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Posts tagged ‘United States Department of the Treasury’

U.S. Blasts Germany’s Economic Policies

 

Employing unusually sharp language, the U.S. on Wednesday openly criticized Germany’s economic policies and blamed the euro-zone powerhouse for dragging down its neighbors and the rest of the global economy.

In its semiannual currency report, the Treasury Department identified Germany’s export-led growth model as a major factor responsible for the 17-nation currency bloc’s weak recovery. The U.S. identified Germany ahead of its traditional target, China, and the most-recent perceived problem country, Japan, in the “key findings” section of the report.

The U.S. is itself dealing with persistently weak growth and has faced complaints from some countries about its attempts at reviving a sluggish economy, including the Federal Reserve’s easy money policies. Finance leaders have also taken aim at the U.S. over the global economic impact of fiscal wrangling between the White House and Congress, including the government shutdown and debt-ceiling fight………………………..

see full article here:

http://online.wsj.com/news/articles/SB10001424052702304527504579168113091545256?mod=mktw

Wall Street Aristocracy Got $1.2 Trillion in Fed Loans

This article was sent into us this morning and it is shocking! This article exposes the extent of the damage to the world’s financial system and also the extent the American Government will go to protect its friends on Wall Street

Citigroup Inc. (C) and Bank of America Corp. (BAC) were the reigning champions of
finance in 2006 as home prices peaked, leading the 10 biggest U.S. banks and
brokerage firms to their best year ever with $104 billion of profits.

By 2008, the housing market’s collapse forced those companies to take more than six times as much, $669 billion, in emergency loans from the U.S. Federal Reserve.
The loans dwarfed the $160 billion in public bailouts the top 10 got from the
U.S. Treasury, yet until now the full amounts have remained secret.

full article and source:http://www.bloomberg.com/news/2011-08-21/wall-street-aristocracy-got-1-2-trillion-in-fed-s-secret-loans.html

Standard & Poor’s downgraded the U.S.’s AAA credit rating

Standard & Poor’s downgraded the U.S.’s AAA credit rating for the first time, slamming the nation’s political process and criticizing lawmakers for failing to cut spending enough to reduce record budget deficits.

S&P lowered the U.S. one level to AA+ while keeping the outlook at “negative” as it becomes less confident Congress will end Bush-era tax cuts or tackle entitlements. The rating may be cut to AA within two years if spending reductions are lower than agreed to, interest rates rise or “new fiscal pressures” result in higher general government debt, the New York-based firm said yesterday.

Lawmakers agreed on Aug. 2 to raise the nation’s $14.3 trillion debt ceiling and put in place a plan to enforce $2.4 trillion in spending reductions over the next 10 years, less than the $4 trillion S&P had said it preferred. Even with the specter of a downgrade, demand for Treasuries surged as investors saw few alternatives amid concern global growth is slowing and Europe’s sovereign debt crisis is spreading.

“The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics,” S&P said in a statement late yesterday after markets closed.

U.S. Response

The U.S. immediately lashed out at S&P, with a Treasury Department spokesman saying the firm’s analysis contains a $2 trillion error. The spokesman, who asked not to be identified by name, didn’t elaborate, saying the mistake speaks for itself.

Moody’s Investors Service and Fitch Ratings affirmed their AAA credit ratings on Aug. 2, the day President Barack Obamasigned a bill that ended the debt-ceiling impasse that pushed the Treasury to the edge of default. Moody’s and Fitch also said that downgrades were possible if lawmakers fail to enact debt reduction measures and the economy weakens.

“This move should not be much of a surprise to markets, though the timing is at a point where market sentiment is fragile after the drop in stocks this week,” said Ajay Rajadhyaksha, a managing director at Barclays Capital in New York. “What really matters is whether the markets are willing to ‘downgrade’ the U.S. bond market. As this week’s move showed, U.S. Treasuries remain the flight-to-quality asset of choice.”

Asian Investors

Asian investors are likely to retain their Treasuries holdings for now, with options limited by the region’s foreign-exchange rate policies. Japan, the second-largest international investor in American government debt, sees no problem with trust in the securities, a Japanese government official said on condition of anonymity.

Policy makers from China to Japan to Southeast Asia are lured to Treasuries as a result of efforts to stem gains in their currencies against the dollar, which would impair export competitiveness. China has accumulated $1.16 trillion in the securities and the nation’s official Xinhua News Agency said in a commentary that the U.S. must cure its “addiction” to borrowing.

“They won’t be happy about it, but Asian central banks will just have to hold on and stick it out,” said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney.“There is pressure on them to hold on to liquid assets and there is nothing more liquid than the Treasury market. At least Treasuries have been doing well and they aren’t holding on to distressed assets.”

U.S. Economy

S&P’s action may hurt the U.S. economy over time by increasing the cost of mortgages, auto loans and other types of lending tied to the interest rates paid on Treasuries. JPMorgan Chase & Co. estimated that a downgrade would raise the nation’s borrowing costs by $100 billion a year. The U.S. spent $414 billion on interest expense in fiscal 2010, or 2.7 percent of gross domestic product, according to Treasury Department data.

“It’s a reflection of the fact that we haven’t done enough to get our fiscal house in the order,” Anthony Valeri, market strategist in San Diego at LPL Financial, which oversees $340 billion, said in an interview before the cut. “Sovereign credit quality is going to remain under pressure for years to come.”

The agreement between Republicans and Democrats raised the nation’s debt ceiling until 2013 and threatens automatic spending cuts to enforce the $2.4 trillion in spending reductions over the next 10 years.

Even with the accord, S&P said the U.S.’s debt may rise to 74 percent of gross domestic product by year-end, to 79 percent in 2015 and 85 percent by 2021.

S&P also changed its assumption that the 2001 and 2003 tax cuts enacted under President George W. Bush would expire by the end of 2012 “because the majority of Republicans in Congress continue to resist any measure that would raise revenues.”

American Policymaking

“More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating,” S&P said.

S&P put the U.S. government on notice on April 18 that it risked losing the AAA rating it had since 1941 unless lawmakers agreed on a plan by 2013 to reduce budget deficits and the national debt. It indicated last month that anything less than $4 trillion in cuts would jeopardize the rating.

“There was still a very narrow cross section of common ground between the parties and we don’t think that this agreement really changes that equation,” David Beers, a managing director of sovereign credit ratings at S&P said in a Bloomberg Television interview.

Capital Weightings

The treatment of Treasuries and other securities backed by the U.S. in terms of risk-based capital weightings for banks, savings associations, credit unions and bank and savings and loan companies won’t change, the Federal Reserve and bank regulators said in a statement following the downgrade.

Obama has said a rating cut may hurt the broader economy by increasing consumer borrowing costs tied to Treasury rates. An increase in Treasury yields of 50 basis points would reduce U.S. economic growth by about 0.4 percentage points, JPMorgan said in a report, citing Fed research and data.

“The minute you start downgrading away from AAA, you take small steps toward credit risk and that is something any country would like to avoid,” Mohamed El-Erian, chief executive and co-chief investment officer at Pacific Investment Management Co., said in a Bloomberg Television interview before the announcement.

Treasury Yields

Ten-year Treasury yields fell to as low as 2.33 percent inNew York yesterday, the least since October. Yields for the nine sovereign borrowers that have lost their AAA ratings since 1998 rose an average of two basis points in the following week, according to JPMorgan.

Treasury yields average about 0.70 percentage point less than the rest of the world’s sovereign debt markets, Bank of America Merrill Lynch indexes show. The difference has expanded from 0.15 percentage point in January.

Investors from China to the U.K. are lending money to the U.S. government for a decade at the lowest rates of the year. For many of them, there are few alternatives outside the U.S., no matter what its credit rating.

“Yields are low in the face of a downgrade because there is nowhere else for people to go if they don’t buy Treasuries because they want to be in safe dollar assets,” Carl Lantz, head of interest-rate strategy at Credit Suisse Group AG, one of 20 primary dealers that trade directly with the Fed, said before the announcement.

Bond Dealers

The committee of bond dealers and investors that advises the U.S. Treasury said the dollar’s status as the world’s reserve currency “appears to be slipping” in quarterly feedback presented to the government on Aug. 3.

The U.S. currency’s portion of global currency reserves dropped to 60.7 percent in the period ended March 31, from a peak of 72.7 percent in 2001, data from the International Monetary Fund in Washington show.

“The idea of a reserve currency is that it is built on strength, not typically that it is ‘best among poor choices’,”page 35 of the presentation made by one member of the Treasury Borrowing Advisory Committee, which includes representatives from firms ranging from Goldman Sachs Group Inc. to Pimco. “The fact that there are not currently viable alternatives to theU.S. dollar is a hollow victory and perhaps portends a deteriorating fate.”

Members of the TBAC, as the committee is known, which met Aug. 2 in Washington, also discussed the implications of a downgrade of the U.S. sovereign credit rating. “None of the members thought that a downgrade was imminent,” according tominutes of the meeting released by the Treasury.

Remaining AAAs

S&P gives 18 sovereign entities its top ranking, includingAustralia, Hong Kong and the Isle of Man, according to a July report. The U.K. which is estimated to have debt to GDP this year of 80 percent, 6 percentage points higher than the U.S., also has the top credit grade. In contrast with the U.S., its net public debt is forecast to decline either before or by 2015, S&P said in the statement yesterday.

New Zealand is the only country other than the U.S. that has a AA+ rating from S&P and an Aaa grade from Moody’s. Belgium has an equivalent AA+ grade from S&P, Moody’s and Fitch.

A U.S. credit-rating cut would likely raise the nation’s borrowing costs by increasing Treasury yields by 60 basis points to 70 basis points over the “medium term,” JPMorgan’s Terry Belton said on a July 26 conference call hosted by the Securities Industry and Financial Markets Association.

“That impact on Treasury rates is significant,” Belton, global head of fixed-income strategy at JPMorgan, said during the call. “That $100 billion a year is money being used for higher interest rates and that’s money being taken away from other goods and services.”

To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

Comment:

This move is a surprise to me as I did not believe the S&P would have the balls to do so .

This is bad for the markets, expect to see wild gyrations in the Dow .This is the kind of move that could cause the Dow to take a further nosedive down to about 9400ish a 2000 point drop .It’s time to get out or get some more insurance! The new rating of AA+ is not justified with all of the printing going full blast the Americans are already broke many times over and should really have a rating of Junk status . But if this happened we could see global  war.

Raising the Roof on Debt

Tuesday, May 17, 2011 –
By Peter Schiff

Today the U.S. government officially borrowed beyond its $14.29 trillion statutory debt limit. And even though the Obama administration has assured us that accounting gimmickry will allow the government to borrow for another few months, the breach has given seeming urgency to Congressional negotiations to raise the debt ceiling. Republicans are making a great show of acting tough by linking their “yes” votes with promises for future budget cuts (that could even slow the rate of debt increases at some uncertain point in the future). But as we go through the process, many novice observers may wonder why we have a debt ceiling at all when our government has never shown the slightest inclination to respect its prior self-imposed limits.

The ceiling was first imposed in 1917 as part of a deal that passed the Liberty Bond Act that funded America’s entry into the First World War. To make it easy for the Treasury to sell those bonds, Congress also amended the Federal Reserve Act to allow the Fed to hold government bonds as collateral. But given the potential for unchecked Federal deficits, Congress sought to limit taxpayer exposure to $11.5 billion.

The problem was that Congress never passed a law to prevent future Congresses from raising the ceiling. And even if it had, that law could have been rewritten by future legislation. Sure enough, when the Second World War rolled around the debt limit was raised frantically, leaving it at $300 billion by 1945. But believe it or not, after the War ended, the limit was actually reduced to $275 billion.

Despite the costs associated with the Korean War, the next increase did not come until 1954. And over the ensuing eight years, the ceiling was raised seven times and reduced twice, finally getting back to $300 billion in 1962. Since then, Congress has voted to raise the ceiling 74 times without a single reduction.

Practically speaking, a ceiling that is raised automatically is no ceiling at all. Given that, why not dispense with the pretense? The reason is politics. No Congressman wants to be on the record voting for unlimited debt, yet most are willing to rail against fiscal recklessness while raising the ceiling every time it’s reached. Any Congressman who gives lip service to a balanced budget Amendment but votes to raise the debt ceiling is a hypocrite. No one needs constitutional help to hold the line on the debt right now!

But epic levels of Federal red ink and the approach of the 2012 elections have raised the stakes. Despite the newfound urgency, nearly all Democrats and a very large chunk of Republicans argue that failure to raise the ceiling will be tantamount to economic suicide. They argue that such a rash move will cause the U.S. to default on outstanding debt obligations, thereby sending interest rates sharply higher across the board. Higher interest rates they argue would cripple the economy and permanently increase debt service costs. As a result, they predict capping debt now will precipitate a far deeper economic contraction than what we have already seen in the last few years.

Few see the inherent absurdity in the notion that taking on more debt improves the economic health and creditworthiness of the United States. I would argue for the much simpler idea that more debt weakens a nation’s financial position. More importantly, capping U.S. debt at current levels means bringing a future crisis into the present where it can be dealt with in practical terms. This is something that nobody in Washington actually wants.

If we do today what we have failed to do in the past, we very may well default on a portion of our debt. No doubt our creditors will suffer. But such near term pain will lead to a quicker and healthier recovery. Out of control Federal spending will have to be dealt with now. A downgraded credit rating will make it harder for the United States to continue borrowing, and as a result should be viewed as a blessing in disguise.

A reduction in debt levels is good economics. Remember, taxpayers will have to repay with interest anything the government borrows now. The more the government borrows, the larger it grows, and the larger it grows, the weaker the economy becomes. The less money the government borrows, the more that is available for the private sector to borrow to increase production and create jobs.

Failing to raise the debt ceiling will force Congress and the President to tell the truth to Social Security and Medicare beneficiaries who have been promised more than taxpayers can deliver. They will have to concede that so-called government “trust funds” are mere accounting gimmicks, and that benefits will need to be cut if the programs are to be solvent. They will have to tell the truth to our creditors that the U.S government has borrowed beyond the ability of its citizens to repay. And lastly, the stark reality will force the government to tell the truth to Federal employees whose salaries and benefits are unsupportable given our fiscal weakness.

But, on the other hand, if we raise the debt ceiling, we can postpone the crisis into an indefinite future. All of these tough choices could be avoided. Government pay and benefits will flow unabated, and our creditors will continue to get their interest payments now. But in the future, the value of principal repayments and government benefits and paychecks will lose purchasing power. That’s because if we keep raising the ceiling indefinitely, we risk destroying our currency. But the long slow death of a currency and the ebbing of a nation’s economic vitality doesn’t make for huge headlines.

It is for that reason I am 100% confident that Congress will do the wrong thing and raise the debt ceiling for the 75th time in 50 years. In the end there will be some kind of phony compromise with each side claiming victory. But while the politicians celebrate another dodged bullet, the U.S. economy will continue to be shot full of holes.

comment:

In light of this enormous debt one would have thought the dollar would be worth nothing .Today it closed at 1.4240 to the euro .We all know that the Euro is finished so why is a currency that can disintegrate anyway still gain on the dollar??

The U.S. Dollar Bubble Has Burst!

Whilst the mainstream press talking heads continue to talk about bubbles everywhere except the biggest bubble of all which is the U.S. Dollar, that partially manifests itself in the USD index trending lower, though given the fact that all currencies are in free fall against one another the dollar bubble bursting is more evident in soaring commodity prices that are leveraged to real inflation. The US government and central banks are accelerating the trend for the destruction of the worlds reserve currency something that is more than evident in the rush into Gold and Silver as alternative currencies to fiat paper because they cannot be printed and therefore more difficult for the master manipulators at the Fed to manipulate lower as they have done so for US treasury yields which do not reflect the real US inflation rate that folks such as shadowstats put as high as 10% against official CPI of 2.7%.

The bottom line is that the US is on an accelerating trend towards a dollar crash event when there is panic loss of confidence in dollars and by virtue of virtually every other currency will suffer to a great extent as all currencies are locked into a money printing death spiral towards oblivion, the only difference between currencies is the volatility in the differing rates of free fall which are the exchange rates that the financial press blandly reports on a daily basis.

Now, everyone’s apparently a dollar bear, though backtrack a few months to December 2010 with the USD Index breaking above 80 and the prevailing mood was turning decidedly bullish, with much talk in the financial press and blogosfear (ignoring dollar perma-bears) for the possibilities of USD rallying all the way to 90, which was not destined to happen as I commented upon at the time that it was a great time to load up with dollar shorts.

My long standing USD analysis (12 Oct 2010 – USD Index Trend Forecast   Into Mid 2011, U.S. Dollar Collapse (Again)? ) concluded in the following   trend expectation for the U.S. Dollar into mid 2011 in that it targets a mid   2011 low of around 69-70. Currently the USD index stands at 73 which puts the   trend firmly inline with the forecast expectations of over 7 months ago.

article source :http://www.marketoracle.co.uk/Article27904.html

Comment :

I am expecting that the dollar will test its all time lows
and maybe even make new lows in any case I then expect as the article says it
to move back up so I see a trade here to the upside but only after it has
tested the lows .I will be buying anywhere below  69.75. I have a mortgage in Euros and I
intended to change it to US Dollar equivalent .

There Is No Business Like Bond Business

 

Front-Running the Fed in the Treasury Market, There Is No Business Like Bond Business

Interest-Rates / US Bonds Jan 19, 2011 – 04:17 AM

By: Professor_Emeritus

 

For some nine years I have been predicting that the economy is going to a recession morphing into a depression, using a purely theoretical argument. The essence of my argument is that the open market operations of the Fed cause a protracted decline in interest rates which is responsible for the hard-to-detect capital destruction affecting the financial sector no less than the productive sector. The immediate cause of the depression is the destruction of capital. The ultimate cause is the monetary policy of open market operations. The chain of causation is as follows.

  1. Open market operations (in effect, net purchases of T-bills) by the Fed are predictable. They invite bond speculators to take risk-free profits offered by this fact of predictability.
  2. Bond speculators buy the long-dated Treasurys and sell the short-dated ones, to pocket the difference in yields. These straddles represent borrowing short and lending long. As such, they are inherently risky. However, Quantitative Easing takes the risk out by making the odds, that the normal yield curve will invert, negligible.
  3. The bond speculator faces the problem of having to roll forward the fast-expiring short leg of his straddle by selling T-bills. The extraordinary funding and refunding requirements the Treasury is facing, and the extraordinary pressure on the Fed to increase the money supply combine to make it ultra-easy for the bond speculator to move both the short and the long leg of his straddles as he sees fit.
  4. The upshot is that interest rates keep falling along the entire yield curve. Regardless how many long-dated issues the Treasury offers, bond speculators snap them up even before the ink is dry on them.

Here we have the solution to the Greenspan-conundrum: the sky is the limit to the bond speculators’ appetite for Treasury paper. They are all right as long as they can sell T-bills against them. But as the sky is the limit to the Fed’s appetite for T-bills, both flanks of the speculators are secure.

In my other writings I have explained how a prolonged fall in interest rates along the yield curve brings about depression through the indiscriminate destruction of capital in the productive as well as financial sector.

There is a vicious spiral: the more currency the Fed creates, the more risk-free profits bond speculators will reap, contributing to a further fall of interest rates.

This outcome is the exact opposite of the one predicted by monetarism. The latter predicts that the new money created by the Fed will flow to the commodity market bidding up prices there, to nip depression in the bud. Bernanke & Co. fully expects this to happen. This is not what is happening, however. The new money refuses to flow uphill to the commodity market. It flows downhill to the bond market where the fun is. Why take risks in the commodity market, the speculators ask, when you can gamble risk free in the bond market? So grab the money, buy more bonds and sell an equal amount of bills. As a consequence of bullish bond speculation interest rates fall, prices fall, employment falls, firms fall. The squeeze is on, bankrupting the entire economy.

Official check-kiting

Some might object that the Fed could short-circuit the process and undercut the bond speculators’ lucrative business. All it has to do is to buy the short-dated paper directly from the Treasury. Inverting the yield curve will shake off the parasites. My answer is that there is no danger of this happening. The Treasury and the Fed know that bond-vigilantes watch what they are doing like a hawk. Any hanky-panky of direct sales of T-bills by the Treasury to the Fed would make them cry “foul play!” As indeed it would be: direct sale of Treasury paper to the Fed would degrade the dollar from irredeemable currency to fiat currency. There is a subtle difference, realized only by the few.

Fiat currency is worse. Its arbitrary augmenting is decided behind closed doors. It does not need the endorsement of the open market. Fiat currencies have a short life-span as they readily succumb to the sudden-death syndrome. Irredeemable currencies are different from fiat in that they are created openly, using collateral purchased in the open market. They have a more respectable life-span. As long as the official check-kiting conspiracy between the Treasury and the Fed remains hidden from the general public, irredeemable currency may even prosper. Direct sale of T-bills by the Treasury to the Fed would tear down the curtain that hides the fact of check-kiting.

The mechanism of check-kiting is as follows. The Treasury issues debt which it has neither the intention nor the means ever to repay. This debt is used as “backing” for Federal Reserve notes and deposits, which the Fed has neither the intention nor the means ever to redeem. When the Treasury debt matures, it is paid in Federal Reserve credit issued on the collateral security of new Treasury debt. When Federal Reserve credit is presented for redemption, the Fed offers interest-bearing Treasury debt in exchange. This is a shell game and it exhausts the definition of check-kiting. Neither the Treasury debt, nor the Federal Reserve credit is issued in good faith. Neither is redeemable any more than Charles Ponzi‘s tickets were. They are both issued in order to mesmerize a gullible public, much the same way as Ponzi did.

Treasury and Fed officials know their history. They are familiar with the fate of the assignat, the mandat, the Reichsmark, not to mention the Continental. They know that no fiat money ever survived “the slings and arrows of an outrageous fortune”. Their only hope is that the fate of the irredeemable dollar, as predicted by Friedman, would be different. They would not embark upon an adventure in monetary policy involving direct sales of T-bills by the Treasury to the Fed. If they did, surely this would be the end of their experiment. Foreigners as well as Americans would start dumping the dollar unceremoniously, and buy anything they can lay their hands on. This is variously known as flight into real goods, Flucht in die Sachwerte, crack-up boom, Katastrophenhausse. I purposely avoid using the term hyperinflation as it connotes with the Quantity Theory of Money, which is not really a theory. It is a linear model trying to explain non-linear phenomena.

Falsecarding by the Fed

There is also a second method by means of which bond speculators are making risk-free profits. They “front-run” the Fed in the bill market. This means that, through inside information or otherwise, they divine when the Fed has to answer “nature’s call” and must make the next trip to the open market in order to buy the collateral without which it cannot issue more money.

Bond speculators forestall the Fed by purchasing the bills beforehand, thus driving up the price. Then they turn around and dump the paper into the lap of the Fed at the enhanced price, making a risk-free profit. This process is called “scalping”, after the kindred activities of small-time speculators in tickets for the World Series and other popular sporting events.

The objection that the Fed knows how to throw bond speculators off scent by various stratagems for example, through falsecarding, say, by selling when speculators would expect it to buy can be safely dismissed. There is no question that every year the Fed is a big buyer of bills on a net basis. If it sells, it has to buy that much more later on. Fiddling means that the Fed may miss its target. Falsecarding may backfire.

The speculators are a smart lot, thanks to “natural selection” culling the rank and file. They risk their own capital, which they stand to lose if they place the wrong bet. Once their capital is gone they are out, and smarter guys will take over. Hired hands at the Fed are no match for them as far as brightness and adroitness is concerned. The latter work for salaries. If they make the wrong bet, losses will be replenished by dipping into the public purse. Think of the losses the Bank of England suffered at the hand of a lonely bond speculator, one George Soros. The British public was forced to swallow the loss, and Soros was allowed to run with the loot and boast in his book that he has busted the Bank of England single-handedly. Recently Soros said in Davos that he is bearish on gold. In his opinion gold is in a bubble. Of course. He knows that he couldn’t bust the Bank of England again, once it is back on the gold standard!

Cheating in Las Vegas

My voice has remained a cry in the wilderness. Nobody paid attention to the mumblings of this armchair economist.

My idle theorizing got an unexpected boost from the website Jesse’s Café Américain (http://jessescrossroadscafe.blogspot.com). On January 22, 2010, Jesse posted a story with the title Front-Running the Fed in the Treasury Market from which the following quotation is taken.

Attached is some information from a reader. I cannot assess its validity, not being in the bond trading business. But it does sound like someone has tapped into the Fed’s buying plans to monetize the public debt and is front-running those purchases, essentially ‘stealing’ money from the public. It’s what they call a ‘sure thing’. To try and figure out who might be doing it, I would look for some big player who is showing extraordinary returns on their trading, with consistent profit that is not statistically ‘normal’, but is consistently ‘too good’. The problem with cheaters is that they sometimes get greedy and call attention to themselves. In Las Vegas the bigger cheats at the casino were often taken to the desert for further questioning and final disposal. On Wall Street they are more arrogant and persistent, defying resolution with that ultimate defiance, “We’ll just have to figure out other ways to cheat, and come back again”.

Time for a trip to the desert?

Here are my reader’s observations from the bond market.

“I used to work for a BB on a prop desk until the financial crisis took hold and they fired the less senior guys. I now trade US Treasurys for a small prop firm in xxxxx, to scalp basis trades in most on-the-run securities. Occasionally, I will also take position in the repo markets for off-the-runs if I see something ‘mispriced’. Your recent article piqued my interest because we, too, have noticed ‘shenanigans’ of a sort in the Quantitative Easing program involving US Treasurys.

“What we have noticed, especially in smaller issues like the 7 Year Cash, is that before a Fed buy-back would be announced, the price would pop significantly as if buyers would run through all the offers on the two major electronic exchanges (BGC Espeed and ICAP Broker Tec). This has occurred more than several times as the 7 Year Cash would be overvalued both by its BNOC, by as much as 20-30 ticks, as well as by its value relative to similar off-the-runs. These buyers would lift every offer they could, driving the price substantially above its ‘value’, sometimes for as long as a week at a time. After this buying occurred, the Fed would announce the purchase of that security, sometimes a handle above its approximate value. This ‘luck’ has occurred not just in the on-the-run 7 Year sector, but also in the 30 Year Cash, 3 Year Cash, and in several other off-the-runs. Again, it was especially prevalent in the less liquid Treasury products. Often the ‘appetite’ for these securities would begin two weeks before the official Fed announcement. The buying was well-orchestrated and done in such a way as to throw it out of kilter with the like cash Treasurys and the CME Ten Year Contract. If you examine the charts of some of the selected buy-backs before the official announcement, you will see a similar occurrence.

“While I haven’t broken this down into a paper to prove it (and I see nothing positive coming out of contacting the ESS-EEE-SFE about this issue), I can assure you that it was occurring on a consistent basis across the entire curve. A certain issue would be bid up substantially above market value (as determined by several metrics), only to be gobbled up later by the Fed at an unreasonably high price. These players must have substantial pockets as we, the small guys (but with a decent capital base) would take the other side of what seemed to be an obvious fade. While this did not occur in every issue of the Quantitative Easing program, it occurred often enough to be obvious to any knowledgeable observer.

While I am not sure that this can be attributed to a purposeful Fed policy or someone at the Fed talking to his pals, I am certain that it transpired.”

Congenital disease of the monetary system

The anonymous correspondent of Jesse is looking for an answer in the wrong direction. Cheating is not necessarily involved. What he has observed need not be a purposeful, if veiled, Fed policy, nor is it necessarily someone at the Fed tipping off his brother-in-law at a brokerage house (however valuable the tip may be).

What we face here is a congenital disease of the irredeemable dollar. Open-market operations is the tool for the purpose of increasing the money supply through monetizing government debt as needed. It should be recalled that open-market operations by the Fed were illegal according to the Federal Reserve Act of 1913. The original Act looked at the monetization of government debt as an anathema. Illegal open-market operations started in the early 1920’s. They were legalized ex post facto in 1935 by an amendment to the Act, after the gold standard was destroyed by the proclamation of president Roosevelt in 1933. Those who sponsored the amendment were ignorant of what effect open market operations would have on bond speculation. Economists in and out of government and academia were equally ignorant. The financial press also failed to criticize the hare-brained scheme of open market operations making, as it did, profits from bond speculation risk free.

There is no need to look for a conspiracy in the bond market. It is quite possible that a large number of smart speculators, acting spontaneously and independently of one another, have come to realize that there is a bonanza, perfectly legal, in ripping off the public purse. Of course, they kept their own counsel.

If anybody is responsible for this colossal blunder of economics releasing the genie of risk-free speculation out of the bottle, the names that come to mind are those of Keynes and Friedman, resp. They invented, resp., ‘improved’, the system of floating exchange rates assuming a goldless currency that has to be arbitrarily augmented from time-to-time through the monetization of government debt (that, incidentally, proliferated profusely after the politicians deliberately unbalanced the budget upon the explicit advice of Keynes). The rest, as they say, is history.

As long as budget deficits were ‘modest’, the activity of speculators making risk-free profits in the bond market escaped public attention. With the advent of ‘Quantitative Easing’ and mega-deficits, everybody sitting at a bond-trading desk can see it. The figures literally jump off the screen, as explained by Jesse’s blog.

Recruiting a corps of shills

To be fair to Jesse’s anonymous correspondent I must admit that his conjecture, that in risk-free bond speculation we may be looking at deliberate Fed policy, is plausible. It is not impossible that the rot in the U.S. monetary system has already spread so far that in a truly free and unrigged bond market no bidders would turn up. Time is long since past when Treasurys were eagerly sought after by the most conservative segment of the investing public, such as guardians of widows and orphans, trust funds, eleemosynary institutions. Typically, they held the bonds to maturity. Treasurys, second only to gold, were the most trusted instruments of wealth-preservation.

Under the regime of the irredeemable dollar no investor in his right mind would buy a Treasury bond and hold it till maturity. Treasurys lose value as ice melts in the sunshine. They have become a plaything in the hands of speculators for their value in turning a fast buck. Under the gold standard there was no bond speculation, just as there was no foreign exchange speculation. Interest rates were stable and so were bond prices. Speculators would shun bonds. Of course, all this changed when president Nixon defaulted on the short-term gold obligation of the Treasury to foreigners in 1971, and gold was finally removed from the international monetary system at the behest of the U.S. government.

For a decade speculators were happy with the trading profits they could make in the bond market. But as the monetary system kept deteriorating, they started abandoning bonds, transferring their activities to the commodity market. By 1981 demand for bonds practically evaporated. As this spelled the end of the regime of the irredeemable dollar, the Fed had to do something to prop up the bond market by enticing bond speculators back.

Thus, then, it is quite possible that a decision was made at the highest level to offer the enticement of risk-free profits to bond speculators. It certainly cannot be denied that bond speculators have been making obscene profits in the course of the 30-year bull market in bonds that is still ongoing. These profits are unprecedented in the history of speculation, both on account of their magnitude and their regularity. They were made at the expense of productive enterprise, the capital of which has been surreptitiously siphoned off by the falling interest-rate structure.

Another way of describing this scenario (assuming it is correct) is that in 1981 the Fed, unknown to the public, decided to recruit a corps of shills to prop up a moribund bond market. The shills hired by the casinos of Las Vegas bet big and win big at the gaming tables in full view of the gamblers who are unaware that they are being treated to a show. The sight of these big payoffs will then perk up the gambling spirit of a lethargic clientele.

The shills recruited by the Fed are the bond speculators, and their remuneration is in the form of risk-free profits they are allowed to make (and keep). The scheme was a roaring success. Not only did it save the bond market from extinction; it also saved the dollar from ignominy, and was instrumental in making possible a whole string of bubbles, each bigger than the previous one.

The Road to Hell Is Paved with Good Intentions

The problem is far more serious than it may at first appear. Risk-free speculation is like a computer-virus that has no antidote and threatens to wipe out the Internet. It short-circuits normal economic processes and gobbles up the world economy.

I would welcome a public debate of my thesis that risk-free bond speculation suppresses the rate of interest and destroys capital in the process. I have challenged neo-classical economists who still consider the open-market operations of the Fed as a ‘refined tool to manage the national economy’. I want them, instead, to see in open-market operations the cancer of the economy responsible for the withering of the world’s prosperity. So far my challenge has fallen upon deaf ears.

Here is the problem. The prevailing orthodoxy is the unholy alliance between Keynesianism and monetarism inspired by Friedman (defying the pretence that these two are antagonistic theories). The idea that an artificial increase in the money supply must raise commodity prices dies hard. But as my theory suggests, and as events have repeatedly shown (first during the Great Depression of the 1930’s, and again, during the present crisis), the presence of risk-free speculation renders the increase in the money supply counter-productive. It causes prices to fall rather than rise.

Giving them the toy of risk-free profits makes speculators vacate the commodity market where risks are too high. They will then congregate in the bond market where risks are non-existent. The speculator who in the absence of risk-free profits might resist falling prices in the commodity market, will decline the honor of pushing the Keynesian agenda if given the choice of risk-free profits in bonds. This is basic human reaction that cannot be criticized, still less rectified, by official brow-beating. Keynesians should have thought about the consequences of their master-plan more thoroughly before they put open-market operations into effect.

The intentions of policy-makers at the Fed are praiseworthy. They want to prevent prices and employment from collapsing. But they are prisoners of their orthodoxy, and their good intentions make them steer the economy to the road to hell. A catastrophe is confronting the Titanic, but the captain, just confirmed in his position in spite of a most serious public challenge, will not change his course.

A head-on collision with the iceberg straight ahead, otherwise known as the debt-tower, now appears inevitable.

Calendar of Events

Seminar at the Martineum Academy, Szombathely, Hungary, March 25-29, 2010

Is the Global Financial Crisis Over?

Sponsored by the Gold Standard Institute, with the participation of Sandeep Jaitly, Peter van Coppenolle, Rudy Fritsch, Darryl Schoon, Nathan Narusis, Professor Fekete, and others. Among other topics, there will be a presentation of the latest research on the gold basis, the world’s pension woes, and an exclusive business ideaturning the ridiculously undervalued “legal tender gold coins” to your advantage. For further details, see: www.professorfekete.com

By Professor Antal E. Fekete,
Intermountain Institute for Science and Applied Mathematics

“GOLD STANDARD UNIVERSITY” – Antal E. Fekete aefekete@iisam.com

For further information please check www.professorfekete.com or inquire at GSUL@t-online.hu .

We are pleased to announce that a new website www.professorfekete.com is now available. It contains e-books, archives, news about GSUL, and material of current interest

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