[Is There Anyone Out There Who Thinks The Bank Bailouts Will 'save' Hpc?]

ParticleMan put it well in another thread earlier today ...

All anybody's hoping for is to avert the totality of the bust from happening in any given instant (to spread it over as many coupon payments as possible).

[Bonds, Interest Rates]

Another thing ... are the semi-nationalised banks now just as safe an investment as the government itself?

If so, and if the banks offer a better rate of return, then won't investors will put their money in the bank instead of government bonds?

And if they don't offer a better return then won't money continue to flow out of the banks and into government bonds, perpetuating the problem?

[Bonds, Interest Rates]

This is the WSJ article that waitsee mentioned earlier.

So do investors buy insurance on the government bonds they buy? And increasing insurance premiums must be reflected in the bond price?

[Bonds, Interest Rates]

Exactly so. And factors which act oppositely also (at this juncture) lift market rates.

As ?...! said just the other day, this is the worst time in a long time to be caught holding debt.

Although it's turning out to be a fairly good time to be holding cash (and similarly liquid instruments).

But if rates remain roughly static, then most people will be able to pay off their mortgages without too much pain. They'll be p**sed-off that they massively over-paid for their houses, but at least they'll still have a roof over their heads. Apart from the million or so who lose their jobs in the recession - they're toast.

So maybe its bad but not catastrophic? Maybe the bailout will actually sort-of work?

[Bonds, Interest Rates]

In real terms (in comparison to asset prices, wage inflation, GDP growth, currency futures) - certainly, this outcome is now baked in.

In the alternate economic reality I think it possible we've just peered into (however briefly), where debt can glut (where open buy-side interest in income-bearing instruments of whatever sort can be satiated, and the aggregate is) - this trend in yields would start to take on a life of its very own (producers would begin to chase demand by improving these same yields regardless of other variables).

Ok, so as we head into recession inflation is going to head towards zero. So interest rates don't need to rise in order for bond yields to increase?

They might rise a bit, stay around the same level, or even fall a wee bit. The real yield will increase because inflation disappears?

Same goes for mortgage (and other loan) rates?

[Bonds, Interest Rates]

I would welcome a coherent exposition of how the market for treasuries works in practice, and which parties the money is expected to come from. One idea I've wondered about is that, maybe, Japan (or some other country with a policy of depressing its own currency) might borrow from its central bank to buy them. I'm still uncertain about the exact mechanism here.

I'm an ignorant amateur, learning here, so can't give a detailed or authorative explanation.

But I believe government bonds are sold on the open market, to raise cash for governemt spending - now for the bailout.

Any investor may come along and buy. Through normal market mechanisms prices ( hence yeilds) are arrived at.

The majority of government bonds are bought by foreign investors.

The imminent large-scale investment raising through bond sales is due to trouble in our economy. It is to bail-out our economy. So it seems to me the money must come from cash-rich investors not currently suffering the same problems. Soverign-wealth funds etc.

There will be a huge amount of bonds being sold .. a buyer's market. Yields must go up .. if I've understood?

I also keep coming back to the popular understanding of the ERM crisis - where popular perception was that a need to raise a £16bn bond caused interest rates to spiral upwards... Is this an accurate assessment of what happened then, and - if so, why are we in a different situation today?

Sounds correct to me (in my amateur ignorance). Sounds just like the situation we are now heading into.

[Bonds, Interest Rates]

the central banks are loaning money to the banks who then buy treasuries from the.... treasury to keep on their books as capital.

it IS fairly circular which makes it pretty dangerous.

That's just the old loan mechanism .. bailout plan A ... utterly insufficient. It just enabled the insolvent banks to pretend they were solvent for a while.

That has been superceded by bailout plan F wherein the government buys newly issued bank equity.

The money to buy the equity has to be borrowed ... by selling bonds .. to someone other than the banks .. investors who are not so far up s**t-creek.

They will demand a better return, pushing up yields. Eventually leading to higher mortgage interest rates, I think.

[Bonds, Interest Rates]

If however it proves that debt is just another commodity (a theory of mine, and probably others) and that there's finite demand for it at any given price/ yield, things are going to go seriously strange next year (even weirder than they've already been).

What do you consider 'strange' (try to stay on topic ) ?

Do you expect higher bond yields?

Do you expect higher interest rates on mortgages and other loans?

[Bonds, Interest Rates]

there's no shortage of bond buyers, the banks are going to have enormous appetite for them as they rebuild their balance sheets.

The government is injecting money into the banks.

The government raises the money by selling bonds.

How can the banks buy the bonds that are sold to raise money to give to the banks? Its circular.

The bonds must be sold to currently cash-rich buyers, presumably foreign investors.

[Bonds, Interest Rates]

So imminent global economic collapse has been averted by UK/Euro/US goverments ploughing trillions into the financial sector.

Those governments now have to borrow the money.

They do so by selling bonds on the open market.

So there's a s**t load of bond sales in the pipline looking for buyers.

Does that mean that bond yields will rise significantly? How much? How quickly?

Does that mean that interst rates will rise significantly? How much? How quickly?

Are mortgages about to become expensive, applying further stress on the housing market and economy in general?

[The Money Supply Just Became Infinite]

But it is a confidence trick.....

The reason I say this is becauseit is merely an elaborate means by which the CB creates fresh money. It would cease to be a confidence trick if they cut out the "middle-man" of the "treasury bill" and simply printed up the money and released it into the economy via say, reductions in tax. When they wished to redeem the money back out of the economy they could raise taxes again for that purpose.

Government bonds are mostly bought by foreign investors. How does cutting taxes help there?

Also, your point about the mad-max scenareo appears to address my question about what happens when there are no more treasury bills to buy or sell.

Shit happens

There are always new treasury bills to buy and sell. The government just issues them. The problem is if there are no buyers.

[The Money Supply Just Became Infinite]

So, buying back government treasury bills is the primary means by which a CB inflates a money supply by creating the cash to purchase these bills back out of thin air?

have I got this right?

Yes.

What happens when there are no more treasury bills to buy back with newly "printed" cash because they have all been bought back up?

Issue more bonds, if you need to. Sell them. Buy them back.

Rinse, repeat.

It's a confidence trick, in the end.

It only works so long as you maintain confidence.

If that goes, it's all just fresh air

When does the trick get found out?

When you have "printed" up too much cash over too short a time frame such that the punters out there in he real economy see the devaluation to their units of exchange happening too quickly for it's effects to be masked over time. At that point, they lose confidence in the currency.

Not a trick. The bond is a promise to pay a debt, with interest, in some time frame.

It is paid through taxation.

Printing new money to buy the bonds is simply the mechanism to spend now what has been borrowed, and will be repayed later.

Seems like a fine system to me. The trouble is ensuring you don't spend more than you can raise in taxes. Also, if there's a sudden glut of bonds for sale (like now to raise the huge bailout sums) the governemnt could have trouble selling them. Yields will go up .. it becomes expensive for the government to borrow. And if disaster strikes, investors might simply say no thanks. If foreign investors lose faith in the UK government they might stop buying bonds. Then we go Mad Max.

[The Money Supply Just Became Infinite]

If a government wishes to increase the money supply it buys back government treasury bills it has sold previously. It pays for them with federal reserves that presumably already exists on their balance sheets. This releases money back into the economy and so inflates the total amount available to that economy.

The question I wish to ask is this?

If a CB wishes to increase the money supply, or needs some money for, say, the biggest financial bailout in history, what happens if it runs out of "reserves"? Does it simply stop purchasing such treasury bills and hold it's hands up and say "sorry folks no money left in the pot"? Or does it simply "print" up some new money to pay for the treasury bills? Also, what if a CB has already bought up all of the available bills that are at large in an economy. Presumably, these would be all the bills that they had sold previously. What happens then?

The central bank buys government bonds using newly printed money.

See my questions to EDM a few posts earlier ...

The government issues bonds. Then sells them to investors, who buy with existing money.

Then the goverment / CB buys the bonds back with newly printed money.

Is that how it works?

Technically, yes, but if you see the c/b and the treasury as one unit, then it becomes easier…

So the government expands the money supply by issuing bonds, selling them, and buying them back with newly printed money.

[The Money Supply Just Became Infinite]

Ellen Brown on Web of Debt explains how the FED does indeed create new money to buy US Treasuries (roughly similar to UK Gilts). So again this is inflationary.

Yes creating new money is inflationary. But its small potatoes compared with the ongoing destruction of credit and collapsing asset prices.

The overall net effect is deflation.

[The Money Supply Just Became Infinite]

Narrow money is printed either by buying government bonds (or borrowing them against cash in repo) or by simply printing it and having the government spend it on whatever it spends money on. ...

I was under the impression that simply printing money (without a corresponding debt) was cheating. That goverments don't do it because it causes investors to lose confidence and stop buying government bonds.

[The Money Supply Just Became Infinite]

I was under the impression that if they wanted to increase the money supply that they BOUGHT bonds from the banks, thereby releasing funds into the system.

Narrow money is printed either by buying government bonds (or borrowing them against cash in repo)

The government issues bonds. Then sells them to investors, who buy with existing money.

Then the goverment / CB buys the bonds back with newly printed money.

Is that how it works?

[The Money Supply Just Became Infinite]

Even more, I would like to know how much of the new Gilts will be bought with new money.

That question seems to be of the essence, but no-one seems to know the answer for sure.

I do. This crisis is extremely deflationary. The reason is simple – if people are being forced to repay debt quickly and suddenly, they quickly and suddenly do not spend money on consumption. Demand disappears.

Increasing the money supply would be inflationary (though right now, only increasing the narrow money supply would be), but so far central banks aren’t doing this.

The source of my confusion on this matter is that I don't understand the mechanism by which the government / CB increases the money supply.

I thought they did so by selling bonds. But you say that those bonds are bought with existing money.

How does new narrow money get into the supply?

Also, does it make a difference if bonds are bought by foreign investors vs. domestic investors? If a foreign investor buys bonds are they repatriating narrow money such that it is inflationary? Whereas if a domestic investor buys they are taking narrow money out of the economy?

[Rtc - You Heard It Here First]

So now the US is going to buy equity in troubled banks and it seems the G7 are sort-of agreed on this as part of the strategy ...

We can use the taxpayers' money more effectively and more efficiently, have it go farther and get more for their dollars and more protection if we develop a standardized program for making and encouraging equity participation

http://www.reuters.com/article/topNews/idUSTRE49994420081011

The view (for what its worth) on CNBC seems to be that the TARP is unimportant (maybe even a failure before its actually started) and direct capital injection is the solution.

Is this just poor reporting?

Or is the capital injection tactic urgent now (or else catastrophe before breakfast on monday), and the TARP a less urgent (can start in weeks not minutes) longer term tactic?

[Rtc - You Heard It Here First]

US following suit ...

The government is planning to buy stakes in a wide range of banks within weeks as the credit freeze increasingly threatens to tip the U.S. economy into a deep recession.

The plans would be a shift in emphasis in Paulson's original plans for the $700 billion bailout package passed by Congress last week. While the Treasury still intends to buy troubled mortgage-backed securities from financial institutions, a direct capital injection would offer more immediate relief.

http://www.bloomberg.com/apps/news?pid=206...&refer=home

Maybe President Obama will appoint Roubini as Treasury Secretary?

[Some Further Analysis Of The Halifax Data]

Euthanasia would be the only way, although I obviously oppose any form of this in the strongest possible way.

Can raising the retirement age to 70 mitigate this problem by any significant degree?

Do you know of any other nations that have been through a similar demographic problem in the last 100 years?

[City Bonuses Down By Up To 70%]

There is now a stampede of ex-City types with aspirations to do some "charidee" work abroad with the VSO.

Send them to Iceland.

[Concerted Global Rate Cuts]

There is lots of talk of concerted, global action to fight the crisis. This week's simultaneous rate cuts are a first example.

I gather there's a G7 meeting about the crisis this weekend.

I wonder if they could collectively agree to inflate out of the crisis?

All goernments would like to inflate their way out, but can't do so individually because they rely on bond sales to foreign governments to fund themselves. If one country decided to print its way out no-one would buy their bonds and that econonmy and goverment would collapse.

But if enough major economic powers agreed to do it together (and to continue buying each other's bonds) would it work?

If the G7 plus China agreed to it, could it be done?

http://en.wikipedia.org/wiki/Image:Foreign...rcent_share.gif

[Bond Market Dislocation?]

Some overlapping discussion of this topic on another thread:

http://www.housepricecrash.co.uk/forum/ind...p;#entry1377317

It seems something unusual happened in the treasury market yesterday, and there are different opinions of what and why.

See:

http://acrossthecurve.com/

.. also some comments from Santelli on CNBC yesterday.

It seems some are of the opinion that yesterday the US treasury deliberately caused losses for investors holding long term bonds in order to encourage investors to stop hoarding treasuries and start buying elsewhere (e.g. CP, equities).

The Fed has caused this. Long term the entire system will bear no ressemblance to the the past five years but as of yet nobody knows what those changes are going to be. At some as of yet unknown time in the future the financial system will be born again.

Short term treasuries are safe from big losses so demand is high. The problem is nobody knows when system changes will be or how they will affect the economy, ergo long term treasuries are without buyers.

It looks like the treasury may experience some kind of funding gap until the administration comes up with some solid answers about how they are going to change the system. In the mean time I would stay away from anything dated longer than 12 months.

I think we may have a few days of calm as regulators look to wait out the month end before announcing further rate cuts.

Credit markets remain frozen too and libor is the one index everyone is watching, as soon as libor drops below 3% we will see a massive rally. Although this is not to be mistaken for a recover. With governments taking big stakes in big banks I expect libor to loosen up in the coming five days. So now may be a good time to gamble on long financial options. And I do mean gamble.

Regarding capital markets there will be severe uncertainty over charts / past data and such over the coming weeks as people come to realise that the financial landscape has changed.

The largest market participants can no longer operate on the same terms of leverage.

This totally invalidates decades of work and refinement of methods for money management funds. So we may see huge redemptions as wealth investors come to realise this fact.

[Concerted Global Rate Cuts]

http://www.tickerforum.org/cgi-ticker/akcs-www?post=66034

Treasury facing severe dislocation

What's happening tomorrow, then?

Oh, and what are the implications of this?

It seems something unusual happened in the treasury market yesterday, and there are different opinions of what and why.

See:

http://acrossthecurve.com/

.. also some comments from Santelli on CNBC yesterday.

It seems some are of the opinion that yesterday the US treasury deliberately caused losses for investors holding long term bonds in order to encourage investors to stop hoarding treasuries and start buying elsewhere (e.g. CP, equities).

[Deflation May Be Next Threat As Commodities, Asset Markets Sink]

I think we grasp the imagery, we (I) was hoping for a non-smart cu_t explanation of how deflation leads to it.

Cheers

I was answering the question: "Call me naive, but what's actually wrong with deflation?"

Now that you've asked a different question ...

Deflation is the result of a contraction in the supply of money and credit.

There is less money to go around.

The contraction makes it hard for companies and individuals to service their debts.

These days, companies and individuals are very heavily indebted.

Prices fall .. like the current falls in share prices, house prices, commodity prices.

But people bought assets with borrowed money previously while asset prices were high.

Now they have a large debt (equal to the previously high price) and an asset worth less than that.

As prices fall people move what money they have out of falling assets and into safer places. People are less willing to take risk with their money.

We see this now with banks unwilling to lend to each other, and a lot of money moving into short-term government bonds.

The cost of borrowing increases. See mortgage rates rising regarless of base interest rates. See bond yields rising.

Costs have to be cut to keep up. And if you can cut enough to keep up you go bankrupt.

Risk aversion means no-one is investing in new production. Jobs are lost, not created.

Its self reinforcing .. falling investment, falling demand, falling prices.

It can lead to a liquidity trap. People hoard money because they expect it will be more valuble later. Further reinforcing the process.