Agreed. in part it is SWF funds are clearly being used like central banks reserves. Russia is likely to use at least half of the funds in the reserve fund to meet spending needs this year. let alone the funds to the banking sector.

While I would not entirely rule out deflation, in my view, inflation is a much greater risk in the medium term and beyond. Inflation offers the easiest way for the US to reduce its real debt burden.

At present there are no safe investment choices for a foreign exchange reserves manager (ie with little or no scope to invest in income-generating real assets), but if I was in charge of a reserves portfolio dominated by US treasuries, I would be switching from them into bunds and JGBs.

Whichever way that central banks are reducing their agency holdings, however, I think it shows the folly of the US being unclear about the status of the agencies. They should state clearly whether agency debt has a government guarantee or not – the government may effectively own the agencies now, but it is not clear whether that means that they would consider that, like normal shareholders, their liability is limited. No doubt this uncertainty is costly to the US.

There is no such thing as an “interest rate” anymore. Interest rates for Treasuries are at all time lows, but interest rates for anything that isn’t government backed are at all time highs. If you don’t have implicit or explicit government backing, you simply cannot get a loan at anything resembling a decent interest rate.

If we get things to the point where people are willing to make non-government backed loans again, this will be wonderful.

But it’s really amazing what has happened to the financial system. There is really is no such thing as a private financial market anymore, it’s completely collapsed. No one can raise any money or issue any substantial loan that is not at some point government guaranteed. The only reason that your credit cards work or you can get an auto loan is because they are backed by FDIC insured deposits, and government guaranteed money funds and commercial paper.

Quite extraordinary. The long term problem that people will have to think about is how you can or can’t fund high-risk/high-reward investments in a state-dominated financial system.

If you kill the financial economy, then the real economy falls apart. Finance is all about trust and trust is what holds society together.

gillies: people would look out across the farm and wonder – what is there here that they cannot take away from me, however “total” the collapse.

And the answer is pretty much nothing. If there really are no financial or property records, then how is the farm “yours.” Pretty soon the farms will be controlled by organized people with weapons.

Does the Agency data include just FRE and FNM or does it also include the Federal Home Loan Banks? I know at one time Russia had a fair bit of money in short term FHLB notes. Since the FHLBs seem to be doing much better than the rest of the financial system, it would make sense that those short term securities might still be worth keeping. Or has the flight to treasuries really gotten that bad?

i think you mean – “if the u s financial economy collapses.” easy for financial people to forget in these times, but underlying the pixel shuffling economy is the bread and butter economy, the so called real economy.

for a thought experiment, imagine this senario : a malevolent genius releases a computer virus that destroys all financial records. the economies of the world, beyond the few remaining barter and cowrie shell native tribals, are temporarily reduced to cash in hand – maybe three per cent of the former total. there is an instant hyperdeflation as prices move to two-point-something per cent of what they were the week before. most people go about survival in a manner that has never been seen before outside of isolated hill villages after an earthquake and before the arrival of rescue units.

the only credit is at a local and personal level. nothing that sustains life leaves local control. except in exchange for something equally desired, in barter trades. of course one side of the barter may be – ‘give me some of that and i will refrain from shooting you.’

that is the (science fictional ?) extreme – but if a “total collapse” undermined trust in currency in general, even temporarily, minds would turn to figuring out what is the real economy. people would look out across the farm and wonder – what is there here that they cannot take away from me, however “total” the collapse.