Ben Benanke's Incompetent

[flow5]

Given that any expansion of commercial bank credit involving loans to, or purchases of securities from, the nonbank public, results initially in the creation of an equal volume of new money in the banking system.

A significant part of the growth in the money stock since Sept. 2008 is not due to an expansion of commercial bank credit, but merely reflects the shifting of the savings/investment deposit type accounts at commercial banks (i.e., esp. small time deposits & retail money market accounts from m2), & other depository institutions into those categories included in m1.

In addition, a larger proportion of all commercial bank deposits were increasingly highly concentrated in "reserve bound" banks. I.e., the rates-of-change in applied vault cash has contracted.

Nothing really has happened, except that a larger proportion, of a larger volume of money, is transaction-based (or largely non-interest bearing). I.e., all transaction-based accounts require a 10% reserve ratio requirement.

However, this shift does represent a de facto TIGHTenING on the part of our monetary authorities. I.e., the FED did not "offset" the rise in required reserves vis a vis the stagnant growth in commercial bank credit.

[flow5]

www.reuters.com/article/2011/07/29/us-usa-economy-idUSTRE7662I420110729


(Reuters) - The U.S. economy came perilously close to flat-lining in the first quarter and grew at a meager 1.3 percent annual rate in the April-June period, leading economists to warn of recession if a stand-off over U.S. debt does not end quickly.

The Commerce Department data on Friday also showed the current lull in the economy began earlier than had been thought, with the growth LOSING STEAM late last year.

That raised questions on the long held view by both Federal Reserve officials and independent economists that the slowdown in growth this year was mostly due to transitory factors.

The U.S. economy in the first quarter expanded at just a 0.4 percent pace, a SHARP DOWNWARD REVISION from the previously reported 1.9 percent increase. While the recovery stepped-up in the second quarter, economists had expected a stronger 1.9 percent reading.

FUNDAMENTAL SLOWDOWN?

Consumer spending, which accounts for about 70 percent of U.S. economic activity, decelerated sharply to a 0.1 percent rate -- the weakest since the recession ended two years ago.


...Government spending declined again as state and local authorities continued to pare their budgets, even though defense expenditures rebounded at 7.3 percent rate after contracting at a 12.6 percent rate in the first three months of the year.

Home building rose at a 3.8 percent pace, while investment in nonresidential structures increased at an 8.1 percent rate.

The easing of the auto parts disruptions and a drop in gasoline prices could be a tail wind to third-quarter growth, but economists are concerned that data for June has been weak.

The report showed a moderation in inflation, with the overall consumer prices rising at a 3.1 percent rate after rising 3.9 percent in the first quarter. But excluding food and energy, prices increased 2.1 percent, the fastest since the fourth quarter of 2009 and above the Federal Reserve's preferred 2.0 percent level.

Data released along with the latest GDP figures on Friday also showed the 2007-2009 recession was MUCH MORE SEVERE THAN PRIOR MEASURES HAD FOUND

===================

Slow growth resulted from an excessive reliance upon Reserve bank & Commercial bank credit. IOeRs killed the financial intermediaries.

[lifewasgood]

Data released along with the latest GDP figures on Friday also showed the 2007-2009 recession was MUCH MORE SEVERE THAN PRIOR MEASURES HAD FOUND

Maybe our measuring methods need to be revised to more accurately reflect reality!

[flow5]

The revision was predominately to the deflator (which subtracts from nominal gDp).

This makes you question the lag for inflation.

[flow5]

Real-gDp peaked in the 3rd qtr of 2007 @ $13,326T. It has failed to reach that level as of this 2nd qtr 2011 (4 years later) - @$13,270.1T

[flow5]

www.nytimes.com/2011/07/31/business/economy/whats-with-all-the-bernanke-bashing.html?_r=1


What’s With All the Bernanke Bashing?

“Since becoming Federal Reserve chairman in 2006, he has kept inflation very close to an unofficial target of 2 percent” - N. Gregory Mankiw is a professor of economics at Harvard

With 7 billion people on this planet you don't need more currency to raise prices (prices could even rise with a global contraction). After all, there is a supply-side factor to the inflation indices (limited available resources), as well as a demand-side (monetary) factor. A 2 percent target is too low.

[smackdown]

"This makes you question the lag for inflation."

Or guess why there hasn't been hyper-inflation in the perfect incubator environment for it. The answer is-- commercial credit. Exactly what size line of credit floats a Big Box like Kohl's... who's box overhead is tremendous, who's sales occur once-monthly with deep discounts and coupons that bring the goods down 95-99% off retail tag pricing. It's because the credit is second fiddle to the constant replenishment of the inventory with the credit-born debt accumulating massively off-book (shell entity) so that in the outside chance that We The People latch-on to this financial nightmare and shove it back on the crooks who caused it, they can release these outrageously bloated credit facilities on the nation and threaten to take us down if we don't let them "fix" the crisis... again (TARP).

[flow5]

wallstreetpit.com/80672-the-three-year-tightening-cycle-of-u-s-monetary-policy

The Three Year Tightening Cycle of U.S. Monetary Policy
By David Beckworth Aug 2, 2011,

Back in August, 2010 Fed Chairman Ben Bernanke claimed that monetary policy can be passively tightened by the Fed doing nothing in the midst of a weakening economy. A failure to act by the Fed when aggregate demand was faltering, he argued, was effectively the same as the Fed TIGHTENING MONETARY POLICY. He made this point in 2010 to explain why the FOMC’s decided to stabilize the size of the Fed’s balance sheet. Here is Bernanke:

At their most recent meeting, FOMC participants observed that allowing the Federal Reserve’s balance sheet to shrink in this way at a time when the outlook had weakened somewhat was inconsistent with the Committee’s intention to provide the monetary accommodation necessary to support the recovery. Moreover, a bad dynamic could come into at play: Any further weakening of the economy that resulted in lower longer-term interest rates and a still-faster pace of mortgage refinancing would likely lead in turn to an even more-rapid runoff of MBS from the Fed’s balance sheet. Thus, a weakening of the economy might act indirectly to increase the pace of passive policy tightening–a perverse outcome. In response to these concerns, the FOMC agreed to stabilize the quantity of securities held by the Federal Reserve by re-investing payments…By agreeing to keep constant the size of the Federal Reserve’s securities portfolio, the Committee avoided an undesirable passive tightening of policy that might otherwise have occurred. The decision also underscored the Committee’s intent to maintain accommodative financial conditions as needed to support the recovery.

In short, the FOMC was concerned that a failure by the Fed to reinvest its payments, which amounts to a reduction in the monetary base, would be contractionary in an economy that was struggling at this time. The FOMC wanted to avoid this passive tightening of monetary policy.

I agree with this line of reasoning about the passive tightening of monetary policy. I, however, see a passive tightening of monetary policy as being more than just the shrinking of the Fed’s balance sheet. It occurs whenever the Fed passively allows total current dollar or nominal spending to fall, either through a fall in the money supply or THROUGH AN UNCHECKED DECREASE IN VELOCITY.

In other words, even if the Fed maintained the size of its balance sheet, a sudden rise in money demand not matched by the Fed would also amount to a passive tightening of monetary policy. With this understanding, monetary policy has been on a passive tightening cycle for the past three years. For nominal spending began to fall in June 2008 and has yet to return to any reasonable trend level growth path (i.e. one that accounts for the housing boom). It is even worse if we look at domestic nominal spending per capita. Not only has it not returned to a reasonable trend level growth path, it has yet to return to even its peak value in late 2007, as seen in the figure below.

A key problem behind this passive tightening of monetary policy is that money demand has been and remains elevated and the Fed has yet to successfully address it. What is frustrating is that the Fed could meaningfully undo this three-year passive tightening cycle by ADOPTING SOMETHING LIKE A NOMINAL GDP level target. For many reasons–its political capital is spent, internal Fed divisions, the popularity of hard-money views, etc–it won’t and so the U.S. economy remains mired in an anemic recovery.

[flow5]

2011 jan ,,,,,,, 0.091 ,,,,,,, 0.156
,,,,,,, feb ,,,,,,, 0.09 ,,,,,,, 0.231
,,,,,,, mar ,,,,,,, 0.125 ,,,,,,, 0.315
,,,,,,, apr ,,,,,,, 0.15 ,,,,,,, 0.288
,,,,,,, may ,,,,,,, 0.18 ,,,,,,, 0.279
,,,,,,, jun ,,,,,,, 0.153 ,,,,,,, 0.287
,,,,,,, jul ,,,,,,, 0.182 ,,,,,,, 0.224
,,,,,,, aug ,,,,,,, 0.174 ,,,,,,, 0.251
,,,,,,, sep ,,,,,,, 0.104 ,,,,,,, 0.261
,,,,,,, oct ,,,,,,, 0.063 ,,,,,,, 0.275
,,,,,,, nov ,,,,,,, 0.076 ,,,,,,, 0.23
,,,,,,, dec ,,,,,,, 0.079 ,,,,,,, 0.219


================

first column rate-of-change in real-output
second column rate-of-change in inflation

accuracy has changed recently (because of velocity), so traders beware

but...the drop from Aug-Nov is very steep historically (so stocks fall sympathetically without added stimulus)
&...inflation remains subborn (Mar still peak this year)

[flow5]

research.stlouisfed.org/fred2/graph/?chart_type=line&s[1][id]=VAULT&s[1][range]=1yr

This is a techical issue. Above is the proof (no growth in applied vault cash), i.e., contrary to the notion that reserve requirements are no longer binding -- because increasing levels of vault cash (larger ATM networks), retail deposit sweep programs, fewer applicable deposit classifications, & lower reserve ratios, have combined to remove most reserve, & reserve ratio, restrictions

=================

Real-gDp peaked in the 3rd qtr of 2007 @ $13,326T. It has failed to reach that level as of this 2nd qtr 2011 (4 years later) - @$13,270.1T

(1) Given that any expansion of commercial bank credit involving loans to, or purchases of securities from, the nonbank public, results initially in the creation of an equal volume of new money in the banking system.

A significant part of the growth in the money stock since Sept. 2008 is not due to an expansion of commercial bank credit, but merely reflects the shifting of the savings/investment deposit type accounts at commercial banks (i.e., esp. small time deposits & retail money market accounts from m2), & other depository institutions into those categories included in m1.

In addition, a larger proportion of all commercial bank deposits were increasingly highly concentrated in "reserve bound", money center banks.

Nothing really has happened, except that a larger proportion, of a larger volume of money, is transaction-based (or largely non-interest bearing).

However, this shift does represent a de facto TIGHTenING on the part of our monetary authorities. I.e., the FED did not "offset" the rise in required reserves vis a vis the stagnant growth in commercial bank credit.

(2) IOeRs are contractionary, induce debt deflation, & induce dis-intermediation (an outflow of funds from the non-banks/financial intermediaries or a stoppage in the flow of savings into real-investment). I.e., IOeRs alter the construction of a normal yield curve, they INVERT the short-end segment of the YIELD CURVE –known as the money market.

The non-banks are the most important lending sector in our economy -- or pre-Great Recession, 82% of the lending market (Z.1 release, sectors, e.g., MMMFs, GSEs, etc.). Every effort should encourage the flow of monetary savings thru the non-banks (the customers of the commercial banks). Re-directing monetary savings does not reduce the size of the CBs because money flowing to the non-banks actually never leaves the CB system in the first place.

============

Payment of interest on demand deposits has lead to further "tightening".

============

Just as REG Q ceilings tipped the scale in the flow of funds, IOeRs have once again tipped the scale in the CBs favor. I.e., all economists are completely wrong. And none of them understand the difference between a CB & a financial intermediary.

[flow5]

Just like in 1937 the FED is too tight (except now we face stagflation). The inflation indices should be divided into supply-side inflation (the scarcity of resources- i.e., 7 billion people are now on the planet), & demand-side (monetary) inflation. The FED can't do anything about the supply-side so its inflation target should be higher.

[flow5]

www.cnbc.com/id/44029585
by John Melloy


A paper written in April by the Federal Reserve Board of San Francisco on this topic has been making the rounds on trading floors as a possible template of what may be used today (link to paper here). As the paper describes, the Fed sold short term securities and bought long-term bonds, lowering long-term Treasury yields

On April 6, 1961, a Fed release "showed a sharp increase in open market purchases of longer-dated Treasurys, including for the first time maturities longer than ten years," wrote Alon and Swanson. "The idea was that business investment and housing demand were primarily determined by longer-term interest rates, while CROSS-CURRENCY ARBITRAGE WAS PRIMARILY DETERMINED BY SHORT-TERM RATE DIFFERENTIALS ACROSS COUNTRIES. Policymakers reasoned that, if longer-term interest rates could be lowered without affecting short-term yields, the weak U.S. economy could be stimulated without worsening the outflow of gold [XAU= 1659.29 11.39 (+0.69%) ].

The bond market is behaving like some sort of maneuver of this nature is coming. In the last week, the 10-year yield [TYCV1 127.7969 -0.2031 (-0.16%) ] and the 30-year yield have seen the biggest moves along the curve, both dropping by 0.6 percentage point. That move accelerated during Thursday's stock market plunge.

"Long end Treasurys led the charge higher when stocks crumbled mid-morning," said William O'Donnell of RBS. "Short Treasury tenors have little room to run and the recent BULL FLATTENING has helped spur thinking that the Fed will consider blowing the dust off of Operation Twist (1961), which was designed to lower long term rates back then."

Nouriel Roubini believes QE3 is inevitable.

By keeping short-term rates the same or higher this time, the DOLLAR WOULD LIKELY STAY STRONG. said investors, and help Bernanke fight back against the biggest criticism of his last quantitative easing plan: the surge in commodities.

"QE3 now seems unavoidable in the context of a WIDENING OUTPUT GAP in H1, a broad-based stall of employment growth and forthcoming increasing drag from fiscal policy," according to a piece by the economic team at Nouriel Roubini's research firm, Roubini Global Economics. "A significant balance-sheet expansion may be a hard sell in H2 2011, with core inflation indexes staying steady through the end of the year. That said, EXTENDING THE MATURITY OF THE FED'S HOLDINGS SEEMS MORE PLAUSIBLE, and indeed would address QE2's key shortcoming-that the program did little to counter the lengthening maturity of outstanding Treasurys."

Roubini's team is referring to another key document being passed around by traders these days, Bernanke's Semiannual Monetary Policy Report to the Congress on July 13.

"On the one hand, the possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support," said the Fed Chief before recent economic data would prove him right. "Even with the federal funds rate close to zero, we have a number of ways in which we could act to ease financial conditions further. One option would be to provide more explicit guidance about the period over which the federal funds rate and the balance sheet would remain at their current levels. Another approach would be to initiate more securities purchases or to increase the average maturity of our holdings."

Other options for the Fed chief that have been suggested by traders is CAP TREASURY RATES, something not done since the 1940s. Other strategists say don't do anything, this is Europe's problem and our own easing will just dig us deeper into a whole we would have to unwind one day.

[flow5]

caps.fool.com/Blogs/qe3-or-operation-twist-2/623045

Author: notehound

Since just about everything that has to do with the economy is either directly or indirectly priced off the 10-year part of the curve, it stands to reason that this is the segment that matters most for the economy. The 10-year part of the curve is the oxygen tank for the market and macro backdrop, yet (QE2) centered its efforts more on the front- and mid- part of the curve.

Bernanke talked about embarking on such a scheme, if necessary, when he was still governor back in 2002:

Bernanke:

"Because long-term interest rates represent averages of current and expected future short-term rates, plus a term premium, a commitment to keep short-term rates at zero for some time — if it were credible — would induce a decline in longer-term rates. A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt ... Lower rates over the maturity spectrum of public and private securities should strengthen aggregate demand in the usual ways and thus help to end deflation. Of course, if operating in relatively short-dated Treasury debt proved insufficient, the Fed could also attempt to cap yields of Treasury securities at still longer maturities ...

Historical experience tends to support the proposition that a sufficiently determined Fed can peg or cap Treasury bond prices and yields at other than the shortest maturities. The most striking episode of bond- price pegging occurred during the years before the Federal Reserve-Treasury Accord of 1951.

Prior to that agreement, which freed the Fed from its responsibility to fix yields on government debt, the Fed maintained a ceiling of 2-1/2 percent on long-term Treasury bonds for nearly a decade."

===============

Unlimited purchases of Treasury's today would cause higher inflation relative to the prior times referenced. Thus Bernanke overestimates this potential.

[flow5]

Stock market bottom is projected to be in OCTOBER at this juncture.

[flow5]

www.bloomberg.com/news/2011-08-05/bernanke-models-prove-faulty-as-fed-forecasts-succumb-to-downward-revision.html

Bernanke Models Tested as Forecasts Fail
By Craig Torres - Aug 5, 2011 7:50 AM CT

…Guiding their assessment of the outlook for the world’s largest economy will be forecasts contained in the so-called TEAL BOOK, a confidential staff report with a blue-green cover. Policy makers’ confidence in those forecasts may be tempered as the course of the expansion has confounded their expectations.

Of 12 Fed staff forecasts since the beginning of 2010, seven have been downward revisions to the near-term outlook, according to minutes of Federal Open Market Committee meetings. This year, the outlook was raised in January and lowered three times since as a stream of data on weakness in employment and consumer spending signaled threats to a recovery from the deepest recession since the Great Depression.

“WE HAVEN’T HAD ANY HISTORICAL EVENT THAT REALLY WOULD ALLOW US TO RELIABLY STATISTICALLY CALIBRATE AN EVENT LIKE THE ONE WE’VE,” David Stockton, director of the Fed’s Division of Research and Statistics, who has overseen forecasting for a decade, said in an interview at the end of June. “There isn’t going to be a simple story here.”

Uncertainty can cause central bankers to keep their hands off the levers of monetary policy and wait for more information, said Antulio Bomfim, senior managing director at Macroeconomic Advisers LLC in Washington. When risks to growth stack up, as is the case now, Fed officials have to be mindful of more severe scenarios rather than just their baseline outlook, he said.

… “When you are LESS CONFIDENT ABOUT THE FORECAST, you become more sensitive to the incoming data,” Bomfim said. With the economy growing at a 1.3 percent annual rate in the second quarter and 0.4 percent in the first three months, Fed policy makers are now “tilting toward easing,” said Bomfim, who worked at the Fed Board’s divisions of Monetary Affairs and Research and Statistics from 1992 to 2003. “We don’t think they will announce an easing action next week, but we think easing is back on the table.”

…That testimony was followed by reports on industrial production, consumer spending and employment that were weaker than predicted by economists. The data have also called into question the forecast of Fed governors for a PICKUP IN GROWTH IN THE SECOND HALF OF 2011. Central bankers estimated in June the economy would grow 2.7 percent to 2.9 percent this year and that the unemployment rate would move down to 8.6 to 8.9 percent in the fourth quarter.

...Fed staff forecasters HAVE BEEN THROWN OFF BY UNFORESEEN SHOCKS that have rammed the economy, such as the threat of a European default in April 2010 and higher oil prices this April. Alongside such ONE-TIME EVENTS are more lasting changes in the way U.S. consumers and companies behave that Fed officials are still trying to comprehend.

Every six weeks, Stockton and a team of 50 ECONOMISTS prepare a forecast that on average looks out eight quarters, while also giving policy makers a “now-cast” about how the economy is progressing today. They also generate as many as SEVEN ALTERNATIVE SCENARIOS TAT DESCRIBE HOW THE ECONOMY MIGHT UNDERPERFORM OR OUTPERFORM THE BASELINE.

…The SUITE OF MODELS used by Fed staff to forecast changes in consumption and investment rely to some extent on past relationships between interest rates, income, and profits. Most also assume credit will be supplied and demanded at a given price or interest rate. Without adjustments, they revert to the mean -- after a period of slump they begin to point upward, in line with previous recoveries.

All of those tendencies have made the models LESS TRUSTY GUIDEPOSTS for what is happening in the current recovery. The staff has to venture judgments and explore new analyses.
The persistence of high unemployment, a concern Bernanke has voiced on several occasions, ripples through the economy. A high jobless rate reinforces low income expectations and can result in an enduring trend of pessimism that MAKES CONSUMER SPENDING DIFFICULT TO PREDICT.

One of the indicators Fed staff are watching is the Thomson Reuters/University of Michigan survey of INCOME EXPECTATIONS. The majority of consumers surveyed in June expected no income increase in the year ahead, as they have in every survey for the past 30 months. That’s a record

…Fed staff are also REVIEWING PRODUCTION SCHEDULES and contacting auto companies to gauge how the resolution of supply chain disruptions following the Japanese earthquake and tsunami in March may lead to higher production of cars and trucks.

…Ordinarily, monetary policy works by making borrowing cheaper so households and businesses can access credit and keep their consumption stable through an economic slump. Now, THAT CHANNEL IS LESS EFFECTIVE.

[flow5]

Unlike the money stock, velocity has sea-sawed during the Great Recession. In 2011 velocity started to contract again on 3/28, reversed 6/13, & then peaked on 7/21.

Right now, monetary policy is tight. I.e., you can't benchmark inflation when it is largely supply-side (finite resources), generated, as opposed to demand-side (monetary) generated.

One small piece of evidence is that the member bank's applied vault cash (which since 1959 they can use to satisfy reserve requirements), has slowly fallen (i.e., the banks are having to put up new inter-bank demand deposits for their RRs (as they lend & invest - i.e., despite large volumes of IOeRs). Note: these are also held at their District Reserve Bank.

This implies that legal reserves are actually binding (or represent "bound banks" expanding vs. "non-bound banks" expanding).

But they are binding to the same extent as contractual clearing balances & daylight credit. So RRs have been contrationary since 2011-02-01 @ 44.442.

[flow5]

As of this point in time, stocks should BLAST OFF in Nov & Dec this year. Great time to buy call options, futures. indexes, & margin up.

[flow5]

Credit rating agency Standard & Poor's on Friday DOWNGRADED the CREDIT RATING of the United States, stripping the world's largest economy of its prized AAA status.

In July, S&P placed the United States' rating on "CreditWatch with negative implications" as the debt ceiling debate devolved into partisan bickering.

To avoid a downgrade, S&P said the United States needed to not only raise the debt ceiling, but also develop a "credible" plan to tackle the nation's long-term debt.

In its report Friday, S&P ruled that the U.S. fell short: "The downgrade reflects our opinion that the ... plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics."

==============

"Updated, 8:27 p.m. ET] The credit rating agency Standard & Poor's announced Friday that it has downgraded the U.S. credit rating to AA+ from its top rank of AAA."

==============

"Money markets are a prime example. They CANNOT OWN any thing that's not AAA"

[flow5]

blogs.forbes.com/steveschaefer/2011/08/05/sp-cuts-u-s-debt-should-you-care-the-fed-doesnt/

"One of the biggest concerns about a potential downgrade was whether financial institutions would be able to continue carrying U.S. debt as risk-free assets on their balance sheet.

The Federal Reserve suggested an answer Friday, responding to the S&P cut with the following press release:

Earlier today, Standard & Poor’s rating agency lowered the long-term rating of the U.S. government and federal agencies from AAA to AA+. With regard to this action, the federal banking agencies are providing the following guidance to banks, savings associations, credit unions, and bank and savings and loan holding companies (collectively, banking organizations).

For risk-based capital purposes, the risk weights for Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies, and government-sponsored entities WILL NOT CHANGE. The treatment of Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies, and government-sponsored entities under other federal banking agency regulations, including, for example, the Federal Reserve Board’s Regulation W, will also be unaffected."

[flow5]

DOW JONES INDUSTRIAL AVERAGE peaked @12,724.41 on July 21st 2011. This coincided with the repeal of REG Q restrictions (the prohibition of payment of interest on demand deposits on the same day)

HISTORY NOTE: "In a letter of March 15, 1981, Willis Alexander of the American Bankers Association claims that: 'Depository Institutions have lost an estimated $100b in potential consumer deposits alone to the unregulated money market mutual funds.' As any unbiased banker should know, all the money taken in by the money funds goes right back into the banks, in the form of CDs or bankers acceptances or other money market instruments; there is no net loss of deposits to the banking system. Complete deregulation of interest rates would simply allow a further escalation of rates by the banks, all of which compete against each other for the same total of deposits."

Written by Louis Stone whom the movie "Wall Street" was dedicated to - Vice President Shearson/American Express

[flow5]

A bond is considered "investment grade" if its rating is BBB- or higher. I.e., there are 8 separate designations which are considered to be IG. Despite Standard & Poors downgrade (the U.S. credit rating to AA+), Treasury's are still at the top of the ladder.

[bimetalaupt]

Aug 6, 2011 11:26:22 GMT -5 flow5 said:

A bond is considered "investment grade" if its rating is BBB- or higher. I.e., there are 8 separate designations which are considered to be IG. Despite Standard & Poors downgrade (the U.S. credit rating to AA+), Treasury's are still at the top of the ladder.

flow5,
Also considered AAA if two of the three grant them this ranking!! so USA = AAA still

Bi Metal Au Pt

[flow5]

History NOTE - Robert Prechter - in the July Elliott-Wave-Theorist:

"Foreign powers have been irate over the Fed’s deliberate inflating policy. At its outset, QE2 generated 'a chorus of criticism' from China, Russia, Japan, Brazil and Germany. It prompted one of China’s three credit rating services to lower its rating on U.S. debt from AA to A+, on the basis that QE2 is a scheme to defraud the Treasury’s creditors"

==============

BUT IT WAS JUST AN ASSET SWAP

[flow5]

WIKIPEDIA: "A wash sale (not to be confused with a wash trade) is a sale of a security (stock, bonds, options) at a loss and repurchasing the same or substantially identical stock soon afterwards (Internal Revenue Code Sec. 1091). The idea is to make an unrealised loss claimable as a tax deduction, by offsetting against other capital gains in the current or future tax years. The security is repurchased in the hope that it will recover its previous value."

"In some tax codes, such as the USA and the UK, tax rules have been introduced to disallow the practice, e.g., if the stock is repurchased within 30 days of its sale. The disallowed loss is added to the basis of the newly acquired security. Tax authorities may consider the practice illegal even in the absence of explicit regulations, on the grounds that the transaction is not genuine, but intended only to reduce tax liability (such as in Australia)."

============

IF YOU DIDN'T GET OUT IN TIME

[flow5]

Date 1 mo 3 mo 6 mo 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 20 yr 30 yr
08/01/11 0.13 0.10 0.16 0.22 0.38 0.55 1.32 2.05 2.77 3.72 4.07
08/02/11 0.05 0.06 0.13 0.17 0.33 0.50 1.23 1.94 2.66 3.59 3.93
08/03/11 0.01 0.02 0.08 0.16 0.33 0.52 1.25 1.94 2.64 3.55 3.89
08/04/11 0.01 0.02 0.05 0.12 0.27 0.44 1.12 1.78 2.47 3.37 3.70
08/05/11 0.01 0.01 0.05 0.11 0.28 0.49 1.23 1.91 2.58 3.49 3.82

DAILY TREASURY YIELD CURVE
=========

Check Monday for rating agency impact.

[smackdown]

With the Credit rating down-grade and no ability to print more money, Ben should be fired. He was completely wrong from the start.

[flow5]

QE2 decreased the demand for, and increased the supply of: loan-funds. I.e., the frbNY took off the loan-funds market (& are holding in SOMA), a variety of Treasury maturities.

I.e., the FED's employment mandate isn't achievable.

The FED should be charged with only 2 mandates:

(1) stable rates of inflation
(2) matching savings with real-investment

In order to achieve # (2) the FED should encourage the flow of, and investment of savings thru, the non-banks - thus promoting the circuit income & transactions velocity of funds. As it now stands the economy doesn't have much of a chance of recovering without completely eliminating IOeRs.

[flow5]

www.ritholtz.com/blog/2011/08/fdic-fed-funds-leen%E2%80%99s-lodge/

FDIC, Fed Funds & Leen’s Lodge
August 6, 2011
David R. Kotok

"What is the difference between -13 and +7? The answer is 20. Twenty is the market-based pricing of the cost of the FDIC asset-based fee assessment. For the first time, we were able to see its impact. It is important to understand this calculation in order to fully appreciate what is happening in the financial markets.

The Bank of New York has IMPOSED A FEE of 13 basis points (13/100ths of 1%) ON LARGE DEPOSITS. With this policy, the Bank of New York is essentially stating IF YOU PUT YOUR MONEY IN OUR BANK, WE WILL CHARGE YOU an interest rate for the privilege of depositing with us. At the same time, the Federal Funds Rate, which is applied in the exchange of overnight reserves between and among banks, traded at +7 basis points. It is here we find the spread of 20 basis points.

Why would the Bank of New York impose such a cost on depositors? Simply put, IT WAS LOSING MONEY. How was it losing money? It has to pay an ASSET-BASED FEE to the Federal Deposit Insurance Corporation, and the excess reserves on deposit at the Federal Reserve ARE COUNTED AS ASSETS in the computation of the fee.

Dear reader, as this gets a little complicated, I am going to simplify as much as possible. Therefore, I am going to make some minor technical errors about the composition of the items in order to get to the calculation.

The Federal Reserve pays a bank 25 basis points as an interest rate on its overnight deposit of excess reserves. If you are an American bank, you have to subtract your asset-based FDIC fee from the 25 basis points in order to determine your net result. The asset-based fee varies based on a formula and is dependent on the composition of your assets, liabilities, and other factors that would require a technical discussion of the computation of fees beyond this commentary. The point is this: the Bank of New York concluded it had to charge its depositors. The underlying message in this policy is to tell depositors to withdraw their money and go to another bank.

Think about what it means for a large bank of great stature to tell its significant institutional depositors to take their money elsewhere. The Bank of New York could only do this if it were losing money on those deposits, which means the net of the FDIC fee at the margin and the cost of reserves, which is the Federal Funds Rate, or the proceeds if you sell excess reserves, was such that the Bank of New York had to establish a negative interest rate, or a fee on deposits.

The implication of a 20-basis-point calculation using a market-based price is that it is the first time we are able to see the negative impact of the FDIC fee assessment. We wrote about it in the past, and we called it “the wedge.” We talked about it at Leen’s Lodge with several colleagues, many of them skilled in monetary dynamics, a number of them involved in institutions; and all of them agreed: there is some cost attached to this “wedge.” In addition, the market-based pricing due to the Bank of New York revelation enables us to establish an estimate of cost. From that, we can infer what the cost might be for other large depository institutional-servicing organizations.

Now, dear readers, recall the estimates of the value of the $600 billion dollar QE2, which was announced a year ago. Various estimates priced the benefit in interest-rate equivalents of 2, 2 ½, or 3 basis points per $100 billion dollars. The value of QE2 in terms of reduced interest rates was somewhere between 12 and 18 basis points. We now see the Bank of New York in a market-based transaction relative to the Fed Funds Rate, saying the cost of the FDIC assessment is 20 basis points.

Take 20 basis points, subtract the midpoint of the estimate of QE2, at 15 basis points, and you have a net imposition on the banking system by the FDIC assessment of an amount that fully unwinds the entire stimulative effect of QE2, plus removes from the market part of the stimulative effect of QE1.

If you want to understand why the stock market reacted so harshly to this news, examine the conclusion. QE2 has been fully neutralized by the FDIC. Furthermore, the FDIC “wedge” is extracting part of QE1. Let us take this to the next step. What can the Federal Reserve do in order to counter the negative impact of the FDIC fee assessment? It can do nothing. That would be a form of DRIVING DEPOSITS FROM AMERICAN BANKS TO THE US SUBSIDIARIES OF FOREIGN BANKS.

This is significant because the US subsidiary of a foreign bank does not pay the FDIC assessment, but it does have the privilege of selling excess reserves to the Federal Reserve; and so therefore, it receives the benefit of the Fed stimulus.

The Federal Reserve could alter its program. It could raise the interest rate it pays on excess reserves. It could neutralize the FDIC fee. It could alter the composition and lengthen out the term of excess reserves. There are many things the Federal Reserve could do.

What can the FDIC do? First, it could recalculate the fee assessment and exclude excess reserves as an asset. It essentially could conclude that excess reserves have a long-term role in which they will be very minor in a normalized economy, and that they are very large only because of this unusual and special Federal Reserve policy. Secondly, the FDIC could admit its error in judgment. They have imposed a fee, even though they were warned about it by some serious researchers. They ignored them, the Federal Reserve leadership ignored them, too, and now we are seeing the consequences. The consequences are severe in the capital markets and in the economic outlook, and they should step up and change the rule. Therefore, excess reserves should be excluded from the computation of the assessment. The mix can then be altered, and the subsidy from the Federal Reserve will go to American banks, not foreign banks. Furthermore, those banks will now have a level playing field and be able to redeploy capital in some more positive form...."


David R. Kotok, Chairman and Chief Investment Officer

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Another example of the stoppage of the flow of savings within the CB system.

[smackdown]

Nice, Flow5... but you missed a significant point. If in fact the point-spread is as you say and that derived-from QE2 money in excess goes to the USA subsidiaries of Foreign Banks to divert around the fee, then the diversion employs stimulus-targeted funds away from the national benefit. I'd call that TREASON. You need to remember that we're talking excess funds, not somebody's life-sustaining savings. There isn't anything valuable or worthwhile going on in the capital markets right now. If there was-- we'd have jobs and positive economics. I applaud BoNY at arm's length only. Keep the money moving while tightening the noose with every movement. It belongs on Main Street, not hoarded by entities on behalf of anyone. It's currency.

[flow5]

Higher reservable liabilities & higher reserve ratios would take care of cross-border speculation (IOeRs were a mistake, but RRs are universally applied). Capital controls just serve as target practice.