FedUpUSA

Archive for the ‘Monetary Base’ Category

You’re losing purchasing power by the second.  Every dollar you earn is worth less and less every day.

Things have gotten very ugly for the US Dollar.

Up until last week, the US Dollar looked as though it might be staging some kind of a rally with a series of higher lows. However, we never quite made it above resistance but have taken out
the multi-month trendline instead.

Worse still, we’ve seen a new lower low formed, which indicates the upward momentum (however small) has been broken. We now have only two lines of support standing between the US Dollar and
all time lows:

This is quite a development as stocks have been showing pronounced weakness over the last month or so. And typically when the markets switch to a “risk off” mode money pours into the US Dollar.

But then again, we have the Fed still juicing the system behind the scenes:

As you can see, aside from a brief dip at the beginning of July, the US monetary base continues its near vertical trajectory, which tells us that the Fed continues to print money despite QE 2 ending.

It’s not much of a surprise, the Fed knows how to do one thing only: print money. However, the fact the Dollar is showing so poorly while Europe is taking a hit is a major warning that all is not well with the greenback.

I’ve long said that we were heading into some kind of inflationary collapse. We might get another round of deflation first (courtesy of Europe imploding), but the end result will be the same: the US Dollar falling when the US defaults on its debts.

On that note, our FREE Special Report titled The Inflationary Disaster explains not only why inflation is definitely coming to the US financial system, why the Fed will be powerless to stop it, and three investments that absolutely EXPLODE as a result of this.

All in all its 14 pages contain a literal treasure trove of information on how to take steps to prepare AND profit from what’s to come. And it’s all 100% FREE.

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Good Investing!

Graham Summers for Zero Hedge

Drowning Liquidity Flood

Something is going on behind the scenes in the normally secretive back vaults of the Washington based funny farm called the “Federal Reserve”.

Thanks to the St. Louis Fed’s economic research unit, we have various data, graphs and information published from daily to monthly, depending upon the data being displayed. By perusing this data farm, one can get a fair (perhaps not good – but fair) idea of the actual actions of the Federal Reserve which, in all cases, is far better than relying on what the Federal Reserve Chairman says. The two rarely match.

Let’s take a look at the chart (BASE) of the base money supply in the USA, calculated bi-weekly, I believe. First we see what happened during the financial meltdown of 2008.

This chart – shaded to indicate all the action taking place during an “official” recession – shows the absolutely horrifying money pumping that flooded the banks with liquidity (i.e. bailout) to prevent the free market from punishing those TBTF banks for their admittedly criminal acts of fraud through the creation, sale and short sales of MBS, CDOs, and ABCs of all kinds and types.

The Federal Reserve just dumped money on the fire to put it out. Or delay it.

From mid-September 2008 through February of 2009, almost a trillion dollars were injected into the banks (at no cost to the banks) to keep them financially viable. We won’t go into the moral hazard of such an asinine policy here, but I believe that if they had not done it, those cretinous banks would have been broken up or bankrupted and reestablished as new institutions. The debt would have vanished in a smoke cloud of epic proportions as stockholders and bond holders took a bath. The debt problem would not have been exacerbated as it is today and those same banks would now be perhaps two dozen smaller, more manageable entities. Such is not to be.

Now let’s look at another graph from the same St. Louis Federal Reserve.

Once again, this is ‘BASE’ or the Adjusted Monetary base chart of money that the Federal Reserve hands out like popcorn (cooked digitally, of course).

See anything funny here? Well sure you do. Just after the first of the year in January 2011, the Federal Reserve began another PANIC injection of funds into the monetary system. In less than three months they have injected almost 500 billion dollars into the system with obviously no end in sight.

As you can see from comparing the two charts, the volume of money creation over time is on a very close footing between the two which means the sluice gates are open as wide as can be cranked (short of C-130s and helicopters dumping cash in bulk out of rear bay doors).

And now the $1 billion dollar question: What has the Federal Reserve so spooked that they are commencing yet another panic stricken flood of liquidity into the financial system?

And here, dear reader, my crystal ball just shattered and I don’t have a clue other than to say, “Something Evil This Way Comes” and you might take a defensive stand in your investments so when we find out and the markets react, you won’t be caught with your shorts around your ankles.

Financial Sense

Submitted by Leo Kolivakis, publisher of Pension Pulse.

Henny Sender of the FT reports that top hedge funds bet on big rise in yields:

The
recent rise in long-term US interest rates comes as good news for
several leading hedge fund managers, including John Paulson, who have
positioned their trading books to benefit from higher yields on US
Treasury securities.

 

Mr Paulson, who
made big gains earlier this decade by betting against the subprime
mortgage market and whose firm, Paulson & Co, manages $33bn, has
said he believes that government stimulus efforts would inevitably lead
to higher inflation and a corresponding rise in rates.

 

“It will
be difficult for the government to withdraw the economic stimulus,” Mr
Paulson said in a speech. “An increase in the monetary base leads to an
increase in the money supply, which leads to inflation.”

Bond
prices fall as yields rise, and Mr Paulson told the Financial Times
last week that he has been hoping to benefit in the Treasury market by
buying options that would become profitable if rates headed higher.
TPG-Axon’s Dinakar Singh has been making similar options trades,
according to a person familiar with the matter.

Julian Robertson,
the hedge fund manager, has pursued a related strategy, hoping to
benefit from a bigger difference between short-term and long-term
interest rates, known as a steeper yield curve, a person familiar with
his trades said.

The yield on the 10-year Treasury, which hit a
crisis low of 2.055 per cent last year, has moved from 3.2 per cent
last month to 3.75 per cent on Tuesday.

Hedge fund managers,
however, have been hesitant to engage in short sales of Treasury bonds
to profit from the rising yields – and falling prices – because of the
Federal Reserve’s heavy involvement in the market. This has led some to
buy options – dubbed “high strike receivers” – that would enable them
to profit from sharply higher Treasury yields, hedge fund managers say.
These trades, which are relatively cheap to execute because they are so
out of the money, are based on the thesis that yields could hit 7 or 8
per cent.

“If they are right, and the world ends, they will make
a fortune,” said one fund manager who is sceptical of the idea. “If
they are wrong, they haven’t lost much.”

Some traders are
cautious because many peers lost large sums betting that rates would
rise in Japan in the 1990s – as yields fell to less than half a
percentage point. The trade was termed the “black widow” because it left so many victims.

“Nobody
understood the extent of deflation and economic weakness in Japan,”
said Dino Kos of Portales Partners, a research consultancy, who was
then a Fed official. “More money was lost on that trade than on any
other single trade. Everyone piled in when rates were at 3 per cent and
then at 2.5 per cent and then at 2 per cent.”

So
is it time to place big bets on rising yields? I could easily see a
backup in yields in the near term as economic reports surprise to the
upside, but I don’t believe that bonds have entered a long-term secular
bear market. I think the hedgies are right, best to play interest rate
directional calls though options.

Also, given the increase in
liability-driven investing by pension funds worried about their funding
status, there is an upper cap on bond yields. I don’t know what the
exact magic number is, but at a certain level (say 7%), you’ll have
pensions scambling to lock in rates. Bond bears tend to ignore this
when predicting doom and gloom on bonds. All they do is focus on the
“pending collapse” of the US dollar, which won’t happen .

By Tyler Durden and Geoffrey Batt

These days catching the Fed chairman telling the truth as opposed to a b(a)ld faced lie is in itself a six sigma event. Sadly this post will continue with hugging the median. Some observations on the most recent fabrications by the chief money printer himself, which go to show just how willing Bernanke is willing to bend reality and/or his perception of it as the occasion suits.

A week ago Zimbabwe Ben wrote an op-ed in Washington Post last week in which he said:

“Now more than ever, America needs a strong, nonpolitical and independent central bank with the tools to promote financial stability and to help steer our economy to recovery without inflation.”

Recovery without inflation is another way of articulating the Fed’s quixotic dual mandate.  Of course, everyone knows the Fed does not care about inflation, or, it seems, the economy, unless of course Goldman Sachs recently changed its name to Inflation Economy, Inc. But what’s striking about this sentence (the last sentence, no less, of a decidedly political op-ed), is that it directly contradicts what he says about QE in two papers in 2004.
 
In the May 2004 edition of The American Economic Review, Bernanke and Reinhart published “Conducting Monetary Policy at Very Low Short-Term Interest Rates.”  ZH cited this paper before as evidence that Bernanke considered monetizing equities viable in a debt deflation.  This time, however, it’s useful because he claims aggressive QE may “have expansionary fiscal effects.” 

Furthermore:

“So long as market participants expect a positive short-term interest rate at some date in the future, the existence of government debt implies a current or future tax liability for the public. In expanding its balance sheet by open-market purchases, the central bank replaces public holdings of interest-bearing government debt with non-interest-bearing currency or reserves. If the increase in the monetary base is expected to persist, then the expected interest costs of the government and, hence, the public’s expected tax burden decline. (Effectively, this process replaces a direct tax, say on labor, with the inflation tax.)”

Then in the Fed Minutes from Nov 4th we get:

“Participants noted that the recent fall in the foreign exchange value of the dollar had been orderly and appeared to reflect an unwinding of safe-haven demand in light of the recovery in financial market conditions this year, but that any tendency for dollar depreciation to intensify or to put significant upward pressure on inflation would bear close watching.”

An odd remark considering what Bernanke et al said in Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment Author(s): Ben S. Bernanke, Vincent R. Reinhart, Brian P. Sack Source: Brookings Papers on Economic Activity, Vol. 2004, No. 2 (2004), pp. 1-78. More specifically:

…quantitative easing may work through a signaling channel if its implementation marks a general willingness of the central bank to break from the cautious and conventional policies of the past. A historical episode that may illustrate this channel at work (although the policymaker in question was the executive rather than the central bank) was the period following Franklin D. Roosevelt’s inauguration as U.S. president in 1933. During 1933 and 1934 the extreme deflation seen earlier in the decade suddenly reversed, stock prices jumped, and the economy grew rapidly.Christina Romer has argued persuasively that this surprisingly sharp recovery was closely associated with the rapid growth in the money supply that arose from Roosevelt’s devaluation of the dollar, capital inflows from an increasingly unstable Europe, and other factors. Because short-term interest rates remained near zero throughout the period, the episode is reasonably characterized as a successful application of quantitative easing.

It appears despite Bernanke (and Geithner’s) repeated appearances, admonitions and Fed Minute posturings to the contrary, Bernanke is fully aware of what his actions will do to both inflation and the dollar, and that the devaluation of the greenback is critical to the success of his campaign of bailing out CREs laden bank balance sheets. Yet in the meantime on every TV and congressional appearance the Chairman will eagerly lie and prevaricate, hoping his listeners have short memories, and have not bought a Kindle yet (difficult to imagine judging by Amazon’s 1,000,000,000,000,000 (non)inflation adjusted P/E) to have read his own scribblings on the matter of impending dollar devaluation. America deserves all it gets if it allows its Senators to reconfirm this human being for the most important post in the world.