The federal reserve and the oncoming global big ka-boom.

[Tyrannus]

And it shall come to pass, that the world will prepare to reap the whirlwind.

Over four years ago, in “Chasing the Shadow of Money”, Zero Hedge first presented a curious if perverse aspect of the Fed’s QE experiment in the context of the modern monetary system: the extraction of “quality” collateral by the Fed’s daily purchases of Treasury (and MBS) securities, and it replacement with reserves - a transformation which while boosting asset prices, results in an ongoing deleveraging of shadow liabilities, as well as a persistent slowdown in the velocity of collateral (due to both its increasing degradation and increasing counterparty risk). Our concurrent investigation into the properties of shadow banking led us to the correction conclusion back in March 2012, and explanation why, the Fed would have to do at least another $3.6 trillion in QE. We are now $1 trillion in, and rapidly rising even as the 10 Year equivalents held by the Fed now represents almost one third of the entire Treasury market: an unprecedented collapse in available private-sector collateral.

And while there has been a small if vocal subset of voices warning about the problems of collateral scarcity, and the implications for the global financial balance sheet if and when renormalization is attempted, for the most part, this remains a very much misunderstood process. Perhaps the main reason for this is that, as Peter Stella summarizes, “When it comes to reducing excess reserves, the ‘how’ matters as much as the ‘when’ and ‘how much’. Understanding this point requires mastery of the brave new world of shadow banks and re-hypothecation – a world that either did not exist or was truly in the shadows when most of us were taught about money and credit creation.”

Over the past 5 years we have attempted to provide a glimpse into how modern shadow banking (with a world in which rehypothecation is the “source” of tens of trillions in deposit-free credit money), however, the vast majority of modern economists and those espousing modern “magic money tree” theories, still view the world through the lens of a 1980s textbook, which is absolutely insufficient when attempting to explain marginal credit creation amounting to tens of trillions in the shadow banking system. Ironically, it was precisely the collapse in collateral chains and the freeze in shadow counterparty derivative exposure just before the failure of Lehman, captured with stunning precision by Matt King’s “Are the Brokers Broken?” report issued a week before the Lehman bankruptcy, that explained more about the perilous nature of modern finance, than any other paper written before or after (p.s. Yes, the brokers were, and still are, broken).

Not surprisingly, the topic of “high quality collateral” and specifically, its disappearance, has been the topic of not one but both of the last Treasury Borrowing Advisory Committee refunding presentations (here and here). And since Tapering was fundamentally, all about slowing down the rate of high quality collateral extraction, one can expect the next TBAC refunding presentation be a veritable screamfest of warnings from the likes of Citi’s Matt King and CS’ James Sweeney (sadly it seems they will fall on increasing more deaf ears). That said, if and when the Fed is compelled by the JPM/Goldman-chaired TBAC to finally slow down and/or halt the pace of collateral extraction, the question is what will happen then, especially as pertains to the all important shadow banking system.

About a month ago, the IMF’s Manmohan Singh wrote a White Paper titled simply enough “Collateral and Monetary Policy” where in 17 pages, which dealt precisely with this issue, which among other things did a great job of explaining the logic behind the Fed’s proposal to commence a reverse repo program which would be expanded to include non-bank participants, in effect expanding the eligibility of the Fed’s “reserves as collateral” away from pure-play bank institutions. However, more than anything, Singh was lamenting the ongoing collapse in the velocity of collateral, as follows: “The economy needs the collateral services that these securities can offer, which transfers with possession, not ownership. Securities in the market domain have a velocity; those at the central bank do not. So, D (excess reserves) does not substitute for C1 (good collateral) and thus there is a net reduction in overall financial lubrication.”

That also suggests that a perfectly centrally-planned market should be oblivious of counterparty (ownership less important than possession) risk, in order to preserve financial “lubrication” - a commandment which so far markets have failed to comply with. In fact the more Bernanke absorbs quality collateral, the lower the velocity of existing collateral. This is also one of the main difficulties facing the Fed. Recall slide 30 of the TBAC’s Q1 presentation appendix on liquid private collateral: Read more on the click of the link.

zerohedge.com/news/2013-09-2 … h-dead-end

[Orbie]

As long as the Chinese continue to buy the debt, there is nothing to worry about. And they can not afford not to buy because if they stop, they go under.

How much reserves do they have? Enough to insure their liquidity for many years to come. This is the charm behind the IMF, they have almost unlimited rescources.

[Tyrannus]

@obe

As long as the Chinese continue to buy the debt, there is nothing to worry about. And they can not afford not to buy because if they stop, they go under.

How much reserves do they have? Enough to insure their liquidity for many years to come. This is the charm behind the IMF, they have almost unlimited rescources.

The international markets revolve around mutual assured financial destruction at this moment so whatever happens to one nation happens to them all.

Not one nation on this earth will escape the repercussions of this mess.

If you believe there is such a nation name one. China isn’t one of them. They have their own economical problems as I am typing this.

[Orbie]

@Tyrannus

@obe

As long as the Chinese continue to buy the debt, there is nothing to worry about. And they can not afford not to buy because if they stop, they go under.

How much reserves do they have? Enough to insure their liquidity for many years to come. This is the charm behind the IMF, they have almost unlimited rescources.

The international markets revolve around mutual assured financial destruction at this moment so whatever happens to one nation happens to them all.

Not one nation on this earth that will escape the repercussions of this mess.

If you believe there is such a nation name one. China isn’t one of them. They have their own economical problems as I am typing this.

 You are right of course, however the greek baliout is an example,and spain to a certain extent, where the rescue was successfully accomplished, and the IMF didn't even need to fund it, it was EU, basically funded by. Germany.  Germany has won WW2 it is said, economically rather then militarily.

All was not lost to the Germans, even at the heyday of the world war where inflation took the DM to unprecedented levels of millions to one. People continued to work, and production continued unabated. The point is, the collapse is a matter more of social attitudes toward the economy rather then any indexes or monetary troubles. Strength is not an exchangeable commodity, it is a human potential. Whatever happens to the money supply, it is the strength of the source of it that matters on final analysis, and that is the strength of the working class.

[Tyrannus]

@obe

@Tyrannus

@obe

As long as the Chinese continue to buy the debt, there is nothing to worry about. And they can not afford not to buy because if they stop, they go under.

How much reserves do they have? Enough to insure their liquidity for many years to come. This is the charm behind the IMF, they have almost unlimited rescources.

The international markets revolve around mutual assured financial destruction at this moment so whatever happens to one nation happens to them all.

Not one nation on this earth that will escape the repercussions of this mess.

If you believe there is such a nation name one. China isn’t one of them. They have their own economical problems as I am typing this.

 You are right of course, however the greek baliout is an example,and spain to a certain extent, where the rescue was successfully accomplished, and the IMF didn't even need to fund it, it was EU, basically funded by. Germany.  Germany has won WW2 it is said, economically rather then militarily.

All was not lost to the Germans, even at the heyday of the world war where inflation took the DM to unprecedented levels of millions to one. People continued to work, and production continued unabated. The point is, the collapse is a matter more of social attitudes toward the economy rather then any indexes or monetary troubles. Strength is not an exchangeable commodity, it is a human potential. Whatever happens to the money supply, it is the strength of the source of it that matters on final analysis, and that is the strength of the working class.

You think Spain and Greece are success stories? Do you know what life is like in Spain and Greece right now? I have a Australian pal in Barcelona, Spain that can tell you what it is like from first hand experience.

Germany? They’re making side deals with the Russians because they already see the writing on the wall.

What do you think is going to happen when whole entire currencies die over night?

[Orbie]

Anything is possible, and one right wing conservative predicted a clash of civilizations ending in a crash of the current monetary system. If something like that were to happen, I do not believe it would be a hard landing, and not a soft one either as it happened in the 1980’s during the carter administration, it would probably a moderate loss of value.

The petrodollar is behind the syrian/iran preoccupation, and as flexible as the modern industrial manufacturing is, if industry gives a thumbs up, the production of alternate fuel,particularly those of electric cars, could diminish the importance the middle east for it’s financial relevance.

I believe if push were to come to shove, industry could phase in new types of oil independent cars within 6 months to a year. They already are in production, but consumers are not obliged to buy them because of their initial resistance to newer technology and uncertain reliability/cost factors.

[Tyrannus]

Are you not familiar with overnight economic crashes? They always say that it can’t happen to us.

Change of energy overnight away from oil petroleum? Will never happen. Global peak oil is a bitch.

Nobody’s found a replacement either.

[Mr_Reasonable]

Tell me about some overnight economic crashes.

[Tyrannus]

@Smears

Tell me about some overnight economic crashes.

Smears, you seem like a intelligent individual, do you really need to ask?

It’s called compound interest and it isn’t something you can paper over.

At some point you reach critical mass and there is no possible way of reversion or containing the infected broken mismanaged system. You essentially cross the event horizon leading to instant defaults overnight on every fabric of a economic system.

[Mr_Reasonable]

Is compound interest like similar to when I reinvest dividends and then next time I get dividends on more money so it’s more dividends and then the next time I get even more money than the last time because it’s on even more shares than the last time and then well…like that?

[Tyrannus]

@Smears

Is compound interest like similar to when I reinvest dividends and then next time I get dividends on more money so it’s more dividends and then the next time I get even more money than the last time because it’s on even more shares than the last time and then well…like that?

What are you? Some sort of Federal Reserve bankster Smears?

[Mr_Reasonable]

Nope, just taking money away from the bastards so I can spend it on what I want instead. Fucking rite aid man.
google.com/finance?q=NYSE:RAD

TD Ameritrade gave me 600 free trades and I’ve used like 40 of em in a week. Shit is cracking me up. Read a lot of news, then make 5k into 6250 for nothing. That’s like…almost 2 months rent for doing nothing. You don’t even need a lot of money to do that. Think about it man. What would your job make you do to get 1250 in hand? Probably a lot more than just sit on your couch smoking weed.