the Fed is not monetizing(ZT)

DrStool      
post Today, 02:34 AM
Post #39


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QUOTE(linrom @ Sep 21 2007, 09:23 PM)
QUOTE(DrStool @ Sep 21 2007, 04:02 PM)

Determining whether a central bank is monetizing isa very simple arithmetic exercise. Is the Fed growing its asset base as fast as the Treasury is increasing its debt. If the answer is yes, then the Fed is monetizing. If the answer is no, then the Fed is not monetizing.

The Fed has not grown its asset base one iota in the past 9 months. Government debt has increased by $300 billion over that time. In that respect the Fed has not only not been monetizing, it has been demonetizing. Those who have been demonizing the Fed simply aren't interest in the Fed's demonetizing.

Who's been buying all that debt? Well, it's a bit tricky, but FCBs have bought about $220 billion in combined Treasury and GSE paper over that time, but only $60 billion in Treasuries. In effect they have been monetizing Fannie and Freddie's debt, and that has kept Treasuries from crowding out private debt.

So essentially, the BoJ, PBoC, and OPEC, are buying and monetizing our crappy real estate backed paper. But are they ultimately to blame. Their banking systems are being flooded with US dollars from US consumers. They have to recycle those dollars, so they monetize our crap paper. But at the heart of it is a US based system headquartered on Wall Street that has made it too easy for the US public to continue to consume by constantly expanding its debt. The monetizers in chief are the structured finance genius wildcat financiers, who hand in hand with Madison Avenue propaganda meisters have hooked the American psyche on ever greater levels of debt and consumption.


There appears to be a much simpler way to determine extend, if any, of Fed debt monetization. Every week, the Fed publishes a report titled H.4.1Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks. This report gives a breakdown of the monetary base and changes on a week-to-week and annual basis.

For instance, during past 12 months the FRB monetary base increased by $24 billion of which about $10 billion was an increase in T-Bills and $11 billion an increase in Repos compared to Total Public Debt increase of $495 billion.

However, this bookkeeping is grossly misleading since foreign held dollars are not included in Fed's Monetary base.
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That's another way of saying the same thing, and the H41 is where I got the data showing no increase this year. All of the $24 billion increase over the past 12 months was in the last 3 months of 2006. None of it this year. The one month moving average of the SOMA has been dead flat all year.

I don't feel that the bookkeeping is misleading. It seems very straightforward. The FCB holdings of Treasuries and GSE's held in custody at the Fed are prominently reported as a memo item. So it's pretty easy to see who has been monetizing and who hasn't. It sure ain't the Fed. They have monetized zero this year. Even the total of $24 billion over the past 12 months means that the Fed only monetized 5% of the total increase in the government's debt held by the public. Perhaps they will do the same thing in the fourth quarter of this year, perhaps not. Until now, they have been the model of prudent central banking this year.