency. This is why there is no practical way out of this mess as it offers no solution to anything whatsoever."

    http://www.jsmineset.com/2012/03/07/monetary-double-talk-beyond-mope/

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  5. It looks to me as if BB wants to save some (helicopter) gas - makes the distribution more environmentally friendly
    :-)

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  6. Jim Grant: "Capitalism is an alternative for what we have now. I highly recommend it."

    Grant: "We ought to be discussing an intelligent move to a sound currency by which i mean a currency that is based on a standard and not at the whim and the discretion of a bunch of mandarins sitting around Washington D.C."

    http://www.zerohedge.com/news/jim-grant-must-watch-capitalism-alternative-what-we-have-now?

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  7. Pretty brazen...

    As an Adviser, Goldman Guaranteed Its Payday

    About a month later, Kinder Morgan announced it had agreed to acquire
    El Paso for $21.1 billion in cash and stock.

    When the deal was announced, buried at the end of the news release was
    a list of Wall Street banks that had advised on the deal, including
    Goldman Sachs. Goldman received a $20 million fee for playing
    matchmaker for El Paso. The fee, of course, was not disclosed, nor was
    the Kinder Morgan stake owned by Goldman Sachs’s private equity arm,
    worth some $4 billion. Nor did the release disclose that the Goldman
    banker who advised El Paso to accept Kinder Morgan’s bid owned
    $340,000 worth of Kinder Morgan stock.

    Now, however, a court ruling in a shareholder lawsuit has laid bare
    the truth: Goldman was on every conceivable side of the deal. As a
    result, El Paso may have unwittingly sold itself far too cheaply. Mr.
    Blankfein may have said he was “very sensitive to the appearance of
    conflict,” but the judge’s order ruling “reluctantly” against a motion
    to block the merger made it clear that Goldman’s conflicts went far
    beyond mere appearances.

    http://dealbook.nytimes.com/2012/03/05/advising-deal-goldman-sachs-had-all-angles-for-a-payday/?src=dlbksb

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  8. Do they think we are stupid?

    Sometimes you wonder if we’re living in an alternate universe.

    Recent news reports that cite un-named sources and indicate the MF Global criminal case has "gone cold" are curious. In fact, these news reports are even more bizarre than previous reports claiming MF Global client funds have simply "vaporized."

    A pattern of behavior and reporting appears to be emerging that supports one overall goal: push the MF Global story under the radar, avoiding serious investigation and keep the inner workings and questionable circumstances surrounding a historic event out of public view and understanding. This, in turn, paves the way for MF Global creditors to legally swoop in on what rightfully belongs to the customers.

    http://www.opalesque.com/641018/Do_they_think_we_are101.html

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  9. Dave,

    You say "The perception difference is that this is "sterilized" because the Fed is just exchanging bonds for "credits," which is the same as cash."

    I don't think this is true. Rather, it is that the Fed is buying long dated bonds thereby pumping money into the system (as you describe), but they ALSO pull money out by borrowing that same money back from the banks. In this way, there is no more money in the system. At least that appears to be the theory. If this were true, then not sure what is the purpose of this other than to flatten the yield curve. This is a direct quote from the article:

    "Under the new approach, the Fed would print new money to buy long-term mortgage or Treasury bonds but effectively tie up that money by borrowing it back for short periods at low rates. The aim of such an approach would be to relieve anxieties that money printing could fuel inflation later, a fear widely expressed by critics of the Fed's previous efforts to aid the recovery."

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    1. Let me ask you something: do you understand what a reverse repo is? Google it and then look up the history over the last 2 years of reverse repos. You tell me if you think the Fed can possibly "sterilize" this money by dumping $500-$750 billion into the system over a short timeframe and then suck it all back via reverse repo. Do that in the context of the total amount of reverse repo activity over the last 2 years.

      That language, as I state, is Orwell-speak. It's nothing more. I penned my piece and published before Sinclair also addressed the same issue in a slightly different way.

      The reason this is being done is to facilitate the issuane of a massive amount of new Treasuries. They are selling short term holdings because there is a giant collateral squeeze in the global repo market - as I'm sure you've read - and there is excess demand for this paper.

      The Fed has claimed since 2008 that it had ways of unloading all the crap it's buying from banks. Not a chance in hell. You've read about the ECB being way overmarked vs. market on its assets. Our Fed is doubly overmarked.

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  10. This just another way of slowing the sale of treasuries and keeping yields below zero. Obviously the banks are low on cash, and were going to sell the damed things anyway. This will just keep it orderly.

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  11. We all know that bonds are between a rock and a hard place. Nobody in their right mind would buy them with negative yields. The pensioners are in serious shit. They actaully thought they were safe in bonds. Alot of pension fund managers are going to get hung from the nearest tree. While all of the Obama tree huggers protest the crule and unusual punishment to the environment.

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  12. It all makes sense now...law enforcement is wrapped up with the wrong whores.

    Accused Manhattan madam Anna Gristina boasted about her insider informants in NYPD, DEA & FBI

    Upstate soccer mom Anna Gristina, in secretly recorded conversations, boasted about her insider informants throughout law enforcement: the NYPD, the DEA, the FBI and ICE, the Daily News has learned.

    Read more: http://www.nydailynews.com/new-york/accused-manhattan-madam-anna-gristina-boasted-insider-informants-nypd-dea-fbi-article-1.1035244#ixzz1oXkjBBBX

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  13. Time To Sell Gold?
    http://www.ritholtz.com/blog/2012/03/time-to-sell-gold/

    or,

    "Practically all governments of history have used their exclusive power to issue money to defraud and plunder the people." Friedrich von Hayek
    Paul Brodsky
    http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2012/3/8_Paul_Brodsky.html
    Greyerz: Greek Deal to Collapse Causing Trillions to be Printed

    http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2012/3/8_Greyerz__Greek_Deal_to_Collapse_Causing_Trillions_to_be_Printed.html



    ...biancos research kind of specious, no?

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  14. In a little-noticed, but incredibly audacious announcement this morning, Federal Reserve officials said they are considering a new type of bond-buying program. This is meant to address worries about future inflation if [when] the Fed decides to take new steps to stimulate the economy in coming months.
    The Fed would print new money to buy long-term mortgage-backed securities or Treasury bonds while effectively borrowing an equal number of dollars at lower short-term rates. This would theoretically relieve anxieties that money printing could fuel inflation later, a fear widely expressed by critics of the Fed's previous efforts to 'aid the recovery'.
    ************************************************************************************************************
    The math (per $ billion)
    Borrow .......$1,000,000,000 at 0.13% annual rate [today's 6-mo. T-bill rate]
    Lend ......... $1,000,000,000 at 3.08% annual rate [today's 30-yr. T-bond rate]
    Earn ...........$29,500,000 per billion of carry trade EACH YEAR
    If only we could do this on a grand enough scale we could wipe out the national debt post haste. [No laughter, please].
    ************************************************************************************************************
    Imagine borrowing from your spouse at 5% while recording only a 1% cost of borrowing in order to see the insanity involved here.
    Your family debt rises by $1 billion. Your family liabilities increase by $1 billion but you declare yourselves much richer at year-end and protected against inflation as well.

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  15. Just a few thoughts....

    "The money printing could fuel inflation later" So the inflation we have right now isn't a problem nor will it be a problem later on so say the dead head Feds. The nation is already in debt to the tune of 15.5 Trillion dollars, and this extra bond creation won't add to the problem? And friends and neighbors wonder why we buy gold and silver and shun the dollar

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  16. There is nothing new under the sun. A leopard does not change its spots. Why would this action be a surprise to anyone one. Someone is going to pay for the national deficit. One more clesha comes to mind...there is no free lunch.

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