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The Fed and Money

For the week, the S&P500 gained 1.3% (up 11.2% y-t-d), and the Dow added 0.2% (up 9.4%). The broader market continues to outperform the S&P500. The S&P 400 Mid-Caps gained 1.4% (up 23.7%), and the small cap Russell 2000 jumped 2.7% (up 24.2%). The Banks surged 6.0% (up 19.2%), and the Broker/Dealers rose 2.1% (up 3.3%). The Morgan Stanley Cyclicals increased 1.7% (up 22.6%), and the Transports added 0.6% (up 24.4%). The Morgan Stanley Consumer index gained 1.0% (up 10.0%), while the Utilities dipped 0.8% (down 0.7%). The Nasdaq100 gained 1.1% (up 19.1%), and the Morgan Stanley High Tech index rose 1.3% (up 14.2%). The Semiconductors increased 1.0% (up 15.8%). The InteractiveWeek Internet index rose 1.9% (up 34.6%). The Biotechs added 0.6% (up 25.4%). With bullion falling $28, the HUI gold index declined 1.9% (up 32.7%).

One-month Treasury bill rates ended the week at 8 bps and three-month bills closed at 11 bps. Two-year government yields jumped 15 bps to 0.61%. Five-year T-note yields ended the week up 36 bps to 1.92%. Ten-year yields jumped 32 bps to 3.33%. Long bond yields rose 12 bps to 4.43%. Benchmark Fannie MBS yields were 24 bps higher at 4.16%. The spread between 10-year Treasury yields and benchmark MBS yields narrowed 8 bps to 83 bps. Agency 10-yr debt spreads widened 2 bps to 19 bps. The implied yield on December 2011 eurodollar futures jumped 19 bps to 0.905%. The 10-year dollar swap spread declined 5.25 to 11.0. The 30-year swap spread declined 3 to negative 30.75. Corporate bond spreads narrowed. An index of investment grade bond risk declined 4 bps to 87 bps. An index of junk bond risk fell 16 to 458 bps.

Investment grade issuers included Merck $2.0bn, IBM $1.0bn, Kellogg $1.0bn, Constellation Energy $550 million, Berkshire Hathaway $500 million, Bio-Rad Labs $425 million, Florida Power & Light $400 million, Life Technologies $800 million, Cardinal Health $500 million, Healthcare Realty Trust $400 million, Albemarle $350 million, Hershey $350 million, Carlisle Companies $250 million, Church & Dwight $250 million and Snap-On $250 million.

Junk bond funds saw inflows of $229 million (from EPFR). Junk issuers included Kinder Morgan $750 million, Seagate $750 million, Nalco $750 million, Standard Pacific $675 million, Bumble Bee $605 million, Chonco Resources $600 million, AK Steel $550 million, Tenneco $500 million, Hertz $500 million, Pilgrim's Price $500 million, CDW $450 million, Dean Foods $400 million, Citadel Broadcasting $400 million, Questar $250 million, Aspen Insurance $250 million, Southwest Gas $125 million and Affinia Group $100 million.

Converts issues included Heartware International $125 million.

International dollar debt sales included National Australia Bank $2.5bn,Societe Generale $2.0bn, Ontario $1.25bn, Novelis $2.5bn, Canadian Imperial Bank $1.0bn, Development Bank of Kazakstan $500 million, E.CL $400 million, Ceva Group $450 million, Trinidad Drilling $450 million, and Saneamento Basico $350 million.

U.K. 10-year gilt yields jumped 11 bps this week to 3.52%, and German bund yields rose 10 bps to 2.95%. Ireland yields dipped 6 bps to 8.08%. Greek 10-year bond yields jumped 13 bps to 11.68%. Ten-year Portuguese yields jumped 33 bps to 6.24%. The German DAX equities index gained 0.8% (up 17.6% y-t-d) to another 2010 high. Japanese 10-year "JGB" yields dipped one basis point to 1.195%. The Nikkei 225 added 0.3% (down 3.2%). Emerging markets were mixed. For the week, Brazil's Bovespa equities index declined 2.0% (up 0.4%), and Mexico's Bolsa % (up 1%). South Korea's Kospi index gained 1.5% (up 18.0%). India's equities index declined 2.3% (up 11.7%). China's Shanghai Exchange was little changed (down 13.3%). Brazil's benchmark dollar bond yields jumped 34 bps to 4.37%, and Mexico's benchmark bond yields rose 29 bps to 4.29%.

Freddie Mac 30-year fixed mortgage rates jumped 15 bps last week to a 6-month high 4.61% (down 20bps y-o-y). Fifteen-year fixed rates surged 17 bps to 3.96% (down 36bps y-o-y). One-year ARMs added 2 bps to 3.27% (down 97bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates up 9 bps to 5.46% (down 36bps y-o-y).

Federal Reserve Credit surged $33.9bn to a record $2.352 TN. Fed Credit was up $132bn y-t-d (6.3% annualized) and $184bn, or 8.5%, from a year ago. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 12/8) declined $0.3bn to a $3.341 TN. "Custody holdings" have increased $385bn y-t-d (13.8% annualized), with a one-year rise of $397bn, or 13.5%.

M2 (narrow) "money" supply added $3.0bn to a record $8.812 TN. Narrow "money" has increased $279bn y-t-d, or 3.5% annualized. Over the past year, M2 grew 3.3%. For the week, Currency increased $1.4bn, and Demand & Checkable Deposits jumped $25.2bn. Savings Deposits dropped $20.1bn, and Small Denominated Deposits declined $5.2bn. Retail Money Fund assets increased $1.0bn.

Total Money Market Fund assets (from Invest Co Inst) jumped $25.3bn to a 13-wk high $2.836 TN. Year-do-date, money fund assets have dropped $458bn, with a one-year decline of $485bn, or 14.6%.

Total Commercial Paper outstanding declined $13.3bn to $1.008 TN. CP has declined $162bn year-to-date, and was down $202bn from a year ago.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg's Alex Tanzi - were up $1.390 TN y-o-y, or 18.2%, to $9.014 TN.

Global Credit Market Watch:

December 8 - Bloomberg (Lee Spears and Cecile Vannucci): "Youku.com Inc. surged in the biggest gain for a U.S. initial public offering in five years and E- Commerce China Dangdang Inc. almost doubled in its debut, the latest sign of booming demand for Chinese Internet companies. Youku.com, China's largest online video company, soared 161% to $33.44 today, after completing a $203 million IPO."

December 9 - Bloomberg (Brendan A. McGrail and Michael McDonald): "San Francisco's Public Utilities Commission, which supplies water to 2.5 million people in the Bay Area, postponed $524 million in competitive offerings, including $350 million in Build America Bonds, as yields soared. The average yield on taxable Build Americas climbed to 6.35 percent Dec. 7, the highest since Jan. 7..."

Global Government Finance Bubble Watch:

December 7 - Bloomberg (Cordell Eddings and Daniel Kruger): "Treasuries tumbled, pushing the two- year note yield up the most since March, after President Barack Obama agreed to extend tax cuts for two years and the three-year note sale drew the lowest demand since February... The compromise will add $148 billion to the shortfall, pushing it to $1.34 trillion for fiscal 2011, Credit Suisse strategists Scott Sherman, Ira Jersey and Jay Feldman... wrote... The forecast is near the $1.42 trillion and $1.29 trillion deficits in the 2009 and 2010 fiscal years."

December 9 - Bloomberg (Simon Kennedy): "The global economy faces an imminent end to three decades of low interest rates as emerging markets embark upon a building boom and aging populations drain savings, according to McKinsey & Co. A shift toward investment and away from savings is set to drive up the cost of capital with long-term interest rates possibly starting to rise within the next five years, the research division of McKinsey... said in a study... 'Everyone who is in business has lived in a 30-year period when rates of interest have declined and that world is coming to an end,' said Richard Dobbs, a Seoul-based director of McKinsey Global Institute and co-author of the report."

Currency Watch:

December 8 - Bloomberg (Masaki Kondo and Shigeki Nozawa): "China bought a net 262.5 billion yen ($3.1 billion) of Japanese bonds in October, the first time in three months the nation increased holdings of yen-denominated assets as that currency outperformed the dollar and euro."

The dollar index gained 0.9% for the week (up 2.8% y-t-d) to 80.06. On the upside for the week, the Taiwanese dollar increased 0.6%, the South African rand 0.2%, and the British pound 0.2%. On the downside, the New Zealand dollar declined 2.3%, the Japanese yen 1.7%, the Swedish krona 1.7%, the Danish krone 1.7%, the Euro 1.45, the Brazilian real 1.2%, the Mexican peso 1.0%, the Norwegian krone 0.9%, the Australian dollar 0.8%, the Swiss franc 0.7%, the Canadian dollar 0.6%, the South Korean won 0.4%, and the Singapore dollar 0.3%.

Commodities Watch:

December 9 - Bloomberg: "Crude stockpiling for commercial and emergency use may account for 300,000 barrels a day of China's incremental oil demand in the next two years, the nation's largest investment bank said. Stockpiling for emergency use will contribute a 140,000 barrel-a-day increase to China's demand growth, while commercial inventory building will account for a gain of about 160,000 barrels a day, Kong Qingying, an analyst at China International Capital Corp., wrote ... The country finished filling the first phase of its emergency crude stockpiles of 16.4 million cubic meters last year, or 103 million barrels... The second phase of 26.8 million cubic meters is expected to be completed in 2012 to 2013, Kong said."

The CRB index slipped 0.4% (up 11.1% y-t-d). The Goldman Sachs Commodities Index (GSCI) declined 0.6% (up 15.4% y-t-d). Spot Gold dropped 2.0% to $1,386 (up 26% y-t-d). Silver fell 1.9% to $28.71 (up 70% y-t-d). January Crude gave back $1.47 to $87.72 (up 10.5% y-t-d). January Gasoline declined 1.7% (up 13% y-t-d), while January Natural Gas gained 1.8% (down 20% y-t-d). March Copper jumped 3.0% (up 23% y-t-d). March Wheat dipped 0.4% (up 43% y-t-d), and March Corn slipped 0.1% (up 38% y-t-d).

China Bubble Watch:

December 10 - Bloomberg: "China's leaders will in coming days lay a course for policy in 2011 that will help determine whether the world's fastest-growing major economy will succeed in reining in inflation without hobbling the nation's expansion. President Hu Jintao and Premier Wen Jiabao convene the so- called Central Economic Work Conference, a three-day conclave in Beijing, starting today..."

December 10 - Bloomberg: "China ordered lenders to park more money with the central bank for the third time in five weeks to counter the threat from inflation after November's lending and trade surplus topped analysts' estimates. Reserve requirements will increase 50 basis points starting Dec. 20..."

December 10 - Bloomberg: "China's trade surplus and lending exceeded forecasts in November, underscoring the case for higher interest rates and a stronger exchange rate to stem the nation's escalating inflation. Exports rose 35% to a record $153.3 billion from November 2009 and imports advanced 38% to an unprecedented $130.4 billion, leaving a $22.9 billion excess... Loans were 564 billion yuan ($85 billion)."

December 7 - Bloomberg: "China's inflation cycle is at a 'critical point,' requiring 'disciplined and comprehensive policies,' China Daily cited Stephen Roach, non-executive Asia chairman at Morgan Stanley, as saying... The Asian nation needs to convince the market that its shift to a 'prudent' monetary policy 'has teeth' by adopting tougher anti-inflationary measures, Roach said..."

December 10 - Bloomberg: "China's property prices rose at the slowest pace in a year in November after the government raised the reserve-ratio requirement for banks twice and expanded measures to limit the risk of asset bubbles. Home prices in 70 cities climbed 7.7% from a year earlier and increased 0.3% from October..."

Japan Watch:

December 9 - Bloomberg (Keiko Ujikane): "Japan's economy expanded more than the government initially calculated in the third quarter because of a bigger-than-reported increase in capital spending. Gross domestic product grew at an annualized 4.5% rate..."

December 8 - Bloomberg (Shigeki Nozawa): "The world is entering a recession that may last up to eight years as the U.S. heads toward a 'lost decade' similar to Japan's slowdown in the 1990s, said Eisuke Sakakibara, formerly Japan's top currency official. 'The world is set for a long-term structural slump reminiscent of the 1870s' when average annual growth was about 1%, Sakakibara, who is a professor at Aoyama Gakuin University, said..."

India Watch:

December 7 - Bloomberg (Kartik Goyal and Abhijit Roy Chowdhury): "India's finance ministry raised its economic growth forecast for the current financial year... The South Asian economy may expand as much as 9.1% in the year ending March 31..."

December 10 - Bloomberg (Kartik Goyal): "India's industrial production grew at the fastest pace in three months, threatening to strain power and transportation capacities and stoke inflation. Stocks rose. Output at factories, utilities and mines rose 10.8% in October from a year earlier..."

December 8 - Bloomberg (Thomas Kutty Abraham): "Tea prices in India, the top grower after China, may climb 20% in the next five months as lower output and rising demand worsens a shortage, according to McLeod Russel India Ltd., the largest tea-plantation owner."

Asia Bubble Watch:

December 10 - Bloomberg (Eunkyung Seo): "South Korea's economic growth is set to slow and inflation is poised to accelerate next year, the Bank of Korea said a day after leaving borrowing costs unchanged. Gross domestic product is likely to expand 4.5% in 2011..."

December 7 - Bloomberg (Shamim Adam): "Singapore's central bank spent an estimated $17 billion buying foreign currencies in October as capital inflows rose at the fastest pace since March 2008, according to DBS Group Holdings Ltd."

Latin America Watch:

December 8 - Bloomberg (Iuri Dantas and Matthew Bristow): "Brazil's consumer prices rose at the fastest pace in over five years in November, cementing expectations that the central bank will raise interest rates at the start of next year. Inflation last month accelerated to 0.83% from 0.75% in October..."

December 8 - Bloomberg (Daniel Cancel): "Venezuelan President Hugo Chavez threatened to nationalize any bank should they fail to provide housing loans, including a unit of Spain's Banco Bilbao Vizcaya Argentaria SA and Banesco Banco Universal, the country's largest lender. BBVA Provincial and Banesco are among banks that could be taken over if they fail to comply with government-set lending requirements for homebuyers, Chavez said... 'Any bank that slips will be expropriated, whether it´s called Banesco, Provincial or whichever,' Chavez said yesterday on state television."

Unbalanced Global Economy Watch:

December 8 - Bloomberg (Christian Vits): "Industrial production in Germany... rose almost three times as much as economists forecast in October, led by demand for investment goods such as machinery. Production jumped 2.9% from September... From a year earlier, output increased 11.7%..."

December 7 - Financial Times (John Reed): "Many of Germany's biggest carmakers are planning shorter Christmas shutdowns this year to meet surging demand, led by China, for their products. Carmakers say they will be shutting down only briefly or working through the holidays to address bulging order books and long waiting periods for their most popular cars."

December 9 - Bloomberg (Toby Alder): "Sweden's inflation rate rose in November as consumer demand picked up in the largest Nordic economy and supporting the central bank's signal it will continue raising interest rates. Headline inflation accelerated to 1.8% from 1.5% in October..."

December 10 - Bloomberg (Michael Heath): "Employment in Australia is headed for the biggest annual increase on record, boosting prospects of an acceleration in wage gains that forces the central bank to resume raising interest rates. Payrolls soared by 366,000 in the first 11 months of this year to 11.4 million, the most since records began in 1978..."

U.S. Bubble Economy Watch:

December 7 - Bloomberg (John Hechinger): "Fifteen-year-old students in the U.S. ranked 25th of 34 countries on an international math test and scored in the middle of the pack in science and reading, raising concerns the U.S. isn't prepared to succeed in the global economy. Teenagers from South Korea and Finland led in almost all academic categories on the 2009 Program for International Student Assessment, according to the... Organization of Economic Cooperation and Development..."

December 10 - Bloomberg (Eben Novy-Williams): "The original rules of basketball, written by James Naismith in 1891, were auctioned today for $4.4 million at Sotheby's in New York. The 13 rules are on a two-page typed document with Naismith's handwritten notes... The Associated Press said the pre-sale estimate for the rules was $2 million."

Real Estate Bubble Watch:

December 9 - Bloomberg (Hui-yong Yu and John Gittelsohn): "U.S. home values are poised to drop by more than $1.7 trillion this year amid rising foreclosures and the expiration of homebuyer tax credits, said Zillow... This year's estimated decline, more than the $1.05 trillion drop in 2009, brings the loss since the June 2006 home-price peak to $9 trillion..."

Central Bank Watch:

December 6 - Financial Times (Robin Harding ): "Ben Bernanke, chairman of the US Federal Reserve, said that 'it's certainly possible' that the Fed will increase its new round of asset purchases beyond an initial $600bn. But he made clear it could be decreased as well. 'It depends on the efficacy of the programme. It depends on inflation. And finally it depends on how the economy looks,' Mr Bernanke said... The rare interview with the Fed chairman reflects a push to connect with ordinary Americans in the wake of attacks on the Fed's new effort to stimulate the economy by buying assets to push down long-term interest rates... Some Republican politicians and economists argue that this new round of quantitative easing will not work and could cause inflation but Mr Bernanke dismissed their concerns. 'One myth that's out there is that what we're doing is printing money. We're not printing money. The amount of currency in circulation is not changing,' Mr Bernanke said."

December 9 - Bloomberg (Joshua Zumbrun): "A majority of Americans are dissatisfied with the nation's independent central bank, saying the U.S. Federal Reserve should either be brought under tighter political control or abolished outright, a poll shows. The Bloomberg National Poll underlines the extent to which the central bank's standing has suffered..."

Fiscal Watch:

December 10 - Bloomberg (Vincent Del Giudice): "The U.S. government posted a wider budget deficit in November... The deficit was $150.4 billion last month... compared with $120.3 billion in November 2009... For the first two months of the 2011 fiscal year, the shortfall narrowed to $290.8 billion from $296.7 billion in the same period last year..."

California Watch:

December 8 - Bloomberg (Michael Marois): "California's budget gap may widen to $28.1 billion over 18 months, according to Governor-elect Jerry Brown... A cash shortage may force the use of IOUs by July, Controller John Chiang said. The deficit estimate takes into account a $2.7 billion drop in projected estate-tax receipts, and compares with the most recent forecast of a $25 billion gap for the period, Brown said... The cash accounts may be short by $2.3 billion within eight months, Chiang said at the meeting in Sacramento. 'I don't want to say it, but this could mean IOUs and more tax-refund deferrals,' Chiang said."

New York Watch:

December 7 - Bloomberg (Michael Quint): "New York state's $132.8 billion pension plan is underfunded by $71 billion and annual taxpayer payments to keep it sound may more than double to almost $4 billion during the next five years, a report says."

December 6 - Bloomberg (Henry Goldman): "New York City's projected budget deficit for fiscal 2012 may widen by $2 billion, to $4.5 billion, because of cuts in state aid, Budget Director Mark Page said."

Muni Watch:

December 8 - Bloomberg (William Selway): "U.S. states are preparing for more budget cuts next year as tax revenue isn't likely to rebound enough to replace almost $38 billion in aid that will be gone as federal economic stimulus ends, according to a report. At least 31 states and Puerto Rico are forecasting deficits of $82.1 billion in the next fiscal year even as tax receipts are picking up, the National Conference of State Legislatures said... Under a temporary mandate since 2009, the U.S. has provided economic aid to states, helping to pay government workers and shoulder the cost of the Medicaid program to provide health care for the poor... The fiscal 2012 deficits come on top of at least $110.6 billion in gaps that have been dealt with or are pending for the current year...."

December 10 - Wall Street Journal (Mike Spector and Michael Corkery ): "Times have gotten so tough for the Illinois state government that it has begun turning to Wall Street trading houses and hedge funds to help pay its bills. The state owes more than $4.5 billion to vendors large and small, ranging from prison-cleaning crews to schools for the disabled. Tax shortfalls and pension obligations continue to leave the state light on cash. Quietly, aides to Illinois Gov. Pat Quinn have begun reaching out to Wall Street with a novel plan to plug this shortfall. Instead of further tapping the public debt markets, Illinois is trying to borrow from private sources for short-term interest loans that could carry higher interest rates than the state pays its bond investors."

December 6 - Bloomberg (Darrell Preston): "Illinois, which has the worst-funded pension system among U.S. states, may face further deterioration because contributions will be below the amount needed, even if it sells bonds next year to close the gap, Moody's Investors Service said..."

December 9 - Associated Press: "There's now a better estimate of how wide the gap between expected revenues and expenses could be in North Carolina state government in 2011. Fiscal experts at the Legislature announced... the preliminary gap for the year starting July 1 is $3.7 billion. That's $500 million more than the minimum budget gap discussed after the current year's $19 billion budget was approved last summer."

December 8 - Dow Jones Newswire: "State economists... projected Florida's budget deficit would grow to $3 billion next year in the wake of declining sales tax collections and an increase in Medicaid costs, the Miami Herald reported..."

December 6 - Bloomberg (Alison Vekshin): "Washington Governor Christine Gregoire intends to call a special legislative session before Christmas to deal with a $1.1 billion projected budget deficit for the current fiscal period..."

December 6 - Bond Buyer (Caitlin Devitt): "Minnesota faces a $6.2 billion budget deficit over the next two years that is about $590 million more than previously projected, according to a new revenue forecast..."

The Fed and Money

"One myth that's out there is that what we're doing is printing money. We're not printing money. The amount of currency in circulation is not changing." Federal Reserve Chairman Ben Bernanke, December 5, 2010.

Dr. Bernanke was pilloried this week for his "we're not printing" comment from Sunday evening's 60 Minutes interview. I'll pile on, but from a different angle. It seems strange to me - perhaps disingenuous - for our Fed Chairman to suddenly take such a narrow view of "money." At $917bn, outstanding currency comprises just over 10% of the "M2" monetary aggregate (savings deposits are the largest component at $5.343 TN). And I have argued over the years that "M2" is a much too narrow definition of "money" to provide a useful barometer of overall Credit and liquidity conditions. Certainly, the expansion of paper currency has been inconsequential to the grand scheme of Washington stimulus.

In the "old days," the banking system dominated system Credit creation. Bank lending was integral to Credit growth, with new bank deposits created through the process of expanding bank loans. "M2" provided a good indication of bank lending - that was a decent indicator of overall Credit conditions. As such, the Fed reigned supreme over the Credit mechanism through its careful regulation of bank reserves. Rather mechanically, our central bank would add reserves - the fodder for new bank loans - when it sought a boost in lending. It would extract reserves when it preferred to lean against the wind. Bank deposits were the critical component of "money" supply, and our central bank judiciously monitored their expansion.

The financial world - certainly including monetary management - was turned upside down with the unleashing of (unconstrained) non-bank Credit instruments. No longer did the banks dominate system Credit creation. In a process that gained fateful momentum throughout the nineties, the bank loan was relegated to second class citizen in the age of the booming Wall Street securitization marketplace. Meanwhile, the Fed's entire process of manipulating bank reserves became moot. Fed policy immediately gravitated toward manipulating the securities markets, and Alan Greenspan - "The Maestro" - absolutely relished his new "activist" role.

I have defined contemporary "money" as the most precious of Credit instruments. "Money" is as "money" does. The great Austrian economist Ludwig von Mises recognized the crucial monetary role played by "fiduciary media" that had the economic functionality of a more narrowly defined stock of money. Especially with the advent of non-bank Credit, the definition of what might operate as "money" in the markets and real economy had to be broadened significantly. And the greater the boom in marketable debt instruments the more paramount the role of market perceptions in determining the stability of our financial markets and real economy.

Over the years, I have explored the concept of the "moneyness of Credit." Moneyness is driven by the marketplace's perception of safety and liquidity. Generally speaking, "money" is a debt instrument perceived as a highly liquid store of nominal value. Money has always enjoyed a special role and, hence, unique demand characteristics: folks simply can't get enough of it, which nurtures a propensity to create it in overabundance. Money operates with its own problematic supply and demand dynamics, and never has moneyness enjoyed such capacity to wreak global havoc as it does today. With all their good intentions, central bankers are nonetheless at the root of the problem.

The Fed may not be running the currency printing press around the clock, but Fed policies have certainly been instrumental to the unending expansion of Treasury borrowings. And, clearly, any meaningful definition of contemporary "money" must include government debt instruments. Indeed, with bank (and, more generally, private-sector) Credit suffering from post-housing mania stagnation, never before has government debt so dominated system "money" and Credit creation.

Importantly, the Federal Reserve's zero-rate policy and massive monetization program have been instrumental in maintaining the perception of "moneyness" in the face of unprecedented Treasury debt issuance. I can't envisage a more powerful Bubble Dynamic: The Fed intervenes and manipulates the Treasury market - the predominant debt market underpinning fixed income and securities markets more generally. Enormous fiscal stimulus then works to stabilize system incomes, corporate cash flows, state & local tax receipts, and asset prices more generally. In the final analysis, Trillions of dollars of government-created purchasing power ensure that a structurally maladjusted U.S. economy has, at the minimum, the appearance of viability - and the stock market booms.

The Fed may not be "printing," but its operations as "backstop bid" are fundamental to the U.S. and Global Government Finance Bubbles. In a replay of how the Fannie, Freddie, the Fed and Treasury "backstop bid" created the "moneyness of Credit" for mortgages and related securitizations, the Fed's quantitative easing program distorts market perceptions of various risks (Credit, interest rate, liquidity and systemic) and promotes over-issuance. From this perspective, our central bank's operations are more dangerous than the traditional printing press.

"Moneyness" was fundamental to the doubling of mortgage debt in just about six years during the mortgage finance Bubble. Over time, the expanding gulf between market perceptions of moneyness and the true underlying state of the mortgage Credit ensured a crisis of confidence. Moreover, the Trillions of mortgage Credit had played havoc with spending and investing patterns and, increasingly over time, the underlying economic structure. These days, the attribute of "moneyness" in Treasury debt is on track to ensure the doubling of federal borrowings in the neighborhood of four years. For this round, the "expanding gulf" is much more pernicious and the consequences of a crisis of confidence potentially more devastating.

Money has throughout history demonstrated its dangerous side. Abuse money and "moneyness" at your own peril - although this fundamental lesson is invariably unlearned given enough time (and the seductiveness of monetary booms). The fiascos are always a little different, inevitably created by clever new wrinkles in the many faces of "money" and Credit. We are in the midst of another sordid episode. John Law's experimentation with paper "money" in France ended with the spectacular bursting of the Mississippi Bubble in 1720. Today's backdrop is much more complex: The Fed and global central bankers are working diligently to control an experiment in electronic "money" and Credit gone terribly awry. If it were only the printing press it would be easier to appreciate what was developing and how to administer some restraint. Instead, the Fed has banked everything on its capacity to inflate marketplace liquidity, sustain massive government debt issuance, and maintain market perceptions of moneyness.


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