And so it begins... and ends...
"Oct. 28 (Bloomberg) -- Korea Development Bank was approved by the Federal Reserve to sell as much as $830 million of commercial paper to the U.S. central bank."
That's right - our Federal Reserve is no longer backstopping just our stuff, nor even "arranging swaplines" - now we're buying foreign commercial paper issued by a foreign bank controlled by a sovereign!
Jesus.
Yeah, I know that the South Koreans are our friends. So what?
Exactly how far does our printing of Treasuries go?
Now we're printing up Treasuries (taking on debt as America) to be able to buy up foreign bank commercial paper?
I've seen stupid before. This is beyond stupid.
Significantly so.
We're not only crowding out our own commercial and private lending (if you haven't noticed mortgage rates continue to rise for this very reason) now we're taking down foreign debt, issuing Treasuries to provide the cash with which to buy foreign commercial paper issued not by a US company, but by a foreign development bank controlled by a foreign government!
Folks, this is outrageous.
Your government's ability to fund its operating debt through taxing you has now been co-opted by The Federal Reserve without a vote and without affirmation of Congress to prop up foreign banking interests.
When we provide foreign aid to a nation Congress appropriates the money and approves of the uses to which it will be put.
This is a blatant open-handed purchase of foreign debt obligating the US taxpayer to pay through his or her taxes the interest on the treasuries issued to cover that buy - without a vote of Congress.
That's bad enough.
What's worse is that our "crowding out" is now extending to foreign banking interests.
Down this rabbit hole lies a dislocation in currency and bond markets.
Ben Bernanke is going to cause a Global Depression.
In fact, he may already have gone too far down the rabbit hole to prevent it from happening.
By the way, to those in Congress who might be reading this, you may wish to note that Ben has committed four of his five "how do I stop a deflation" ideas already - and has failed to stop the deflation. The four are, in short:
Buy assets (Bear Stearns debt, et.al.)
Low fixed-term loans (e.g. TAF, TSLF, etc)
Acquire real or financial assets (TARP anyone?)
Treasury issues debt which the Fed then purchases with newly-minted money (Fed Balance sheet doubling anyone?)
Announcing an explicit ceiling on long-maturity Treasury debt.
Why is this last one important? Because all of this coupon printing (Treasuries) along with 1-4 is extraordinarily inflationary. I know, Ben said its not in his Congressional testimony. He's lying. It is. You doubt that? Go look at the price of 30 year mortgage money and what has happened to it in recent weeks. Longer-term debt is very sensitive to potential future inflation and will turn upward long before the inflation actually appears, because the lender is stuck with the note for the entire period.
So how do you stop long maturity Treasuries from shooting the moon on yield?
You announce that you are capping the yield through unlimited purchases of same.
That is, you'll buy as many as you need (printing as many dollars as necessary) to hold the price high and yield low.
There is one problem with this - it is insanely inflationary, especially when the government is running a fiscal deficit.
In fact it virtually guarantees a "feedback" cycle that ultimately will destroy both the government and the monetary system.
Here's why.
We currently require about $2 billion a day in foreign flow of funds into our Treasuries to fund our government's operation. We have "gotten away with this" and "enjoyed" unreasonably low yields on long maturity government debt because we buy a lot of foreign things - most specifically Chinese toys and oil. As we do so these governments become awash in dollars - effectively, we are exporting our (monetary) inflation to them in return for their imported goods. To prevent this inflation from destroying their economy they "sterilize" these dollars by buying Treasury securities with them, thereby removing the dollars from circulation and dampening the inflationary impact.
But if Bernanke were to try to cap long yields foreign investors would immediately tender their bonds into The Fed, destroying this external funding source.
Why?
Because all those dollars would devalue the currency, and in doing so foreign interests would take an immediate and permanent capital loss on their bonds, as the dollar would be worth fewer of their native currency units than it was prior to the "capping" expedition. To avoid this risk they would both cut off their purchases of future bonds (since the capped coupon would not reasonably compensate them for the inflationary risk) and tender their present stock, choosing to buy something else (oil, raw materials such as cement, some other government's debt, etc) with their foreign capital flows - something that is not subject to being devalued at whim.
This would force The Fed into an untenable position - capping bond yields creates an instantaneous circle jerk, and the requirement for foreign funding makes the implosion both quicker and more violent than it would otherwise be.
Treasury issues bonds into the market (too many for demand) and this depresses the price and jacks yields. To prevent yields from rising Bernanke monetizes them by buying them off the market to hold up prices and suppress yields, issuing dollars into the market in the process. This causes the total number of dollars in the system to rise (he must print the dollars with which to buy the Treasuries, and give that dollar to someone - either a holder or Treasury which presumably will spend it into the economy), which depresses the foreign trade value of a dollar. Prices for goods (imports especially!) rise precipitously, and holders of these bonds who can't tender them to The Fed sell them, mandating yet more Fed purchases and money printing to keep up the charade.
The inflationary impact of the dollar issuance reduces discretionary spending which in turn reduces real GDP and tax receipts.
That, in turn, forces Treasury to issue more debt to fund operations which......
See the problem? This cycle immediately spirals out of control, leading to a Weimar Germany-type meltdown of the currency and Treasury funding path.
Down this road lies the destruction of America's political and monetary systems.
This is the problem with academics running their "theories" in the real world. In the real world Ben has discovered that his much-vaunted "liquidity pumping" leads to commodity price moon-shots, massive distortions in the corporate debt markets and rising (not falling!) mortgage rates.
Ben's thesis says that none of these "side effects" should have happened, but of course the historical record says that they all did, because in the real world your sphere of influence doesn't extend to people beyond your borders or those whom you cannot compel to do your bidding, all of whom are free to act as they see fit.
You've been warned Congress - Ben's "next trick", and the last of the five, is the one that can destroy this nation's political and monetary system.
PS: I've been right about the impact of Ben's previous machinations - all things he denied would happen but I said would in fact did. Who 'ya wanna place your next - and possibly final - bet with?
The value of all assets must be allowed, even encouraged, to normalize. This crazy attempt to prevent that from happening at all costs will not work and puts our nation's political and monetary systems at risk.
Rick Santelli this morning on CNBC laid it out in nice, clear succinct language - all we have been doing is for one purpose - to protect insolvent, that is bankrupt companies from having to come clean and face the music of the market.
The bad news is that in doing so we have destroyed our credit markets, replacing them with The Fed as the first, last and only lender, and we are threatening to destroy not only the entirety of our capital markets but our monetary and political system as well.
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