Friday, February 17, 2012
Potentially Dangerous Stuff
The Frankfurt-based ECB is exchanging its Greek bonds for bonds of an identical structure and nominal value, the only difference being that they would be exempt from so-called collective action clauses, the officials said late yesterday on condition of anonymity. One said the bonds have a face value of about 50 billion euros ($65 billion).We'll have to see how everyone reacts to this news. Two very large, very desperate central banks are battling to keep somewhat insolvent systems afloat. At the end of this month, ECB is set to conduct another money toss. We'll have to see how big that one is. If the net add between the two really is about 1 trillion, it's an immense sum - about 1.3 trillion dollars, of which at least 40% will find its way out of the heart of Europe by June.
The Fed is locked into buying long US Treasuries, and the world is locked into a rather dangerous game of cranking the money lever. Moves by smaller central banks probably mean little. Over the last year, US federal debt held by the public 2/15/2011 to 2/15/2012 has increased by about 1.1 trillion, of which the Fed acquired a net 480 billion +, approximately 43%, although letting the MBS run off changes the net annual add on the security buys to about 318 billion.
Now ECB is still going to have to fund additional sovereign purchases by European banks, because a lot more is due to come on the market this year. So overall the minimum net add from them probably goes to 1.4 trillion Euros? Holy Hannah, that seems like a huge number, but by summer that implies that the Fed plus the ECB dump a minimum net 900 billion USD into the international markets, of which probably only about 200 billion can be absorbed in "real" investments. If that's true, we are looking at a very big wave of inflation.
Most fundamental economic de-correlation (disaggregation) of trends occurs through changes in market pricing. What happens when you dislocate that mechanism?
If you were a hedgie, you would probably move your risk allocation away from shorter term sovereigns and into something else. Surely that will make these central banks double down on their bets, because aren't we losing the last set of possible market clearances?
In the meantime, India is forcing the import of more coal. Japan, of course, is locked into more fossil fuel imports to offset the loss of nuclear electricity production.
The US cannot be insulated at all from the inflation, because producer margins are not that good on many of the basics and the dollar cannot be that strong because let's face it, our goal is to keep it weak.
I'm looking at these numbers globally and they just don't add up. This seems sort of nutty. I doubt what's happening in China can really offset much of it, because although deposits at Chinese banks have stopped their epic rise, that just means that the flow of money into building stuff (which absorbs excess money) slows down.
Paper assets is still continuing. Energy, silver, and gold.
Hedge your bets.
Say, did anybody notice that the Google word verification generator has been replaced, and the new one doesn't come up with relevant words anymore? Perhaps the experiment with AI sentience got out of hand and had to be aborted...
Mycroft? You still there?
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