Thursday, August 19, 2010

What'd He Just Say??

The FED has announced that it will be 'reinvesting' the proceeds it collects from its holdings of mortgage debt --
Federal Reserve officials decided to reinvest principal payments on mortgage holdings into long-term Treasury securities, making their first attempt to bolster growth since March 2009 to keep the slowing U.S. economy from relapsing into recession.
This has to be one of the most horribly misleading euphemisms I've ever encountered.  It's so bad that most of even the mainstream articles announcing the move printed 'reinvest' in sneer quotes as I did.  Of course, most of them recognize the euphemism to mean something different from what I consider it, although it would be interesting to know for how many our opinions are beginning to converge.

I wonder if Orwell had central banks in mind when he came up with the idea of newspeak.  Central banks do not 'invest.'  They 'commit fraud.'  I mean, commit fraud, no sneer quotes about it. 

When private individuals invest, they do so with their hard-earned money with the intent to generate a return for themselves.  When the FED 'invests,' it does so with money that it prints ex nihilo and has little to no regard for the return its assets generate.  Rather, the primary purpose of its 'investments' is to manipulate markets to favor a handful of the largest banks, with an occasional thought to certain political interests to protect its state-enforced monopolist power.

What does this mean for markets?  Well, so much for the talk about the FED 'winding down' its ballooned balance sheet.  But practically, it doesn't mean all that much, actually.  Since the FED is holding mortgage paper, technically, some people are effectively making their house payments to the FED, just as they would to whomever held their debt.  A normal bank would take the payment and do what normal banks do with it, but when the FED receives a payment, technically the money disappears into the monetary void of the FED's vaults.

If the FED did nothing but collect these house payments, the monetary base would slowly contract.  This announcement simply declares that the FED intends to use the payments to buy Treasuries, so that the monetary base will not contract.  This will push down interest rates on Treasuries, at least while the FED stays in the Treasury market as a buyer.  It is a political announcement.  "The FED is compassionately supporting markets," it says.  But, of course, it is doing nothing of the sort.  Sleight of hand, market blather, nothing more.

But you don't really need to know all that.  All you need to do is check the monetary base (BASE) at the St. Louis Fed website.  It will tell you everything you need to know.

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