The shell game behind quantitative easing

[Nonc Hilaire]

rDtVABEzcy4

[noddy]

is that the thing where your friends get to spend the printed money before the inflationary effect kicks in and the rest of us just lose value ?

[Zack Morris]

The central bank has a limited set of knobs to turn to stabilize the economy. The assumption is that the American people will do the rest by enacting legislation and crafting policies to create fair access to the nation's economic bounty. Unfortunately, the American people have lost their ability to be pragmatic and have been hoodwinked by the GOP into joining a scorched-earth war to defend Galt's Gulch. I cannot count the number of times last week I hear $2,000 stimulus checks decried as "socialism", for example.

I'll continue to enjoy the benefits of QE and the real purchasing power it translates to while the deplorables spin internationalist conspiracy theories and sink further into oblivion.

[Typhoon]

I'll continue to enjoy the benefits of QE and the real purchasing power it translates to while the deplorables spin internationalist conspiracy theories and sink further into oblivion.

On the other hand, the combination of historically unprecedented low, in some countries negative, global interest rates and record breaking government, corporate, and personal debt is a novel experiment in economics.

Will be interesting to see if the entire global economy can sustain "turning Japanese" or, to mix metaphors, if money really does grow on trees.

Still, do enjoy your "I'm getting mine, so screw everyone else" lifestyle while it lasts.

[Typhoon]

FT | Stress test looms for financial system in 2021

Volatility rises as shadow banks become a bigger provider of liquidity to markets

Be warned. The global financial system in 2021 will face a gigantic stress test.

This follows from one of the more important lessons that emerged from the coronavirus-induced market turmoil in March last year — a lesson that is worth revisiting.

The so-called dash for cash was in part a reflection of how the big banks’ balance sheets had failed, since the 2008 financial crash, to keep pace with the growth in the stock of US Treasury securities that was spurred by the post-crisis surge in federal deficits.

Their ability to act as intermediaries in the Treasury market was thus impaired. And their readiness to provide liquidity to the market by absorbing investor flows on to their balance sheets, as opposed to simply matching buyers and sellers, was further reduced by the tougher capital and liquidity rules introduced after the financial crisis.

The stricter regulatory framework was, in one sense, good for financial stability. The banks emerged relatively safe from last year’s crisis. But their role as providers of liquidity has increasingly been filled by less-regulated non-banks, or shadow banks, such as hedge funds. These borrow heavily, often to maximise the return from trades that arbitrage tiny differences between the prices of closely related assets.

With the onset of heightened volatility and market stress last March, these non-banks faced margin calls and funding difficulties. They went from being market stabilisers to amplifiers of market stress.

Jon Cunliffe, Bank of England deputy governor for financial stability, has remarked that there is nothing new in seeing these so-called leveraged relative value trades unwind. It happened at Long-Term Capital Management, the hedge fund that had to be bailed out in 1998. What was different this time, he points out, was that the stress was systemic.

As a consequence, the world’s hitherto most liquid market — US Treasuries — saw yields rise sharply while the bid-ask spread on 30-year US Treasury paper increased tenfold. The safest global haven lost its haven status until the US Federal Reserve came to the rescue, cutting the target range for the benchmark to near zero and committing to buy $500bn-plus of Treasury securities.

What matters about this rescue for 2021 and beyond, argues Darrell Duffie of Stanford University’s Graduate School of Business, is that there is counterproductive moral hazard in relying on future Fed rescues of the Treasury market as an alternative to reforming the structure of the market so it can better handle large episodic future surges in demand for liquidity.

In a paper last year, he observed that such surges could be expected to arrive with greater frequency and magnitude, given both the historically high and growing ratio of federal debt to gross domestic product and the ballooning stock of outstanding Treasury securities relative to the capacity of dealer balance sheets.

In other words, a financial system with a morally hazardous inbuilt incentive for excessive risk taking is now subject to a rolling stress test on an unprecedented scale.

The financial fragility revealed in March 2020 highlights a fundamental change in the structure of the financial system. For much of the postwar period, it was all about channelling savings to borrowers, facilitating payments and helping people and corporations share risk.

Yet, since the deregulatory thrust that began in the 1970s, a growing share of financial intermediation — borrowing and lending — takes the form of collateralised repurchase agreements or repos where cash is exchanged for high-quality assets such as US government debt. At the same time, much of the risk-sharing function is conducted in multitrillion-dollar derivatives markets.

Michael Howell, managing director at CrossBorder Capital, points out that in this more market-based framework, the provision of liquidity depends heavily on wholesale markets. Here the players — often shadow banks — are leveraged and part of complex networks of collateralised lending relationships. Shadow banks, he adds, mainly repackage and recycle existing savings. Their funding model is based on short-term repos and they are much more exposed to interest rate fluctuations than banks.

It is a more opaque, fast-moving financial world that poses huge challenges for regulators. As for the financial system itself, the big future challenge will be how to refinance an ever-growing mountain of debt when so many banks and non-banks have flawed or constrained balance sheets. The conclusion must be that central banks’ market stabilising activities will be with us for longer than many now expect.

john.plender@ft.com

[Doc]

The central bank has a limited set of knobs to turn to stabilize the economy. The assumption is that the American people will do the rest by enacting legislation and crafting policies to create fair access to the nation's economic bounty. Unfortunately, the American people have lost their ability to be pragmatic and have been hoodwinked by the GOP into joining a scorched-earth war to defend Galt's Gulch. I cannot count the number of times last week I hear $2,000 stimulus checks decried as "socialism", for example.

I'll continue to enjoy the benefits of QE and the real purchasing power it translates to while the deplorables spin internationalist conspiracy theories and sink further into oblivion.

I take it you never learned how to count in school.

[Nonc Hilaire]

Zack’s right on this one. My savings is in metals but QE has made trading SPY options easy profits. The Fed makes no secret of supporting the S&P so I’ve been real comfortable buying a quarter out.

[Zack Morris]

There is no question the US is headed for a reckoning at some point, probably in the medium term (5-10 years out). Anecdotally (haven't checked the stats), inflation is picking up in food items, and certainly in housing, health care, and various technology goods (although these are due in large part to tariffs, increasing inter-generational progress, and of course supply issues both COVID and non-COVID related).

But hey, the mantra from the majority party for the past twelve years has been "gridlock is good". We've missed a lot of opportunities for structural reforms to tackle income inequality, the health care crisis, global warming, and infrastructure. Americans will reap what they sow. I could see myself leaving the country in 5-10 years. NZ, Singapore, Vietnam, Portugal, Spain, the Netherlands, Canada, even Japan are all looking increasingly attractive and all would offer me a path to long-term residency and perhaps citizenship.

[Typhoon]

There is no question the US is headed for a reckoning at some point, probably in the medium term (5-10 years out). Anecdotally (haven't checked the stats), inflation is picking up in food items, and certainly in housing, health care, and various technology goods (although these are due in large part to tariffs, increasing inter-generational progress, and of course supply issues both COVID and non-COVID related).

But hey, the mantra from the majority party for the past twelve years has been "gridlock is good". We've missed a lot of opportunities for structural reforms to tackle income inequality, the health care crisis, global warming, and infrastructure. Americans will reap what they sow. I could see myself leaving the country in 5-10 years. NZ, Singapore, Vietnam, Portugal, Spain, the Netherlands, Canada, even Japan are all looking increasingly attractive and all would offer me a path to long-term residency and perhaps citizenship.

Translation. Having contributed to the stinking mess in my own backyard, I'm going to move elsewhere and repeat.

Japanese citizenship? Good luck.

[Simple Minded]

There is no question the US is headed for a reckoning at some point, probably in the medium term (5-10 years out). Anecdotally (haven't checked the stats), inflation is picking up in food items, and certainly in housing, health care, and various technology goods (although these are due in large part to tariffs, increasing inter-generational progress, and of course supply issues both COVID and non-COVID related).

But hey, the mantra from the majority party for the past twelve years has been "gridlock is good". We've missed a lot of opportunities for structural reforms to tackle income inequality, the health care crisis, global warming, and infrastructure. Americans will reap what they sow. I could see myself leaving the country in 5-10 years. NZ, Singapore, Vietnam, Portugal, Spain, the Netherlands, Canada, even Japan are all looking increasingly attractive and all would offer me a path to long-term residency and perhaps citizenship.

Translation. Having contributed to the stinking mess in my own backyard, I'm going to move elsewhere and repeat.

Japanese citizenship? Good luck.

When Zack applies for Japanese citizenship, he needs to highlight his wokeness in his resume'.

Shirley, you will be willing to write a glowing letter of recommendation for him, no?

"If I can make it there, I'l make it anywhere, its up to you New York, New York!"

On the other hand, if you want to torpedo (Kamikaze?) Zack's Japanese citizenship, contact the Immigration department and advise them: "Hey, when you are interviewing this fool, just ask him two questions:
1. Are Japanese people white?
2. Is Japan a member of Western Civilization?"

Future sheep shagger in NZ..... maybe.

[Zack Morris]

There is no question the US is headed for a reckoning at some point, probably in the medium term (5-10 years out). Anecdotally (haven't checked the stats), inflation is picking up in food items, and certainly in housing, health care, and various technology goods (although these are due in large part to tariffs, increasing inter-generational progress, and of course supply issues both COVID and non-COVID related).

But hey, the mantra from the majority party for the past twelve years has been "gridlock is good". We've missed a lot of opportunities for structural reforms to tackle income inequality, the health care crisis, global warming, and infrastructure. Americans will reap what they sow. I could see myself leaving the country in 5-10 years. NZ, Singapore, Vietnam, Portugal, Spain, the Netherlands, Canada, even Japan are all looking increasingly attractive and all would offer me a path to long-term residency and perhaps citizenship.

Translation. Having contributed to the stinking mess in my own backyard, I'm going to move elsewhere and repeat.

Japanese citizenship? Good luck.

I'm an upstanding citizen with an outstanding academic and professional track record. I have made only positive contributions. All permanent residency schemes of the aforementioned countries target people of my caliber and I would be in the very top echelon of all applicants.

[Typhoon]

There is no question the US is headed for a reckoning at some point, probably in the medium term (5-10 years out). Anecdotally (haven't checked the stats), inflation is picking up in food items, and certainly in housing, health care, and various technology goods (although these are due in large part to tariffs, increasing inter-generational progress, and of course supply issues both COVID and non-COVID related).

But hey, the mantra from the majority party for the past twelve years has been "gridlock is good". We've missed a lot of opportunities for structural reforms to tackle income inequality, the health care crisis, global warming, and infrastructure. Americans will reap what they sow. I could see myself leaving the country in 5-10 years. NZ, Singapore, Vietnam, Portugal, Spain, the Netherlands, Canada, even Japan are all looking increasingly attractive and all would offer me a path to long-term residency and perhaps citizenship.

Translation. Having contributed to the stinking mess in my own backyard, I'm going to move elsewhere and repeat.

Japanese citizenship? Good luck.

I'm an upstanding citizen with an outstanding academic and professional track record. I have made only positive contributions. All permanent residency schemes of the aforementioned countries target people of my caliber and I would be in the very top echelon of all applicants.

Sure you are.

And I'm the Emperor of Osaka.