"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat
Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput
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Federal Reserve adds $22 billion in Treasuries to its Balance Sheet this week
Since the beginning of December 2010, the Fed has purchased an average of $24 billion of Treasuries each and every week. They are now holding an astonishing $1.345 TRILLION in US Treasury obligations making them the largest holder of Treasuries on the planet, larger than even China with its reported $1.116 Trillion in Treasury holdings.
Fears still remain that Japan will become a net seller of US Treasuries to fund the rebuilding of their shattered nation. Current holdings for Japan are $882.3 Billion.
The question remains unanswered - who is supposedly going to step up to purchase any Treasuries that the Fed might wish to sell in order to reduce their balance sheet given the fact that their yields remain abysmally low compared to other nations around the world?
When you see crude oil over $112 and Brent knocking on the door of $130, with corn at record highs and the CCI (Continuous Commodity Index) attempting to retest its all time high, it is a given that food and energy costs are soaring and that severe inflationary pressures are building in the US economy. Anyone who buys Treasury debt at current yields, especially in the face of a falling Dollar, is practically guaranteeing themselves tremendous losses.
So to whom will the Fed sell this stuff to? Those that answer the primary dealers will buy it back are seemingly ignoring the fact that were this the case, the stock market would drop like a lead balloon as noted by the direct link between the size of the Fed's balance sheet and the level of the S&P 500.
The answer is that there is no solution to QE. It cannot be undone without creating havoc somewhere.
So if they do qe3 will that not be a crime in the face of dropping dollar?
ReplyDeleteAnd some fools still actually question if QE will continue past June
ReplyDeleteDon't forget to factor in the kind of scenario Jim Rickards was talking about re: QE3... where the Fed's balance sheet was so full of treasuries the interest alone would allow them to continue QE without calling it that, simply by putting that interest into motion it becomes its own market force. In other words, they wouldn't have to expand their balance sheet to continue pumping money into the market.
ReplyDeleteThe headline rhetoric vs. the reality could diverge sincerely in the next couple of months. If they don't do as Rickards describes and announce a formal QE3 policy then it will likely be even worse than they announce given the above situation.
Ye gods this is really scary stuff.
Ta,
At this stage I am uncertain what will happen with QE. I think that QE3 will happen, what I am not sure of is if QE2 will be allowed to end for a time first. They are really backed into a corner here, and any action or inaction has negative consequences. So, what will they do? Whatever is best for the BANKS is my guess, so I'm trying to work out what that is!
ReplyDeleteCan somebody explain why the FED would want to sell their Treasuries? Can't they hold them till they mature?
ReplyDeleteso!, if they stop QEII for a while what should be the consequence in the whole market in the short term then....everything will collapse (include Silver)?, except gold?...
ReplyDeleteIt will go on, they can't stop it, but what I'm wondering is how they will spin it to keep face.
ReplyDelete"So to whom will the Fed sell this stuff to? Those that answer the primary dealers will buy it back are seemingly ignoring the fact that were this the case, the stock market would drop like a lead balloon as noted by the direct link between the size of the Fed's balance sheet and the level of the S&P 500."
ReplyDeleteQE probably had a psychological impact on the market, so a reverse might drive the S&P down. But it's no certainty at all. It's also not the case that PDs have to sell equities to buy treasuries or something. The excess reserves are there in aggregate. Reversing QE will just swap a lower interest-bearing asset (excess reserves, 0.25%) for a higher interest-bearing asset (treasuries).
Treasury rate are mainly an arbitrage between the fed funds rate and future expectations of the ffr. Reversing Q.E. will probably alter future expectations, therefore increasing yields (but not sure how big this effect is, since the effect of QE of lowering yields wasn't too big).
So, reversing Q.E. might impact the stockmarket negatively, due to changed perceptions. But it's not like the PDs in aggregate don't have the reserves or something to buy the treasuries and have to sell equities (not to imply that you said that btw, just to make this point clear).
Oh..and to add: if the havoc created by withdrawing Q.E. would result in a collapse in commodity prices, that would be a good thing for all the people afraid of hyperinflation no? ;)
ReplyDelete