Entering the Endgame for Monetary Policy
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Look at the H.4.1 report. We may have finally hit the panic phase of monetary policy, where the Fed increases the monetary base dramatically. They are pumping the “high-powered” money into loans:
- $20 billion for Primary credit
- $80 billion for Primary dealer and other broker-dealer credit
- $70 billion for Asset-backed commercial paper money market mutual fund liquidity facility
- $40 billion for Other credit extensions
- $80 billion for Other Federal Reserve assets
- -$20 billion netting out other entries
Making it an increase of roughly $270 billion from last week’s average to Wednesday’s daily balance. Astounding.
In general, the increases are not being pumped into the banks, but into specialized programs to add liquidity to the lending markets. Now, I’ve written about this before, but it bears repeating. What happens if the Fed takes losses on lending programs. It reduces the seniorage profits that they pay to the Treasury, which means the Treasury has to tax or borrow that much more. The Fed isn’t magic; it’s a quasi-extension of the US Government in a fiat currency environment. It’s balance sheet is tied to the US Treasury.
Yves Smith at Naked Capitalism is correct. The US is no longer a AAA credit, particularly if you measure in terms of future purchasing power of US dollars. I’ve felt that for years, though, with all of the unfunded future promises that the US Government has made with Medicare, Social Security, etc. The credit of the US Government hinges on foreign creditors (like OPEC and China) to keep it going. What will they offer them? The national parks? 
I try to be an optimistic guy and hope for the best. But the current actions of the government are making me think about a massive re-alignment of my portfolio… and I never do things like that. But, if the government is ramming through desperate measures, maybe I should too.
September 26th, 20084:11 pm at
you are misinterpreting the size of increase in high powered money. as part of this operation, the treasury sold $200 billion of short term bills and deposited the proceeds with the fed. this portion is just a transfer not a fresh injection. the treasury drained the $200 bil and now the fed has it. i agree with you that even taking that out, it is still a big increase in the fed’s balance sheet but not as big as what you are suggesting.
September 26th, 20084:13 pm at
I have watched in terror this year as the Fed has junked the balance sheet with loose RP/loan collateral. As I understand it, the Fed’s assets are effectively the collateral for these green notes that I hold in my wallet. Even though they are worth more now than they were in July, I perceive them to be worth less: there are more of them and they are “secured” by worse assets.
I see the NYFED has made a few… err, I’m not even sure what to call it–the agency equivalent of a bill pass–in the permanent open market operations. As I understand it, this is the 2008 equivalent of printing money. Wait until those crazy gold bugs notice.
So, they sold Treasuries earlier this year, and now are replacing them with Agencies (which are the same thing, as far as I’m concerned). Weird.
September 26th, 20085:12 pm at
So, David, what do you mean by “massive re-alignment”? Are you thinking of expatriating your money? Are you thinking of investing it in securities denominated in other currencies? If so, what? I have these thoughts as well, but the thing I keep coming back to is, if not the USA, where? People keep bringing up the Great Depression, but the thing nobody mentions about the GD is that practically every country in the world defaulted *except* the USA!
September 27th, 20087:06 am at
I agree with Tim. I’d like more clarification about your ideas for realignment. I’m thinking of doing the same but everywhere I look globally I see overleverage and deflation. With T-bill yields being crushed doesn’t that mean people are fleeing to safety. I don’t know what to make of the situation at this point.
September 29th, 20089:23 am at
David:
As a former manager of a credit hedge fund that didn’t make it, I would advise you to heed your “inner voice” telling you to alter your portfolio. I didn’t heed mine, as the thought at the time seemed completely contrary to everything I had learned to date in my 15 year career. But alas, different markets call for different game plans, and this is definitely a different market.
September 30th, 20082:58 am at
If you are considering re-aligning your portfolio,
what then, would you suggest your mother do or others who are retired and depend upon either their stock portfolio or 401 K plans for part of their income.
And how would you realign your portfolio? What kind of massive changes would you make?
Mom
October 22nd, 200811:35 am at
Dear Mom,
My post http://alephblog.com/2008/10/18/picking-some-stocks-to-survive-the-market/ was my attempt to give an answer. Not a fast answer, but I had so many irons in the fire that I had a hard time focusing. With the crises in the lending markets, time and focus have been scarce – I’ll have a post up on my new purchases soon.