Not a good sign: the Treasury once again can borrow for free
Ok, the Treasury can not borrow for free. Three month Treasury bills, according to Bloomberg, yield something like 2 basis point.
Treasury yields aren’t hard to calculate. But they are still my favorite indicators of the scale of the current crisis. The fact that so many are willing to lend so much to the US Treasury for so little is a clear indicator of a lack of confidence in other financial asset. Dr. Krugman is right. Market analysts are more or less saying the same thing: ““Where the credit markets are trading, it’s all but implying a 1929 scenario,” said Joe Balestrino, fixed income strategist at Federated Investors”
I can not match John Jansen’s market experience — but I share his amazement at the scale of the moves in the Treasury market today. Jansen:
The Long Bond is trading at a yield of 3.43 percent and the dollar price has exploded 9 points today. I have done this for nearly 30 years. I have never witnessed this before.
The rise in the price of the ten year bond wasn’t quite as dramatic, but the rise in price (and fall in yield) still shows up quite cleanly.
Suffice to say that surge in Treasuries — and rise in credit spreads — isn’t a good sign. Investors (including central banks) aren’t willing to accept anything that just has an implicit government guarantee — let alone debt with real risk. Right now they want nothing less than the full faith and credit of the US government.
p.s. I would be interested to hear a true believer in the efficient market hypothesis explain recent moves in 30 year swap spreads. For a primer, read Jansen.
“The 30 year swap rate is 2.84. It has dropped about 80 basis points on the day and is about 60 basis points rich to the 30 year Treasury.I just spoke with an options trader about this historic move. He said that there structured product trades buried in trading books all over the world which are melting. There is a massive short in the 30 year sector (in Treasury paper and in the swap market) which resulted from sales of cheap volatility. Some of these positions have been on the books of various entities for years and it is only recently that the chickens have come home to roost. Each time the spread turns more negative, that movement forces some one to receive in swaps to hedge there position. There are short the long end trades in every permutation and combination along the curve. The receiving creates a self fulfilling prophecy which compels someone else to receive.”
I am no expert on swaps (to put it mildly) but it sure seems like the current move is driven by something other than fundamentals. A negative swap spread — according to the FT – implies that “investors are somehow reckoning that they are more likely to be paid back by a private counterparty than by the government.” That doesn’t seem consistent with what the rest of the market is telling us …
Brad, while I attempt to trudge up the swap spread hill, it would be interesting to know your opinion on my earlier doubt on consolidation of GSE balance sheets on to the public sector should work:
Chidambaram:
My second point is related to the first one and it’s a second thought on the rules governing the consolidation of public sector balance sheets. As of their latest reporting the Agencies are by and large solvent entities. If there’s a rule that their liability should add on to the liability side of the Govt.’s, then correspondingly their asset side should also add up. So providing a full faith and credit of the united states guarantee should add the net worth of the agencies to the public debt and not the total of their liabilities. Their net worth could even turn negative in future, or found to be negative at present on closer scrutiny; but given the total size of the bailouts so far the beneficiary effects of this guarantee will far outweigh its negatives.
Getting new funding from China and other foreigners for Agency bonds without further issuance of Treasuries will stop further increases in money supply for bailouts. At the same time I would like to correct it if I’ve created a perception that the Agency Bug caused the crisis. The Agency bug is some collateral damage from the crisis which we have to deal with but it was not the bug which caused the crisis.
While Paulson is shoveling money out the door as fast as possible, the Tresury needs to create the money for him to use. The low cost of selling treaury notes is good, is it not, from the perspective of the U.S. government.
Seems to me U.S. government policy should be to support the market for government bonds.
Reassurance that the Federal government is going to collect taxes to pay these bonds when they come due should help keep the interest rate low. Therefore, the first action of Obama, when he takes office, should be to implement the tax increases on the wealthy that he promised in his campaign.
Taxes on the wealthy will have the least impact on consumer spending, compared to an equal amount of money raised from lower income households.
People have lost sight of the fundamental issue of an economy: it exists to make and trade things and services. All of these financial statistics are simply measures of confusion. People are willing to lend to the Treasury for no return because they have no idea what to do with their money. Yet there are talented people willing to work and productive companies with innovative ideas and technologies separated from the money they need to build this country only by this fog.
Charles is on the right track. What we need is to put people to work making valuable goods and services that people want, not waste our talent on coming up with new derivatives to skim the churning money supply for the benefit of relatively few people. The financial sector has grown by leaps and bounds while productive industries have wasted away. It’s time to drive the money changers out of the temple and put them to useful work.
Time for a little bit of humor:
Here’s an interesting extract from the Q & A discussion on Treasury’s public education web site:
http://www.ustreas.gov/education/faq/personal/assistance.shtml
Question: Can I get a loan or a grant from the Treasury Department?
Contrary to the impression of many people, the Treasury Department generally does not administer any financial assistance, loan, or loan guarantee programs to individuals or businesses. The only source of information we can provide for personal financial assistance is the Catalog of Federal Domestic Assistance. This book provides a detailed listing of Federal assistance programs and the agencies responsible for their administration. It is available in most large public libraries. If you believe you qualify for any of the programs listed therein, you should apply for benefits to the agency or department administering the program at the address shown therein.
Re treasury market efficiency. Weak o strong efficiency? And why would a market where a single issuer controls supply and is not subject to insider rules be efficient in the first place? All information is not available to the market, especially not under present conditions..
However not being efficient does not make it easy to predict for investors.
I can only repeat that there re at least two things pushing the US spiral downwards (and the US is a fairly unstable and vulnerable economy with weak social security systems etc and very high levels of household debt) (1) procyclical effects at work in the financial system (banks need more capital to cover losses and pension funds must switch to “safer” assets as their coverage ratios get hammered. Both re positive feedback phenomena without natural floors (2) uncertainty over gvt policy direction, combined with likelyhood that that uncertainty will last a while
Whew! This swap spread stuff is quite confusing, … isn’t it???
Off-topic joke, back to the G-20 summit:
The Texas Farmhouse view of Sarko admiring his wife’s favorite liberal paintings; opening his first ever copy of Das Capital at a middle page in front of global media footlights; and coming to Washington ‘to explain that the US dollar is not the only currency in the world’ is as follows:
There’re really lots of problems with the French. The biggest problem with the French is that they don’t have a word for entrepreneur.
sexy industries in the next 10-20 years:
– healthcare
– agriculture
– renewable energy
Suppose that dr. Krugman is wrong, for a while and for the argument s sake.
Only then you could see things, that – right now – you re not even aware of, exist.
“A negative swap spread — according to the FT – implies that “investors are somehow reckoning that they are more likely to be paid back by a private counterparty than by the government.””
Not my market, but I don’t agree with this. Buying a long bond is giving money to the Treasury and hoping to get it back in 30 years (and getting coupons in the mean time).
In a swap the two counterparts are agreeing to exchange interest rate flows (one according to a fixed rate, the other according to a variable rate) – no principle is exchanged, so no one is being “paid back” the principle.
Elwood: The financial sector has grown by leaps and bounds while productive industries have wasted away. It’s time to drive the money changers out of the temple and put them to useful work.
Wall Street is one of the very few places where someone with a physics Ph.D. can find decent work at decent wages. If you want to change things so that people fresh out of graduate school can make $120K as a post-doc rather than $35K as a post-doc then more power to you. But the reason you have so many physicists working in financial is because most of the non-financial jobs stink.
At one point in my life, I made the decision that there was no nobility in voluntarily being poor.
Put up or shut up. If you want people to do “productive things” you need to find the money to get to do that. If you are unwilling or unable to find alternatives in which people with science backgrounds can find competitive salaries, then you really have to think deeply as to why that is.
Nick Calamos had some observations on the market’s aversion to risk yesterday
… he didn’t say anything about ‘efficient markets’
http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vASiF5CC0w6w.asf
Taleb says B-schools use bogus risk models;
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aW2ByfpGZflA
Taleb says risk models are ‘hogwash’
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aoRI4D54a3D8
It’s interesting to note the ‘options trader’ you refer to lays blame on ‘hidden’
structured products on banks’ books … could the real cause of the problem be
people that use concepts like ‘cheap volatility’ to determine trading decisions …..
just because options theory says option prices are not a function of expected
return doesn’t mean the underlying asset’s evolving expected return can’t feedback
to options pricing and wreak havoc with such superficial notions as ‘cheap volatility’
Neat post Brad, thank you.
Regards,
Mike
“a” is correct. The swap spread can be affected by non-arbitragable technicals due to the obligation of the floating rate leg as well. This doesn’t necessarily translate to negative credit spreads on bank term funding paper.
TwoFish,
Past tense, “In the past could make $120K as a post-doc….”
What do you think the US-consumer, China-producer will be replaced by?
Brad:
I think seeing the fixed interest rate leg in the swap as a reflector of current expectations of future interest rate expectations is sufficient to explain the above issue.
But I’m increasingly worried that there might be no economic or diplomatic solution to the petro euro vs petro dollar question that has been raging since at least the year 2000.
Following is some trend analysis of the EUR/USD exchange rate patterns responding to diplomatic developments around the petroleum trade:
January 1999: launch of the euro.
2) January 1999 Oct 2000: euro in “bear
market² versus the dollar.
3) November 2000: Iraq switches oil sales to
euro. Euro’s fall versus the dollar is halted.
4) April 2002: senior OPEC representative gives
speech in which he states that OPEC would consider possibility of selling
oil in euros.
5) April 2002 to May 2003: euro in “bull
market” versus the dollar.
6) June 2003: US switches Iraqi oil sales back
to dollar.
7) June 2003 to September 2003: euro falls
versus dollar.
October 2003 to early February 2004:
statements by Russian and OPEC politicians/officials that switch to euro
for oil sales is being considered. Euro’s value versus the dollar
increases.
9) 10 February 2004: OPEC meets and no decision
to switch to euro is taken.
10) February 2004 to May 2004: euro falls
versus the dollar.
11) June 2004: Iran announces intention to
establish oil-trading market to rival those of London and New
York.
12) June 2004: euro’s value versus the dollar
begins to increase
again.
Someone needs to write a FAQ on the petro-euro conspiracy theory. Oil is *priced* in dollars, that doesn’t mean that you have to buy oil in dollars. In particular Iran will only take euros for oil.
Economists need to wake-up and smell the coffee. The US Economy is imploding into a “greater depression” resulting from the largest credit bubble in world history. Trillions of dollars of defaulting debt remains hidden in off balance sheet SIVs. Hiding behind creative accounting rule changes proposed by Paulson in this market is simply not going to work. Looking ahead, foreclosures, credit card defaults, and bankruptcies are going to explode along with a soaring unemployment rate. Commercial real estate is the next to experience an financial implosion, collapsing regional banks and JP Chase-Morgan that escaped the residential subprime bust. The market isn’t irrational to bid T-bond rates to absolute zero: the entire US Bubble economy is insolvent. Sadly the only cure for a credit bubble and the resulting capital misallocation is to have never let it inflate in the first place. For the entire economic fiasco, the Federal Reserve should be held accountable for gross mismanagement of US monetary policy. Bernanke needs to tender his resignation.
Twofish I would really appreciate further analysis and commentary from you on this question. The question of petro euros versus petro dollars and all related stuff, including the prisoner’s dilemma game with China, Taiwan, Korea Forex reserves, etc …
If the USD is going to collapse there’s really no point is discussing the bug which caused the credit crisis, that is still alive and kicking today.
this one s for all you conspiratists;
you have 13 seconds to reply (to all qs)
“previously-built-in-systemic-stress-test questionnaire”:
Part 1: why don t I understand anything
1.where did the USD reserves originate from, into existence? why? who, much later-on, consulted the CBs to mutate into hedge funds and what logic was that particular consultation advice based upon?
Time! Thank you, please stop writing and surrender your papers. Now!
the rest was as follows:
2.how much will all other investing subjects like the idea (fact now) that a new(investing)comer (with lots and lots of subsidiaries) can issue (unlimited amounts of) money as (spends it on) investing, all at-the-same time? Would you award an award for that study?
Part 2: while you are funding yourselves away
3.what are the two main consequences of any nullified contract in any court of (f)law?
4.do banks exist? why would you think such a thing? today, does it matter?
5.does the newly discovered (monetary police) goal of crowd-control crowd-out the wrong crowd or the right crowd and what is the nature of the relation between the wrong and the right crowds in a crowding-out model, given the rates of the cheering?
Part 3: and finally, where are we all
6.is the next answer convention-based: how long do 13 seconds take to expire? did you move in-between?
7.are we in OZ? If so – explain the strange creatures. If not – explain the strange creatures.
See – not enough time.
Ps
Moldbug, although you obviously skipped the number 2., your just-in-time Surprise Santa out-of-the-bag Jump proposal is still to be appreciated (opposite from devalued) as Yes, it IS Santa, not savings, that saves the X-mass.
a, and ad 8.: in the meantime as the two counterparties are busy, exchanging their perceived future interest rate flows, and – based on assumptions that change so fast and so vast these days – trying to perceive their flows correctly before exchanging them off at some rate, an over edgy naked or an over over edgy, dressed up shorter might strike on that principle, just a little to fast, as things got so “edgy”. Somehow, that is.
pps
solutions are simple because the problem is simple, it s only those that complicate things that want no solution (as one).
Chidambaran, pse ask the US to wait a while. That bug will starve pretty soon and then, who kows, the US may get well again, more or less.
But why would it matter in what currency Iran (or any oil producer) settles its oil exports, apart from making it (perhaps) a little harder for the US to monitor Iranian oil sales? What matters is in what currency they invest the proceds (if there is a surplus of course). You do not have to sell in Euros to invest in them. Anyway, Euros are not all that expensive at the moment and interest rates are still OK. Plus, lots of banks sporting government guarantees. Iran’s problem is that not many banks want Iranian government deposits.
I read the long discussion of the U.S. conspiracy to get contol of oil and to use that control to maintain the value of the dollar.
I don’t know what to make of it. I know the U.S. CIA has acted in other countries to try to change the rulers – in the case of Iran, they apparently succeeded.
On the other hand, it seems over the top to see all subsequent history in this simple story.
Apparently, as a citizen, I am not going to be allowed to see all that former President Reagan did along the lines laid out in this indictment.
I don’t see how this story can be either confirmed or refuted. I would hope the leaders of the U.S. would not ALL be as described, but Mr. Bush’s actions have been troubling ever since he orchestrated the invasion of Iraq for no good reason that he could articulate.
[...] Treasury Borrowing for Free: On his blog, Brad Setser says that it’s not a good thing that the Treasury can borrow for free right now. “Treasury yields aren
If you assume that the broader geoeconomic policy of the united states has depended on sustaining a link between global petroleum imports and the dollar, since 1971, what that gives you is a strong proclivity of the Washington policy establishment towards the oil industry’s corresponding interests.
While much hope has been in the commoner’s mind regarding the new President Electcy; the new President Electcy preferring to immediately squander further billions on troop deployment in Afghanistan; to provide a modicum stability to its fragile political infrastructure; and turning third division into a pipeline police for the oil consortium to complete its plan to pump the oil from the Caspian sea source to the Arabian sea market; even as more and more pink slips accumulate and clog up the domestic taxpayer’s financial pipeline; is a clear indication that that proclivity continues to dominate geoeconomic policy.
Reasoning from the broader geoeconomic context; you don’t have to look too far to see that a deviation of oil price from economic fundamentals; caused by speculation in oil futures through the corrupt cftc; provided a hyperinflationary environment in which there was strong downward pressure on home values.
Oil moved from $68 to $146 within the space of a year, and it then collapsed to around $56 in 4 months. How can this absurd movement be explained as a result of economic fundamentals of global demand and supply?
George Soros arguments relating to applications of his reflexivity principles to the current bust merit some serious thought.
And analysts like Brad Setser and Bena Gyerek would do very well to see BW II in its context in economic history. Arguing for a correction in ‘the misalignment of exchange rates’ ignores the context of that misalignment, whose roots can easily be traced back to the original bretton woods itself.
Arguably the above article misses out on tracing further back to the Cross of Gold speech from William Jennings Bryan, which might signify an early application of enlightened self interest to global capital flows.
please excuse the grammatical errors in my post above
@Chidambaram
“Oil moved from $68 to $146 within the space of a year, and it then collapsed to around $56 in 4 months. How can this absurd movement be explained as a result of economic fundamentals of global demand and supply”
I don’t dismiss psychology/irrational actors, but to some extent I think fundamentals might explain it. Think of a supply curve the goes vertical at some price because we reach the limits of production. The price could shoot sky high very suddenly if demand increased. Similarly if demand decreased the reverse is would happen very dramatically as well.
Reformer Ray:
Everybody else except Twofish seems to agree that we are in a financial panic of gigantic proportion – that nothing like this has ever been experienced in recorded history.
Reformer Ray, you have to note that I’m firmly with 2fish on his contrarian views.
I can go line by line on any so called academic reports that Dr. Roubini has on his scaremonger web site and demolish them.
Notice how I demolish Jansen’s mistaken arguments about credit risk on the Treasury.
But the one thing I’m not sure of is my intellectual prowess in comparison with George Soros. George Soros has repeatedly proven that he is capable of visualizing global capital flows to predict exchange rate movements and there are billions of dollars in his name to prove his ability.
George Soros has been predicting that the US geoeconomic policy is unsustainable and that the dollar will collapse.
This one point keeps worrying me because if the dollar collapses then the US economy will be back to where it was in 1929 without doubt.
Then there will be no point in examining any bug fixes, either in a bankruptcy court or a treasury soapbox.
Chidam: Twofish I would really appreciate further analysis and commentary from you on this question.
The reason that oil is quoted in one price is that it simplifies the accounting. If you have one quote in dollars, another quote in euros, and then you have another market in converts dollars to euros, you have to spend a lot of effort to get the numbers of match, especially since all of the numbers are changing on a second by second basis.
If you quote the price of oil in dollars but want to pay euros, then you look at the price of oil, the dollar-euro exchange rate, and that gives you what you need to pay.
Also the supply curve for oil is vertical because drilling for oil is expensive and no one is going to look for new oil if they think the prices are going to collapse in six months. In the 1980’s, a lot of oil companies ran into trouble because they invested a lot in oil and then lost their shirts when the price of oil collapsed.
“Neoliberal economists in the last three decades have denied the possibility of a replay of the worldwide destructiveness of the Great Depression that followed the collapse of the speculative bubble created by unfettered US financial markets of the ‘Roaring Twenties’. They fooled themselves into thinking that false prosperity built on debt could be sustainable with monetary indulgence. Now history is repeating itself, this time with a new, more lethal virus that has infested deregulated global financial markets with ‘innovative’ debt securitization, structured finance and maverick banking operations flooded with excess liquidity released by accommodative central banks. A massive structure of phantom wealth was built on the quicksand of debt manipulation. This debt bubble finally imploded in July 2007 and is now threatening to bring down the entire global financial system to cause an economic meltdown unless enlightened political leadership adopts coordinated corrective measures on a global scale.”
http://www.globalresearch.ca/index.php?context=va&aid=11072
If you are unwilling or unable to find alternatives in which people with science backgrounds can find competitive salaries, then you really have to think deeply as to why that is.
Because of their amoral algorithms that enabled the financial services bubble and its subsequent explosion?
Another immediate policy recommendation:
Stop blowing money on troop deployments in Afghanistan.
Twofish/Patrick request you to go to the link below from my earlier post and have a look:
http://www.ringnebula.com/Oil/Timeline.htm
I have a lot of difficulty in believing vertical oil supply curves, given the curving oil pipelines and the blood around them.
um, per DC, if it wasn’t obvious before, the US banking system is insolvent… but where does that leave bagholders, esp re: like china? they’ve been holding on to the audacity of hope, but it may be time to face the humility of realsim (and reason!)
@Chidambaram
I wouldn’t argue that the entire supply curve is vertical, but rather that it’s discontinuous and that, at some point, no matter how much oil sells for, there is simply no way to produce more. Ultimately, this MUST be true because of geology. The question is whether we entered that vertical zone along the supply curve in the recent run-up. I’ll concede that your guess is as good as mine on that one.
“Chidambaram responds:
Reformer Ray:
Everybody else except Twofish seems to agree that we are in a financial panic of gigantic proportion – that nothing like this has ever been experienced in recorded history.
Reformer Ray, you have to note that I’m firmly with 2fish on his contrarian views.
The future is unknown but the present is known. The current condition of: 1) Excessive consumer debt; 2)Excessive Federal government debt; 3)Excessive trade deficit; 4)Excessive stock market values in early 2007; 5)Mortgages written without regard to ability to pay; 6)Securitization of loans to disguise their real worth; 7) A manufacturing sector that accounts for only 12% of GDP compared with more than twice that for our international trade competitors: 8)A disfunctional political system.
All that is enough to guarantee a long and painful recovery from a condition in which banks are very reluctant to lend to each other because they do not trust the ability of counterparties to pap. There is no light on the horizon, if we keep on doing what we have been doing.
I am proud that I at least have articulated two options for change.
China’s response for their need for oil is quite different from the U.S. They use their wealth to pay for long term contracts with smaller government-owned oil producing nations. The number of government owned oil production facilities is increasing. U.S. bais against government owned oil producing nations serves China well in that they do not need to compete with the U.S. for this market.
@Patrick:
Oil doesn’t have any supply curve or demand curve. When you have a large number of buyers and sellers facing relatively low transaction costs and barriers to entry and exit, you get a market. In a market you get a supply curve and a demand curve.
Oil doesn’t have a supply curve because the numbers of sellers and buyers of crude are both limited. How much supply of oil a sheikh will provide at a price of say $50 per barrel, when it costs him only $5 to produce it, is anybody’s guess. There aren’t too many sheikhs competing in the market to provide more or less; or bargain the selling price down.
There isn’t any demand curve for oil, even among retail customers because the existence of a demand curve requires the existence of effective substitutes for a product. If there’s no substitute for an essential commodity, you have no choice but to consume as much of it as is essential irrespective of its price.
@Patrick
If you think that the oil price went up because all the oil wells were running out of oil due to increased demand and consumption, then you’re blown away by some propaganda about oil reserves.
ReformerRay: The current condition of: 1) Excessive consumer debt; 2)Excessive Federal government debt; 3)Excessive trade deficit; 4)Excessive stock market values in early 2007;
If you graph all of these conditions as a percentage of GDP over the last 100 years, you’ll find that none of these are true if you use historical or international standards.
ReformerRay: 5)Mortgages written without regard to ability to pay; 6)Securitization of loans to disguise their real worth; 7) A manufacturing sector that accounts for only 12% of GDP compared with more than twice that for our international trade competitors:
If you look at those numbers for losses as a ratio of GDP, they aren’t that bad. As far as a low manufacturing number, I don’t think that is a bad thing.
8)A disfunctional political system.
That’s definitely not true. We had an election with a peaceful transition of power to someone that is going to true some new policies. People are getting into rooms screaming at each other, and then coming up with agreements that move things forward.
Politics is easy when people agree. When people don’t agree it gets messy, and the US handles the messiness of people not agreeing much better than most other places.
@Reformer
Can you get any data on whether there’s a massive build up of short positions on the USD in the currency derivatives market? e.g. increased open interest in long term USD/EUR put options as the option price kept increasing?
Chidam: Oil doesn’t have a supply curve because the numbers of sellers and buyers of crude are both limited.
This isn’t true. Every oil well has a number associated with it. When the price of oil goes above that number, they turn it on, when the price of oil goes below that number, people turn it off.
Chidam: If there’s no substitute for an essential commodity, you have no choice but to consume as much of it as is essential irrespective of its price.
So why have people stopped buying huge SUV’s. When gas prices increase, people drive less and take fewer trips.
Michael Pettis coins a new term on his blog today to describe China’s strategy of “half-hearted fiscal stimulus and more interfering with trade in order to alter the terms in its favor”: Smoot-Hawley-with-Chinese-characteristics.
Howard Richman
http://www.tradeandtaxes.blogspot.com
[...] say that the surge in Treasuries — and rise in credit spreads — isn’t a good sign.” (Follow the Money also Aleph Blog, [...]
Movements in the long end swap market are truly beguiling. 30 YEAR swap spreads are trading 58 bp BELOW 30Y treasury yields. What is going on there?
My guess is that people figure that current situation is unstable and that LIBOR is eventually going to go down, below current 30 treasury year rates.
Howard,
That the US Economy is toast has little to do with the Chinese. There isn’t a single Chinese-built vehicle sold in the United States so how is it possible that the Chinese responsible for Detroit automaker travails. The Bank of China is a $10 billion victim of the AAA-rated subprime “money finance swindle” perpetrated by Wall Street fraudsters. AIG is probably underwater by $4 trillion for selling credit default swaps on the subprime, Alt-A, and corporate junk bond garbage. The Chinese trade surplus issue pails in comparison to the multi-trillion dollar “black hole” losses on Wall Street.
The other thing is that people are likely hoarding cash so that they are in good shape when General Motors declares Chapter 11 and all heck breaks loose once again.
[...] Treasury Borrowing for Free: On his blog, Brad Setser says that it’s not a good thing that the Treasury can borrow for free right now. “Treasury yields aren’t hard to calculate. But they are still my favorite indicators of the scale of the current crisis. The fact that so many are willing to lend so much to the US Treasury for so little is a clear indicator of a lack of confidence in other financial asset. Dr. Krugman is right. Market analysts are more or less saying the same thing: ‘“Where the credit markets are trading, it’s all but implying a 1929 scenario,” said Joe Balestrino, fixed income strategist at Federated Investors’” [...]
[...] Treasury Borrowing for Free: On his blog, Brad Setser says that it’s not a good thing that the Treasury can borrow for free right now. “Treasury yields aren’t hard to calculate. But they are still my favorite indicators of the scale of the current crisis. The fact that so many are willing to lend so much to the US Treasury for so little is a clear indicator of a lack of confidence in other financial asset. Dr. Krugman is right. Market analysts are more or less saying the same thing: ‘“Where the credit markets are trading, it’s all but implying a 1929 scenario,” said Joe Balestrino, fixed income strategist at Federated Investors’” [...]
Soros sees an urgent need for intelligent regulatory reform but fears it will not develop because of the unequal cat and mouse game between market participants and regulators.
The solution is to force George Soros to become a czar regulator of all financial transactions, with all the legal regulatory agencies gathered under his wing.
Ole Joe Kennedy tamed the stock market in the thirties because he knew their game. Soros is the man for the current task.
I’m not nearly as alarmed as Krugman nor am I as panicked about the general situation as I was a month ago.
1) The short term credit markets are still functioning. The spread between short term Treasuries and LIBOR is not insane and the interbank market is not frozen like it was a month ago. The reason that I think you have a negative swap spread is that you have a huge difference between short term Libor rates and long term Treasury rates, and people think that short term Libor will go down.
2) You do have a huge spread between treasuries and high yield bonds, but that isn’t unexpected. It’s tough to lend to companies with less than perfect credit because people figure that there is a very good chance that those companies will not be around in two years. There have been very few corporate defaults thus far, and people are looking at corporations wondering which one’s are going to start dropping.
In any case this credit spread is quite rational, and it’s hard to figure out how this will turn into a major crisis. Having difficulties in getting long term bond credit are nowhere has dangerous as not being about to get short term revolving credit.
Finally, I still do not see anything in this particular financial crisis that makes it worse than 1972-1975 or 1981-1983. Just like people were irrationally optimistic in the boom times, there is a lot of irrational pessimism now.
Regulation of the financial industry is too difficult a problem for the Congress to solve on its own. Roosevelt understood. Appoint someone who knows what is going on to propose the needed regulations and then present them to Congress as THE SOLUTION.
Laws are necessary. However, the way the “instruments” were invented so rapidly after 2003 suggests that the regulators, whoever they are, should expect to submit requests for new laws at any time when rapid invention is destroying past barriers to high yield.
The economic slowdown of 1980-1982 was caused by the high interest rates created by the Federal Reserve Board in 1979 to combate inflation. After the high rates began to reduce inflation and before they got really low, foreigners began to send money to the U.S. to take advantage of the interest rates. The the military spending of Reagan and the deficits of Reagan took over and resulted in increasing GDP at a rapid pace from 1983 to 1985.
Brad,
I heard that you had worked for Tim Geithner both in IMF and Treasury. Hope you can give us your new blog site address when you move to DC.
Best Regard
DJC asks: “That the US Economy is toast has little to do with the Chinese. There isn’t a single Chinese-built vehicle sold in the United States so how is it possible that the Chinese responsible for Detroit automaker travails.”
There are two explanations:
1. Chinese Import Restrictions. China has a 25% tariff on U.S. automobiles and an illegal 25% tariff on the U.S. autoparts. Add to those tariffs the extra cost of American exports resulting from China’s currency manipulations, and it is easy to see why Detroit hasn’t been growing with the growing Chinese market for automobiles.
2. China and the other Mercantilist Countries caused the US financial collapse. The mercantilist countries, especially China, purposely exported to the United States without importing as much, sending us loans instead of buying our goods. Without the income that would have come from American exports, American consumers piled on more and more debt to buy foreign goods. Debtors cannot keep on piling on debt forever. U.S. banks were caught holding the bag. One problem with mercantilism is that it eventually bankrupts the markets for its goods.
Howard
chidam — short comments please.
lost in sauce — i was hoping a reader would be able to explain the move in 30 y swaps to me!
Twofish: At one point in my life, I made the decision that there was no nobility in voluntarily being poor.
No, but there is nobility in not wasting your life in a meaningless pursuit of wealth. If you have a PhD in physics, I’m pretty sure there are exciting and productive jobs you can do, outside ws.
The end of the era of the overpaid Wall Street physicists will probably be a good thing.
http://www.fanniemae.com/markets/debt/pdf/CUSIP_PS31398ALA8.pdf;jsessionid=FJ4MKPX0P3ORFJ2FECISFGI
Fannie Mae’s Constant Maturity Swaps (CMS) Curve Non-Inversion notes are structured notes which make coupon payments based on the number of days during the interest payment period when the CMS curve is upward sloping. Investors in CMS Curve Non-Inversion notes would receive a coupon above current prevailing market rates if these trends continue and the yield curve remains upward sloping. CMS Curve Non-Inversion notes are created through the reverse inquiry process, as Fannie Mae attempts to meet investor demand for non-standard debt securities. for more information please ask mr. new T sec.
Brad:
i was hoping a reader would be able to explain the move in 30 y swaps to me!
Daily interest rate data on 30 year constant maturity
Nov 17 3.97
Nov 18 3.94
Nov 19 3.72
Nov 20 3.23
Source: Fed’s daily interest rate statistical release
http://www.federalreserve.gov/releases/h15/update/
Current market expectation of future 30 year rate:
(30 year swap rate)
2.84
It doesn’t mean that either swap dealers or swap counterparties are more creditworthy than the US Treasury. What it means is that these people are not capable of attracting higher interest rates than what the market is expecting from Treasury.
Brad:
Right now they (Chidambaram: meaning investors) want nothing less than the full faith and credit of the US government.
The market is not demanding a full faith and credit guarantee to buy GSE bonds. GSE bonds are in circulation at reduced valuations because the market view is that GSE’s are private cos. Reduced market value of US homes reflects in reduced GSE bond valuation. If Treasury wants to restore confidence in the GSE bonds beyond their market value that has to be backed up with a full faith guarantee.
A full faith and credit guarantee to the GSEs has little or no relative impact on the public debt because they are solvent entities as of their last reporting. Adding their net worth to the public sector balance sheet will ensure a more rapid recovery both in the housing market and in the securitization market, providing much needed stability while longer term reforms and further policy responses to the current crisis are evolved.
The new administration is willing to spend billions of dollars to provide stability to Afghanistan’s fragile political infrastructure, and turn third division into a pipeline police for the oil companies while they construct a pipeline, reaping ever increasing profits by buying oil cheap in the Caspian and selling it expensive in the Arabian sea markets.
http://www.washingtonpost.com/wp-dyn/content/article/2008/11/10/AR2008111002897_pf.html
The money to be expended on the troop deployment, in these times of financial crisis, is better spent on domestic financial pipelines that are clogged up with pink slips.
George Soros argues (my summary) that the value of a home determines how much lenders are willing to lend on it. At the same time the total amount available to lend influences the value of the home. In such a reflexive system, the existence of a prevailing misconception in the market can create a bubble, with the value of the home and the amount available to lend mutually re-inforcing one another.
(Soros says that the misconception was that this reflexive relationship doesn’t exist. According to him, the market’s abandonment of this misconception has led to a housing downturn.)
My point is that we have to recognize another popular misconception regarding the Agencies, which was caused by the structure of the GSEs. The market has abandoned the misconception that the GSEs are insulated from default by government backing.
I’m not debating the merits of the original GSE structure. Congress separated management of the GSEs from ownership; and aligned management incentives to the performance of their social responsibility while relying on the owner-investor’s interests to achieve a balance in terms of safety and soundness. Rapid progress towards the GSE social goals would arguably have been impossible with a pure government bureaucracy. Currently the government is the conservator of the GSEs and the government’s interest to promote social goals through GSEs should be backed up with credibility.
Providing the full faith and credit guarantee will ensure improved market conditions without relying either on a direct government spending program or a further reduction in interest rates, both of which have an inflationary effect.
Brad,
With real U.S. Treasury interest rates all negative, we clearly don’t need Chinese capital right now. Yet, Paulson has been bending over backwards to ignore Chinese trade manipulations: (1) in May he told Congress that China does not violate IMF rules by manipulating its currency, despite more than $1 trillion of Chinese dollar reserves collected as part of those manipulations; (2) he has yet to do anything to stop China’s high tariffs on American automobile parts, despite a WTO finding that these tariffs are illegal; and (3) he has yet to do anything to counteract China’s imposition of export subsidies, which are in direct contradiction of WTO rules.
Howard Richman
http://www.tradeandtaxes.blogspot.com
@Twofish
Relying on physics knowledge to make money isn’t worth it.
Physics shows that as knowledge tends to zero, wealth tends to infinity.
Consider this physics model:
Power = Work Done/ Time
As we all know, Knowledge is Power.
Substituting, we get:
Knowledge = Work Done/Time
But Time is Money, right?
So we have
Knowledge = Work Done/ Money
This implies
Money = Work Done/ Knowledge
So, as the knowledge in the denominator tends to zero, money should tend to infinity!!!
there are biased views based on nationality.
indian americans seem that oil price is speculation because if oil price go high it puts india into an anarchy.
lly chinese american and east asian prefer
artificially low currency because they know
that they are export oriented economies and domestic demand based on income from exports.
should exports collapse thier economies collapse.
commodity producers see conspiracy in falling commodity prices.
nobody worries about the system. self interest is rife. vice rules. nobody is willing to sacrifice. we dont want repeat of roman collapse.
if current situation of rising dollar prevails.
trade deficit will continue to increase.
won has halved, peso has fallen 40%. major currencies have fallen by 30% except yen.
US manufacturing will collapse within next 3 years ie to zero. US can only sell t-bills and notes.
Brad,
TIPS with 2 month to maturity are yielding at about 15% so it is predicting about 2.5% deflation by January. So Treasury 3 month real yield is EXTREMELY high right now.
Chidam: A full faith and credit guarantee to the GSEs has little or no relative impact on the public debt because they are solvent entities as of their last reporting.
Heh… Heh… Heh…
Lehman Brothers and Bear Stearns were solvent entities a year ago. Accepting any sort of contingent liability is extremely dangerous since you could end up with mushrooming debt at just the wrong time.
Giving GSE’s full faith and credit is not something you do without a lot of thought and planning, since it is decision that you cannot undo. What happens to GSE’s after the biotech crash of 2018?
Personally, I think it is a bad idea. I also think trying to do a recovery through the housing market is also a bad idea.
Also doing *anything* on the false idea that it is free because it doesn’t show up on a balance sheet now, is a very, very bad idea. It’s how we got into this mess. It’s far, far better to just take the hit now than to sweep things under the rug where they blow up later.
FG: No, but there is nobility in not wasting your life in a meaningless pursuit of wealth.
Anything that gives my family a reasonable standard of living isn’t meaningless. Anything that gives my the chance to use my skills to make the world a better place isn’t meaningless.
FG: If you have a PhD in physics, I’m pretty sure there are exciting and productive jobs you can do, outside ws.
I think you would be shocked and depressed at how bad the situation is. If you stay in academia, you are looking at a starting salary of $35K with a reasonable expectation of $60K as a community college prof and maybe $120K if you win the lottery and get tenure at a major university. On Wall Street, those numbers are $120K/$200K/$1M.
It’s also the respect factor. There are basically no jobs outside of academia, finance, and maybe some software development where physics Ph.D.’s are treated decently. The life of a community college prof or junior faculty stinks.
Also Wall Street, is one of the few places where physicist do something like physics. There are a lot of computer programming jobs, but you aren’t doing deep algorithm work.
FG: The end of the era of the overpaid Wall Street physicists will probably be a good thing.
I don’t think the era is ending. The era of complex derviatives quants is probably over, but there are going to be a ton of jobs in risk management. The Fed and Treasury department will want to know what happens if one of a million different scenarios happen, and building models and systems to handle that is going to cause a huge demand for physicists.
Also, Wall Street physicists help make decisions that have a lot of impact, which is one reason the job is attractive. If you helped make the wrong decisions two years ago, then you don’t have a job. If you helped make the right decisions for your firm two years ago, then I don’t think you are overpaid.
Twofish:
I don’t think the era is ending. The era of complex derviatives quants is probably over,
Twofish I suggest you spend some time at this link and also browse that web site on various categories, at least as an advance defence move against getting suddenly fired out.
One of my pals at ‘America’s most respected investment house’ told me how they’re going about firing people. This is anecdotal data as of a couple of weeks back.
This investment house was involved in some past controversies so for several years they have had extremely tight norms, such as once you go long in an equity you have to hold for at a least a year, and so and so forth. Despite this stuff they’ve had pretty big losses in Lehman, some Oil stocks and several other holdings, and count themselves as the biggest losers in some of these equities.
Now, there’s actually no known history of this company ever firing anyone. But they’re firing people now. And the way they’re going about it is really strange. There’s this particular very senior person who normally sits somewhere upstairs and normally no normal person is visible to the Lord from upstairs.
For a couple of weeks the folks at my pal’s work area noticed that the Lord is roaming the floor. Occasionally he will go up to some really normal person, who would previously NEVER have been visible to the Lord from upstairs, and say “Can you come with me for a few minutes?”
The kid goes upstairs and then in a jiffy the kid just leaves and disappears never to be seen or heard of from anyone at work again, and specifically not bidding any goodbyes to anyone at work.
My pal complains that they’re not even allowing people to say goodbye to colleagues, and it’s cruel. What might have happened is that the folks don’t want to create a stampede and want to maintain their perception as something very strong and stable, in the middle of all the carnage.
So they’re trying to make long term contributors disappear overnight, and hoping that no one will know. It’s a little bit like what my late grandmother told me about cats. She told me that the cat closes its eyes when it drinks milk. The cat feels guilty about stealing the milk and it has a reflexive misconception that when it closes its eyes, then no one can see it drinking the milk either!
http://www.quantfinancejobs.com/jobs/quant-new-york.asp
http://www.quantfinancejobs.com/
sorry .. forgot to paste the links
Well I pasted the links separately and it says that the comment is awaiting moderation. It seems that a comment without links will go through directly but it has to get moderated if it has links on it.
http://www.quantitativefinancejobs.com
hope it helps … go to the quant – new york section and you can see lots of ads for people like you
Brad asked: lost in sauce — i was hoping a reader would be able to explain the move in 30 y swaps to me!
You expect a rational answer?
Mohamed El-erian said it was flight to liquidity. That seemed right to me. Everything is being trashed to transform into treasuries which are the only thing still liquid. The new global, 1 world, single, pangean currency who’s value will be determined soon.
Bsetser: “I would be interested to hear a true believer in the efficient market hypothesis”
I am not one of these true beleivers, but let me offer and opinion:
If our currency were gold and there were just such an accumulation of the mteal on the sidelines, what would this imply? Since our money is fiat, it is being converted to treasuries – i.e., the full faith and credit, which is the very closest to “real” value one can get.
Why? There is no need for as much money in circulation when a return to the Great Depression is imminent.
Hence, money is being withdrawn and converted to hoard.
Another way of saying this, more controversial perhaps, the market is being downsized.
To add one more point: This is not a flight to liquidity, but just the opposite: the withdrawal of liquidity.
Twofish: I think you would be shocked and depressed at how bad the situation is. If you stay in academia, you are looking at a starting salary of $35K with a reasonable expectation of $60K as a community college prof and maybe $120K if you win the lottery and get tenure at a major university. On Wall Street, those numbers are $120K/$200K/$1M.
I am sorry but that is complete nonsense. I personally know at least a half-dozen people with Ph.Ds in physics or electrical engineering who in the past 2 years got excellent jobs in places such as MIT Lincoln labs, JPL, Aerospace Corp, Sandia National Labs etc. This is not counting those who found jobs in the private sector. Academic jobs are a lottery of course, but there is plenty of well paying jobs outside finance for physics grads. Wall St jobs certainly pay more, but it is more like $120k starting vs $95k starting in other places. Plus you don’t have to sell your soul.
All thisk concern for Twofish’s employment it misplaced. He is a cool, compent and knowledgeable character that anyone would like to have on his side.
I appreciate his willingness to talk about himself so honestly. It is refreshing.
Of course, he has a lot of mistaken ideas about trade. Other than that, he is mostly on target.
I take a bigger point from this discussion about pay. If the U.S. wants better automobiles designed and built by U.S. auto makers, we better see that the pay of bankers and financiers does not eclipse that of engineers and designers
observer: I personally know at least a half-dozen people with Ph.Ds in physics or electrical engineering who in the past 2 years got excellent jobs in places such as MIT Lincoln labs, JPL, Aerospace Corp, Sandia National Labs etc.
Jobs in national labs very nice, but they are quite competitive. More to the point, I’d prefer not to have “he helped build better missiles and hydrogen bombs” to be on my tombstone. Look at the names. With the exception of JPL, what do you think they do at those places, and who do you think gives them large amounts of money and why?
observer: This is not counting those who found jobs in the private sector. Academic jobs are a lottery of course, but there is plenty of well paying jobs outside finance for physics grads.
There are, and I’ve done some of them. The trouble with those job for physics geeks outside of finance is that after three to five years you end up in the end reporting to some clueless MBA. Your odds of moving into middle or senior management in most of the non-Wall Street jobs are nil. It’s not that bad when you are fresh out of school, but after three to five years, you end up hitting the glass ceiling.
observer: Wall St jobs certainly pay more, but it is more like $120k starting vs $95k starting in other places. Plus you don’t have to sell your soul.
Actually you do. To move into any position of authority in a non-Wall Street firm you have to sell your soul and become an MBA, and if you are willing to do that, you have to ask why you didn’t get the MBA in the first place.
The really nice things about Wall Street physicists is that you are doing something akin to physics (i.e. numerical modeling of parabolic differential equations). In most non-Wall Street jobs you end up programming things that have little to do with physics.
Also you can rise in the ranks of investment banks and still be quite technical, whereas in most other firms, once you hit the glass ceiling. There is a glass ceiling in investment banks, but it is much higher than at other firms. In most firms the glass ceiling for physicists is one level above the line worker. In most investment banks, the glass ceiling for physicists is one level below the CEO.
Also the notion that Wall Street trying to make sure that widows and orphans have fully funded pensions is somehow more soulless than working at a national lab building a better hydrogen bomb is a little weird.
Finally, if you go to work and say “I think it is a great thing that China is becoming a world superpower, and we should do what we can do help them.” The people in an investment bank will all nod their heads and say yes. I don’t think that people at the hydrogen bomb factories are going to be quite so open minded.
There’s also the point that if you say the wrong thing on a blog the worst that Wall Street can do to you is fire you, and once you leave, you can do whatever you want. Whatever you learn in a Wall Street firm is yours, and you are allowed, even encouraged to sell your knowledge and expertise to the highest bidder once you leave.
If you work at a bomb factory, they can do a lot worse things to you, and once you’ve worked on certain problems and have critical pieces of information in your head, they’ll never let you out of their sight.
Twofish,
With the emerging regulatory regime for the coming decade, there may not have to be a lot of fresh modeling left. Models will require severe vetting (as to their robustness, relevance, suitability for integration in a control and back office environment etc) besides, most banks will start using the same models and much derivatives trading will move from OTC to exchanges. The past ten years of physics-in-banking had a few flaws, and it appears that ISDA is no longer the power it used to be. So perhaps phisicists should do a little MBA or Law (with their prodigious IQs that should be a walk in the park, right?
Chidambaram,
I like your funny investment house. Is there a granny too?
the current system is one where bankers get everything.
dollar is a currency that not only represent a bunch of bankers but whole of america. if bankers get so much wealth for just shuffling of paper and get real goods and services
it is unfair.
current system have hijacked every one that bankers are backbone of economy. rather than remaining a mere intermediatory, they have become the distributors of wealth
americans are committed in accepting dollar as currency in that
sense that it will lead to free and fair distribution of wealth based on merit and believed that it will be controlled by few power mongers.
america is different from zimbabwe. dollar is the reserve curreny and lot of countries are peggeed to dollar.
creating more dollar in fact create more claims on assets
based on the countries and since overcapacity is present in countries that have pegged currency to dollar.
now assets in those countries now belong to americans.
thus americans will feel rich.
[...] details: Brad Setser: Follow the Money » Blog Archive » Not a good sign … [...]
“This is the biggest financial crisis since the” (Great) “depression”.
- Brad Setser
Response:
Having behind us the commercial interests and the laboring interests and all the toiling masses, we shall answer their demands for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.
- William Jennings Bryan
I’d like to postulate that unless an argument can made that a systemic deflationary environment, similar to what was caused by the gold standard, still prevails through the present global financial architecture; our analysis of the current crisis should predicate on comparisons with proximate economic events subsequent to widespread adoption of the gold standard rather than during it.
Consider the various depressions, panics, trade wars, unimaginably high unemployment percentages; and the railroad bankruptcies that are the folklore of economic historians.
In a gold standard world, you naturally have a secular increase in economic value as a result of innovation and enterprise. However the total supply of gold that is valuing the total products and services remains constant, by and large.
A gold standard thus institutes a systemic deflationary environment, where financial markets are unable to reflect the increased value of economic activity and its products.
Leaders worldwide had a fascination with accumulating gold, and gold supply is systemically limited. This led to focus on an internecine competitive accumulation of wealth rather than co-operative creation of wealth. In the context of the nation state as the predominant social institution, the competition for gold took the form of trade wars, and military campaigns; and the corresponding diplomacy of secret naval treaties and war reparation treaties; punctuated by severe financial disasters, and widespread disruption of peaceful employment and enterprise.
For instance, as the total number of railroads in a gold standard economy increases, their value needs to be reflected not only in increased dollar value of their stocks and bonds, but ultimately in the gold reserves of the treasury and the private sector of that economy.
Net exports would increase net gold reserves of a particular economy in a gold standard world, but these increased reserves should arguably reflect increased valuation of exporters’ economic activities rather that of increased domestic railroads.
Irrespective of the gold standard government’s policy on printing more dollars and paper currency with a lower value for each dollar in gold, or otherwise, or the opposite; and irrespective of whether private banks or the government’s agencies control the issue of paper money; it can be argued that as long as the gold is the final determinant of economic value, its systemic supply limitation prevents it from reflecting the increased value of economic activities to the financial markets.
Several attempts were made to navigate this fundamental dichotomy of the gold standard, specifically with respect to railroads.
Two of them are of note:
1) Investors leveraged their holdings of common stock in the railroads by having them issue wagonloads of debt securities both domestically and around the world. This resulted in their frequent bankruptcy and receivership.
2) Governments attempted to increase their gold reserves through destructive expenditure on foreign military campaigns. Relative success and failure in these campaigns temporarily exported and imported financial disasters, only to bring them back more equitably around the world through failed war reparations and decreased international trade activities.
We will now return to our Simple Example Approach. We’re making several simplifying assumptions; but as you complicate the model and bring in accurate data to reflect the real world, you will find that its logic is undoubtedly accurate.
Suppose you have an imaginary simple world with a railroad economy, and a very strict gold standard.
Initially you have 10 railroads, 35000 US dollars and 1000 ounces of gold.
Ceteris paribus, each of 10 initial railroads should be worth 100 ounces of gold.
People work hard and create 30 new railroads, bringing the total to 40 railroads.
An increase in gold supply relative to increases in supply of anything else is limited. Assume that the government adhered strictly to the gold standard and the total dollars and the total gold are the same as they were at the beginning.
What is the value of each of the 40 railroads now?
Each railroad is now worth only 25 ounces of gold, since there are totally 40 railroads and 1000 ounces of gold in our simple economy.
Brad, do you know where to find data on historical Treasury prices/yields? The Fed’s website has data back to the 50s for some issues, but I’m interested to see what happened circa 1920s-1930s.
Thanks
Brad, I’d like to know if you’re there, reading this blog post. Please text back on to the blog if you’re there. I know this is a Sunday morning, but please don’t ignore this text.
I’m worried that beginning Monday (tomorrow) or sometime later this week, the US dollar might go into a free fall collapse. The world will change overnight if that happens.
In fact I’ve been worrying about this all weekend so far …
We’ve all been looking at the data on increased demand for US Treasuries and interpreting it as increased global faith in the US Treasury. What if that interpretation is not valid?
Consider what would happen if China, France, Russia, Argentina, etc … the countries that have been rather openly issuing challenges to the US dollar … trigger a sell off in their Treasury holdings …
The rest of the market will have no choice but to follow, since these official holders of Treasuries are the largest there are …
A sell off in the Treasuries will collapse the US dollar for sure
What we’re going by is China’s statement that they’re interested in preserving the value of their forex reserve. What if that game has already ended?
Once the US dollar collapses, all the other countries in the world will be free to pursue a completely independent monetary and fiscal policy to promote their own domestic economic growth rapidly.
Besides right now we’re still on Sunday, November 24, 2008 and as of today there’s only a lame duck administration in place. The new administration has yet formed itself officially, and the old one is on the way out.
What better time for them to trigger a US Treasury sell off than now, if at all they’re considering that option?
I’m no expert on interest rate swaps. Please could anybody comment on the 30 year swap? Even if you’re not an expert, but just clever at reasoning things out, your analysis would really help.
If the market is expecting reduced interest rates in future, can that imply the above market position? I might have made a terrible mistake in my reasoning above.
If Friday’s market movements are really showing the market doubting the full faith and credit of the United States in the fixed interest rate leg of the interest rate swap, what it implies is that we’ve been terribly wrong, thinking all along that since foreign official and private players seem to be buying a lot of Treasuries, it shows their confidence in the US and the US dollar!
If any readers are around and reading this blog please text back on to the blog page. Any analysis or comments would really help quite a lot.
What if the official holders of US Treasuries trigger a sell off beginning tomorrow?
If the US dollar collapses overnight it will become impossible to import anything from anywhere at any reasonable price.
And demand is so low right now, that the impact of it would be a complete collapse of the economy …
Eurassian: With the emerging regulatory regime for the coming decade, there may not have to be a lot of fresh modeling left.
I think that there is going to be a lot of new modeling and even more implementation issues. For example, if the Dow typically moves up and down 10 points, you can run the risk reports overnight and then apply small corrections during the day. If you the Dow typically moves 500 points, then you want to run the risk report every ten minutes which is a problem if the reports takes eight hours to complete.
At this point someone high up starts screaming, I don’t care what you have to, I don’t care how much it costs, I need to be about to run those #@$#@$ reports in two minutes…
Great!!!
Eurassian: Models will require severe vetting (as to their robustness, relevance, suitability for integration in a control and back office environment etc)
Great!!! More jobs.
Eurassian: besides, most banks will start using the same models
Not a problem. All models of airplanes use the same laws of physics.
However, one problem with subprime CDO’s where that all of the banks *were* using a standard copula model which was deeply, deeply flawed.
So I think that what will happen is a lot more paranoia towards models, and no one is going to accept any price unless you run it against five or six fundamentally different models.
Eurassian: . So perhaps physicists should do a little MBA or Law (with their prodigious IQs that should be a walk in the park, right?
IQ isn’t that important in physics. Most people with average intelligence would make decent physicists. Persistence and curiosity are much more important.
MBA’s are rather difficult for a lot of physicists because of personality issues. Law and finance works better because you be shy.
Twofish,Could you please respond with any analysis/comments on my above two posts if possible … I’m really, seriously reasoning that if the market is shorting 30-year Treasuries Friday then it clearly means a huge bear run on Treasuries, and a free fall collapse of USD this week.
As I’m saying I could be really, seriously wrong in reasoning that the fixed interest rate leg of the swap is about the expected interest rates … any comments on that?
Chidbam is deeply concerned that the dollar may crash – which I interpret to mean it is less valuable in international trade than it was previously.
Since my primary interest is in reducing the U.S. trade deficit, I see that as a benefit rather than a disaster.
I agree, it would have been better to have passed laws regulating imports as a means of increasing exports. But, since no one wants to have the U.S. government take responsibility for the size of the U.S. trade deficit, I will applaud the market, if it is moving to increase exports again, as it did some months ago.
Twofish
paranoia towards models or just common sense. no model, no matter how many variables it uses or measures, can duplicate reality approximate , maybe, under the best of conditions but however great a model, it is still constrained by parameters.
hmm, as for physicists, not going to comment on that, have offended more than one can reasonably be expected to offend, but let’s just say that the innocent nerd is hardly the common image these days , some of them haven’t even heard of Hawkings, much less get hopelessly hooked on what were typical physicist hangups in the past; wonder how many would crack a smile at “restaurant at the end of the world”
hey!
xxoxo
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take a look at them:
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This interest rate has everything to do with creating a caste of debt slaves:
American Express can charge me 42% interest on my credit card, from just having an existing balance.
And if I choose to save a few shillings, and want to save a little in a safe place, I get zero! Absolutely ZERO!
Why can’t those of us get a piece of the action? It’s because the government is taking all the profits, along with the bankers.
I protest!!!! This should be illegal!!!! I protest!!!!!
Chidam:
“As I’m saying I could be really, seriously wrong in reasoning that the fixed interest rate leg of the swap is about the expected interest rates … any comments on that?”
No, you are correct. In pricing a fixed vs. float, you price the float side first based on the projected (probably LIBOR) spot rate curve. Use the present value of this obligation to determine what “fair” (i.e, net zero) interest rate should be set for the fixed.
Brad: I wanted to know your thoughts on what it means for the Treasury to be able to borrow “for free” in relation to its prior debtor obligations. As an entity takes on more and more debt, we would expect the required yield on such debt to increase; this prevents the debtor from “borrowing his way out of debt” by paying off debt with debt.
Currently, we have the opposite situation. My question is: why doesn’t the treasury take advantage of its current near-free borrowing and insatiable demand to arbitrage its debt burden?
The only answer I can think of is they plan on issuing incredibly huge amounts of debt soon, and don’t want to saturate the market. Would like to know your thoughts.
I noticed that Fails by U.S. Government Securities Dealers – U.S. Treasury Securities, Fails to Receive (in millions):
09/17/2008 $ 292,508
09/24/2008 $ 1,846,492
10/01/2008 $ 2,497,627
10/08/2008 $ 2,481,355
10/15/2008 $ 2,697,858
10/22/2008 $ 2,627,691
10/29/2008 $ 1,634,134
11/05/2008 $ 1,344,336
11/12/2008 $ 653,424
From:
http://www.newyorkfed.org/markets/gsds/search.cfm
Why are those numbers so high?
[...] sought-after collateral in times of crisis. And here’s the yield on T-Bills … The commentary on this chart: “Where the credit markets are trading, it’s all but implying a 1929 scenario,” said Joe [...]
[...] sought-after collateral in times of crisis. And here’s the yield on T-Bills … The commentary on this chart: “Where the credit markets are trading, it’s all but implying a 1929 scenario,” said Joe [...]
[...] sought-after collateral in times of crisis. And here’s the yield on T-Bills … The commentary on this chart: “Where the credit markets are trading, it’s all but implying a 1929 scenario,” said Joe [...]
[...] sought-after collateral in times of crisis. And here’s the yield on T-Bills … The commentary on this chart: “Where the credit markets are trading, it’s all but implying a 1929 scenario,” said Joe [...]
[...] sought-after collateral in times of crisis. And here’s the yield on T-Bills … The commentary on this chart: “Where the credit markets are trading, it’s all but implying a 1929 scenario,” said Joe [...]