An interesting idea from the Fed

The Fed, as we know, has a real sticky wicket to get through: it knows that it's gotta find some way to, as the pundits are saying, "drain the swamp" and not let all the positively, massively, completely insane amount of money they've printed out into the wild for good, or else we'll be reprising the German hyperinflation. But, similarly, we've got such a vast debt-deflation hangover that they can't just jack up interest rates, as that would kill off any nascent recovery. They've been kicking around the idea of doing reverse repos for a while (where you sell T-Bills from them and they have to buy them back in the near future); that plus paying interest on reserves would allow them to incent lenders to keep their money on the sidelines, but it's rather limited.

The new idea is to allow not only their primary dealers network, but also money-market funds, to trade treasuries with them. The beauty of this scheme is two-fold. First-off, the primary dealers are fairly limited in what they can absorb at any one time, whereas there's a ton of domestic money-market demand sloshing around. Secondly, and here's the genius of it, the money-market funds would likely not be allowed to trade those T-bills with anyone else (which would infringe the primary dealers) -- thus they get a mechanism by which to handle their duration risk by floating treasuries that by definition cannot escape out into the wild.

... and, when you consider the embedded profits of getting treasuries via a primary dealer that a money-market fund would be able to avoid paying, this would provide a minor boost to the rates they could provide, too.

... and thinking about it, the only way for the money-market fund to profit from the T-bills is either price speculation against only the Fed (an illiquid market -- not so nice) or by banking the coupon payments. This might eventually end up not as actual treasuries (with their unpleasant maturity dates), but as a floating-rate perpetual bonds whose yields are set via the normal auction process (I'm *really* speculating here).

I'm impressed.

How could this happen... Why Greece... A hypothesis.

So everyone's all concerned about things blowing up, and it always acts as a great shock to people who trust the official statistics that normally say everything's fine (because it's not in the interests of anyone in power to report otherwise). This leads in large part to conspiracy-theory thinking, the "someone's evil" reflex of caveman-thinkers (who, in that much simpler time, were correct nine times out of ten); but we're supposedly more enlightened folks who can address the symptoms of systems that're out of whack: hence my simple hypothesis -- whether we're talking about banks, corporations or countries, those entities with the largest ratio of hidden to declared liabilities die first. In the corporate world, the financially "innovative" behemoth, Enron, who first figured out how to hide their indebtedness behind SIVs (which earned their CFO "CFO of the Year") was the first to go. Similarly, tiny Greece, with 1/4 of its population working for the government and, as a result, very little economy to speak of, has plunged first in the looming sovereign debt crisis saga. If my hypothesis is correct, then before looking at Italy (one of the so-called "PIIGS"), expect France to hit the rails first.

The fix for this, of course, since most of the net liabilities in all these nations are in social spending like pensions, health-care, &c., is to either reduce these liabilities or else to declare them and curtail current spending appropriately. These two forms of political suicide, "betrayal of trust" and "austerity measures" are such a Scylla and Charybdis for politicians that I suspect we'll get to see if my hypothesis is correct.

Government statistics at their finest

So the jobs print came out: we lost an additional 60,000 jobs in January, which meant that unemployment dropped from 10% to 9.7%.

Anyone who thinks the state should be in charge of people's lives should contemplate that stat (released to great fanfare, no less). Instead of mailing tea-bags, if we could just get the bureaucrats to use real data instead of the output of models, we'd be a lot better off (and drink more tea).