The Lemon Fool

So we saw that the markets had kittens after the yield spike:
https://www.marketwatch.com/story/as-ri ... =home-page

Given this, I'm curious as how the $1.9TN package will be funded
https://www.reuters.com/article/us-heal ... SKBN2AQ1FT

that is, by printing money and creating extra $$$ to dish out, or by selling more TBs?

And hence what will the likely effect over 2021 will to treasury yields?

Matt

I guess that the Fed will sell bonds to raise finance for the package but will continue to buyback financial assets (QE) as they have (6 months back) signalled that they are happy with inflation at +2.0%

https://perspectives.group.pictet/powel ... licy-shift

Indeed US inflation was at 2.5% in Jan 2020
https://www.statista.com/statistics/273 ... in-the-us/

which was tolerated.

They will monitor employment rates and use that to dictate when to start taper off the QE and hence will earn the tax revenues to pay the higher yields should inflation rise over 2%.

Matt

I guess that the Fed will sell bonds to raise finance for the package but will continue to buyback financial assets (QE) as they have (6 months back) signalled that they are happy with inflation at +2.0%

https://perspectives.group.pictet/powel ... licy-shift

Indeed US inflation was at 2.5% in Jan 2020
https://www.statista.com/statistics/273 ... in-the-us/

which was tolerated.

They will monitor employment rates and use that to dictate when to start taper off the QE and hence will earn the tax revenues to pay the higher yields should inflation rise over 2%.

Matt

The new input into all of this are the crypto currencies.

Before crypto there was nothing that anyone could do to avoid the drop in value of a currency if the central bank started printing like crazy.

Now there are potential stores of value that are fixed in amount, i.e. can not be subject to excessive supply.

It is not clear to me how central banks deal with this. The obvious course of banning crypto's and launching a propaganda war against them is made difficult when lots of high profile business are now holding bit coins on their balance sheets and so it looks to me like the point at which the US could ban crypto has now passed and the central banks will have to learn to deal with them and that suggests a whole new dynamic with the rules and guides still to be determined.

Regards,

odysseus2000 wrote:

I guess that the Fed will sell bonds to raise finance for the package but will continue to buyback financial assets (QE) as they have (6 months back) signalled that they are happy with inflation at +2.0%

https://perspectives.group.pictet/powel ... licy-shift

Indeed US inflation was at 2.5% in Jan 2020
https://www.statista.com/statistics/273 ... in-the-us/

which was tolerated.

They will monitor employment rates and use that to dictate when to start taper off the QE and hence will earn the tax revenues to pay the higher yields should inflation rise over 2%.

Matt

The new input into all of this are the crypto currencies.

Before crypto there was nothing that anyone could do to avoid the drop in value of a currency if the central bank started printing like crazy.

Now there are potential stores of value that are fixed in amount, i.e. can not be subject to excessive supply.

It is not clear to me how central banks deal with this. The obvious course of banning crypto's and launching a propaganda war against them is made difficult when lots of high profile business are now holding bit coins on their balance sheets and so it looks to me like the point at which the US could ban crypto has now passed and the central banks will have to learn to deal with them and that suggests a whole new dynamic with the rules and guides still to be determined.

Regards,

Governments have effectively banned holding Gold in the past, I doubt they will have an issue with the legality and practicality of banning Crypto in the future should they choose.

dealtn
Governments have effectively banned holding Gold in the past, I doubt they will have an issue with the legality and practicality of banning Crypto in the future should they choose.

I agree, except how will they do it?

The block chain exists across the entire internet, so to ban block chain you have to shut the internet down. Clearly that can be done, but will the electors stand for it? No problem in a totalitarian regime like China, anyone objects, they are killed, but in the Western democracies?

One can perhaps argue that the politicians can selectively try to suppress block chains, but then its the old: "If guns are banned, only criminals will have them."

Perhaps I have this all wrong and if someone can explain how the politicians can practically ban block chains with near 100% efficiency I would be interested in the how.

Regards,

odysseus2000 wrote:

dealtn
Governments have effectively banned holding Gold in the past, I doubt they will have an issue with the legality and practicality of banning Crypto in the future should they choose.

I agree, except how will they do it?

The block chain exists across the entire internet, so to ban block chain you have to shut the internet down. Clearly that can be done, but will the electors stand for it? No problem in a totalitarian regime like China, anyone objects, they are killed, but in the Western democracies?

One can perhaps argue that the politicians can selectively try to suppress block chains, but then its the old: "If guns are banned, only criminals will have them."

Perhaps I have this all wrong and if someone can explain how the politicians can practically ban block chains with near 100% efficiency I would be interested in the how.

Regards,

You can making speeding an offence without banning/confiscating cars. Anyone "caught" speeding might face sanctions. Would not the same apply to cryptos? They can still be used, but it would be illegal. How many US companies would allow their products to be bought using cryptos were such a law introduced? How many US listed companies would have cryptos on the balance sheet were such a law introduced?

You can making speeding an offence without banning/confiscating cars. Anyone "caught" speeding might face sanctions. Would not the same apply to cryptos? They can still be used, but it would be illegal. How many US companies would allow their products to be bought using cryptos were such a law introduced? How many US listed companies would have cryptos on the balance sheet were such a law introduced?

Yes, but how would you have a speed trap to catch offenders when the transactions occur across the entire internet?

Sure you can make all kinds of laws but any international company can create subsidiaries in any jurisdiction that welcomes crypto (just as UK Caribbean islands have for decades been used to circumvent various US regulations) and then the whole business carries on. Sure the US can rant about overseas criminality, but stopping it is a different business. There have been endless anti drug laundering laws, but the drug business just gets bigger and bigger.

Now that blockchains are in the wild it looks to me that they can only be killed if the internet is killed and as time progresses the number of open source business using block chain looks very likely to expand making more and more stuff decentralised and creating more and more complications for central banks who want to carry on like they have been.

There is a lot of talk about the great reset and what it would mean and mostly this seems to be about seeding more power to central authority while at the same time in the wild things are becoming more and more decentralised. Coinbase which is coming to the Nasdaq does not list a headquarters noting that the term has no meaning to their business.

Regards,

odysseus2000 wrote:

I guess that the Fed will sell bonds to raise finance for the package but will continue to buyback financial assets (QE) as they have (6 months back) signalled that they are happy with inflation at +2.0%

https://perspectives.group.pictet/powel ... licy-shift

Indeed US inflation was at 2.5% in Jan 2020
https://www.statista.com/statistics/273 ... in-the-us/

which was tolerated.

They will monitor employment rates and use that to dictate when to start taper off the QE and hence will earn the tax revenues to pay the higher yields should inflation rise over 2%.

Matt

The new input into all of this are the crypto currencies.

Before crypto there was nothing that anyone could do to avoid the drop in value of a currency if the central bank started printing like crazy.

Now there are potential stores of value that are fixed in amount, i.e. can not be subject to excessive supply.

It is not clear to me how central banks deal with this. The obvious course of banning crypto's and launching a propaganda war against them is made difficult when lots of high profile business are now holding bit coins on their balance sheets and so it looks to me like the point at which the US could ban crypto has now passed and the central banks will have to learn to deal with them and that suggests a whole new dynamic with the rules and guides still to be determined.

Regards,

Sorry to be slow - its been a long day.

But can you explain how that, i.e. the emergence of crypto, impacts the relative amounts of QE, debt issuance and tax that will finance the $1.9T relief?

Matt

It would be interesting to see what happened if Greta Thunberg waged a war on Bitcoin for being such a huge CO2 disaster.

The great and good in the US would have to get rid of it or get the Greta STARE!

Sorry to be slow - its been a long day.

But can you explain how that, i.e. the emergence of crypto, impacts the relative amounts of QE, debt issuance and tax that will finance the $1.9T relief?

Matt

Crypto potentially create asset classes that are beyond the control of the central banks, acting like super currencies that can not be debased by money printing.

If this happens then to get folk to stay with the $ and other reserve currencies will be difficult and will presumably be attempted by raising rates so that the amount of central bank has to pay to get treasuries away goes up. Central banks have got used to the idea that raising money is painless as the interest they have to pay is low or negative. That happy outlook for central banks may no longer apply and treasuries may have to pay a lot more to counter folk buying Bitcoin etc. I have no idea how this plays out, but I doubt things will continue as they have since Nixon left the gold standard. Potentially central bank currencies could be linked to cryptos, a sort of quasi-return to the gold standard, but the gold standard was abandoned for many reasons connected with the constraints it imposed on central banks.

Regards,

scrumpyjack wrote:It would be interesting to see what happened if Greta Thunberg waged a war on Bitcoin for being such a huge CO2 disaster.

The great and good in the US would have to get rid of it or get the Greta STARE!

Very funny, but is it relevant to my OP?

odysseus2000 wrote:

Sorry to be slow - its been a long day.

But can you explain how that, i.e. the emergence of crypto, impacts the relative amounts of QE, debt issuance and tax that will finance the $1.9T relief?

Matt

Crypto potentially create asset classes that are beyond the control of the central banks, acting like super currencies that can not be debased by money printing.

If this happens then to get folk to stay with the $ and other reserve currencies will be difficult and will presumably be attempted by raising rates so that the amount of central bank has to pay to get treasuries away goes up. Central banks have got used to the idea that raising money is painless as the interest they have to pay is low or negative. That happy outlook for central banks may no longer apply and treasuries may have to pay a lot more to counter folk buying Bitcoin etc. I have no idea how this plays out, but I doubt things will continue as they have since Nixon left the gold standard. Potentially central bank currencies could be linked to cryptos, a sort of quasi-return to the gold standard, but the gold standard was abandoned for many reasons connected with the constraints it imposed on central banks.

Regards,

Interesting. I kind of get it. People will be less interested in holding TBs hence yields will have to rise?

TheMotorCycleBoy
Interesting. I kind of get it. People will be less interested in holding TBs hence yields will have to rise?

Yes.

Whether this happens I don't know, but the strength of bitcoin and its emergence into more general use puts this as a possible future scenario that will reduce the power of the central banks and their political masters.

I expect that the politicians will fight this, but whether cryptos can now be stopped is a big question.

Regards,

The stuff about crypto is all very interesting, in fact I've been discussing it here:

viewtopic.php?f=78&t=27742&start=120

but the question to which my OP relates is about the $1.9TN relief package and how much it's funding will be aided by further QE. Ody has enlightened me somewhat in his ideas about BTC reducing the appeal of TBs, in fact Cathie Wood of ARK Invest has spreadin the word, see the linked thread.

However, since the broad adoption of crypto by mainstream firms is probably several years whilst the $1.9TN package is immediate, I'm more intrigued at the moment in the views held regarding QE and yields from now to mid 2022.

thank Matt

This is a 20 year chart of the 10 year:

https://twitter.com/0_ody/status/136669 ... 79811?s=20

Is the recent near quadrupling of the yield in the last year from 0.4 to 1.6 significant or just the normal fluctuations?

Have we seen the lows in yields and are we beginning to see that government debt will be more expensive going forwards or is it all just about to fall back down?

Not so long ago many were convinced that rates were heading negative everywhere, but now we have the reserve currency of the world attracting positive return. Is that an indication that inflation is coming or does it mean nothing?

Central bankers tend to keep doing what ever works until it doesn't.

Whether all this stuff about the great reset will amount to anything I have no idea.

The one new thing in all of this is crypto currencies. Will they be ignored or will they change the dynamic that the best play has been to buy treasuries which has been true for 20+ years, despite every treasury bear being convinced that treasuries are massively over priced and should be shorted. The short trade has ruined more than a few treasury bears.

Regards,

TheMotorcycleBoy wrote:that is, by printing money and creating extra $$$ to dish out, or by selling more TBs?

Everything is always paid by "printing money". That's the standard mechanism by which all spending of all types is paid. Because payment is a liability side operation for a bank. And the 'money' we know and love is a receipt for the liabilities of some bank or other somewhere.

"Funding" means nothing more than whether the backing assets of those payments are held as "floating debt" (variable interest rate), "unfunded debt" (fixed interest rate for a fixed term), or "funded debt" (fixed interest rate perpetual).

Bond issues, reserve holding and QE are nothing more than the latest iteration in the centuries long debate about how interest works and which type of asset should be held by banks.

odysseus2000 wrote:I agree, except how will they do it?,

Refuse licences to the crypto exchanges to clear the asset exchange into real money, and jail anybody in the finance industry that facilitates such an exchange.

Just as they do with hard drugs.

All hard assets of any type - from crypto to drugs - uses the liquidity mechanisms of the payment system to enable wider trade.

Crypto, gold, property and the like all have the same effect. They help reduce the demand for financial asset saving in the denomination, which will reduce the deficit and increase the tax take.

If everybody held their savings in other currencies, gold or crypto then we would automatically eliminate the deficit and have a balanced budget.

Refuse licences to the crypto exchanges to clear the asset exchange into real money, and jail anybody in the finance industry that facilitates such an exchange.
NeilW

So the exchanges move off to where licences are granted.

Convert crypto to what ever national currency in said jurisdiction and then use it to buy what ever other currency they want.

Regards,

NeilW wrote:

odysseus2000 wrote:I agree, except how will they do it?,

Refuse licences to the crypto exchanges to clear the asset exchange into real money, and jail anybody in the finance industry that facilitates such an exchange.

Just as they do with hard drugs.

All hard assets of any type - from crypto to drugs - uses the liquidity mechanisms of the payment system to enable wider trade.

Crypto, gold, property and the like all have the same effect. They help reduce the demand for financial asset saving in the denomination, which will reduce the deficit and increase the tax take.

If everybody held their savings in other currencies, gold or crypto then we would automatically eliminate the deficit and have a balanced budget.

So what's your view of the questions posed in my OP, Neil?

Printing or borrowing?

Matt