Friday, January 30, 2009

The Fix Is Out

I'm still real rough on the economics flying around right now, so I'm hoping that writing it down will help it make sense to me. Forgive me if you already know all this.

First we have the deflationary cycle hitting us. In the past we would have inflation where we wake up and, although our money might be worth less, the amount on our home loan has magically gone down as well. With deflation the amount of our home loan stays the same, but we take a pay cut (oh, and the house is worth less too). This came about since the drastic contraction of the credit markets has sopped cash out of the system, leading to less cash chasing more goods and services (for example, how much do you have to pay the many of the millions of unemployed at the moment to get them to show up for work? Much less than you would have a year ago!)

The fix the Fed is trying to implement is 'quantitative easing', a phrase that I hadn't heard until the current debacle (or can't remember, it's been nearly twenty years since econ 101). Quantitative easing is just a really fancy phrase for 'printing money'. The only issue is that the markets have contracted so much that there really isn't a mechanism to patch our deflation with printed inflation. The way I understand it, since all of our currency is 'loaned' into the system (either via banks through the Fed, or the Fed purchasing treasuries ), that there's no way the Fed could just set up a booth where you could just go pick yourself up a bundle of newly printed benjamins. It's worth pointing out that quantitative easing didn't get rid of Japan's deflation either.

Then we have the bond market for treasuries which so far are rather hushed by my completely uneducated measure. The yield on the ten year treasury has drifted up a little (i.e., investors are just mildly interested in the possibility of being paid back); but the Treasury had no issue selling two year treasuries this week (have fun refinancing those in two years Uncle Sam, you sure as hell aren't going to get a 0% loan then!). But a fix of sorts is in the work here too.

From what I've read it would be a bad thing if the Fed itself bought up all the treasuries at a price it felt like paying instead of the market price; it would essentially be a government price fixing scheme. As well, since so many loans are based on the market rate for treasuries, what remains of the credit markets would get torpedoed since there would be no way to tell what the 'honest' rate for government debt is, since it would be completely made up by 'Uncle' Ben Bernake and 'TurboTax' Tim Geithner. What the Fed has been doing though is printing cash for insolvent financial institutions and having them buy treasuries. Using this method, the Fed still gets to price fix to a limited extent by artificially driving up demand (the banks aren't given a choice as to what to buy) and the insolvent banks (which are still insolvent) get a hard asset on their books in the form of Federal Government Debt.

But what are those treasuries actually worth as a 'hard asset'? Probably less than they were acquired for. So even though the insolvent banks were loaned money from the Fed at a 0.0% interest rate to buy the government debt, they're still on the hook for the yield differentials on the bonds since they would almost certainly have to sell them for less than what they bought them for (and if Congress/Obama has their way, remarkably less).

So we have banks that they're trying to save that shouldn't (and probably can't) be saved, billions that won't be paid back going to people who don't deserve it, and Congress ready to go even further into debt (if possible) so that some of their cronies can get jobs in printing posters to encourage condom use or some such crap. With all that, Karl Denninger politely points out that there's still a non-zero possibility of the whole circus going belly up.

All that blabber sets up the video below. No it is not me, amazingly enough, but the language is kind of salty:

*I've based and stole most of my conclusions from Karl Denninger's Market Ticker site and Mike Shedlock's Global Economic Trend Analysis site. Some hat tipping goes to the commentators over at the Market Watch site as well.


Marty Plumbo said...

I pray this guy doesn't have a kid.

Of course, he probably has a dozen. Or so.

Evil Sandmich said...

The sentiment on the site that I snagged that from seemed to be "thank God someone is pissed about Washington on this" followed quickly by "too bad it wasn't someone else".

Still, I'd rather have him as Treasury Secretary than the guy we have now. Someone in Congress said something along the lines of not only is Tim Geithner the best person for the job, he's the only person for the job. If the best finance person that our country can produce is a tax cheat, then we are well and truly screwed. And no, the fact that it isn't true but a Congressman thinks such a thing anyway, is not any better.