QE4 Started & Nobody Noticed

[devil21]

Thanks

That doesn't make sense, though, right?

If JPM's buying treasuries hand over fist, why is the Fed getting oversubscribed?

ZH:

That assumes they're actually buying them, as opposed to acting as an intermediary for other entities seeking to offload them away from the open market. Chinese, for example, could approach JPM for a "loan" and hand over Treasuries as collateral. Essentially JPM doing a repo for Chinese. But if the Chinese entity doesn't repay, JPM is stuck with the collateral and it goes onto JPMs books. Force repo market to lock up by ceasing to fund overnight loans, Fed printer steps in, JPM unloads Treasuries onto Fed. Fed ends up as bagholder entity and the Treasuries never hit the open market and never affected rates.

There's a theory floating around that excess reserves aren't really excess reserves.

That is, they're all obligated already in some way, such as in overnight repos.

How else do you explain JPM or anyone else refusing a free arb between IOER and repo, fed funds, or libor?

It has to be either fear of risk (of what?) or simple lack of cash (in which case excess reserves aren't excess).

I'd read about that theory if you have a link to share.

 

[pmbug]

...
How else do you explain JPM or anyone else refusing a free arb between IOER and repo, fed funds, or libor?
...

I thought this was a pretty accessible and plausible explanation:

https://monetary-metals.com/treasury-bond-backwardation-report-22-sep/

 

[devil21]

One other under-reported aspect of repo was that the Fed responded to a FOIA request for info about WHO was getting the fresh cash. Reply was "We'll tell you in 2 years."

Sure sounds to me like the Fed is going to be the bagholder for outstanding Treasuries that are and will be dumped by foreign holders, via repo operations over the next couple years as the global dollar standard unwinds. Then the Fed in it's current iteration is killed and the associated FRN denominated debt is repudiated. See my old thread in this subforum titled "Interesting Canadian Appeals Court ruling" to get the bigger picture.

 

[acptulsa]

Sure sounds to me like the Fed is going to be the bagholder for outstanding Treasuries that are and will be dumped by foreign holders, via repo operations over the next couple years as the global dollar standard unwinds. Then the Fed in it's current iteration is killed and the associated FRN denominated debt is repudiated.

In this way the banks are first repaid, and only then the public's money becomes officially and legally worthless.

 

[Pauls' Revere]

The greatest fear is that it will overflow into money markets funds, which would have to “break the buck”. And keep in mind that money market funds are not covered by FDIC or guaranteed in any way.

IIRC, there was one money market fund that broke the buck during the last financial crisis, and that is when they went into full do anything mode. Explaining to people that their “cash” has disappeared is a tough thing to do. Too reminiscent of the Great Depression.

Any good sites to watch indicators for those?

 

[Madison320]

Trump wants negative interest rates and heuge QE so he can look amazing just in time for the election.

Yup. That's exactly right.

The problem is that you were arguing the reverse when Obama was president. There's a word for that:

hy·poc·ri·sy
/həˈpäkrəsē/

noun
the practice of claiming to have moral standards or beliefs to which one's own behavior does not conform; pretense.

 

[Madison320]

The Fed has printed $326 billion since September 11, 2019.

This amounts to a monthly increase of $108 billion. For comparison, QE3 at its height was 'only' $85 billion per month.

There are two components to this new QE: repo operations (essentially lending against collateral, like the ECB does) and outright asset purchases (like the Fed did during previous QE rounds). Three months ago, the repo market blew up, with interest rates spiking to extraordinary highs. What exactly caused this is still unknown, but it indicates severe stress in the financial system (i.e. someone couldn't pay their debts). The Fed responded first by offering short term repos, then longer term repos, then it restarted the asset purchase program, promising to buy $60 billion per month through at least March 2020. Of course, this is in addition to the Fed lowering the funds rate several times last year, after they realized that this economy will implode if rates return to even a small fraction of what was once considered normal.

Had the Fed not taken these actions, we'd likely be a recession right now.

If they don't ease further in the near future, it's likely that we'll soon be in a recession.

What's really worrying, however, is not so much a recession, as the prospect of the Fed easing in perpetuity to prevent one.

This is just a wild guess but I think one potential bubble popping moment might be when the Fed's balance sheet hits a new high. What's that, another 2 or 3 months maybe when it hits 4.4T or whatever the old high is?

 

[Madison320]

As to where this is all heading:

Liquidation, i.e. the reallocation of presently misallocated resources, is the only solution, but this is politically impossible, as the Fed's only true mandate is to reelect politicians, and politicians who preside over depressions don't get reelected. So, as always, the Fed is trying to provide a "soft landing," i.e. print enough to allow a tad of liquidation (i.e. future growth), but without serious unemployment (= lost elections). But they always fail, because what they're trying to do (control, in a rational way, the most important price in an immensely complex market economy) is impossible. All the Fed can do is print so much that the current debt problem is delayed., or print somewhat less, and then react to the recession by printing that larger amount anyway. Anyway, recession or not, Fed reacting quickly enough or not to present stresses, the long-term situation is that the Fed is going to have to either allow total liquidation (politically impossible - see above), or go absolutely ape$#@! with money printing, to the point that last episode's QE will be not noticeable on a chart. And have no doubt; the Fed can and, if politically necessary, will, monetize every $#@!ing dollar denominated liability on planet Earth. Hyperinflation is preferable, politically, to liquidation.

I agree, it has to end with high inflation. That's the only thing that will stop the government from taking the path of least resistance, which is borrowing and printing.

And before someone replies, "But Japan!" remember that there are 1000 Zimbabwes, Argentinas and Venezuelas for every Japan. Besides that I don't want to work 80 hours a week and live in a closet just to keep the government from wrecking the currency.

 

[Zippyjuan]

Yup. That's exactly right.

The problem is that you were arguing the reverse when Obama was president. There's a word for that:

hy·poc·ri·sy
/həˈpäkrəsē/

noun
the practice of claiming to have moral standards or beliefs to which one's own behavior does not conform; pretense.

Different times- different economies. Limited stimulus can help turn things around in a recession (though I did say that QE after the first round was not necessary- stimulus has diminishing returns). You don't juice a steady economy like we have now.

 

[Madison320]

Different times- different economies. Limited stimulus can help turn things around in a recession (though I did say that QE after the first round was not necessary- stimulus has diminishing returns). You don't juice a steady economy like we have now.

Right, so you agree that after around 2011 you can substitute "Obama" for "Trump" and the statement would be just as true:

Your statement:

"Trump wants negative interest rates and heuge QE so he can look amazing just in time for the election."

So do you agree this is true after 2011?

"Obama wants negative interest rates and heuge QE so he can look amazing just in time for the election."

 

[pmbug]

...
In this step by step analysis, we will put together the week by week numbers from the Fed and the Treasury, uncover what is being hidden behind a veil of complexity, and show the simple truth - about 90% of recent federal government deficit spending has effectively been funded at below market rates by simply creating the new money.
...

http://danielamerman.com/va/ccc/F1DefFund1219.html

 

[Paul799]

Thanks to r3revolution, devil21 & all for this thread,
which allowed me finally to reach a better understanding of what repo operations are.


So, the Fed is monetising US federal debt through POMO and repo operations

http://danielamerman.com/va/ccc/F1DefFund1219.html


Even if Zippy for once had been right, only through POMO the Fed has been monetising 60-70% the new US federal debt in the last 3 months

I think everybody is wondering how long before the system breaks down.
Japan shows that it can long at least several years

 

[Zippyjuan]

One year ago (December 18, 2018), the Federal Reserve held $2.300 trillion in US Treasuries.
As of this week- December 19, 2019 they held $2.287 trillion in US Treasuries. Meanwhile, the amount of US Treasuries increased by almost $1 trillion.

https://www.federalreserve.gov/releases/h41/current/

 

[acptulsa]

One year ago (December 18, 2018), the Federal Reserve held $2.300 trillion in US Treasuries.
As of December 19, 2018 they held $2.287 trillion in US Treasuries. Meanwhile, the amount of US Treasuries increased by almost $1 trillion.

https://www.federalreserve.gov/releases/h41/current/

Gee, Zippy, we're sorry if this is too adult a conversation for you to follow.

That assumes they're actually buying them, as opposed to acting as an intermediary for other entities seeking to offload them away from the open market. Chinese, for example, could approach JPM for a "loan" and hand over Treasuries as collateral. Essentially JPM doing a repo for Chinese. But if the Chinese entity doesn't repay, JPM is stuck with the collateral and it goes onto JPMs books. Force repo market to lock up by ceasing to fund overnight loans, Fed printer steps in, JPM unloads Treasuries onto Fed. Fed ends up as bagholder entity and the Treasuries never hit the open market and never affected rates.

When the Fed holds collateral, but the loan hasn't defaulted yet, is that collateral on the Fed's books yet? No? Well there's the answer.

 

[Zippyjuan]

Gee, Zippy, we're sorry if this is too adult a conversation for you to follow.




When the Fed holds collateral, but the loan hasn't defaulted yet, is that collateral on the Fed's books yet? No? Well there's the answer.

Are you assuming that everybody is defaulting on their loans? What is the default rate?

 

[pmbug]

One year ago (December 18, 2018), the Federal Reserve held $2.300 trillion in US Treasuries.
As of December 19, 2018 they held $2.287 trillion in US Treasuries. ...

Would be interesting to see the data charted over time instead of picking two data points. The Fed was shrinking it's balance sheet until shit got real. It has expanded again dramatically in a short time frame. Back to where we started, except momentum/velocity is in the opposite direction and much stronger.

 

[acptulsa]

Are you assuming that everybody is defaulting on their loans? What is the default rate?

Are you assuming nobody is defaulting on their loans? You were the one trying and failing to convince people the Fed has no more bonds in its possession than it did a year ago.

 

[Zippyjuan]

Are you assuming nobody is defaulting on their loans? You were the one trying and failing to convince people the Fed has no more bonds in its possession than it did a year ago.

A bank does not own collateral unless the loan defaults. Then they typically sell the collateral to recover the losses from the loan. A bank defaulting on a loan from the Fed would be in a bad spot and harm their reputation- costing them business. The would have a hard time borrowing from anybody after that and a hard time attracting new depositors. Default on Fed loans is very rare.

 

[acptulsa]

A bank does not own collateral unless the loan defaults.

Correct. And that's why the Fed's books do not prove what you were pretending the Fed's books do prove.

I'm so glad you were able to catch up with the class. Now try not to go astray again.

 

[Zippyjuan]

Correct. And that's why the Fed's books do not prove what you were pretending the Fed's books do prove.

I'm so glad you were able to catch up with the class. Now try not to go astray again.

Collateral is not on the Fed books because the Fed does not own the collateral. They don't own those Treasuries. The bank taking out the loan owns those Treasuries. Just as they did before they took out the loan- the ownership did not change.