The Circular Pipe – Professional Edition Fed Report

October 30, 2008

The Fed pumped a net of $145 billion in cash into the market this week through its alphabet soup of programs and conduits. Surprise, surprise, stock prices jumped. But Treasuries groaned. Was the Fed actually creating money and credit, i.e. monetizing? Or was it simply acting as a circular pipe? You’ve probably already guessed the answer. 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.

This entry was posted on October 30, 2008 at 10:05 pm and is filed under Money and The Fed, Professional Edition. You can follow any responses to this entry through the RSS 2.0 feed.

One Response to The Circular Pipe – Professional Edition Fed Report

caliboy on October 31, 2008 at 7:07 am

Lee,

I question whether the move up in the yields of long term Ts truly reflects any sort of massive rejection by the market of ongoing Treasury borrowing.

An argument can be made that the more the Treasury borrows the more it crowds out private market securities only serving to accelerate risk aversion and further flight to safety into Ts. This was Japan’s experience over the last couple of decades despite budget deficits that dwarf anything the US has racked up to date.

I think we are a long way away from the type of bond market dislocation at least on the scale you are intimating. At this juncture, any move above 5% on the ten year note would only act as a catalyst for a monumental deflationary collapse(aka adverse feedback loop) and flight to safety.

It seems pretty clear that the Fed has conceded, at least internally, that it has fallen into ZIRP. In the near future, I would anticipate a new set of policies consistent with the ZIRP reality including quantitative easing. But it won’t matter as the reserves will simply end up on the federal deposits balance sheet earning .25 % for member banks.