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Thread: Bernanke: Game Over

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    Default Bernanke: Game Over

    Interesting article from market-ticker reference bonds

    http://market-ticker.denninger.net/a...Game-Over.html

    Monday, January 26. 2009


    Posted by Karl Denninger at 07:12

    Bernanke: Game Over?

    Bloomberg is allegedly reporting that Bernanke is "contemplating" buying the long end of the Treasury Curve due to "bond market instability."
    Here's what he's unhappy about:

    There is nothing "unstable" about any of this. Rates are going higher. Why? Gee, let's see, Obama says he's going to blow $1 trillion on a "stimulus" package, the other $350 billion of the TARP was released, the GAO says we're going to run well north of a Trillion in deficits, and people are wondering why the bond market expects the government to pay up in higher interest rates for the right to borrow more than 10% (and that's almost certainly a LOW estimate) of the total outstanding debt in one freaking year after having added 16% in the last one?
    You're kidding, right? America is acting like a subprime credit-card customer who has decided to go nuts in the local "bigbox" electronics retailer, and the market is (appropriately) reacting to that by repricing RISK.
    Bernanke thinks he will simply cap the market by intervening?
    Let us dwell for a few minutes on how our government financials and currency actually work.
    Treasury prints up T-Bills which it then sells. The Fed is the purveyor of currency, which it produces by buying T-bills with "newly minted" dollars, expanding the total amount of dollars in the system when it so chooses.
    Ok.
    The market determines all interest rates. Yes, even the "Fed Funds" rate; if you think The Fed leads the market, you need to go study some charts. The Fed does not set rates, it is compelled to follow the market, because if it tries to force rates to where they do not want to go it can obtain that result in exactly two ways:
    1. It must provide or draw an infinite amount of money into or out of the system in order to drive and maintain it outside of equilibrium OR
    2. It must crowd out all private parties from a particular area of investment, thereby allowing The Fed to effectively "take over" from private parties.
    The second is non-intuitive - you need to contemplate how the markets (for anything) work for a few minutes before it makes sense.
    Consider a situation where The Fed "wants" the GSE funding cost to be, say, 2%. The market wants it to be 4%, because the market perceives more risk than The Fed would like to have it admit.
    The Fed can cause the GSE paper to trade at 2%, but if it does so it will be the only buyer of said paper, because nobody else will buy at a 2% coupon.
    The same thing is about to happen here. If Bernanke actually attempts to suppress the Treasury Market's interest rates, that is, "support the long end of the curve's price", then he will wind up having to buy all, or essentially all, of the supply. People who own Treasuries will sell to him, surmising that he is overpaying, and gleefully taking what is an "extra" profit from his hands.
    If you're wondering why the commercial and consumer lending market has gone straight to hell, this is the reason. Bernanke has interfered with the private credit market in virtually every area, and in each place where he has "supported" the price of debt instruments (suppressing yields) he has wound up as effectively the only buyer in short order.
    This is bad when we're talking about the private credit markets but if it shifts to Treasuries then the game is literally over immediately, because at that point you have just created a circle jerk.
    Treasury prints Ts to finance its operations but the guy who buys them is the guy who prints the money in exchange. Therefore every additional Treasury sale is no longer a debt sale, it is an act of printing money by the Central Bank and destroys the standard of living of everyone in The United States.
    This, should Ben engage in it, is a willful act of destruction of your private property rights, your wealth, and your income. It is not an accident, it is not "necessary" and it solves exactly nothing.
    It is simply an attempt to defraud - yet again - the American People, this time by attempting to "make ok" the financing of deficit spending that the market simply will not support at the price Treasury wishes to pay.
    Down this road lies the near-immediate implosion of all commercial credit as there will no longer be a "fair" reference against which it can be based. We've already tampered with the commercial paper and mortgage security markets; this will complete the "transition" from a market economy in bonds to a command economy, complete with a self-appointed King who has simply ignored the provisions of The Federal Reserve Act when it suited him.
    Bernanke will literally have reached the end game where he is the lender not only of last resort, but of the first and only resort at the same time, with all of his lending "decisions" being made by fiat instead of by the market's approximation and evaluation of risk.
    Once this begins expect mass bankruptcies in the commercial sector as private credit provisioning will immediately disappear. Bernanke's ability to replace that functionality is fanciful and he will soon learn this lesson the only way the market knows how to teach it - the hard way - just as he has had every other "plank" in his Doctoral Thesis destroyed - one at a time.
    No, it is not inflationary when your job disappears because the place you work for goes under; while Ben can try to replace the entirety of the private credit market I wish him the best of luck in that endeavor, given that it is some fifty trillion dollars. How much faith will the world have in The Fed when it tries to backstop a $50 trillion marketplace with under $1 trillion in banknotes? It has already doubled its balance sheet - but this would require expanding it by twenty five more times.
    He's going to fail at this endeavor in truly-spectacular fashion.
    Got ?


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    Default Re: Bernanke: Game Over

    Add to that the debt we took on for Iraq and Afganistan; all the funding was off budget. The Fed is pushing on a wet noodle with interest rates, and has been for quite a while now. Lower interest rates don't do a thing if no one wants to lend. Discount windows and other Fed rabbits are getting few and far between, Berneke needs to stop sticking his hand in the top hat because of late all he's getting is the Bullwinkle effect (it's never a rabbit).
    "All the prophets of Doom, Can always find room, In a world full of worry and fear..." - Protest Song, Monty Python

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    Default Re: Bernanke: Game Over

    Quote Originally Posted by Silverbird View Post
    Berneke needs to stop sticking his hand in the top hat because of late all he's getting is the Bullwinkle effect (it's never a rabbit).
    Silverbird - considering your job - there is no doubt you know way more than me in regards to many aspects of the economy.

    My view may be largely unique - but I am convinced that Greenspan (who is largely responsible for our current condition) falsely led the general public to believe THE FED can miraculously solve and resolve tremendous economic disasters.

    The facts are - Greenspan hugely lucked out with the recessions he faced. Cuts in Interest Rates were able to do the trick for him - but his greatest help was the economy taking TRACTION with housing after the Shadow Banking (S & L) failed.

    The TRUTH IS - the FED can only do so much... and Ben has already cut the rates from over 5% down to 0.25% in a little over a year. Huge amounts of money through the FED have been sent over seas - unlimited dollars - to keep the global economy in tact. Previous caps have either been lifted on have tremendously increased from say $60 B to $240 B.

    He has been forced to tackel Fannie Mae, AIG, and big name failures like Bear Steans and all the others.

    I think the biggest problem is 'our refusal' to believe the truth - which Bush and others did everything possible to keep us from seeing. I am more guilty of this than most as I saw the first half of 08 as a "correction" at best EVEN WHEN I WAS SPELLING OUT AN UNAVOIDABLE RECESSION in the spring. But I ignored all the findings.

    Now the Recession is undeniable - NOW I BELIEVE WE ARE ENTERING THE GREAT DEPRESSION

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    Default Re: Bernanke: Game Over

    Quote Originally Posted by Steadygain View Post
    I think the biggest problem is 'our refusal' to believe the truth - which Bush and others did everything possible to keep us from seeing. I am more guilty of this than most as I saw the first half of 08 as a "correction" at best EVEN WHEN I WAS SPELLING OUT AN UNAVOIDABLE RECESSION in the spring. But I ignored all the findings.

    Now the Recession is undeniable - NOW I BELIEVE WE ARE ENTERING THE GREAT DEPRESSION
    The government is going to try and spend our way out of this mess. Congress will have to raise the limit on their credit cards. They want to do this and get a "cheaper rate". No money down and 100 years to pay isn't going to work without ruining the dollar.

    TARP1 didn't work so now they are going to throw the same amount of money at the banks for TARP2 and expect it to work this time? The amount of debt piling up is phenominal.

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    Default Re: Bernanke: Game Over

    Quote Originally Posted by Gumby View Post
    The government is going to try and spend our way out of this mess. Congress will have to raise the limit on their credit cards. They want to do this and get a "cheaper rate". No money down and 100 years to pay isn't going to work without ruining the dollar.

    TARP1 didn't work so now they are going to throw the same amount of money at the banks for TARP2 and expect it to work this time? The amount of debt piling up is phenominal.
    With so many jobs lost so far and rising, I wonder how long it will take before us FEDS get hit with downsizing, rifs, etc? If there is no tax base, how will we get paid? Can get really depressing if you let it.

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    Default Re: Bernanke: Game Over

    I sure hope we don't enter a depression! I'm hoping the market goes up and we have a rebound! Perhaps I should have my money in the G Fund....

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    Default Re: Bernanke: Game Over

    Quote Originally Posted by wv-girl View Post
    With so many jobs lost so far and rising, I wonder how long it will take before us FEDS get hit with downsizing, rifs, etc? If there is no tax base, how will we get paid? Can get really depressing if you let it.
    WVgirl, this is the dark dark thought that could keep me up at night, every night if I let it. Either the fed debt gets cut now, or it gets cut later. If it doesn't, we're going to hit the wall as a nation before I retire. The only way for me to manage it, is to

    1) concentrate on making sure I have multiple bank accounts in relatively safe banks and CUs(bankrate.com)-in case they (powers that be) start limiting withdrawals from individual accounts-as happened back in the S&L crisis apparently (I wasn't affected back then since I didn't do business with S&Ls, being a poor grad student, so only recently I learned about that little side effect).

    2) make sure I'm not carrying any sizeable debt at any one time (see #1)-especially mortgage debt (if out of work, at least still have shelter).

    3) get better at being more self-sufficient-how to make, fix essential things myself (reduce need to pay others for things I can do myself-in case I can't afford to pay).

    4) reduce energy needs-get my home insulated better-good payoff ratio.

    5) get as healthy as I can now!

    6) save save save a $ cushion for in case out of work for 6 months or more (or in case have to take a substantial paycut to keep some income going somehow.

    7) put as much into longer term retirement as I can-Roth and TSP and brokerage taxable accounts-diversify to frontload potential tax law changes that will necessarily boost tax rates on anybody who still has $ coming in and/or tucked away.

    8) figure out what skills and resources I have or could develop that would help to bring in some self-employed income to offset job loss or income downsizing-things I can do or could do-good ol' amurican ingenuity, good ol' creativity instinct.

    I've been thinking about these things for at least 2 years now, maybe 3. I'm slow at implementing some of it, faster at implementing others.

    some say gold, silver, lead and powder etc. Me, I'll consider silver and gold as part of my longterm savings plan at some point but not yet. I'd rather have chickens and a garden and tools first. I don't know, I don't know which this is all gonna break. deflation vs. (hyper)inflation and/or both in sequence.

    9) relationships with family, friends and neighbors-invaluable in the times that are coming.

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    Default Re: Bernanke: Game Over

    Quote Originally Posted by alevin View Post
    WVgirl, this is the dark dark thought that could keep me up at night, every night if I let it. Either the fed debt gets cut now, or it gets cut later. If it doesn't, we're going to hit the wall as a nation before I retire. The only way for me to manage it, is to

    1) concentrate on making sure I have multiple bank accounts in relatively safe banks and CUs(bankrate.com)-in case they (powers that be) start limiting withdrawals from individual accounts-as happened back in the S&L crisis apparently (I wasn't affected back then since I didn't do business with S&Ls, being a poor grad student, so only recently I learned about that little side effect).

    2) make sure I'm not carrying any sizeable debt at any one time (see #1)-especially mortgage debt (if out of work, at least still have shelter).

    3) get better at being more self-sufficient-how to make, fix essential things myself (reduce need to pay others for things I can do myself-in case I can't afford to pay).

    4) reduce energy needs-get my home insulated better-good payoff ratio.

    5) get as healthy as I can now!

    6) save save save a $ cushion for in case out of work for 6 months or more (or in case have to take a substantial paycut to keep some income going somehow.

    7) put as much into longer term retirement as I can-Roth and TSP and brokerage taxable accounts-diversify to frontload potential tax law changes that will necessarily boost tax rates on anybody who still has $ coming in and/or tucked away.

    8) figure out what skills and resources I have or could develop that would help to bring in some self-employed income to offset job loss or income downsizing-things I can do or could do-good ol' amurican ingenuity, good ol' creativity instinct.

    I've been thinking about these things for at least 2 years now, maybe 3. I'm slow at implementing some of it, faster at implementing others.

    some say gold, silver, lead and powder etc. Me, I'll consider silver and gold as part of my longterm savings plan at some point but not yet. I'd rather have chickens and a garden and tools first. I don't know, I don't know which this is all gonna break. deflation vs. (hyper)inflation and/or both in sequence.

    9) relationships with family, friends and neighbors-invaluable in the times that are coming.
    +1, alevin gets it.

    there may or may not be any ways to preserve financial security when that tide comes in, but this one stands the best chance at preserving happiness and peace of mind, imo.

    when the anadromous herd throws themselves on the shoals to spawn and die in a frenzy of broken dreams, at least there'll be plenty to eat.

    moral of the story, live your dreams now, best return on investment you'll ever get.
    through the hurricanes and harm

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    Default Re: Bernanke: Game Over

    Quote Originally Posted by wv-girl View Post
    With so many jobs lost so far and rising, I wonder how long it will take before us FEDS get hit with downsizing, rifs, etc? If there is no tax base, how will we get paid? Can get really depressing if you let it.
    My unit just went through "work-force planning"/re-org/downsizing....so it's already hitting some of us feds

    Budgets will continue to get squeezed, so the once safe fed employee better be formulating a contingency.
    "All that is required for evil to succeed is for good men to do nothing." - Edmund Burke 100 G COB 10/22/14


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