Subject: There IS a difference here between
From: <Saved by Microsoft Internet Explorer 5>
Date: Thu, 9 Nov 2006 13:23:12 -0500

Of Treasuries and Credit Bubbles: the Stench of Fiat Remains
the Same

While
cruising the blogosphere we recently encountered this economic observation

There IS a
difference here between...

rasputin

NEW
11/9/2006 7:36:30
AM

...what the Treasury Dept. is doing and what the
Fed. does when they repsectively do their repo thingy:

1. When the
Fed does a repo, they literally create the money out of thin
air.

2. When the Treasury does it, they are SHIFTING funds already
created under our corrupt, politburo-central-planning-junta from one
basket

(bank accounts of the Treasury in
banks) to another (the greedy little hands of the "repoee"). Therefore,
while it DOES increase somewhat

the over liquidity, it is NOWHERE
NEAR at the multiple of the Fed's shenanigans.

Hope this helps
Ras

in
reference this column by John Crudele: US
Treasury Is Doing the Fed's Work? NY Post

There is one significant
difference he misses, and a glaring error that we are surprised to see coming
from that haven of Credit Bubble analysis, PrudentBear, in the person of Doug
Noland.   Well, not really
PrudentBear but their chatboard.
Admittedly websites often have less relation to their chatboards than
Universities have to their parking facilities.

The
primary difference that he misses is that the Treasury is not an unbiased,
profit seeking entity.  The Treasury
is a political animal, that has a vested interest in the performance of the
economy (especially round election time or various ‘wag the dog’ moments).

The Fed
is supposedly the unbiased money manager that uses repos, jawboning, and
neglected tools such as reserve and margin requirements to set the liquidity
thermostat.  When the Treasury has
the same repo ability in amounts compared to those used by the Fed, at rates
apparently determined by the Treasury and not the Fed, then it doesn’t take an
HVAC technician to see that there is great potential for mischief in short term
fiddling with the heat. (STFWTH).

Further,
Mr. Rasputin distinguishes between ‘money created out of thin air’ versus
funds disbursed from the Treasury, and concludes that the impact is “NOWHERE
NEAR” but more on the order of ‘somewhat’ presumably on the movement of said
thermostat or perhaps hidden M3.

Is this
valid?  Is most of the ‘out of thin
air’ money these days being created at the locus of the Federal Reserve?   No, as Mr. Doug Noland has taken
GREAT (as opposed to incidental or cursory) pains to point out REPEATEDLY
(compared to occasionally.)

First,
the money received by the ‘repoee’ does not know where it originates, only the
rate of interest and the duration of the repo, and the general state of
liquidity and opportunity for use.
If the money environment is hot, it is a BETA SEEKING MOTHER  (BSM, in contrast to soundly invested
productive capital normally sourced from savings).   We have a lot of BSMs careening
around the dollar world, as Mr. Paulson reported recently in the WSJ, helping to
offset the housing bubble collapse, in a rather sophisticated ‘hair of the dog
that bit us’ economic cure.

The multiplicative factor of a repo is
more related to its terms, its credit basis, and its duration than its source,
with emphasis on duration (permanent vs. temporary).  With the de facto repeal of the
Glass-Steagall Act, an accomplishment second to few in terms of lobbyist time
and money spent, the money center primary dealers, now resembling large hedge
funds with an edge moreso than traditional banks, can put the hot money to good
use on their own trading desks. Do they do this?  What portion of their income has been
coming from their trading operations and program trading for their own accounts
lately?

Secondly,
the ‘money’ created by the Treasury originates from their deferral in paying
bills and preferring to issue debt, which is one step removed from the thin air
of the central banks, the Fed, and the primary dealers in the vortex of the
credit bubble.  The last time I
checked the books of the US were not generating positive cashflow.   And its not a big step.  All the Treasury requires is one or two
central banks and/or primary dealers operating complicity in the ‘public
market.’  Printing Press.  Money machine  Scrip is scrip is scrip, breeding like
bunnies.

We hope
this helps.  Doug, your work is not
in vain.  We understand your
pain.  Ras, a noble effort, and
surely in the 99th percentile of its posting place, at least.  Similar comment on Mr. Moto’s subsequent
detailed explanation.   And for
the rest of us, got gold?

Jesse