Gold

[nomadic]

Whilst I think it's highly unlikely that the US will default, I don't see it as a given that the debt ceiling will be raised.

I'm sure Mr Bernanke would be more than happy to print some money to tide the US over.

Actually, I think "printing money" also requires an increase in the debt ceiling. The money printed by the Fed still counts as debt. The treasury still produces a bond and sells it (thereby increasing the debt), it just happens to be the Fed that prints money to buy it.

Also, there's some debate over whether or not the 14th amendment would allow Obama to unilaterally increase the debt ceiling if it can't be done in the "conventional" manner:

"Section 4. The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned."

http://en.wikipedia.org/wiki/Fourteenth ... nstitution

[Iron]

Actually, I think "printing money" also requires an increase in the debt ceiling.

Hi Nomadic

You may be right, but my understanding of QE is that the central bank credits itself with some money ex nihilo (out of nothing), and then uses it to buy bonds (see http://en.wikipedia.org/wiki/Quantitative_easing). I don't see how that would require an increase to the debt ceiling.

On reflection, though, I think it's an unlikely solution, as it would be a default in all but name, and America's future ability to borrow cheaply would probably be ruined.

Jeff

[CaerMyrddin]

Markets have been pretty calm about this issue. The US can always print more money and avoid nominal losses to the investors and offset part of their debt.

[Iron]

Depends on what you consider to be pretty calm.

The S&P had quite a tumble yesterday, and the cost of insuring against default on one year US bonds hit an all-time high. But, on the other hand, the markets aren't in freefall (yet!).

Jeff

Markets have been pretty calm about this issue.

[nomadic]

You may be right, but my understanding of QE is that the central bank credits itself with some money ex nihilo (out of nothing), and then uses it to buy bonds (see http://en.wikipedia.org/wiki/Quantitative_easing). I don't see how that would require an increase to the debt ceiling.

The key there is "to buy bonds". The treasury has to issue new bonds in order to raise funds to meet the revenue shortfall, and that = debt. If there is not enough natural appetite in the market for those bonds, then the interest rate the treasury has to offer on those bonds will have to increase through supply and demand (otherwise they won't attract buyers).

The Fed can "print money" in order to step in and soak up the excess supply in order to keep interest rates artificially low. But regardless of whether or not the Fed buys the treasury's new bonds or someone else does, the Treasury still needs to issue a bond - and it's the sale of those bonds that increases the debt. Doesn't matter who buys them. The treasury still owes someone.

[Iron]

The key there is "to buy bonds". The treasury has to issue new bonds in order to raise funds to meet the revenue shortfall, and that = debt.

My understanding is that QE is a bit like you going to your bank and saying 'Can you add 100 billion dollars to my bank account please? You don't need to transfer the money from anywhere - just create it out of thin air!'.

Whilst you or I would get committed for making such a request, Ben Bernanke can do precisely that with the US Treasury's bank account!

So he would be buying bonds from the market with the newly created money, meaning he would be lowering America's debt without having to spend any money he had before the QE! In the words of Paul Daniels, 'Now, that's MAGIC!'

Jeff

[nomadic]

'Can you add 100 billion dollars to my bank account please? You don't need to transfer the money from anywhere - just create it out of thin air!'.

I suppose that's one theoretical way to look at it, but what you're missing is that they do still at least pretend to adhere to accounting principles in the process. Using your example, the Fed will debit "cash" to the Treasury's account on the Asset side, but there will also need to be a balancing entry - a credit to "Debt" on the Liability side.

You've probably heard references to the Fed's "ballooning balance sheet". Those assets causing the Fed's balance sheet to balloon are U.S. Treasury bonds (which are technically an asset for the Fed and in turn a liability for the Treasury).

[nomadic]

Those assets causing the Fed's balance sheet to balloon are U.S. Treasury bonds

Sorry, didn't mean to imply that they are exclusively Treasury bonds... but rather that treasuries are a significant amount and the source of the majority of the most recent increases.

[Iron]

I suppose that's one theoretical way to look at it, but what you're missing is that they do still at least pretend to adhere to accounting principles in the process. Using your example, the Fed will debit "cash" to the Treasury's account on the Asset side, but there will also need to be a balancing entry - a credit to "Debt" on the Liability side.

You may be right, although I'm not sure normal accounting principles apply to QE, given that the money doesn't come from particular organisations or individuals, but is created out of nothing. So surely with QE there is a debit side but not a credit side.

You could also argue that QE is a redefining of the currency, rather than a debit in the traditional sense. If there are a trillion pound notes in existance, and you print another trillion, then in theory each pound is worth half as much as it used to be (and you've just effectively halved your national debt in the process!).

BTW, if anyone things that Nomadic and I have 'debit' and 'credit' mixed up, accountants refer to deposits as 'debits' and withdrawls as 'credits', even though peoeple talk about crediting money to their bank account (just to confuse things! ).

Jeff

[nomadic]

Well, if the Fed's balance sheet doesn't have a credit side, then should we just refer to it as "the Fed's sheet" since there's no way it would ever "balance"?

Keep in mind though, in terms of simply quantifying national debt, it doesn't really matter in any case whether or not the Federal Reserve has a balancing credit on its balance sheet or not - it's the Treasury's balance sheet (not the Fed's) that matters in terms of quantifying the national debt... and if anyone is holding a U.S. Treasury bond on their balance sheet as an asset, then it is a liability (specifically "debt") for the Treasury.

For example, in an optimistic scenario, the Fed could eventually unwind QE at some point by selling the bonds it holds onto the open market. If the bonds held by the Fed didn't already count as debt, then it would have to mean that the sale of a bond by the Fed into the market to someone else (let's say some sort of private investment fund bought it), would then have to finally trigger it to be counted as debt. But that accounting technique couldn't work - since it would mean the debt number could go up simply because a bond changed owners even though the treasury didn't borrow any new funds. The only way it works is to count it as debt as soon as the bold is sold by the Treasury (regardless of who buys it).

[nomadic]

Was just looking up some of the technical specifics of the QE process. Technically the Fed is legally forbidden to buy bonds directly from the Treasury. Therefore, the Treasury must sell the bonds they issue into the open market (definitely counted as debt).

The Fed then steps into the open market as well and purchases bonds (with QE funds) - could be newer bonds or could be older bonds - which offsets the impact of the supply/demand imbalance in the bond market so that interest rates don't increase. So basically, what technically happens is that Goldman Sachs actually buys the bonds from the Treasury, then turns around and sells them to the Fed at a markup.

[superfrank]

what technically happens is that Goldman Sachs actually buys the bonds from the Treasury, then turns around and sells them to the Fed at a markup.

That's exactly what happens.

Also, banks can use essentially infinite leverage. They get to borrow at 0.6% on the interbank market, buy bonds issued at 3% and make a 2.4% spread on all that money for as long as the low short term rates last.

And we are supposed to believe that huge salaries and bonuses are justified to maintain and attract banking 'talent'.

Investment banks make most of their money directly or indirectly from governments and hence taxpayers. They are parasites.

[superfrank]

S Korea buys gold as safe haven, first time since '98

http://www.bbc.co.uk/news/business-14368064

Better late than never.

[andyfuller]

Can some one explain why Gold is currently falling despite all the selling and fear? They keep saying there is a rush to cash (Bonds) but why don't people want to hold Gold?

[sweetybt]

I don't know exactly Andy as I am short on gold

but today I went long on diesel. about 50L

and Cote de Bourg, .75L

and poor in running punts.