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Fed and Treasury Up the Ante – Professional Edition
The Fed announced a couple of mammoth increases to its existing alphabet soup programs today, increasing the currency swaps with FCBs to $620 billion from $290 billion. It also doubled the TAF to $300 billion, and announced a special series of 2 forward TAF auctions totaling $150 billion to tide the banking system over its year end requirements. Meanwhile the Treasury ostensibly completed its schedule for the week, announcing the 4 week bill auction and 3 more CMBs totaling $135 billion to fund the Fed’s bailout needs. That brings to $143 billion the amount of new cash to be raised this week. It is not clear whether the Fed is doing enough outright pumping to offset the negative effects of the ongoing tidal wave of Treasury supply on the market. Click here to download complete report in pdf format (Professional Edition Subscribers). Try the Professional Edition risk free for thirty days. If, within that time, you don’t find the information useful, I will give you a full refund. It’s that simple. Click here for more information.
3 Responses to Fed and Treasury Up the Ante – Professional Edition
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“I’m finding it difficult to get my mind around the implications of all these programs and numbers and I
welcome your comments and feedback. Feel free to use the comments section on the blog. I am open to
any and all ideas. The thing that strikes me at first blush. is that this whole thing seems like a circle jerk, and one that may be hurting the credit markets rather than helping.”
I believe these measures are ultimately an ill-fated attempt by the Fed, in partnership with the Treasury, to prevent the velocity of money from collapsing, thereby, resulting in a total deflationary collapse. The Fed is seeking to keep open the private credit conduits, as represented by ABCP and now the entire commercial money market, by a process of financial alchemy converting ABCP into money good Ts hoping against hope that the market will eventually regain confidence. The Fed has taken over the role of the IBs as the securitizer of last resort.
However, on the other hard, the Fed, in order to prevent a run for the exits by foreign creditors from Treasuries, cannot begin monetizing either. Therefore, the Treasury must borrow the money from the money markets and hand it over to the Fed, thereby, crowding out the private credit and equity markets.
Such measures are symptomatic of a central bank falling into a liquidity trap.
The expression torn between Scylla and Charybdis comes to mind.
Ultimately the Fed will have no choice but to puke out all this garbage and preserve the ability of the US govt. to borrow or else the primary justification for the Fed’s existence will disappear.
Lee,
Perhaps you can explain any possible relationship you perceive in the currency swaps between the Fed and FCBs given your assumption that FCBs are increasingly short of the dollars necessary to continue buying GSEs and Ts.
Is this another circle jerk?
Or are the currency swaps truly needed by the FCBs to provide liquidity to foreign banks suffering from deflating dollar denominated assets on their balance sheets?
I’m definitely not an expert on currencies or currency swaps, and till now I haven’t had to be, fortunately. But these measures, and the size of them along with all the reported anecdotal evidence, suggests to me that European banks have a real problem getting their hands on the dollars they need to roll over the mountain of dollar denominated debt they hold. Richard Russell predicted this back in 2004 and 2005 while ruminating on the idea of a dollar short squeeze.
My primary problem is that the massiveness of this probably leaks into the correlation that has been working for so long between changes in the SOMA and stock market direction. The Fed is now forcing money out in such huge quantities in the TAF, currency swaps, Discount Window, PDCF, AMLF,etc, that the SOMA itself may be becoming a whole lot less relevant. I just don’t know yet. We’re just going to have to watch closely over the next couple of years to see where the correlations lie.