Notes From Underground: The FED Feeds the Liquidity Machine

In the very anticipated FOMC release, the FED announced that the Operation Twist would be extended from the June expiration until the end of the year. No surprise as Bernanke seemed to believe  that the FED had to do something about the lethargic growth in the economy. Listening to the press conference held after the FOMC release, it seems that Ben Bernanke is the most troubled man in America. All of the FED‘s actions during the last two years have failed to generate the robust growth that TEXTBOOK MODELS HAVE PREDICTED. Europe continues to be the main theme as to why the GLOBAL ECONOMY IS FAILING TO GAIN ANY REAL TRACTION. Europe continues to plague the world as capital investment languishes in fear of European debt problems causing a massive new round of deleveraging.

Bernanke was peppered with questions about the way around the “FISCAL CLIFF” that is looming in post-election America. Chairman Bernanke noted that the FED would appreciate any clarity about from the fiscal authorities as to the road ahead, but otherwise the FED still has some monetary tools in its arsenal if the CONGRESS cannot get beyond the politics that inflates the fear of the “FISCAL CLIFF.” Again, the FED was not forthcoming about what tools it would utilize but it seems that the best effort would be directed at massively increasing the DOLLAR SWAP LINES so as to prompt the ECB into swifter action.

If not swap lines, then we can look on the order of something similar to the efforts of the Bank of England’s EXTENDED COLLATERAL TERM REPO FACILITY. Bernanke made mention in his press conference that he found the BOE’s recent action very interesting. The British bank is attempting to get some velocity into the vast amount of bank liquidity by lowering collateral standards for short-dated repo. The FED is watching as it deals with a velocity constrained monetary situation. This is just a quick note as the effects of WORLD TRAVEL weigh heavy … more tomorrow.

***A quick heads up: The JAPANESE YEN traded weak today and it important to be alert to any major currency action by the BOJ. Now that the G-20 has come and gone–and accomplished little more than setting out a list of platitudes in its wake–it will be important to monitor the YEN to see if the Japanese were able to get the OK for YEN intervention in its exchange for greater IMF funding for Europe and, of course, in aiding in the PUBLIC BROWBEATING of Chancellor Merkel. The consensus outcome of the G-20 was that Germany needed to capitulate and allow for a EUROBOND and EUROPEAN BANK BACKSTOP.

If the Japanese were to INTERVENE AGAINST THE YEN BE ON THE ALERT FOR FURTHER COORDINATED ACTION FROM THE FED AND OTHERS SO AS TO HALT THE RISE IN EUROPEAN PERIPHERY YIELDS. The usually hyped up Secretary Geithner was very calm and sanguine about the outlook for the European summit at the end of JUNE. Never underestimate the impact of presidential election politics on global events–think the August 1971 DEVALUATION OF THE DOLLAR and NIXON’S CHINA TRIP–all intended for election effectiveness. The Obama administration is very well versed in the Nixon playbook. (READ ALLEN MATUSOW’S BOOK–NIXON’S ECONOMY).

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8 Responses to “Notes From Underground: The FED Feeds the Liquidity Machine”

  1. gary s rosenthal Says:

    Ira..I recently sent the comments below to Harry Logan..can you help answer my question to him re Fed accounting of the 3yr collateralized loans to the bks?…also I just read the CME is going to offer physical delivery gold futures contracts..will this reduce the bullion bks fradulent manipulation of the CME paper only gold futures contracts?..without the risk of physical delivery the size of the bullion bks give them complete short term dominance of the so called CME gold price discovery mechanism….warmest personal regards, Gary Rosenthal P.S. welcome back, you have been sorely missed!
    ====================================================
    ..Harry…you asked “The Feds still do not state how they can run a deficit of 1.5 trillion dollars per year and with no nation on earth buying these USA treasuries how on earth does the Fed balance sheet stay constant?”..the Fed is printing money and lending it to the bks to buy the Fed’s short term treasuries…the bks then use the treasuries as collateral for the loans and collect a tiny spread..call it a collateralized repo, all it does is “swap” the short term treasuries on the Fed’s balance sheet for collateralized bnk loans ..in essence the Fed is creating the money to “accelerate the maturity” of the short term Treasuries on the Fed’s balance sheet and replace them with loans to the bks.. the bks do this because the Fed has guaranteed to keep short rates down for the 3-yr term of the loan or repo..how is this operation any different from the LTRO performed by the ECB?..I don’t understand why everyone doesn’t see this as an expansion of the Fed’s balance sheet as the loans to the bnks have to show up somewhere..maybe you can explain to me what I am missing because I believe the entire operation is just an accounting sleight of hand..

  2. arthur Says:

    Great post (as usual). Yra, in your opinion, the biggest source of geopolitical risk right now is? Thanks

  3. Danny Says:

    Welcome back Yra!

    In terms of the most significant outstanding risk: Greece/Spain/Italy; Japanese monetary policy; OPEC/Iran Sanctions; Supreme Court Ruling on Obamacare; U.S. presidential elections; U.S. fiscal cliff at year end; etc.?

    It’s almost remarkable to sit back and just look at the amount of outstanding issues that could impact the markets in totally different directions depending on their outcome.

    Have a good weekend.

  4. Dave in FLL Says:

    Yra – I just don’t understand how Japan has managed to maintain a strong Yen for the better part of 2 decades. It looks horrible, but it’s looked horrible to me for the better part of 10+ years. I can’t find any satisfactory explanation of this phenomenon. Any ideas or at least a hint pointing me in the right direction?

  5. yra harris Says:

    Dave in FLL—having just returned from japan I saw first hand how expensive the YEN has made Japan for foreigners.But as the very astute Naomi Fink reminded me over coffee—not bad for those who live in Japan as delation has been a good thing;especially for owners of JGB’s.The reason in my opinion is that the YEN holds its gains is because of the vast amount of repatriation of foreign earnings.I see Japan similar to England in the late 1800’s and early 1900’s when British foreign investment kept the current account in surplus.An anecdotal effect of the strong yen is that I saw an significant increase in German autos on the streeets of Tokyo and Kyoto and I plan to look more at this—the initial input into my reserach ahs been that foreign auto registrations are up significantly just over the last year.—but Dave look to the current account and the fact that zero interest rates are plaguing all of the DM just keeps the pressure on the YEN.

  6. yra harris Says:

    Danny–there arer many hot/flash points on the world stage but I make Europe the number one problem–complicated by the coming increased comradeship between Germany and Russia—this will be a theme going forward for the Notes From Underground

  7. yra harris Says:

    Arthur–the fiscal cliff on top of the lack of leadership in Europe is a very dangerous situation —the FISCAL CLIFF has Andrew Mellon written all over it and Bernanke is very concerned—and needs Europe to do a massive “stimulus” program so the light shines again on the weak leadership in washington—1937 redo

  8. yra harris Says:

    Gary Rosenthal—I don’t know enough about the CME contract to offer an opinion–but will look into it this week.The FED issue has been to ty and free up as much liquidity as possible but it has not worked but look for Bernanke to begin playing with the collateral rules ala the Bank of England.The FED’s Treasury buying program has meant that the SOMA has accumulated a great deal of the best collateral and is leaving the REPO market drained of quality paper.The FED’s models apparently fail to take into account the importance of REPO for the modern financial system–a global problem –as we see in Europe as the BUNDS went hyperbolic as other EURO sovereigns were downgraded and very little collateral was available putting a bid to German paper.The London Clearing House raised the haircuts on the Spanish and Italian sovereigns so the feedback loop remains—part of the reason that so many people have been so wrong about the U.S. Treasury market—there is a premium on collateral for the REPO market.

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