Welcome to 0%

Today the Fed, in a move of futility, dropped discount rates to 0%-.25% ; another way of saying 0%.

This of course has little effect in the light of near 0% yields for short term Treasury Bills on the open market.

The yield for the Treasury Bill even turned negative recently for a short moment.

The re-iteration by the Fed that it will use all tools possible to “save the world” certainly precipitated some market reactions:

  • 10 yr Treasury Notes soared yet another day and now yield a historically low 2.23%. Treasuries have pretty much developed as expected.
  • 1 month Libor is now at .88%. Good news for everyone who has an adjustable rate mortgage
  • Stocks soared, the S&P 500 rose by 4.77% – a purely inflationary rally as can be seen in a significant rise in gold, silver, and related stocks: NEM rose by 7%, PAAS by 13%. Like I said I am still bullish on silver
  • The Dollar dropped sharply against the Euro, the Pound, and the Yen – my premonition from September unfortunately turned out to be true – I only see it dropping further from hereon, unless the central banks of Europe, Great Britain, and Japan join the hyperinflation course

The effect on the interim money supply data will be reported in this blog once it is published. (November month end was the last one.)

Related Posts:

Feelin’ Stimulated?

The Federal Reserve is planning to press rates toward zero, as Reuters writes.

The U.S. Federal Reserve is expected to drop interest rates close to zero on Tuesday, but anticipated remarks on unconventional methods to dispel a year-old recession are what will really matter.

Economists forecast a clear statement that the U.S. central bank will aggressively deploy so-called quantitative easing measures to shelter the economy from a steepening downturn, but do not expect details of what steps it will actually take.

I’m not sure what else Bernanke wants to announce. Bank reserves with the Fed have exploded. They will trickle through eventually. Give it a few weeks already! It is obviously Bernanke’s objective to destroy the Dollar. But the impatience with which the media cheers him on in his endeavor is truly disturbing.

The announcement is expected around 2:15 p.m. on Tuesday at the end of a two-day meeting. The gathering had initially been scheduled for a single day, but was extended so policy-makers could study options for unusual steps to spur the economy with little room left to lower borrowing costs.

To make a little guess: I think the Fed will announce the 0.5% cut and markets will tank as a response. I don’t see what other surprising measures the Fed can announce at this point that have not already been priced in during the phony rally on Friday.

“From here on out, monetary policy has to rely primarily on non-traditional tools, tools other than the funds rate, to try to stimulate the economy,” said former Fed Governor Lyle Gramley, who expects the Fed to spell this out.

Anyone feelin’ stimulated already? Fells more like fatigue to me.

[Bernanke] emphasized the Fed would use all the weapons in its arsenal to protect the economy, and identified direct purchases of government and mortgage-related debt as possible options.

…like what the Fed has been doing for almost 100 years now? The policy it employed during the Great Depression? A Glass-Steagall Act 2.0? The interested reader should also look into what happened when the Federal Reserve first began allowing mortgage backed securities into its arsenal in 1999. Right, it accelerated the US Housing Bubble. They have learned absolutely nothing. Bernanke knows and understands nothing. Be prepared for hyperinflation. Watch gold and silver soar.

The Fed has already embarked on quasi-quantitative easing by allowing its balance sheet to more than double in size after pumping over $1 trillion into financial markets to prevent them from seizing up completely in the face of mounting losses.

This is of course complete nonsense. The credit markets are completely frozen up because of the intervention and the bailouts. Why should a bank lend money when all it needs to do is wait for yet another bailout and in the meantime maintain interest-bearing deposits at the Fed.

“The focus will be on purchasing assets to affect spreads. All of their policies are aimed at driving down borrowing costs to consumers and businesses,” said Dean Maki, co-chief U.S. economist at Barclays Capital in New York.

Whether or not they are intervening, spreads will most likely keep coming down anyway. But once the impending hyperinflation comes full circle, all rates will go through the roof. All the printing and intervention will have brought about the opposite of what was desired. Treasuries, especially treasury bills are a bubble waiting to burst. Treasury bills have for the first time returned a negative (!!) interest rate in the December 9th auction.

“We don’t think that the best use of the Fed’s balance sheet is to further reduce the risk-free rate,” he said. U.S. Treasury bonds are said to offer a risk-free rate of return because the U.S. government, with the ability to print dollars via the Federal Reserve, would never default on dollar debts.

It will virtually default, however, once hyperinflation destroys the dollar entirely.

More madness along the exact same lines can be read in Top economists talk unconventional Fed policy.

As if that wasn’t enough, it appears as though Mr. “Change” Obama’s stimulus could reach $1 trillion:

President-elect Barack Obama‘s team is considering a plan to boost the recession-hit U.S. economy that could be far larger than previous estimates and might reach $1 trillion over two years, the Wall Street Journal reported on Saturday.

Obama aides, who were considering a half-trillion dollar package two weeks ago, now consider $600 billion over two years “a very low-end estimate,” the newspaper said, citing an unidentified person familiar with the matter.

The final size of the stimulus was expected to be significantly higher, possibly between $700 billion and $1 trillion over that period, it said, given the deteriorating state of the U.S. economy.

Officials with Obama’s camp have declined to comment on media reports about the size of the boost his administration might seek to give the economy through increased public spending and tax cuts.

Obama is due to take office on January 20.

Battered stock market investors around the world have taken heart from previous indications of how Obama’s administration may seek to kickstart growth in the world’s largest economy.

Obama has promised he will launch a massive public works program to help lift the U.S. economy out of recession.

The president-elect is likely to be briefed by his aides on the outline of the stimulus plan next week with a view to getting it passed by Congress by the time he is sworn in next month, the Journal said.

Economists have previously said they expect Obama to quickly sign a multi-year spending package that could be worth up to $750 billion, or almost 5 percent of U.S. gross domestic product.

The administration of President George W. Bush has been given authority by Congress to spend up to $700 billion in taxpayer money to rescue the nation’s banking system.

The money was originally set aside to buy up toxic mortgage-backed securities but is now being used to recapitalize banks and induce them to lend more freely.

So the “change” Obama wants to bring is larger stimulus packages than the ones we already got. What a mess! Where is Paul Volcker’s viable experience from 1980 inbetween all this madness?

Related Posts:

Reserve Ratio at All Time High

The Federal Reserve’s true reserve ratio, the ratio between the monetary base and bank deposits that are subject to reserve requirements reached an all time high in October at 59%:

This is due to the aforementioned explosion in the monetary base that has not yet fully been reflected in the true money supply.

In order for  the reserve ratio to go back to more normal levels, the true money supply would either need to rise to approximately $6.3 trillion from currently $2.07 trillion within the next few weeks, or the reserve balances would need to drop back down to normal levels.

My money is on the former alternative. This will of course result in hyperinflation. Gold and silver will then soar to unprecedented heights.

Either way, something big is going to happen shortly. The Federal Reserve Bank is approaching judgment day.

Related Posts:

Federal Reserve Bank – Balance Sheet (December 2008)

A look at how the composition of assets on the balance sheet of the federal reserve bank has changed over the past year:

December 6th 2007 Release:


Click on Image to Enlarge.

As can be seen above most holdings were in safe Treasury securities. A simplified view juxtaposes risky vs safe assets in December 2007:


Click on Image to Enlarge.

December 4th 2008 Release:

Click on Image to Enlarge.

As can be seen above a hole array of new asset types have been introduced by the Federal Reserve in response to the correction that started to accelerate in October of last year. Most notably the following facilities have been introduced or extended by the Federal Reserve in order to inject money into the economy:

– Other Federal Reserve Assets (most likely currency swaps but no additional data is provided)

– Term Auction Credit (a facility that allows the Federal Reserve to purchase troubled assets from banks)

– Commercial Paper Funding Facility (purchases of commercial paper to make money available to businesses directly)

– AIG Credit Line, Maiden Lane, Maiden Lane III (programs to simply lend money directly to AIG and JP Morgan)

– Asset-backed commercial paper money market mutual fund liquidity facility (some other facility to inject money by acquiring unconventional assets)

Most notably, the relative composition of risky vs safe assets has changed substantially. It is reasonable to classify all loans to virtually bankrupt businesses and purchases of troubled assets risky, for the simple fact that no private investor demanded them at the prices the federal reserve paid:

Click on Image to Enlarge.

The general trend has been for the FED to get rid of Treasury Bills and Notes while purchasing more risky assets. It can be assumed that the FED pursued this strategy in order to avoid, at least temporarily, an outright hyperinflation with a surging money supply. But the FED is slowly running out of Treasury securities to swap against. It will be interesting to see how the balance sheet continues to develop over the next months. The Federal Reserve, the supposed safe lender of last resort, is turning into the shakiest bank in the country. So far it has swallowed up bad loans from other banks. But who will come to its aid once its assets have to be written down due to non-performance? The IMF ?

Related Posts:

Bernanke Digs Deeper

It was deja vu time when Federal Reserve Chairman Ben Bernanke spoke today. To all those who remember his helicopter speech, but thought he was kidding: He was obviously not. He is ready to destroy the currency whose stability he is supposed to overlook, prolong the agony of this depression, and then plunge the nation into a hyperinflation of unprecedented proportions. Reuters writes:

Federal Reserve Chairman Ben Bernanke on Monday urged decisive action to protect the economy and said the central bank had alternative tools it could employ to help as interest rates approach zero.

“Our nation’s economic policy must vigorously address the substantial risks to financial stability and economic growth,” Bernanke told the Greater Austin Chamber of Commerce.

Yes, we must address the substantial risks that a reckless monetary and fiscal policy of credit expansion has created.

On a day when the arbiter of U.S. business cycles said the United States fell into recession last December, Bernanke said the economy was still under “considerable stress” and had slipped further since markets crumbled anew in September.

“Households have continued to retrench, putting consumer spending on a pace to post another sharp decline in the fourth quarter,” the Fed chief warned.

Yes, they have cut down on consumption in order to begin generating savings again. Something that the US has forgotten about over the past 30 years. Something that the US direly needs lest it keep moving toward national bankruptcy.

Bernanke said further cuts in overnight interest rates beneath the Fed’s current target of 1 percent were “certainly feasible,” but he suggested the U.S. central bank would also use other unconventional measures to spur growth.

“Although conventional interest rate policy is constrained by the fact that nominal interest rates cannot fall below zero, the second arrow in the Federal Reserve’s quiver — the provision of liquidity — remains effective,” he said.

He said the Fed could directly purchase “substantial quantities” of longer-term securities issued by the U.S. Treasury or government-sponsored agencies to lower yields and stimulate demand.

As a response, 10 yr Treasuries surged again as today and they will certainly keep going down the path I suggested. That this will do nothing but encourage more government borrowing and spending and will plunge us deeper into financial Armageddon goes without saying.

Bernanke also said the Fed could side-step institutions that are reluctant to lend and pump money directly into specific markets. The Fed has already done this in the market for commercial paper, short-term debt companies use to finance day-to-day operations, and last week it announced a program to push funds into markets for consumer-related debt as well.

Yes, the Fed is, in fact, not leaving out a single opportunity to aggravate its credit expansion.

The Fed is widely expected to lower benchmark U.S. interest rates by a half-percentage point to 0.5 percent at its next scheduled meeting on December 15-16. It is also expected to discuss what other policy tools could be used, and Bernanke’s speech was seen as a game plan for likely next steps.

Of course the Fed is well aware that reducing the Fed funds rate to .5% will have no result whatsoever since short term interest rates on the open market are already near 0.

In calling for vigorous action to support the economy, Bernanke said the economy was likely to be sluggish for some time. “The likely duration of the financial turmoil is difficult to judge, and thus the uncertainty surrounding the economic outlook is unusually large. But even if the functioning of financial markets continues to improve, economic conditions will probably remain weak for a time,” he said.

Bernanke’s prophetic predictions in the midst of this crisis are not very impressive, really. Just last year he called the economy sound. He has absolutely no understanding of what is going on.

But he said there was no comparison between the current downturn — already the third-longest since the 1930s — and the Great Depression, when the U.S. economy contracted for over a decade, one in four U.S. workers was unemployed and bank failures were rampant.

“Let’s put that out of our minds. There is no comparison in terms of severity.”

…and I guess this is true because he says so? If anything, this crisis will be much worse than what happened in 1930. Bernanke’s poor judgment is simply deplorable. He truly believes he can fix this thing. Even if he doesn’t solely share the blame for the causes of the recent credit expansions, he has surely done everything he needed to do in order to prolong and aggravate it.

Bernanke drew a distinction between the aggressive actions he and his colleagues have taken and blunders by the 1930s-era Fed, including excessively tight monetary policy and inaction as the financial system collapsed. He said he was being guided in part by his reading of history.

“I made my own mistakes, but I don’t want to make someone else’s mistakes,” he said.

Excessively tight monetary policy? If anything the monetary policy of the 20s was excessively lavish. And the Federal Reserve of 1930 didn’t shy away from continuing it until the banks started accumulating excess reserves. Sound familiar? Sorry Ben, sadly you are precisely repeating the mistakes of The Great Depression.

Related Posts: