Quantitative Subterfuge

I’ve written previously on Quantitative Easing. As we know, it’s critical to have a printed money bond purchase program that looks like America. Though perhaps feeling a bit sheepish about distributing so much newly conjured fiat to their Wall Street cohorts, the federal reserve board has begun steadily tapering its volume of monthly purchases: now down to a mere $45 billion/ month. If you understand nothing else about QE, conceptualize it simply as an undeclared tax. The government could be funded entirely through the program with direct taxation falling to zero–and yet would we receive NSA services for free? No.

And while the tapering appears to continue apace, with an anticipated termination point this fall, there is now some suspicion as to whether The Economy is going to find that weaning palatable. A huge public and private edifice has been constructed around near zero interest rates. Federal, state, and municipal budgets–already far in the red–have come to rely upon something very near to zero interest financing. Even at current subterranean levels, net interest expense represents over 6% of federal outlays. Imagine if that were to settle back around recent historical norms nearly 10% higher. That’s $350 billion more dollars in the budget red. And for states and municipalities that can not print a path home, it would likely mean many more unseemly defaults and bankruptcies.

And there is also the impact on markets. Remember the price of debt instruments move inversely to yield. A 500-600-700+ basis point increase in yields would result in bond market carnage of a terrible beauty. And not just bonds. The equity markets, without a QE tailwind, featuring high multiples, and spiking interest rates would look very much like Major Kong’s final ride. All of this must make the fall QE drop-dead date appear daunting.

All of which makes a recent little publicized purchase out of Belgium quite curious.

In his latest article, former Assistant Treasury Secretary Dr. Paul Craig Roberts says, “The Fed is the great deceiver.” Why is he making this shocking accusation? The reason is tiny Belgium’s whopping purchase of $141 billion in Treasury bonds earlier this year. Dr. Roberts explains, “We know that Belgium didn’t have any money to buy $141 billion worth of bonds over a three month period. That sum comes to 29% of the Belgium GDP. So, they don’t have a surplus in their budget that is 29% of their GDP, and they don’t have trade or current account surplus in that amount. In fact, everything is in the red. Their budget deficit is in the red, and their trade and current accounts are in the red. So, Belgium didn’t have the money, and yet, they managed to pick up $141.2 billion in U.S. Treasuries over a three month period. So, where did they get the money?” Dr. Roberts, who holds a PhD in economics, goes on to say, “We know their central bank couldn’t have printed euros to buy the bonds with because the Belgium central bank can’t print euros. Belgium is part of the euro system and has lost the ability to create its own money. So, the only source for that kind of money would have been the Federal Reserve. The Federal Reserve thought it needed to hide the fact it was buying $141 billion in bonds over a three month period when it was officially reducing or tapering the quantitative easing down to $65 billion. It didn’t want to have to admit it was really purchasing $112 billion a month, almost double the announced purchases.”

Dr. Roberts also says, “I think also the Fed did not want it to get out that some large country is unloading Treasuries. Somebody dropped over $100 billion in Treasuries in one week. If that was a large holder and that became known, it could panic smaller holders and you could see a stampede, and the Fed could lose control of interest rates. So, I think the Fed thought the best thing to do is launder its purchase through a different country; and, thereby, disguise what is actually happening.”

Why is the Fed worrying about the shell game of Treasury purchases? Dr. Roberts says, “I think there wasn’t any buyer for the $104 billion in one week. So, if that kind of bond sale sat unattended, interest rates would rise; and so, the Fed had to buy the bonds in order to protect its interest rate policy. But, if it outright bought them and this was known, then it starts to interfere with the ‘tapering’ that it promised to do because all of a sudden it’s not ‘tapering,’ at least not for those three months. It signals somebody is unloading Treasuries, and that could stampede others. What it indicates is they are not feeling all that confident that the dollar is on such a sound footing, or the U.S. financial system is on all that much sound footing that they can openly step in and take up that type of purchase.”

And why would this be of interest to readers here? If one understands the modern metaphor for bread and circuses, then The Kakistocracy remains vertical by the twin pillars of fear and football. Fear of career ruination, social ostracism, and innate desire to avoid the periphery of the herd. And football: why worry about the disintegration of your children’s future when the Dallas Cowboy’s playoff chances hang in the balance? It is in maintaining the football consumer that these Federal Reserve machinations become interesting.

If they view the economic picture as sufficiently bleak to warrant laundering bond purchases, then the odds of an actual QE cessation seem very low. And if we are now entering a terminal epoch of QEnfinity, then we may anticipate a new normal of college graduates finding no meaningful employment and seniors watching their nest eggs devalued to scrap. Both fear and football have much to worry from the mindsets that will result.

As an addendum to the Economy’s plight, I was fascinated reading this article from 0Hedge on the world’s expanding graveyards of new unsold cars. There is no demand, there is no purchasing power, yet because of such enormous labor and production inelasticity, plants must keep churning out boxes until the mechanical arms finally seize–it’s organ grinders monkeys all the way down. Marvel at these photos of never driven vehicles slowly disintegrating in the sun.







A person who doesn’t give a damn about the results will find the next couple of generations to be very interesting.


2 thoughts on “Quantitative Subterfuge

  1. Read the latest?

    Libor may have a twin brother. Word has leaked out that the London-based firm ICAP, the world’s largest broker of interest-rate swaps, is being investigated by American authorities for behavior that sounds eerily reminiscent of the Libor mess. Regulators are looking into whether or not a small group of brokers at ICAP may have worked with up to 15 of the world’s largest banks to manipulate ISDAfix, a benchmark number used around the world to calculate the prices of interest-rate swaps.


  2. Those pictures are astounding. There is no reason under the sun you should make more than you can sell unless you’ve got artificially cheap financing. The supply-demand curve is way out of whack because interest rates no longer reflect reality.

    I get the same sense driving around town (in my 9-year old car) at the endless procession of retail outlets. Who buys all this crap? [Looks out window at transplanted Third Worlders trudging up and down the sidewalks] Them?

    Like you say, this will be interesting.

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