Crucial Economic Issues in the Age of Trump

I sent this email to Ellen Brown's public banking group. She had asked how I knew that the Fed tested counterparties by raising rates a bit. That was in response to this article I shared.  http://www.talkmarkets.com/content/financial/feds-andolfatto-powell-and-the-secret-goal-of-the-fed?post=173896&uid=4798

It was a good question.

In response, I shared this. It doesn't answer all the issues, but gives an understanding of them and maybe a few questions that need to be discussed are revealed:


Good question, Ellen. Well, it is (testing the counterparties) because 1. the Fed is raising rates slowly, and 2. the long bond operates within a strict channel. Get much above 3 percent on the 10 year and it drifts lower. Art Cashin has said that going over 3 percent is a worry, and historically, he was very concerned about collateral in the past. I write about it here: http://www.talkmarkets.com/content/bonds/bond-vigilantes-liberty-street-fed-collateral-study-and-art-cashin?post=167584&uid=4798 I probably should have included this in the other article. It is an inference that I am making because Cashin has been on Wall Street forever. Collateral quality is what keeps it all together. 

I cannot prove the Fed allows rates to rise in order to test the counterparties, but the Fed most likely wants counterparties to have too many bonds than too few bonds. Remember, the collateral of choice for Wall Street, especially after the MBS debacle, are treasury bonds, the new gold. They won't fail, or at least they won't fail unless Trump has his way in destroying the New Normal. Ed Yardini says there is a cap on long rates. Trump's men have written about breaking the New Normal which is based on control of the long rates. That is why I wrote this:  http://www.talkmarkets.com/content/bonds/trumponomics-increase-exports-slow-imports-bludgeon-the-new-normal?post=112404&uid=4798 

Not only could Trump attempt to break the New Normal, but he has spoken about accepting less than par when China decides to redeem treasury bonds. That would cause nations not to buy the bonds, and long interest rates would soar. If Trump carries this out, this is a radical and dangerous thing coming. I don't know if he would go through with it but that is why I wrote this, lol: http://www.talkmarkets.com/content/global-markets/trumps-punishment-of-china-the-start-of-a-radical-rejection-of-foreign-capital?post=182537&uid=4798

And I forgot where I wrote it but I commented on Tyler Durden's statement that in a downturn, counterparties would need 11 trillion dollars worth of bonds. If that is true, I don't know how that would be achieved without scaring counterparties into buying more bonds. I think the Fed does that. Hoarding bonds is like hoarding gold. Solomon Bros were ahead of their time, lol.

The war to protect or undo collateral is at the heart of financial stability and Trump's efforts to destroy that stability. Ominous times. Maybe. I would add that in Asia, commodities replace bonds as collateral. Again, mark to market would have to take place. It is a possibility. Then our bonds would behave more normally. Could we afford it? And public banks replacing the Fed? How would big business roll over their loans? It could be done but the public banks would have to be really big. These issues raise more questions than answers, Ellen. 

Gary Anderson
Talkmarkets Founding contributor/ Las Vegas

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