hmmm...somethings up, page-48

The mystery continues. T-Bonds futures have opened even higher today. I may be wrong, but I think we are now at the lowest ever yield on the 10 year.



No one big went belly-up over the weekend (although there are noises out there about Bank of America). I just wonder whether this is another manifestation of Helicopter Ben's latest salvo:-

To repeat, I suspect that operating on rates on longer-term Treasuries would provide sufficient leverage for the Fed to achieve its goals in most plausible scenarios. If lowering yields on longer-dated Treasury securities proved insufficient to restart spending, however, the Fed might next consider attempting to influence directly the yields on privately issued securities. Unlike some central banks, and barring changes to current law, the Fed is relatively restricted in its ability to buy private securities directly. However, the Fed does have broad powers to lend to the private sector indirectly via banks, through the discount window. Therefore a second policy option, complementary to operating in the markets for Treasury and agency debt, would be for the Fed to offer fixed-term loans to banks at low or zero interest, with a wide range of private assets (including, among others, corporate bonds, commercial paper, bank loans, and mortgages) deemed eligible as collateral. For example, the Fed might make 90-day or 180-day zero-interest loans to banks, taking corporate commercial paper of the same maturity as collateral. Pursued aggressively, such a program could significantly reduce liquidity and term premiums on the assets used as collateral. Reductions in these premiums would lower the cost of capital both to banks and the nonbank private sector, over and above the beneficial effect already conferred by lower interest rates on government securities.

So, back in 2002 Bernanke saw the options of purchasing agency debt and exchanging less-than pristine collateral for loans to private banks, as being something which would be considered in tandem with operating in the Treasury markets for longer-term debt.

Given that the quantitative easing rabbit is now acknowledged to be out of the hat, it wouldn't surprise me if we are now seeing its most obvious manifestation - direct monetization of government debt.

Now, in theory, this does not need to be an endless process. Indeed, I'm sure that Bernanke and the other wonks in the Fed justify this on the basis that it's temporary and reversible. In other words, that it does not inevitably lead to the slippery-slope of hyper-inflation, because...well..."We can stop, anytime we want."

Yeah, right! We're already at $8 trillion. Not bad for a single year. Much more to come in 2009.

Monetization for non-reserve currencies is the almost inevitable slide towards bankruptcy - foreign creditors cotton-onto the gambit pretty quickly and start to flee. As a consequence, the central bank of the perpetrator needs to monetize ever-faster, just to keep the interest rate low. In the end, the central bank ends up holding a large and unsustainable amount of the country's own debt. Inflation; currency collapse; debt default; revolting citizenry.

However, the situation might be different, or at least slower, in the case of the reserve currency - the $US.

If Ben is actually purchasing treasuries across longer maturities, it won't take too long (a few months, maybe) for the bond market to realize what's going on. Then, we'll see what the reaction is.