Tuesday, May 23, 2017


Remember quantitative easing?  Sure you do.  That was the last Really Good Idea to prevent financial collapse when you reached a point when interest rates were at zero or below and nothing was going on.  How does it work.  Simple.  You fold the economy with cash by the method of having the Central Bank buy everything out there and anything that can be issued to, in the case of the Fed, over $4 trillion and about half that for the ECB.  In this country we used to have what we called the "Bond Vigilantes" who kept things honest through the operation of the markets, but with the entry of the guy that makes the money, discipline evaporates and as we have seen over the past few years, government is run through "continuing fiscal resolutions"--don't need no damn budget...free money!  

So what happens when things begin to look better economically and the reason given for this activity seems to be lessening.  One would think that the activity should cease, right?  Not so fast my friend because it seems that as some of us have been suggesting and as reported in the WSJ the other day it may not be so easy.  In fact, it may be quite difficult, unsettling and perhaps dangerous to markets.  Consider this yet again: $4 trillion is a lot of jack, Jack.  When you start spreading that kind of size in any market there is going to be a reaction, but more importantly, let us not forget that the geniuses that created Dodd/Frank imposed substantial liquidity AND capital requirements, forcing in the first case financial institutions to hold the most liquid of assets...govvies or govvie backed paper while at the same time charging them for the privilege.  Then, just to make sure they got it ALL wrong, you can't trade the damn things for your own account.  Bye, bye liquidity. Now dump a trillion or two...which is why no brighter light like Billy the Dud was heard musing that maybe the Fed will only unload 50% of its holdings as if this bright bulb has a clue as to what the right number might be.

The Fed has a bit of dilemma but at least the assets in question are of similar quality.  Shift thoughts to Over There where the assets held by the ECB are definitely not of the same quality, so, in a far less liquid market even as compared to the compromised market Over Here, who buys what and at what price?  Mario, I suspect, is in no rush to normalize but I'll but a Euro to a Drachma that with the uptick in the economic outlook the clamor from the less concerned, Germany, Netherlands, etc. will begin to build.  Of course, if everybody could just agree to a common fiscal policy and a real central bank....anyway the whole thing seemed like a good idea at the time.  Then again, so was freely operating markets.  The bit about tangled webs wasn't a bad thought either.

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