bravo moldbug, bravo.
mold exists outside of time

Primary Dealer $ 26,235 $16,459
Direct Bidder $ 205 $ 180
Indirect Bidder $ 2,170 $ 2,157

Total Compet $ 28,610 $ 18,796
Rate = 2.850

26-WEEK BILLS
CUSIP:912795C82
(amounts in Mns)
Tender Type Tendered Accepted

Primary Dealer $ 24,070 $ 12,438
Direct Bidder $ 83 $ 83
Indirect Bidder $ 2,038 $ 2,026
Total Compet $ 26,191 $14,548

Rate = 3.950

August 13 2007
13-WEEK BILLS
CUSIP:912795B26
(amounts in Mns)
Tender Type Tendered Accepted
Primary Dealer $ 41,749 $ 14,640
Direct Bidder $ 275 $ 253
Indirect Bidder $ 3,808 $ 3,760
Total Compet $ 45,832 $ 18,654

Rate= 4.630

26-WEEK BILLS
CUSIP:912795C74
(amounts in Mns)
Tender Type Tendered Accepted
Primary Dealer $ 32,205 $ 8,454
Direct Bidder $ 2,100 $ 2,093
Indirect Bidder $ 4,179 $ 4,068
Total Compet $ 38,484 $ 14,616
Rate = 4.710

August 6 2007
13-WEEK BILLS
CUSIP:912795A92
(amounts in Mns)
Tender Type Tendered Accepted
Primary Dealer $ 36,460 $ 13,469
Direct Bidder $ 170 $ 170
Indirect Bidder $ 5,737 $ 5,237
Total Compet $ 42,367 $ 18,876
Rate = 4.770

26-WEEK BILLS
CUSIP:912795C66
(amounts in Mns)
Tender Type Tendered Accepted
Primary Dealer $ 30,001 $ 9,234
Direct Bidder $ 2,330 $ 2,330
Indirect Bidder $ 4,366 $ 4,229
Total Compet $ 36,697 $ 15,793
Rate = 4.730

1:35 PM

In this abyss, the exchange ratio between debt of any nontrivial maturity and cash is very different from that exchange ratio as it exists in the world today. Because, obviously, interest rates are higher. Much higher. Volckeresque doesn’t even begin to describe it.

Last week the market looked into the abyss, and the abyss looked back. To the extent that its cold and ancient stare was colder and more ancient in the dollarsphere than in the eurosphere, reasonable considering the relative debt mountains, we would expect to see the dollar rise against the euro. As we did.

Then Dumblemort rose up, shouted a great oath, and kicked the door closed. Leaving only a swirl of cool wind, the memory of infinite fear, and a slight scent of sulfur. We love you, Dumblemort! We are more devoted than before.

Everything makes sense if you model the BWII CBs as a single actor, with the usual political motivations of all central banks.

Ascribing economic motivations to central banks is not useful. Their political goal is to keep the global economy from either “crashing” or “overheating.” These concepts may not be meaningful economically, but they are meaningful politically. “Crashing” means mobs of unemployed navvies. “Overheating” means baguette-price riots. These images are burned into the minds of generations of enarques. No employee of any CB anywhere wants to see any of these things, ever, in any country. So, despite inevitable international tensions, motivations are generally aligned.

Perhaps this actor needs a name. The point is that Dumbledore (the Fed) and Voldemort (the foreign CBs) are one. Call him Dumblemort. Dumblemort is behind everything. If the question is a question, “Dumblemort” is the answer.

Now and for the indefinite future, the entire yield curve is controlled by Dumblemort. As are all currency cross rates. Dumblemort can issue any currency, can guarantee the present price of any security, and so on. As yet he has ventured only tentatively into the final frontier of freedom, the equity market, but even here his hand is beginning to be felt.

Actually, Dumblemort hates all this. He loves free markets. He understands them perfectly, and in a sort of theoretical sense he wishes he could cease to exist, allowing the yield curves of the world to simply reflect reality. Dumblemort is certainly not in any way evil. He is not even misguided. His job is a dirty job, he knows it and he detests it, and he wishes someone didn’t have to do it.

But Dumblemort has to live with the reality of the situation, which is that he is very old. And so is his bad habit of managing credit markets. Because his operations tend to raise the price of debt, over the last 100 years his world has built up a pretty big pile of the stuff. If Dumblemort suddenly walked off the job, this pile would fall down, and a lot of people would be crushed.

One of the ugliest parts of Dumblemort’s job is that he cannot even maintain a stable yield curve. Dumblemort does not want the market to either crash or overheat, but his only way of preventing it from crashing or overheating is to feint in one direction when the market starts to move in the other.

He has no policy tool that allows him to damp these oscillations. If he commits himself to any fixed yield curve, the amount of outstanding debt will go instantly to infinity, because the market will borrow money to buy any asset, leveraging infinitely against collateral whose price is bid up to infinity, and so on. Fortunately for Dumblemort, any such strategy leaves the market infinitely exposed to any hint that the yield curve might revert to its precipitous, Dumblemortless shape. The more the hedgies overextend themselves, the more they consign their family jewels to Dumblemort’s cold hands. The slightest squeeze and they know who’s boss.

So what of spreads? Spreads have blown out because a yield curve oscillation affected the price of many collateral assets (such as houses), and thus of debt collateralized by these assets. Investors bought this debt not because they were stupid and didn’t think short dollar rates would rise, but because they had institutional guarantees and regulatory directives. In other words, the difference between a pension fund required to buy AAA-rated bonds, and a sovereign wealth fund, is a difference of degree. The answer, once again, is Dumblemort.

Dumblemort personally buys only the simplest and most secure of instruments. But financial institutions who are regulated by Dumblemort, and to whom in many cases Dumblemort provides insurance explicit or implicit, are not so picky. These quasiofficial entities have been driving down spreads. And their behavior has been exacerbated by nonofficial entities who believe they can rely on Dumblemort’s implicit guarantee - the “Bernanke Put,” whose virginity is no longer debatable.

Without occasional punishment, these players will drive debt to infinity. With too much punishment, the growth of debt will stop or even reverse, a disastrous result in an economy profoundly and irreversibly hooked on asset-price inflation. The entire system is, of course, insane, but it exhibits no incremental path to sanity, and it exists within a political process committed to incrementalism.

But we had alan Greenspan saying at the time where some regulator-led spanking was most needed:

[...] But regulation is not only unnecessary in these markets, it is potentially damaging, because regulation presupposes disclosure and forced disclosure of proprietary information can undercut innovations in financial markets just as it would in real estate markets. [...]

http://www.federalreserve.gov/BoardDocs/Speeches/2002/200209252/default.htm

Throw oil on fire as the old saying says.

They finance the US because they need a place to put the dollars they’ve bought once they’ve decided to buy them. Makes sense to combine a core level of investment in the source currency risk free asset (treasuries), with some diversification into other currencies and higher risk assets. The question is always the asset mix - whether they have too much in treasuries, not enough in other currencies or higher risk assets, etc. etc. Given what started the ball rolling and its momentum, makes sense to maintain a fairly substantial base of their assets in US treasuries - after all, the US is the source location and source currency of most of the global current account deficit. I wonder what portfolio theory would say about the ideal diversification strategy?

Asset value doubts should have pushed spreads much higher for those housing loans but I don’t see why it would have pushed the “market” rate higher because there are plenty of real world investment that would have taken plenty of money, like solar or wind power plants that make plenty of sense, are relatively low risk and in need of big loans of long duration.

For reference USA electricity thermal power (coal/oil/gas - non renewable) installed is around 300 GigaWatt (for a total continuous use of around 400 GW) and one installed Watt of renewable power currently costs from 5 to 30 USD depending on the technology and location. That’s a few trillions USD to invest. Data source:

http://www.eia.doe.gov/cneaf/electricity/epa/epat1p1.html

Why haven’t the housing spreads widened, I don’t know. We’ll see who holds the 4-8 housing overvaluation trillion potato, data courtesy of Dean Baker:

http://www.cepr.net/documents/publications/meltdown_2007_08.pdf

And so who is the reason why the spreads didn’t widen at some point in this crisis.

“…Bank of America, the country’s second-largest bank, “has quietly begun offering credit cards to customers without Social Security numbers - typically illegal immigrants,” according to the Wall Street Journal. Customers can qualify for a credit card if they have had a checking account at the bank for at least three months. They are required to leave a deposit and pay a relatively high interest rate…” http://blogs.usatoday.com/ondeadline/2007/02/bank_of_america.html