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Now You See It, Now You Don’t – WSE Pro

Since the Fed’s first TAF operation on December 17 the Fed has reduced the size of the SOMA by nearly $25 billion. 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.

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7 Comments

  1. pogo

    Re: liquidity
    John Williams update 12-28-07:
    “Although the pace of broad money supply growth may slow slightly in December, such remains at a level that historically has been followed by debilitating inflation. Despite games the Fed is playing with day-to-day open-market operations, it is not sterilizing the still-heavy influx of foreign-held dollars into U.S. Treasuries, which is the same thing for the Fed as pumping liquidity into the system.”

    Whaddya think?

  2. Lee Adler

    Hmmm. Well, I don’t know who John Willams is, and I do not like to pass judgement on other analysts. But as to the ideas expressed, no, I don’t think it is the same at all since it is actually the recirculation of dollars that were already in the financial system. This pumping has been going on for 4 years and has been a constant. Without it, Treasury yields would be godknowswhere.

    This is not the same as direct monetization by the Fed, and not even close to the Fed handing cash to the Primary Dealers on a daily basis. Instead the Fed is taking cash out of the PD pockets, which I believe is a much more powerful influence on the markets than the FCB accumulation of Treasuries and GSE paper. Yes, that’s a prop, for sure, but it’s not high octane jet fuel like direct Fed injections. The FCBs have also been a lot less active in recent months than in the past couple of years, and Treasury supply is increasing faster, so to that extent, the FCBs are barely making a dent in the whole supply problem. Macroliquidity including the Fed, FCBs and GSEs has been virtually dead flat for most of the year. That’s why the market is having trouble.

    Also, the point about broad money supply I don’t agree with, as you know if you have been following my work. A huge chunk of the reported M numbers is backed by fictitious capital, and most of the growth in broader Ms this year is directly correlated to the cash coming out of the CP market. So in addition to the FC backing, I suspect there’s a lot of double counting going on. That will become clear when money market funds begin to break the buck.

    A lot of people are fixated on money supply growth, and in my view they fail to take into account the likelihood that much of what is reported simply does not exist. I suspect that early next year the data will begin to reflect the shrinkage that I think is going on.

  3. pogo

    John Williams=http://www.shadowstats.com/cgi-bin/sgs

    Thanks. My intuition gave me the same answer, as much as I respect JW.

    I’ve been reading Eustace Mullins on the history of the Federal Reserve: “The Federal Reserve Conspiracy.” What I keep running into there and in other sources is that the FR has tightened liquidity for its own purposes. For example, to gain financial hegemony ~l918+ to force the western banks into joining the FR web by tightening interest rates for farmers but making credit available for big manufacturers [trusts, et al]. At other times, late 1920s, tightened during a credit crunch, loosened a bit in the early 1930s but tightened again in the mid 1930s when the shituation was reaally awful only to loosen with the war looming later on. Interesting that at certain junctures the FR finds the means to loosen up, but at other times when it’s obvious liquidity is called for, it doesn’t add.

    The bankers that pushed for the FR managed Wilson’s campaign, who promised no war. He gets elected, we join a war we have no stake in and JP Morgan gets paid back $400mil the Brits owe with the first proceeds of the first Liberty Bond sales. Then comes the income tax in 1916, which we never seemed to need before. Makes a guy wonder . . .

    and think the heretofore–to me–unthinkable: maybe the Depression was intentional and maybe the failure to inject liquidity now is also intentional. The FR always protects its members who are in position to weather any storm, the rest of us be damned. I don’t know what the game plan would be, but since the central bankers can’t be so stoopid not to see what we see, maybe they’re playing an all together different game, rendering our logic and common sense irrelevant.

  4. Lee Adler

    My guess is that they are leaning against the current surge in reported money supply. This is their usual modus operandi. When reported money growth reaches a certain rate they drain. Could be as simple as that. It’s also probably a mistake in that context because money supply isn’t really growing. It’s shrinking. Those who are in charge of counting it just haven’t realized it yet because the institutions holding the bad paper supposedly backing the liabilities counted in money supply are so slow to write it off. If the pundits are right that there’s 700 billion in credit losses out there, then the actual money supply is NOWHERE near the numbers currently being reported.

  5. pogo

    It is entirely possible that the Fed doesn’t realize how much toxic waste is out there that has no value at all. Given their contacts in the banking industry, i.e., their shareholders, I deem this unlikely, but possible. If so, they are well into a scenario that could lead to the demise of the Fed. 2008 should prove to be waaaayyyy too interesting.
    Thanks and Happy New Year!

  6. Lee Adler

    Hmm. Shares of the regional banks are held by the member banks, but as with any corporation, that does not mean that the shareholders control the corporation. The corporation is controlled by the board of directors. The Board of Governors of the Fed is appointed by the President with consent of Congress. The Fed operates under Congressional legislation. Congress can change the Fed’s role at any time.

    I think that the idea that the member banks somehow control the Fed’s mission is mistaken. If any group of banks has greater influence over the Fed, it would be the primary dealers, half of whom aren’t even US banks. They talk to the Fed’s trading desk every day. That influence is clearly limited, however. Given the lengthy terms of the Chairman Governors, the Fed seems to march to the beat of its own drum.

    That’s my impression.

  7. pogo

    To be sung to the tune of “Unforgettable:”

    “inconceivable (that the Fed could not realize there are $700bil in credit losses out there), that’s what you are”

    I believe the Fed to be a creature of the movers and shakers who have run the money system before and since the Fed was created, who work for each other in private and in public, who marry each other and their children to each others children. They aren’t just some group of bankers who meet and shuffle papers and wait for someone to point out what we know from reading their publications. They know what is happening.

    Yes, I know: unthinkable, inconceivable. FWIW: that’s my best shot. I know you think otherwise.

    Good luck and thanks.

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