Monday, December 28, 2009

Fed Wants to Drain Reserves

Today, the Fed announced hopes of crafting a policy which would drain banks of their reserves[1]. Apparently, this is to keep reserves from being lent out[2], suggesting the possible initiation of a stronger dollar policy, or at least stop it from weakening further.

I've been commenting for awhile about the increase in base money supply by over $1T since September 2008. At the same time, it has not had an impact on the actual money supply because it all seems to be sitting in bank reservers not doing much of anything. So, does the Fed want that money back? I have doubts.

Anyway, this is all in the "announcement" phase and far from the "planning" or "action" stage. I prefer to wait until the action stage, or the planning stage at the earliest, before commenting on anything. However, the articles have an interesting statistic: The Fed's balance sheet is now $2.2T with the intent of absorbing $1.25T in mortgage-backed securities through March.

Since most of these securities are probably toxic with minimal chance of being paid back, this amounts to a pure infusion of around $1T into the economy.

This kind of money should be inflationary, however we continue to see deflation, particularly in the housing market, due to the much greater contraction of credit, both through defaults, and the general resistance and reduced ability of the the public to take on more credit.

1. Fed Proposes Term-Deposit Program to Drain Reserves.
2. Fed Proposes Tool to Drain Extra Cash.

Saturday, December 26, 2009

Debt Ceiling $12.4T

Santa's elves have been busy. Also on Christmas eve, and with minimal fanfare, the Senate approved increasing the national debt ceiling by $290B (or $2105 T*Bux) to $12.4T overall.[1] While this isn't a huge percentage increase, it does suggest the prior limit of $12.1T will be reached shortly, if not already.

Another figure I recently saw was a expansion of public debt to $7.7T, nearly $2 trillion dollars higher than $5.9T owed at the end of 2008. "Public debt" is the portion of the national debt owed on treasury bonds. The rest, I understand, is debt owed to the American citizenry for Social Security and Medicare entitlements.

Federal tax revenues collected in 2008 was $2.3T

1. Congress Increases Debt Limit.

Thursday, December 24, 2009

Merry Christmas... Suckers!

Sadly, Obama used this Christmas eve to announce there will be no limits to the amount of taxpayer subsidy to support Fannie Mae and Freddie Mac.[1,2] When the program was instituted in September 2008 under Bush, bailout limits were set to $200B. Obama then doubled limits to $400B, and today he announced no limits.

Effectively, banks can shift toxic loans on to the tax base by selling them to Fannie Mae and Freddie Mac. With the government buying, likely worthless mortgage securities will be bought at full price. This amounts to very generous support of Wall Street courtesy of taxpayers. Reportedly, so far $110B of mortgage securities have been picked up, so this pre-emptive expansion of government support seems a little enthusiastic.

Also, the CEOs of these two failed government-run programs are once again eligible for bonuses of up to $6M.[3]

1. U.S. Promises Unlimited Financial Assistance to FNM, FMC.
2. U.S. Move to cover Fannie, Freddie Losses Stirs Controversy.
2. Regulators Approve Millions for Fannie, Freddie Execs.

Tuesday, December 22, 2009

FDIC Limit Extension

Late news but I thought I'd pass it on.

In September 2008, to mitigate cash flight from banks, the FDIC limit was raised from $100k to $250 per bank, good through 2009. If memory serves, this was connected to the TARP legislation.

Last May, the increased rate was extended through 2013.

Thursday, December 17, 2009

Man of the Year

Ben Bernanke won Time Magazine's "Man of the Year."[1] The article opens with: "A bald man with a gray beard and tired eyes is sitting in his oversize Washington office, talking about the economy. He doesn't have a commanding presence. He isn't a mesmerizing speaker. He has none..." and it goes on further like this. You know, Time, when I'm up for nomination for forecasting the fate of the dollar, you can just go ahead and pick the other guy.

In what has to be regarded as an embarassing setback for Bernanke, a hold has been placed by Bernie Sanders (I-Vt.) on his confirmation for another term as Fed Chairman.[2] This means he will require 60 votes for confirmation. Almost surely he will get that, but this stretches out the process and gathers unwanted attention in an area of politics that I imagine tends to prefer quiet and usually enjoys support from both parties. In today's panel hearing he won by what must have been a concerning 16-7 margin. Though he will be confirmed, this cannot be regarded as a victory.

Sen. Jim Bunning (R-Ky.) noted that past recipients of Time's "Man of the Year" included Adolf Hitler, Josef Stalin (twice), Yasser Arafat, Vladimir Putin and Richard Nixon (twice).

1. Person of the Year 2009 (Time).
2. Senate Panel Endorses Bernanke for Second Term (LA Times).

Citi's Stock Selloff

Back in March I wrote a regrettable post angrily denouncing the media for crediting the emerging turnaround in the DJIA (then in the mid-6000's) to Citigroup's declaration of quarterly profits. As we now know, over the subsequent months the DJIA has advanced briskly and broadly to the mid-10,000 range. The last line of the post I would like more than anything to delete, in fact the whole post I would—it really was written in the heat of the moment—but integrity dictates it has to stay. This "dead cat bounce" wasn't the huge surprise to me that the line suggested, though later I did make a top call in the 8500 range.

Today, a substantial slide in the DJIA was again attributed to Citigroup—this time because they "sold stock at a discount."[1] Again, I'm tempted to poo-poo this as having any sort of relevance to the broader economy, but experience has shown me I have much to learn.

1. Stocks Fall on Citi Sale, FedEx Forecast (BusinessWeek).

Wednesday, December 16, 2009

FOMC December

Today the Fed kept rates the same[1], at close to 0%. Nor where there any additions to quantitative easing or lending instruments. They anticipated the U.S. economy is in the early stages of recovery, and as recovery moves foward there will be changes to tighten money supply, but nothing new for today.

Personally, I see no economic fundamental driving the recovery other than an easy money policy directed at Wall Street and Corporate America.

1. Fed Press Release (12/16/09).

Tuesday, December 15, 2009

"Public Debt"

In the last post I came upon an interesting number from the CIA World Factbook, that the U.S. public debt is around $5.4T, which seemed odd, considering the debt clock has us over $11T nearing the spending cap of $12.1T.

So I looked it up. There is public debt, which is $5.4T for the USA as of 2008 (but likely a trillion dollars higher now), which is the amount owed to holders of Treasury bonds. Then there is gross debt, which is that number plus what it owed by intra-governmental trust funds like Social Security. It is gross debt which is nearly $12T in the U.S.

This blog will continue to try to make sense of scattered concepts and figures one finds when attempting to nail down the level of government indebtedness.

Monday, December 14, 2009

Mexico Downgraded

Downgrading of national debt I expect to become more commonplace in coming months, and one day will reach Europe and the United States. But today Mexico is in the spotlight, dropping from a BBB+ rating to BBB rating. Business week[1] cites a high reliance on oil taxes and a reluctance to implement a national sales tax as pivotal to the debt downgrade.

The CIA world factbook for Mexico (2008) cites a GDP of $1.56T, with a public debt at 36% of that, or around $560B, and revenues at $257B, with state expenditures at $258B. It varies depending on where you look, though; vague and inconsistent figures are a common pattern when it comes to the unsustainability of government spending.

In other news, political tensions seem to be heating up in Italy, where the prime minister spent some time in the hospital after taking a hit to the face from a gothic cathedral replica[2]. No reason was given to what motivated the 42-year-old assailant, who seems to be getting more fame than notoriety from it—but Italy has one of the higher debt-to-GDP ratios in Europe.

For Italy (2008): GDP is $1.83T, public debt is 106% of GDP (or nearly $2T), revenues are $1.07T, and expenses are $1.13T. A debt-to-revenues ratio of 2 is a pattern in Mexico, Italy, and Greece.

Using the same method for the USA (2008) we have: GDP $14.44T, Public Debt at $37.5% of GDP (or $5.4T, which I wonder how they calculate when we have debt ceiling of $12.1T), revenues at a scant $2.52T (or around $16,000 T*Bux), and expenses at $3T.

1. For Want of Higher Taxes, Mexico's Debt is Downgraded.
2. Italy Ponders Wounds as Berlusconi Mends from Attack.

Friday, December 11, 2009

Even Steven

The U.S. Dollar Index has nearly fully retraced gains made from the start of this blog in April 2008, through March 2009. Had I said in March to divest from the dollar and jump into the stock market, I would be the smartest blogger on the Internet, and had I done so myself I would be around 40% richer. Part of the rebound was the expected "dead cat bounce" seen commonly in deflationary corrections. Part is from recent bailout activity. How much is which I cannot say due to the seeming reduction in transparency of bailouts over the past few months.

Anyway, the dollar has not quite fully retraced its path but it is close and it easily could. Given this, I'd like to reflect on the purchasing power of the dollar over this time.

From March 2009 through today, clearly it has not been as good an investment as the stock market, or against foreign currencies. But has it been bad? Comparing today to April 2008, I would rather buy a house today. I think now is a better rental environment as well. I would rather fill my car with gas today then back then. I would rather hire an employee today. Prices of food and everyday goods remain similar—however deflation would first present as increased rates of items on sale. Has there been that? I think so, but overall my grocery tab feels about the same. At least it hasn't increased further as it had been doing though most of this decade. I'd even rather buy stocks now than a year-and-a-half ago, though if I had wanted to I missed my opportunity last March. Generally, since the start of this blog, deflationary forces have been prevailing, and the purchasing power of the dollar is stronger.

Of course, one thing that I wouldn't rather buy now is gold, that recently peaked at $1214/oz. From the start of this blog until today, gold has had some ups and downs but is up around 25%.

The U.S. Dollar Index is limited in that it compares the dollar against other currencies. If all currencies were to devalue simultaneously, which isn't far fetched as central banks frequently act together, the index in that case would stay even, while the purchasing power of the dollar is lost. Mostly the purchasing power of the dollar has held steady or strengthened, with the main exception being gold.

Wednesday, December 9, 2009

Greece Downgraded

Greece is in the news today. Their government bonds are facing a hefty downgrade, and interest rates demanded are rising briskly[1]. In short, the Greek government is running out of options to finance itself, to the point where a possible bailout from the European Union has been raised.

The article gives a puzzling statistic, which I think is a mistake. It reports Greek national debt is 125% of GDP, which would be a very manageable level of debt—better than major European economies as well as the U.S., all running in the ballpark of 150% of GDP, or Japan which is close to 200%. I wonder if they mean 125% in excess of GDP, or 225%.

This is an interesting number to me because it defines the point where governments are forced to stop deficit spending. In a recent post, I offered a debt-to-GDP ratio of somewhere between 2 to 6 based on examples we have from different countries. If the Greek balance sheet is going into a tailspin at 2.25, then we may be reaching government spending limits even sooner than I was guessing.

ADDENDUM: So I've been researching national debts, and I find numbers all over the place. 125% is a common number I see for Greece, with the U.S. and much of Europe hovering around 60-70%, and Japan at 170%. So clearly there are different ways to calculate the figure. Will post further when I see better consensus data. Here is some 2008 data, though, as we know, when it comes to public spending, 2009 was a busy year. What really matters is that national debt to tax collection ratio, of which GDP may be seen as a ballpark indicator of taxes the government can collect.

From the CIA World Factbook for Greece (2008): GDP is $344B, National Debt is 97.4% of GDP, Revenues are $127B, and expenditures are $144B.

1. Greece Government Bond Tumble Fails to Entice Pictet

Friday, December 4, 2009

Base Money Surpasses $2T

A little over a year ago, before September of 2008, base money had plateau'd at around $800B. Within three months there was a sudden spike to $1.8T, where it had stabilized for the better part of 2009. Around September of this year it has begun to drift upward again, now just over $2T.

Bank reserves follow exactly the upward trend in base money supply, meaning any new money created is just sitting in banks. Obviously the Fed and the Treasury Department gave it to them to lend out to "jump start" the economy and support inflated asset prices. But banks seem to be hesitant to lend it out.

So because the added money is sitting in banks, this is the equivalent of printing a trillion dollars and then burying it in coffee cans in the desert. There is no meaningful effect it is having on the overall supply of money in circulation. Not that a trillion dollar expansion is not of concern, but that is how it is playing out.

Sunday, November 15, 2009

Nobody Wants a Weak Dollar

The truth comes out. As easy money policy drives the USD index back toward the lows when the blog was first started, this is coming under criticism of Chinese regulatory authorities, whose balance of trade is harmed by a weakened dollar[1]. They cite a weak dollar adversely effects developing economies, and the carry trade that has resulted has re-created a spectulative environment[2].

I'm glad the Chinese have government officials capable of talking sense when it comes to fiscal policy, though, to be fair, it seems every nation can talk about other nations finances more sensibly than their own—and China's supression of the yuan comes at a cost to the standard of living of Chinese workers. But it is pretty rare for anybody to speak on the dollar sensibly in any official capacity, so thumbs up to China for crossing that barrier.

Also noteworthy is China's attitude that the value of the dollar is a function of fiscal policy, which I fully agree with. Inflation and dollar weakness is not some inevitable natural event.

1. China: Loose US policy, weak USD creating speculation (WSJ)
2. China: Low US interest rates threaten recovery (AP)

Friday, November 13, 2009

Economic Capacitance in the U.S.A.

Earlier in this blog I used a term "economic capacitance" to describe the length of time an economic unit (i.e. individual, family, business, or government) can persist in the face of negative cash flow.

With no income, economic capacitance (EC) in months would be savings divided by monthly expenditures. If there were income, but expenditures are greater, EC in months would be savings divided by losses per month, where losses are income minus expenditures. If one has a good credit rating, one could add borrowing capacity to savings, which would lengthen the amount of time before excess expenditures render one bankrupt. In short, economic capacitance is the length of time one can maintain excess spending before the shit hits the fan.

The U.S. government is an economic entity. Income comes from taxes. Expenditures reflects the military, social, and infrastructure services it provides, and also subsidies and bailouts. To my knowledge, the Federal Government has no savings, nor any resources that could be construed as savings, but I won't rule out there could be something I don't know about. The federal government can pay for services directly with tax money, or through bonds it can float, which are then paid off with taxes.

The U.S. government has been deficit spending for years, with ever increasing debt reaching upwards of $12 trillion now, or close to $80,000 for every tax paying citizen. Some of the debt it accrues will be essentially forgiven by a targeted 2% inflation rate every year. But the government is still deficit spending well beyond that, exacerbated under the Bush administration, with no end in sight under Obama.

Through direct bailouts of banks and an easy money policy flowing in the direction of corporate America, this financial house of cards that is the credit bubble remains standing: but at a cost of hundreds of billions of dollars in bailout packages, and more in loans to poor credit risks, and more still on guarantees for toxic securities.

So, with that introduction, I'd like to reflect on: just how long can the government keep doing this?

As long as there is a market for Treasury Bonds, the U.S. government is in business. They can shovel as much money into Wall Street as they like. With all the chatter about where the dollar is headed, the market for treasury bonds shows no sign of letting up. So, in the end, the free market for Treasury Bonds decides the economic capacitance of the federal government. When people stop buying treasury bonds, and only then, would the government be forced to curtail its spending.

So when is that? Currently the U.S. debt is around 1.5 times its GDP. Most major European economies are around that. Japan's national debt is closer to 2 times its GDP, and they are far from financial armageddon. Now Iceland's debt is/was 6x its GDP and financial armageddon HAS hit there including a bloodless coup against the political party responsible. So the tipping point is a debt-to-income ratio somewhere between 2 to 6. The U.S. is too big to do what Iceland did; I'm going to guess that a debt to GDP ratio would be 3, after which borrowing costs would become prohibitively expensive. So that is around double where we are now, or another $12T the government has to play around with, in my opinion.

So then, is there any sense to curbing our spending to not reach that point, and go back to living within our means? Going into debt now reduces our capacity to accrue debt later, so future America will not have the same opportunities for deficit spending that we have today. Worse, if greater amounts of tax money in the future go to pay off the debt burdens accrued from the past, that narrows the government services future America will enjoy—either that or increases its tax burden, with all the impediments that puts on a market system.

Friday, November 6, 2009

Jobless Rate Crosses 10%

After hovering in the 9% range for the last few months, the unemployment rate in the U.S. was measured at 10.2% for the month of October.

70 years ago, unemployment counts were highly inclusive measurements trying to capture every one capable of holding a job that wasn't fully employed. It was counts like these that brought us rates of 20+% during the Great Depression. Times change, and now this statistic counts only those without any employment who are actively looking for work. Those who are working part time, or who are working outside their field of expertise (computer programmers who are now baristas at Starbucks), or who have given up and are no longer looking for work will not be included in today's measurements. Factoring in these underemployment rates would double this number.

Any recent "recovery" in asset prices was not driven by increased spending or a robust economy. It is driven by taxpayer-funded government bailouts.

ADDENDUM [12/6/09]: Or you can just watch this video.

Wednesday, November 4, 2009

November FOMC Meeting

The FOMC meeting today kept rates at near 0%, though decreased the infamously vague "agency debt" from $200B to $175B.

Changes in monetary policy remain few and far between of late, but those which have been instituted, and are underway as we speak, continue to keep the economy afloat, in terms of maintaining overpriced assets through easy credit from the government. One wonders how successful the "recovery" would have been without this in place.

The U.S. dollar suffers when the government floats treasuries to bail out the financial sector. This blog maintains it cannot last forever, and when it ends, the government will have to choose between dollar devaluation or a deflationary recession (where the buying power of the dollar goes up), and they will choose the recession.

Friday, October 16, 2009

Fox Guarding the Chicken Coop

In more disheartening than noteworthy news, a high ranking Goldman-Sachs executive has been hired as director of the enforcement division of the Security and Exchanges Commission. Goldman Sachs execs have been holding the Treasury Department Secretary position for this administration and the last, and widely occupy high ranking government positions.

It is not like we really lost anything, because the SEC has done nothing of substance during the entirety of the mortgage debacle, and has never been in danger of protecting the public or making a real difference, but it feels like rubbing salt in an open wound.

UPDATE [4/16/10]: Now that Goldman-Sachs has been charged with securities fraud, some more detail and an updated live link is warranted. The person in question was 29 year-old Adam Storch, who was appointed as chief operations officer of the enforcement division of SEC, who reports to director Robert Khuzami.

Wednesday, October 14, 2009


Giving credit where credit is due, no pun intended, well maybe sort of—I mean there is a lot of government subsidy going into the system now—the DJIA peeked over 10,000 on a long trudge up from it's mid-6000 nadir. Anybody who bought in the 6000s and is still holding onto things knows a lot more than I do, is very lucky, or knows the right people.

I watched this show in the real estate market of 2006, patiently, and so I'm sitting back and watching the same show again now. As stocks rise the dollar will be unsteady, but gold is robust, comfortably above $1000/oz.

The fundamental premise of this blog is unchanged. In good times the dollar can be strong AND the market can be strong. But in a recessionary environment, one of them has got to give. Those holding onto bonds—treasury, corporate, or securities—will not sit idly by while their wealth is deflated away.

Thursday, October 1, 2009

Lewis Voted off the Island

Bank of America CEO Kenneth Lewis announced his resignation yesterday. Mostly, heat has come upon him for the acquisition of Merril Lynch, possibly under the coercion of the Fed and Treasury Department, at a heavy cost to BAC shareholders. I would say his prior acquisition of Countrywide was a similar error of judgment, but he hasn't seen a fraction of the criticism for that. With those two acquisitions and all the toxic debt they held, BAC's viability relies on government subsidies and bailouts, in their multiple current forms.

Tuesday, September 22, 2009

Health Insurance, the Public Option, and Free Markets

Since I've had this discussion on several occasions, and since it seems to be what everyone is now talking about, I thought I would comment on it here.

As I've expressed before, I support the insertion of free market principles into our health care system as much as possible, in opposition to socialized medicine, which I feel will be inefficient and lead to inferior quality. At the same time, I support the "Public Option" as a lesser solution—in other words the ability to buy the equivalent of a Medicare policy. It has largely been dismissed now from serious congressional consideration under pressure of the health insurance lobby. The reason cited is that insurance companies couldn't fairly compete against it, and so it opposes market principles.

There are (at least) two reasons why the free market does not apply to our current private health insurance system:

1. Under current statutes, Americans are coerced to buy private health insurance. This is not free market. In my case, I'm 40, my previous employer paid $500/mo., for which I had a Kaiser plan and used almost none of it except for three doctors visits for a specific condition which was mostly successfully treated. Now I did have the option to refuse any plan, but I could not have said to my employer: "I want to insure myself: please give me the $500/mo. instead." Without that option, free market principles do not apply.

2. Private insurance gets huge indirect government subsidies in the form of Medicare. Medicare is given to all Americans over 65, and all Americans with permanent disabilities. This amounts to cost-shifting health insurance onto government once people become unprofitable: either they cannot afford premiums, or they get to an age where they become statistically more likely to develop expensive conditions to treat. There was a time when healthy people were charged high premiums to offset costs for the unhealthy. Those days ended with Medicare. Now healthy people are merely gouged for high premiums, and the tax base handles the vast majority of the truly sick in this nation.

Since Medicare is capable of treating the truly sick, and for the most part they get good care under Medicare, with minor adjustments it should be able to oversee the healthy majority of Americans as well, particularly if they collect premiums in line with what health insurance companies are charging.

This talk about free markets is simply the fact that Health Insurance companies have found and unbeatable racket to extort the American public and don't want to lose it.

Saturday, September 19, 2009

Oh What is a Bear to Do?

I'm posting today simply to say I still consider this a fully active blog and it is still my intention to post approximately twice per week regarding economic events that could influence the value of the dollar, and any other thoughts on the subject that cross my mind.

It is just that news regarding bailout activity has been distinctly inactive—real factual news as opposed to commentary or speculation which is abundant—and replaced by hot air around health care reform. With nearly a trillion dollars of taxpayer money being put on the table and up for grabs, naturally, those who stand to profit from the pending health care legislation have cranked up lobbying and media efforts such that events unfold in their favor.

New economic bailout activity may have slowed down, but bailout activity already in the works is in full swing. Since the last two major bailout events--the TARP and Obama stimulus—were followed by precipitous market declines, it may be policy makers now are bending over backward not to upset this house of cards.

What happens from here? Is this the beginning of the recovery, or is this an overstretched rebound? If it is a recovery, it is a tepid an incomplete one. There is still significant unemployment and the mortgage situation is still in the toilet and will get worse as the under-reported Alt-A market continues with their adjustments until 2012.

But for those who think good times are here again, I guess all I can really do is use such a time to take a little break.

As the stock market grows, the dollar falters. Neither is back to the 2007 highs for the DJIA or 2008 lows for the dollar.

Friday, August 21, 2009

The Recession is Over

...according to a statement made by Ben Bernanke today.

That's great. I'm so glad to hear it. They were sounding somewhat more pessimistic at the FOMC last week but hey, I'll take it. Hopefully now, the bailouts will come to a close, the auction lending facilities will be wrapped up as soon as possible, quantitative easing will at least not be extended beyond where it is at now (if not stopped early), and further FOMC meetings will bring rises in the interest rate.

Or perhaps, maybe, current circumstances are supported by unsustainable easy credit from the government that will reverse once the bailout measures reach their natural endpoint of an exhausted tax base?

Monday, August 17, 2009

Squeezing the Shorts

This blog has presented a macroeconomic theory over the past year and a half, which examines money supply, bailouts, and equates inventory with money supply and considers the consequences assuming that relationship to hold true.

But in terms of day-to-day fluctuations of the stock market, and even sustained runs, my guess work has not been good, and were I playing a shorting game, even though I am as much a bear as anyone, my guesses as to when fluctuations were to take place have been so bad I’m sure I would have lost my pants.

Part of it is the activity of bailouts of the falling economy, which is at best kept discrete and at worst hidden from the public eye. Bailouts allow upswings to go on longer than they should. But shorting is another factor which allows a bear run to enjoy one last moment of triumph when all looks hopeless. Which I’d like to comment on today. So I propose three phases to a bear run to help predict or at least better understand the natural course of upswings during a generally down market (or “bear runs”):

1. The Run: all bear markets have reversals of course. In the panic of a down market the indices will overshoot, which will be followed by a reactive upswing. This results from the inevitable imprecision of market pricing, which worsens during strong or unexpected periods of change—in other words, sinusoidal amplitudes that surround mean pricing only worsen. To predict the course of the bear run, one guesses what the mean pricing of stocks should be at a given moment, and the degree that the fall went below that average. The rebound should overshoot the "true" value by a similar amount.

2. Doubt and Shorting: when that moment comes to pass, and indices start to level off, and we all think the run is over, then since many people are expecting reversals of the market, shorting will be prevalent.

3. Squeezing the Shorts: however, if many people short the market at the same time, a third dynamic comes into play. Prices of stocks are determined by what buyers are willing to pay, and what sellers are willing to accept. With many shorts in play, those who possess the stock know that shorters HAVE to buy stock at whatever price it is at when the short sale comes due. At that time, there will be intense demand for the stocks, and since shorters have no choice, an extortion game can be played where shockholders wait it out for excessively high returns. And so we see sudden spikes of stock prices at the end of “bear runs,” right after it has started to level off.

4. Recycling: now, seeing this uptick can potentially arouse confidence and produce another run, albeit smaller, until shorters are exhausted and the run loses all confidence.

Then and only then will there be a down swing in the market.

Thursday, August 13, 2009

"Agency Debt," Part 2

In the continuing mystery of "agency debt," for which the Fed intends to spend $200B (around $1500 T*Bux) as a part of its quantitative easing program—"agency" we think means the GSE's—but "debt" remains ill-defined other than it probably does not mean mortgage-backed securities since there is a separate $1.25T program for that.

On his blog, Mish showed a robust market for corporate debt over the past month which he attributed to fueling the S&P index.

If this is where the $200B is earmarked—toward buying, insuring, or somehow facilitating corporate debt—we have an explanation for the sustained comeback of U.S. stock indices in the setting of an otherwise deteriorating economy.

But I don't know of any GSE that invests in major corporations so, again, the term "agency" continues to remain non-specific.

Wednesday, August 12, 2009

Quantitative Easing through October

The Fed had an uneventful FOMC meeting today. The notes are pessimistic about the economy despite recent events in the DJIA and other economic indices. There is no suggestion of rate hikes from 0% as it stands now. They did extend the window of quantitative easing by a month from September to October, but the amount remains $300B for treasuries, and then around $1.5T in "agency" mortgage-back securites and "debt."

For the record, $300B equals $2175 T*Bux, and $1.45T is $10,512 T*Bux. In other words this round of bank bailouts runs close to $13,000 per taxpayer. But money isn't coming from taxpayers... it's coming from the printing presses of the Fed, and so the tax is more of a devaluation of existing currency than something taken from our income. Such devaluation will be reversed as the bonds are paid back. Treasuries will be repaid, but I'm highly skeptical about agency mortgage-backed securites and debt, and so much of that $1.5T would be pure monetary expansion handed to the bankers.

My guess is, money supply will be diluted by around $1T from this. This would be bad for anyone holding onto cash.

Cash supply now runs around $1T (discounting what is sitting idle in bank reserves), and fractional reserve debt runs around 9x that (with approximately $4T in mortgages and $1T in consumer debt)—and so I'm guessing a ball park money supply of around $10T from cash and credit.

In the current environment of tightening credit, we have 90% of the money supply that could potentially contract quite a bit, and if credit falls more than 15%, such would wash out any total monetary expansion from quantitative easing.

Monday, August 10, 2009

Trophy Houses

In the midst of this current economic resurgence since last March, where it is hard to discern any economic growth driving it but it keeps progressing and beating expectations, I’d like to comment on a clear pattern seen in the real estate market since declines began in 2006 (or 2007 in San Francisco). It is this: low-end properties are correcting toward fundamentals faster than the higher-end ones, with middle-range properties somewhere in between.

To me the explanation is straightforward: there is greater economic capacitance at the wealthier end of the spectrum, so more ability there to sustain a drain of wealth while waiting for a turnaround. (Those getting the bailouts enjoy a whole lot of economic capacitance.) Low economic capacitance has a snowball effect: inability to keep up with underwater mortgages leads to that many more properties on the market, which leads to further erosion of prices, which means more underwater mortgages and more homeowners with a motive to walk away, and less ability to buy in worsening economic times.

However, if low-end properties become a decent investment once you factor in the rent-to-mortgage ratio, whereas higher tier properties demand mortgages well in excess of rents, then the low-end market will draw interest from middle-range buyers, exerting a downward pressure on that market, which will eventually work its way to the top.

So goes economic theory. In actuality, upper-end properties in areas of high demand are declining in price very slowly, at best. I’m thinking of San Francisco. Which begs the question—might there be areas immune to economic factors, “trophy” properties in other words, which will maintain a strong market so long as there is an upper 5% of the population that controls 80% of the wealth, or so?

Now I’m all for redistribution of wealth, so long as it is voluntary, and trophy purchases of any kind—cars, boats, houses—have exactly that effect: a drain on wealth from those who have it. By “trophy” I mean a purchase which commands prices above and beyond fundamental value because of general desirability and status benefit which comes of it. So, is this trophy market sustainable? Could somebody get an upper tier house in San Francisco with the anticipation that wealth would at least be preserved and capital gains could even improve on the investment?

I suppose the only answer is: “time will tell.” It depends on how deep the pockets of the wealthy run. But one does not become rich or stay rich by losing money. In anything but a climate of compelling capitals gains, trophy properties are costly.

Sunday, August 2, 2009

What If...

For all of those now contemplating that the recent upswing of economic indices reflects a true turn around, I wish they would all pause for a brief moment to reflect on the following: imagine if all taxpayer underwritten government programs—the TARP, TAFs, the upcoming PPIP, and any other money the Fed, Treasury Department, and GSEs are now tossing around—what if it all suddenly came to a halt? Then what? Would you still anticipate the economy to continue growing and the numbers to keep rising?

All bear markets have bull swings. This one, in addition, has a lot of government backing. The Obama administration will do everything possible to keep the bubble economy in this disequilibrium state. As long as there are people willing to buy Treasuries, such money can be used indefinitely to keep easy credit flowing and the money supply high. The end point is where Treasuries become prohibitively expensive because nobody wants them or, hopefully sooner, the tax base increasingly comes to realize the fraud being perpetrated and takes a stronger stand against it.

Government bailouts can only stall the economic contraction. Eventually they will run out of money, and the return to fundamentals will continue. What is worse, the government money misapproprated in Wall Street bailouts now will be gone when it is truly needed for jobs, extended unemployment, food programs, and basic social supports.

Wednesday, July 29, 2009

Banking Bonuses

This faux-recovery we are now in, being hailed as the beginning of a true turn-aroud, continues to defy top-calling from bloggers and pundits alike—not so much in amplitude, which is still modest, but in duration. I figure, you get to make a top or bottom call once. Mish threw his away months ago, I blew mine earlier this month. Both of us were close in terms of value, the market has not gone up much since we made these calls, not far beyond the normal range of noise, but it still hovers in mid air, and is certainly not going down.

The March rebound began with Citibank's announcement of better-than-expected profits, defying expectations, and other banks have done likewise, and many are taking aggressive steps to pay back TARP money. This latest spike once again stemmed from Citibank's announcement of profits.

And as a result of widespread "profits" and repayment of TARP bailouts, financial executives will resume collecting outrageously high salaries and bonuses. Keep in mind the amount of government (taxpayer) support for the credit industy, even outside the TARP, and the ongoing suspension of mark-to-market accounting, where one can place whatever value they like on toxic assets. Financial stocks are still in the toilet and their shareholders are still screwed.

The day of reckoning is merely postponed. Saying: "we need to rescue banks because our economy depends on credit" is like saying: "we need to bailout Enron because we need energy."

Friday, July 10, 2009

California IOUs

An interesting situation is brewing around the IOUs California started issuing last week due to budget gridlock in Sacramento—in the face of tax income for 2008 being greatly below expected. A number of banks agreed to honor these IOUs until today. After today though, many banks, at local and national levels, are voicing resistance about honoring them any further.

California will almost certainly pay them back. They carry an annual rate of 3.75%, which is a better deal then I've gotten on any of my CDs even at promotional rates for a long time, and better than I recall on Treasuries for awhile now. If a holder of an IOU were to sell it for 90 cents on the dollar, that would be the hottest deal in town. Even at 95 cents they would probably fly off the shelves. At 3.75%, even at face value I bet they would sell well.

Which makes it strange that banks are starting to refuse them, particularly with the bad PR and the risk of losing accounts with depositors going elsewhere. It would appear their ongoing liquidity problem, at this point, may be extreme.


In a humorous turn of events, banks are claiming their refusal to take state IOUs is a public service. Wells Fargo says: "The State of California–just like any household or business–must be responsible for living within its means." Bank of America adds: "We do not want our acceptance of registered warrants to deter the state from reaching a budget agreement as soon as possible." Does Wells Fargo suggest that major banks, being a business, ought to live within their means as well?

Plenty of credit unions see the opportunity here and will be accepting state IOUs.

UPDATE [7/12/09]: It looks like the market rate for California IOUs is emerging between 80-95 cents on the dollar. The cited problem is they are cumbersome to deal with. In a climate of scarce liquidity, I can see it as an issue. Otherwise why couldn't a bank take out a loan from the Fed at under 1% to service these at nearly a 3% markup?

Agency Debt

Today the Fed will buy nearly $4B of "agency debt"—the first of an earmarked $200B. $7B was offered for sale to the Fed, of which only about half of that was taken. It appears they are starting slow.

By "agency," they mean the GSEs: Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. As for "debt," it would be packages other than mortgage backed securities since that has been distinguished separately. Bonds perhaps? It still seems rather vague but may clarify in further press releases.

It's small potatoes now, but if the Fed starts buying, with printed cash, debt that has no chance of being repaid, from agencies where no recourse will be demanded, that would constitute a pure infusion of cash into the money supply, which would reflect a permanent devaluation of the dollar by the relative percentage the money supply was expanded.

This is in contrast to credit-driven bailout measures (i.e. funded by Treasury Bonds), or any easy credit, which is only a temporary devaluation of the dollar. It also contrasts to taxpayer-funded bailout measures which does not devalue the dollar at all but simply shifts cash from taxpayers and the usual tax money recipients to those who receive the bailouts. A poor investment at best.

Friday, July 3, 2009


Amid the California state government resorting to IOUs, and the Bureau of Labor and Statistics cooking the unemployment numbers to keep things safely under 10%, economic strife has hit home and yesterday was my last day at a job of 8 years.

No, I'm not moving in with my parents. It was a half-time job and I work part time elsewhere. They wanted me to do more work for less pay, so I decided it was time to move on. My pay was funded at city, state, and federal levels so it was not surprising, and I might have brought this upon myself by voting down props 1A-1E and encouraging others to do the same—although even if they passed I figure it would have only delayed the inevitable. I'm glad I voted the way I did.

Leaving a job is pretty stressful. I feel it is the right course and will open up new opportunities, but I wouldn't call this past month a good one.

But, there's plenty on the bright side. Having been a renter, I've saved up money and get by on very little. With my other part time job I'm pretty sure I'll be cash flow positive. I haven't taken a vacation in years—now, I don't have much of an excuse anymore. So I'm going to be living it up. I've also had my fill of being an employee so will at least be an independent contractor and hopefully start of my own practice when the time comes. At least, I will have the chance to rethink my direction in life.

Sunday, June 28, 2009

If Borrowers Ruled

I've made the point before that hyperinflation favors those in debt, and deflation benefits the lenders. Furthermore, I've stated that at the end of the day America is a democracy, but at the beginning of the day it is a plutocracy where political favors are lobbied by wealthy interests. Finally, I argue that hyperinflation versus deflation following a credit bubble is a function of monetary policy; deflation will happen with a hands-off approach, hyperinflation happens when money is printed and distributed without recourse.

Which all adds up to a safe feeling in my mind that the correction of the housing bubble, and all other bubbles blown of late, will be deflationary, and cash will increase in purchasing power and value as time passes. So long as the government can use tax money and treasury bonds to support inflated asset prices, it will continue to do so, but when that reaches its endpoint, the correction will be deflationary.

For every dollar of debt somebody owes, there is a quiet entity expecting to be paid back with interest, not to mention strong currency. Anyone who has treasury bonds or sizable holdings of bonds of any kind will have lobbying efforts intent on keeping the dollar strong. (Keep in mind, with a 10% fractional reserve policy, 90% of the money out there is debt.)

Now if politicians obliged themselves only to the voting public, it would be a different story. With most Americans having more debt than savings, they would benefit from strong inflation assuming incomes rose to match it. Employment was strong during the hyperinflation of the Wiemar Republic, although workers were paid with Monopoly money so their wages were really much less than in times of stable currency.

So hyperinflation had two benefits: it forgave debt, and unemployment was very low. Both of these are very democratic and enticing to anyone who can't find a job. Retirees who lived on fixed government pensions were left to starve, and anyone with cash holdings either moved it to assets or lost everything.

In Germany and Austria in the early 20's, the labor unions had particularly strong political status, and they favored free and easy money for reasons mentioned above. More so, we saw these countries strangled by war reparations. In this climate, we have a situation where hyperinflationary policies became politically possible. But given the general suffering and economic chaos that resulted, in hindsight it would still be inadvisable.

We are far from those conditions here. Hyperinflation is as easy as turning on the printing press. But politically, it is impossible.

Friday, June 26, 2009

Flight to Cash?

The U.S. savings rate hit a 15-year high, just under 7%, today. Despite all the financial shenanigans, we see a slight trend of people going back to cash. As always, this sort of thing is concerning to the contrarian investor. But the last time people moved into cash, back in September, the dollar had a nice run that lasted until March and the onset of quantitative easing.

It's been a tepid rebound we've had since March. If it were in line with past dead cat bounces, eyeballing the DJIA over the decades, such a faux-recovery spike could have easily reached 10,000 and maybe even 12,000 before the true decline to fundamentals began. So it's hard to draw conclusions about the last three months. Either we are waiting for the real rebound, or this was it and its weakness underscores the strong deflationary pressures at work.

Thursday, June 25, 2009

FOMC Outlines Quantitative Easing

Concluding their meeting yesterday, the Fed held interest rates at near 0%. This was expected and no surprise to anybody.

They reiterated their plan to continue what quantitative easing is currently underway, but did not add to it, citing some signs of a turnaround in the recession.

Here are the numbers: for this year they plan to buy $300B of Treasury Bonds, $1.25T of agency mortgage-backed securities, and $200B of "agency debt." I don't know what agency debt is, but I'm guessing both that and the mortgage-backed securities have very little market value so this amounts to a $1.5T infusion of cash into the economy, which can't be good if you have a savings account. The government is probably good for the treasury bonds, so the purchase of them with printed currency amounts to a $300B increase in money supply that will remit over the course of the bond.

More information about the mortgage-backed securities and agency debt is needed before any firm conclusions can be reached. Does the money for their purchase originate with printed currency or Treasury Bonds? And what recourse is there for the defaults? These will need to be known to determine how inflationary this policy will be.

And, although $1.5T is a lot of money ($10,875 T*Bux), the total money supply of dollars is somewhere around $10T, around 90% of it is debt, and that is all under heavy deflationary pressure at the current time.

Tuesday, June 23, 2009

Hyperinflation Survival Guide

Here's a few more thoughts from reading When Money Dies (UPDATE 5/20/10: sorry, online text has been removed by publisher's request, and it is quite pricey on Amazon).

There were some who prospered during the collapses of currency in Austria, Hungary, and Germany following WWI. There are also areas of need that were particularly hard hit, which caused much suffering in these countries. If you truly believe hyperinflation is about to happen in America, here are some preparations you can make, and some hot career moves.

When currency collapses in value, it is mainly consumable goods that will be scarce. Everybody will be hoarding them. Durable goods will be in plentiful supply, since people will be trading those for consumables—by which I mean food and fuel. The bomb shelter types will be in good shape for hyperinflation. I'd recommend keeping bags of flour, grains, and canned food, enough to last for a year, until the new currency is well established.

In case you forgot anything, have plenty of cigars and cigarettes on hand. In war, prisons, and hyperinflation, tobacco has always served as makeshift money when there is no other. Being durable, portable, divisible, and having intrinsic value—it fulfills pretty well the criteria for natural currency. Bummer about the huge tobacco tax—come to think of it, does the government know something we don't?

Farmers did okay during the Weimar collapse, mainly though the trade of durable goods for food. Either make friends with a farmer, or learn to become one. At least that way you won't starve. At the very least take up gardening if you anticipate hyperinflation. In Austria, in the early 20's, a farmer could trade a few bags of apples for a piano.

Which brings up hot careers: aside from farming, look into finances or the black market. Crazy profits are to be made there. While many starved and died of disease and exposure, others partied—and you want to be one of those. Wall Street types did well during the collapse of the Krone and the Mark, for the exact same reason they've done well in the past decade. When cash is devaluing, the stock market is hot. Foreign currency and stocks were the primary ways people preserved what wealth they had. Since financiers get a cut of these transactions, they will profit handsomely during the collapse of the dollar. They may be losing their jobs now, but they shouldn't get too cozy at their parent's house. They will be plenty busy when hyperinflation hits.

Now, when people are freezing and starving, they will gladly trade their most prized and valuable belongings for food and fuel. While the government tries and fails to ration everything, the international black market will be sizzling. Don't miss out!

If you follow these simple rules and quickly get your money into stocks and gold, there is plenty of fun to be had with hyperinflation. Any schadenfreude renters may now be feeling will pale in comparison to those prepared for the dollar's collapse. At the very least, it will be your chance to loose those 20 pounds you've been meaning to shed.

Sunday, June 21, 2009

The Distinction Between Deflationary and Hyperinflationary Policy

I've been reading When Money Dies: the Nightmare of the Weimar Collapse by Adam Fergusson. The book is so rare it costs several hundred dollars on Amazon, but fortunately it is free online. I'm still near the beginning but it is a thought provoking read.

What interests me in it is the distinction between deflationary and hyperinflationary outcomes of economic contractions. The more I read, the more I conclude the differences are disturbingly narrow, and if monetary policity shifts from one direction to the other it could easily go without notice to the public for awhile.

I hope both inflationists and deflationists can agree that either outcome will be a determination made by the regulators of fiscal policy—in the U.S. it would be the Fed and the Treasury Department. There is nothing inherent in economics that will naturally go in one direction or the other. Hyperinflation or deflation is a choice consciously made and acted upon by financial authorities.

In the event of recessions, governments try to stimulate the economy with loose monetary policy. In our case now, this has been going on without stop since the end of the internet bubble. It is still going on, first with a real estate bubble, then a second stock market and commodities bubble, and now with quantitative easing. Efforts at money creation have been taking place non-stop for a decade.

But all the money created by the government, so far, is in the form of credit, which is expected to be paid back. The act of paying back credit at the end of a bubble is deflationary. First, there will be less credit available in the coming years, and second what disposable income people now have will be mainly used to pay off debt. The overall result is money contraction and price deflation.

What happens in hyperinflation is that money is created and distributed without any need to pay it back. It is handed out as payment for government services or entitlements without any expectation it will be returned.

This difference turns out to be subtle. So far, all reported stimulus money is a government loan underwitten by the tax base. This fundamentally does not expand money supply. Any expansion is only temporary, so the ultimate outcome is deflation. Were such loans NOT to be underwritten by the tax base and could be defaulted on freely, hyperinflationary risks come into play.

When it comes to tight wages, unemployment, reduction of government services, widespread defaulting on credit, and tight lending standards—deflation is what we are seeing. Prices of everyday goods remain about the same but most investment classes remain down from 2008. All deflationary unwinds have exhibited rebounds like the one we are seeing now and if deflationary patterns hold then corrections to fundamentals will resume any day now.

My money remains in dollars, but at this point diversifying into gold and some competitively priced stocks would be a more sensible strategy than when this blog first began. Were I a more savy investor I would have jumped from dollars into stocks in March, but had I done that now I would be going back to cash.

Saturday, June 20, 2009


News of economic woes has fallen on California a lot lately, and given the budget crisis and a particularly bubbly real estate market and tech industry—it seems California will be leading the way down this economic sink hole.

For May, the jobless rate here cracked the 10% barrier, 11.5% actually. It leads the rest of the nation now at 9.4% and rising. Maybe there is some cause for optimism from the rebound of the stock market, but to my mind there are no real signs of improved employment opportunities and a lot of government jobs in jeopardy come July.

With the Alt-A resets only starting, and the middle- to upper-end housing market cracking at the seams, there is plenty of room still to fall, and years before a turnaround can be expected.

Monday, June 15, 2009

California Foreclosure Prevention Act

In one of those efforts that means well but in the coming months we will probably see a far worse backlash, today California added 90 days to the period between the first defaulted payment and repossession through foreclosure, unless the servicing bank has a program in place for loan modification.

As history is playing out, banks are much more resilient toward any sort of loan modification than I would have guessed, based on general business sense that lowered loan payments are better than no loans payments and trying to sell the house in a saturated market. But as it happened, all government efforts to assist the process have failed. The original Hope For Homeowners Act was a bust, which followed a similar Bush plan that was also a bust. In that we need this sort of legislation, the more recent Obama plan must be struggling.

Where the mortgage markets are already starting to freeze, despite the Fed's efforts at quantitative easing to keep money flowing, a move like this can't make banks more likely to originate loans.

Thursday, June 11, 2009

Sign of the Times

That resort, St. Regis in Dana Point, where AIG famously held a $440 thousand spa retreat for its executive to celebrate their newfound bailout money—that resort is in a foreclosure sale.

Ah, AIG. It hasn't made the news for awhile. I wonder how much of it there is left. Monetary policy has become so quiet lately.

Friday, June 5, 2009

ECB Pause

With the Fed and Bank of England ZIRP'd, the ECB holds at near-ZIRP of 1%, catching the social vibe that maybe the worst is behind us and things are about to turn around.

At home, the DJIA has been hovering at the upper 8000s. Unemployment is on a constant march upward, and at 9.4% for May it could well surpass 10% in a month or two. But it's no longer "unemployed"... it's "funemployed!" Recent successes of the DJIA and rising oil prices have reassured the more optimistic among us of good investment opportunities soon.

The debt unwind, and the consequent contraction of money supply, has plenty of room still to go. Quantitative easing can stall the process but does not affect fundamentals.

Sunday, May 31, 2009

May Recap

Bailout news is fewer and farther between lately. I don't think that it has lightened up, only that the DJIA has crashed twice now after the initiation of major bailout packages—the TARP and the Obama Stimulus—so they've learned to be more discrete.

The dollar continues to be under persistent and heavy fire with bouts of quantitative easing, which in essence blows a new treasury bubble after the internet, housing, and commodities bubbles crashed. Quantitative easing is the lender of last resort—the printing press—however just like any debt-driven "prosperity" it will eventually reach its limits and make the crash that follows all the more worse rather than letting equilibrium forces restore our economy to its natural state in the fastest and most painless way.

The dollar hasn't lost all of its gains since it March 2008 lows, but its heading in that direction. How far it will go before the treasuries bubble collapses I don't think anyone can know for sure but I don't think it will retrace all the way before quantitative easing reaches its natural endpoint.

Keep in mind, there has been quantitative easing in Japan for years, and the yen is one of the stronger currencies.

I've heard no word as of yet about the beginning of the Public-Private Investment Program, the last piece of bailout malfeasance, which in essence will unload toxic securities held by banks on to the tax base. I wouldn't be surprised if that has begun, I just haven't seen anything specific about it. It is terrible for the tax base and takes money away from more needed and socially beneficial bailouts, but this would have no effect on money supply or inventory and so no direct effect on the dollar, unlike quantitative easing which amounts to a temporary increase in cash supply.

Tuesday, May 19, 2009

1F-passes; 1A-1E fails

In one of those rare moments where I agree fully with the California electorate, propositions 1A-1E—which offer diffuse tax increase to cover California's budget shortfall—have been defeated; and 1F—which blocks pay raises of elected officials during deficit years—has passed.

The voters, what few of them showed up, have spoken. Hopefully this generalizes to the rest of the country regarding voter attitudes toward uncontrolled government spending.

Sunday, May 17, 2009

On the Origin of Currency

Today, we will have a speculative history lesion.

Our prehistoric ancestors lived in small communities. Specialized communities prevailed over generalized ones, since specialization exists in all human groups today, but we don’t see it in other primates, so specialization ruled. Such groups require trade among members—potters need to be able to pay the bakers, and everyone needs to contribute for the soldiers—and to do this human society requires a tool of exchange.

In small communities a “moral economy” forms—people share, but individuals who give more things of greater value to others are regarded by the group more highly than those who gave less. People gave what they had, and took what they needed—and people who gave more were remembered more fondly, and prospered.

As small villages grew into cities, moral economies became impractical. Trading had to be done through barter if the group was too big for everyone to know everybody else. Trust could not be relied upon. An economic exchange had to be sealed at the moment, which meant if one wanted or needed the possessions of another, they had to offer something immediately in exchange.

Currency is an extension of barter. The coin of the kingdom would be a tradable good, desired by many, that ideally would have been convenient in the sense of being (1) easily portable and (2) divisible. For example, if you want a haircut and you have a goat, then exchange is problematic, because the goat is worth more than the haircut, and you cannot cut off a piece of the goat for the haircut. Ideally, currency would be (3) long lasting and not degrade over time, and also it had to be (4) precious to some degree—it could not be too easy to procure. The bartered good that best displayed these properties would be widely accepted as the natural currency.

In World War II, for example, when cash was scarce, cigarettes were used as currency among GIs, and are probably still used that way in prison today. In ancient times, salt was used to pay roman soldiers, which likewise has many of the properties of a natural currency. But it was mostly gold that would prove to be ideal, and coin was preferable to crown or ring, being standardized and more divisible. Over the centuries, gold came to be replaced by bank notes, which were more convenient still, being even more portable than gold. However, trading bank notes was still essentially trading gold, since bank notes could be redeemed for gold.

With the development of fractional reserves, things began to change. Usually you could redeem banknotes for gold, but if the bank ran in to trouble, and there was a run on it, there were more banknotes than actual gold. Notes required faith in a stable economic system. They were riskier, and required there be no economic surprises.

The final stage of the evolution of currency has been a disconnection of bank notes from gold. Bank notes are not longer redeemable for gold, or anything. Cash is not a “natural currency,” and it is not based on faith either; its use is legally enforced. It is legal tender. Whether anybody has any faith in the dollar or not, bond holders must accept it as a means of payment. The law cannot say what its value is though—that is determined by their supply (which is regulated), and individual judgments about the desirability of the goods dollars can buy.

Modern cash has the advantage and disadvantage of manipulability by federal regulators. During times of wealth expansion, the fiat currency system can be easily increased to accommodate growth while preventing constriction of prices due to scarce cash. But regulators can also get it wrong, and expand the currency when the economy isn’t really expanding, except in the form of a speculative bubble. When people think they are in a new economic paradigm, they are really just greater fools getting in a lot of debt to pay excessive prices on speculative assets or commodities.

So that’s the good and the bad of where we find ourselves in regard to cash. It is the central lynchpin of a demand-driven economy.

Saturday, May 9, 2009

A False Assumption

I’d like to comment on a statement one routinely sees in nearly every critique of the dollar or fiat currency—the fallacy that it is "backed by nothing." This sentiment is all over the blogs, even otherwise good ones supporting free market principles.

Granted, the only use of paper money I can think of other than spending is to patch side wall tears in bicycle tires: due to its durability you can stick paper money between the torn tire and the inner tube and get home that way. Otherwise it is already printed on so you can't use it as notepaper, and due to paper money’s poor absorbent qualities it wouldn’t even be good for the usual uses of throwaway paper.

Okay, there isn’t much intrinsic value in the bill itself, unlike gold coins which could be melted down to make jewelry, arthritis medication, or a handful of other industrial uses.

But fiat currency is backed by the law. It’s legal tender. So legally, it is backed by all things for sale in the American economy; in a 10% fractional reserve system, credit accounts for around 90% of the money supply, so it is not something a merchant could easily turn away. In practice dollars can be conveniently and easily exchanged for goods and services. For anyone who holds the dollar, it is backed by any and all things for sale in America.

In this light, let us compare paper money to a stock certificate. Those who would disparage the dollar would tend not to say that a stock certificate is backed by nothing. But practically speaking, it is not like you can exchange some certificates for machinery from a factory, even if you are supposedly a part owner of it. The stock certificates gives one power over the management, supposedly, and the potential for dividends. But beyond that, company stocks can only be exchanged for dollars. So really a stock certificate is backed only by that which many consider to be backed by nothing, or fiat currency.

So paper money has all kinds of backing. Any criticism built on the premise that fiat currency is backed by nothing is illogical, dead wrong, and can be safely dismissed.

Friday, May 8, 2009


It feels like we are in a "mini-2006" right now, which was a bubblicious jubilee in a credit-intoxicated delirium as prices hovered in orbit well beyond any stones throw of fundamentals. Generally, in jobs and the stock market there seems to be an optimism out of proportion and disconnected from the gravity of the facts.

Since mid-March the stock market has made a robust comeback from its 6000-range lows, back into the mid-8000 range. Among job-seekers I know there doesn't seem to be the weight of economic pessimism beating down as it has been at least since the holiday season.

Still though, this mini-correction of the economy is a far cry from its speculative highs and is following the pattern of a dead cat bounce found in the midst of any crash. To the degree that quantitative easing is contributing, and it may be, even though one would still anticipate this faux-recovery without it, quantitative easing will still be an economic burden in the long run weighing on us later either through a restriction of economic activity through tight credit and reduced government spending; or a devaluation of cash and debt—in other words inflation.

As always, since those whose wealth is stored as debt are the same ones who pull the cranks and turn the levers on the money machine, I think we'll see trends toward deflation in the long run.

It's still cheaper to rent than to buy, and P/E ratios still stink. The job market continues to contract, and for each job lost, that is a further decline in economic velocity which builds as it cycles.

But for those who remember fondly 2003-2006, current events should arouse a pleasant sense of deja vu, while it lasts.

Thursday, May 7, 2009

ECB Rate Cut and more Easing out of England

Today, the European Central Bank continues toward ZIRP with dropping overnight lending rates to 1%. The Bank of England has announced another 50B GBPs of quantitative easing (in addition to 75B GBPs before), and maintained thier overnight rate at 0.5%.

Both of these would be favorable developments for the value of the U.S. dollar on world markets, but tempered by the fact of our own quantitative easing underway. There was a mild spike in the value of the euro vs. the dollar today, probably from those investors who regard this sort of intervention as a favorable development, and no changes of significance with the pound.


The results of the Fed's stress test of major banks are finally in, projecting how much loan losses banks might face under adverse financial circumstances.

Between credit extended for businesses, mortgages, and consumer loans, under the worst case scenario they considered (basically a mild economic contraction over the next two years—not the worst case scenario possible), banks stand to lose upward of $600B; $186B from mortgages alone. Ten of the 19 banks looked at are undercapitalized, needing raise close to $75B total by this November. Bank of America is the worst offender, needing to raise $34B, Followed by Well Fargo at $14B, GMAC at $12B, Citigroup at $5.5B, and the rest under $3B or not needing to raise any capital. Bank of America and Wells Fargo are no doubt dragged down by their accumulation of Countrywide/Merril Lynch and Wachovia (who before that had acquired Golden West), respectively.

So, the test results today confirm the presence of severe undercapitalization in the system, and major losses as the credit contraction moves forward. The tests seem to have been conducted responsibly; perhaps skewed a little too optimistically, but not sugarcoating the problem either. I'm going to hazard a guess now that the economic contraction will exceed their worst case scenario, and another stress test will be needed before all is said and done.

Tuesday, May 5, 2009

Chrysler Bankrupt

We are in the midst now of an arranged bankruptcy of Chrysler, where it would be purchased by Fiat, all coordinated by the federal government at a suppressed price. We've seen this before, where banks were seized by the FDIC and then sold to other banks, whereupon shareholders lost everything, and unless special deals were made then bondholders lost everything too.

With Chrysler, the federal government does not have seizure power, but the Treasury Department can twist the arms of TARP lenders with exposure to Chrysler to comply with the plan. Non-TARP lenders to Crysler, and stock and bondholders of any sort, are compromised by the deal and their only recourse is to file legal action, which surely will happen.

Unlike bank seizures, this is going to be messy, I suspect worse even that Wells Fargo's purchase of Wachovia, which was bad enough.

Having owned a Dodge pickup—and not that I didn't like the truck but I was distinctly unimpressed the way the company operates and treats its customers—I'm left thinking the government shouldn't lift a finger for Chrysler.

Wednesday, April 29, 2009

SF Mechanist's Health Care Proposal

Off topic, but I thought I'd throw it out there, since it's making the rounds on the blogs.

I believe that in clinics and hospitals funded by government (county, medicaid/cal, medicare), private insurance (including HMOs and PPOs), and private pay, Americans get good health care. Exceptions abound, here as anywhere, but overall the quality is good. The problem on all levels it is ridiculously expensive and burdened with heavy administrative costs.

"Single-payer" health care does not leave me with any confidence the situation will improve.

So, my system attempts the following: maintain current levels of care and availability for all, dispense with the notion of "free" health care because it isn't and in fact it is valuable, but still maintains high levels of care for people if they can't afford it, and reduces costs overall. It is a return to a fee-for-service system with government subsidies, loans, and backing.

Starting with fee-for-service, free market principles bring its advantages to the efficiency of the system. Health care delivery becomes a negotiation between doctors and patients of what is available and what patients wish to pay for. If it is too expensive, rather than shoving it to government, patients can talk about options, such as generic medications.

But say there is a catastrophic emergency, or one is diagnosed with HIV or cancer, and is unemployed or the working poor. Necessary health care is still rendered regardless of the ability to pay, and then the patient is billed for reasonable costs of services; there needs to be an office that helps patients negotiate such costs like insurance companies now have to assure they are not being gouged. But assuming the bill is reasonable and reflects the market value of services provided, the patient owes it.

If the patient cannot pay, then the government pays it, probably starting with Medicare, but the patient still owes the government for the cost. It is not the kind of bill that is sent to the collection agency, and if the patient remains working poor for life, they might never pay it. But if they win the lottery or come upon a sizable inheritance, then they would have to pay it.

If with job promotions or better education they reach a point where they could start to pay their health care bills off, then deals could be made such that it wouldn't be a serious burden, but over the years some headway could be made toward paying back what they owe.

Medical treatment that serves public health and safety—i.e. immunizations, tuberculosis treatment, and some mental health and substance abuse services—can still be made available by government subsidy.

Insurance savings would be considerable. I believe this system would maintain or even improve current health care standards, greatly reduce costs, and insure that necessary treatment is made available for all.

Tuesday, April 28, 2009

Swine Flu

It seems kind of overkill, but Obama is requesting $1.5B to go combat the swine flu; on the other hand, nowadays it seems like pocket change when it comes to government spending. I know people are dying but there is no particular treatment of the flu other than managing its complications.

For those curious, $1.5B amounts to $10.88 T*Bux. Well worth it if it stops you from getting the flu, swine or otherwise, though I imagine, if approved, it will simply disappear into the public health care bureaucracy without tangible benefit.

Friday, April 24, 2009

The Stress Test

So, results of the "stress test" for banks—to see how viable they would remain under favorable and not-so-favorable economic forecasts—were supposed to be in today, and most of what was revealed is we are going to have to wait until later to hear anything of substance about the stress test.

In the better scenario, and economic turnaround is coming soon, and unemployment and the credit contraction won't get worse than it currently is. In the worse condition, present economic factors particularly real estate, decline moderately through this year and then level off in 2010. There is some acknowledgment that things could go still worse than that.

If the banks were able to pull some accounting rabbit out of the hat, I'm sure we would have heard the results today.

Monday, April 20, 2009

Banking Profits

Starting with Citibank's announcement that marked the beginning of this bear run, further increases in the DJIA has been punctuated by reports of profits from the different banks, including Bank of America, Wells Fargo, JPMorgan, and now the latest: Merril Lynch, of all things.

Stepping back and looking at the broader picture, one has to seriously question this new profitability of banks in Q1 2009. First, most of the banks would be effectively bankrupt if not for the committment from the Fed, Treasury Department, and Congress to keep them afloat no matter how many toxic loans they underwrote. Second, we have an easing of mark-to-market accounting such that banks can freely overvalue their assets. We have bailout money pouring in hand over fist. Now TARP money banks are supposed to pay back. But bailout money that came in indirectly via AIG they have no obligation to repay (and AIG will collapse before it pays anything back), and now they have non-recourse government guarantees of toxic asset purchases throught the public-private investment program, which will amount to either a direct transfer of tax money to the banks obligation-free, or an expansion of the money supply by the $500B alotted through the program.

Banks are not profiting. Banks are bankrupt without the system bending over backward to keep them from sinking like a rock.

Wednesday, April 15, 2009


We all know that the U.S. National debt could pave a road to the moon and back in so many dollar bills. Statistics like that abound. but it is unrelated to everyday experience, and still leaves the true impact of this issue blissfully abstract.

Since recent bailout measures are approaching a trillion dollars a pop, to bring it home, I’d like to introduce "T*Bux," or how much money an average U.S. taxpayer owes on a government expenditure.

The U.S. Census is 307,212,123, per July 2009 estimate. As of 2007, there were just under half, or 138 million taxpayers in the U.S.

Ordinary calculators can’t handle 1 tillion divided by 138 million, so, knocking 6 zeros from each, we have 1,000,000 divided by 138. Or the T*Bux on $1T is $7250 per taxpayer, rounding off. This is the figure that will be used to make calculations.

The TARP is running $0.7 trillion, so that's $5075 T*Bux per average taxpayer. Quite the extortion when you look at it that way, what we are personally handing to the banks for screwing up our economy. Oh, sure, they'll pay it back. Well probably not AIG which alone, by my last count, has a $.18T tab, or $1305 T*Bux, for just one insurance company. What is lost for good is the $0.5T going to Public-Private Investment Program (PPIP) to guarantee toxic assets bought at inflated prices, or $3625 per taxpayer. Obama’s stimulus is $0.78T, or $5655 T*Bux in addition. The U.S. National debt ceiling, which we are very close to, is $12.1T, or $87,000 T*Bux.

After what we owe on our houses, the second biggest taxpayer indebtedness will usually be to fund government, with cars and credit cards and such weighing in at a distant third place.

As population estimates change, T*Bux will be revised.

Sunday, April 12, 2009

Are We Halfway There Yet?

Thought I would just check in this Easter. Bailout news seems to have abated as the DJIA creeps back into the low 8000's, and with quantitative easing, mortgage rates are dropping to the 4%-range (mainly directed at refinancing), and the program to buy around $500B of toxic assets from banks at inflated prices is moving forward if not currently underway.

News keeps cropping up around how the rates of acceleration of worsening economic factors, such has house price declines and joblessness, is getting less bad as months go on, and eyeballing the economic situation, I'm guessing the credit unwind is reaching the halfway mark. There would still be around 2 years Alt-A resets ahead of us, and banks are still hanging onto a lot of foreclosed property to limit supply. Even after the credit bubble is fully unwound this all would still be followed by a period of economic contraction though tight credit, made worse by a declining tax base and increasing deficits leaving fewer bailout options as time goes forth.

But I'm guessing we are closer to economic stabilization by a return to fundamentals than we are to the speculative peak of the bubble. But I'm not believing calls that the correction is over and we can now look forward to good economic times.

In other words, I expect to see good news coming as prices move toward affordability.

Thursday, April 2, 2009

Easing of Mark-to-Market

So I saw the DJIA this morning and saw a sharp upward spike just peeking over 8000. Since it reached the mid-6000's, its has been rising steadily over the last month. But this shift seemed abrupt so, curious, I went to Google news and the only financial news that pertained was an easing of mark-to-market accounting regarding the toxic assets held by banks.

No doubt this relates to the so-called "public-private" program to bid for the toxic assets of banks, which will be almost fully government-subsidized non-recourse (for the taxpayer) purchases in a highly manipulated bidding system where only a few insiders would be allowed to participate. As it is shaping up it will amount to handing $500B of taxpayer money to banks in a sneaky way. More commentary to follow when it springs in to action.

The Market is a strange beast, but pretending there is money in the system where there isn't doesn't make it so. Though, maybe the market is salivating over the taxpayer money it sees headed its way.

Wednesday, April 1, 2009

Visit to Wells Fargo

When I first started this site, just over a year ago, I had planned to focus more on things like CD rates and bank promotional specials. As it turned out, there was more bailout news than I was expecting, and more correction of the economy, and so attention turned to that.

But I'd like to refocus on cash as an investment, starting now. I've discussed before my little adventures with a Washington Mutual money market account, which is still going fine.

So I went to Wells Fargo today because a CD was maturing, and they called me several times encouraging me to open a checking account. I looked over their rates: 3-month CD's were at a miserable 0.80%, 9-month was 1.4%, and the "premiere" savings account they were pushing was at 1.15%. You can get over 3% only with a 36-month term. Maybe I just go in at the wrong time, but Wells Fargo has never impressed me with their rates. I was inclined to stay with the 3-mo CD's, but got talked into the savings account.

Most of the bigger banks I use are pushing checking accounts, even when I insist I'm never going to use it. Not sure why. The banker was kind enough to shred the free checks that came with it.

So in casual chatter I asked when Wachovia would be absorbed into Wells Fargo, and he didn't anticipate it would be for a year or two. By contrast, Washington Mutual is already Chase. Since I have an account with Wachovia I asked if FDIC covers the accounts separately, as two different accounts, which it does for now. However he didn't seem too sure that the FDIC limit of $250,000 through the end of this year would be made permanent. It felt like he was inclined to believe it would revert back to $100,000.

Tuesday, March 31, 2009

G20 Fizzle

There has been some talk about a "new world order" in the G20 meeting going on now, specifically around the replacement of the dollar as the worlds reserve currency with a new global currency. One wonders what there is for sale this world currency could buy; what there would be that backs its value other than fiat currencies themselves. Anyways, from what I've been reading it does not sound like these talks have progressed very far, and unlikely will by meetings end. Otherwise there is empty chatter around the current global downturn, and some welcome discussions of anti-protectionism, that unlikely will make much difference.

With talk of a new world order, gold has been doing okay. The dollar I anticipate will recover after the meeting closes.

Monday, March 30, 2009

Automaker Bailout Denied

After dipping in the bailout well once already, to the tune of around $20B from the first round of TARP money, the automakers GM and Chrysler have been back for more to stay afloat, which has been denied by the Obama administration until more corporate restructing has taken place. As a consequence, the CEO of General Motors has resigned.

Today Obama reassured us that the auto industry would not "vanish," and there is no reason it should, if there are entrepreneurs who will buy the bankrupted factories and resume auto production more profitably.

Hopefully, what is being said today about the auto industry will be applied later to banks and their subsidiaries. I'm looking at you AIG and Citigroup.

Sunday, March 29, 2009

Predictions: The Good, the Bad, and the Ugly

March 16, 2008 stands in history as the all-time low for the U.S. Dollar Index. Two weeks later, one year ago today, I started the Ca$h Bull.

I started it amid fears that the dollar was facing imminent collapse, and in danger of being replaced as the world reserve currency by the Euro, or even the Yuan. This blog was begun on the premise that the value of currency should be viewed by its purchasing power of goods and services in its native economy rather than as a contest against other currencies on the global market—and that cash, especially the dollar, would emerge strongly as the world-wide credit bubble resolves in a recessionary economic contraction.

Some anniversary facts and statistics: with all the posts (not including this one) cut and pasted into a word file with a 12 point font, the document is 104 pages long. Sadly, neither “The Ca$h Bull” nor “The Cash Bull” flags this site on a Google search. But “the Cash-Inventory Equivalency” comes up on the first page, and “The Desire Coefficient” comes up #1.

So I’d like to thank those who patronize this blog, especially you East.Bay.Miser, your responses do make a difference. Today I’m going to start allowing anonymous posting to make it easier for people to comment. I’m also modifying the tags system to be in line with its proper use, rather than as keywords which I originally thought. The new tags should be up in a day or two.

Though I try to focus on financial analysis here and avoid making predictions, sometimes they slip out. So, for fun, here is a rundown of how I did—divided into the good, the bad, and the ugly.

The Good:

3/29/09: “I am heavily invested in the U.S. dollar, and contrary to many opinions, I think now is a good buying opportunity for it.” (Truth be told I started working on the theory posts of this blog, up to "The Value of Money," a couple weeks beforehand.)
4/5/08: “So long as base money continues to hold about even, the fallout from the credit bubble will be deflationary as asset prices correct to their fundamentals.” Even with base money doubling we are still seeing a deflationary trend. This sentiment has been repeated many times so will be mentioned just this once here.
4/28/08: “Though they will almost certainly print some money, it will not be enough to stave off a deflationary recession.” They have and it hasn't.
5/14/08: “Americans have been lent more than they will be able to pay back, which will result in widespread defaults and foreclosures.” A straightforward statement now but very much denied back in the day.
6/28/08: “The last time we saw rates this low (2% overnight rate), we saw the rise of the housing bubble. Now, we see an economy holding on by its fingertips as this behemoth slides into a recession.”
8/5/08: “Prices are already dropping in the asset classes (i.e. stocks and houses) and I predict will continue to fall throughout the general economy under supply and demand forces as we progress further into the current economic downturn.” Today we see clear evidence of this downturn in commodities, retail, and manufacturing. Declining prices haven’t quite matched declining demand as of yet, but both are deflationary.
8/6/08: “Despite the stated intention of the legislation [The HOPE for Homeowners Act] to keep house prices unaffordable, my guess is the correction will continue unabated.”
8/7/08: Regarding rate drops by the ECB: “I think I am not alone in believing we can anticipate rate drops in coming meetings.”
8/9/08: “There will come a day where banks are unwilling to lend, and borrowers cannot or will not take on more debt regardless of how favorable are the terms.”
9/15/08: Regarding the fall of Lehman: “For the first time credit default swaps are being triggered, and soon the whole patency of the default swap market (in other words, bond insurance) will be tested.” Enter AIG bailouts the very next day.
11/10/08: “Bailing out AIG is a more civil way of handing money to banks straight up.” Common knowledge now that AIG was forced to disclose how it used the bailout money.
12/4/08: “Today is a stepping stone that will likely conclude in a worldwide zero-interest-rate policy (ZIRP).” The U.S. and U.K. are there, and the ECB not far behind.
12/16/08: Regarding ZIRP: “It is hoped that lending money for free will increase credit, lending, and general economic activity. We haven't seen that with the prior interest rate drops, and we won't see it with this one either.”
1/26/09: “future indicators show no end to budget cuts and profit downgrades.” There have been quite a few in the last couple months and more expected.
1/28/09: “Expect quantitative easing soon.” No shocker, but still a two-month heads up.
2/10/09: About Geithner and acquiring toxic assets from banks: “The fact he is calling for the use of private capital in all of this, for this ‘bad bank,’ which obviously isn't going to happen unless it is fully guaranteed, strikes me as almost a delay tactic.” This was a smirky remark but now the plan is for private acquisitions of toxic assets to be 90-95% government guaranteed.

The Bad:

4/30/08: “Today, the Fed eases the overnight rate to 2%, hopefully ending a striking series of sudden decreases throughout the past 8 months.” Oops. Not.
5/10/08: “I think the dollar will correct against foreign currencies eventually, but slowly” While the dollar is correcting against foreign currencies, slow isn’t the right word for it, unless you are willing to accept wild fluctuations around a downward trend line as meaning “slowly.”
9/7/08: “Clearly, banks have no reason to fear making unwise loans because they can anticipate a taxpayer bailout every time.” Not every time. In fact not enough times that they seem worried about it now.
9/15/08: “Not that I'm expecting $1.50 gasoline prices again…” I saw it once for around $1.90 in San Francisco, which is getting pretty close.
9/25/08: “This uptick on the base money supply is worrisome and if not a random artifact of the financial turmoil and indicative of a trend it could spell concerns for the value of the dollar.” If any Internet site reported on this shift in base money before me, I’d love to see the link. This files under “bad” because the dollar has continued to strengthen anyway.
10/1/08: “When all is said an done, the DJIA will be trading close to the 6000 range, and real estate will fall on the order of 50% from peak, assuming there is not a hyperinflationary event.” I’ve already called this as wrong because things are going to get worse.
10/9/08: On the drop in the DJIA after the TARP passed: “This is a deep spike downward, but I anticipate there will be some recovery before proceeding with its steady downward course… there is plenty of steam left in this bust.” Eh… there wasn’t that much recovery, but the downward trendline since then has been steady.
12/6/08: “I see a plan starting to unfold… Congress agrees to pass the unspent $350B of TARP bailout money, if the Bush adminstration agrees to give some of it to automakers.” I must have put on my tinfoil hat that day. Automakers got their share of the first round of TARP money and, except for a $20B outlay to Bank of America, Obama got the full second half of it.

The Ugly:

9/11/08: Here’s what I predicted the bailout would be: “The federal government will buy troubled mortgages from banks, I imagine at near face value, floating Treasury Bonds as needed to pay for them—such that the Treasury Department holds the mortgage stinkers, bought for with bonds that will be paid off by the taxpayer over time. Banks now have the opportunity to become re-capitalized from recent losses and dump toxic mortgage securities all at once.” As it turned out, bailouts went every which way BUT that. Worse, I had this on “Selected Posts” for months. Even on 9/17/08 I made the comment: “My earlier prediction that the conservatorship of Fannie Mae and Freddie Mac was sufficient to cover the bailout fell squarely on its rear end less than a week later. You win some, you lose some.”
9/16/08: Regarding AIG: “Personally I cannot get excited about the downfall of an insurance company; they are the embodiment of the risk aversion seemingly inherent to American culture.” Oh, how much I had still to learn.
10/13/08: “The whole idea of ‘free market’ in the financial industry is such a laughable notion by now that I don't find nationalization of the banks particularly troubling.” Mid-October was too early to make such a call, and with nationalization now looming under Geithner, I do find it troubling.
3/10/09: “Get dollars now and sell your stock while you still can.” Though in the long run I think you’ll be better off, this was a terrible statement to make right at the beginning of a bear run. It’s from a post written in the heat of the moment that probably never should have been uploaded and I have a good mind to delete it. I’ll be more careful from now on.


10/30/08: “I have a suspicion this [foreign banks] is where all the newly minted currency since September is going [to pay off loans to U.S. banks].” An interesting, if slightly paranoid, idea. Fed data shows clearly that the newly minted money is now sitting in U.S. Bank reserves. But might the Fed have given it to foreign banks first, in exchange for foreign currency, to pay off their carry debt to U.S. banks?