bubble, bubble, toil and trouble

Good morning.

Yeah, Europe woke up, and no the US dollar didn't like the result; the dollar index fell to 78.5 before bouncing briefly back over 79 - but is now heading back down. At least some European investors seem to be rolling into Yen, which climbed to 87.2ish against the US currency before the small dollar bounce. Said dollar has fallen 5.2% since Saturday's peak at 92.

But that's not important. Well, it is. It matters.

But it's not important compared to the bubble Dr. Bernanke and Mr. Paulson have started in treasuries. The first two charts at that page are yields, so "down" means "more people buying" - and paying more for it - not less. Those numbers are from close yesterday, by the way; as I type this the 10-year is at down to 21.1 (in those chart system numbers), or 211 basis points.

Now, this all sounds great, right? Because people have been piling onto treasuries, rates are going down because dollar paid is going up. New debt is cheaper. And it is great, unless (or, rather, until) that bubble pops. So what's that mean? See the link above. It's the currency-destruction/Federal debt explosion I've been worrying and talking about for some months now.

China Daily is running an editorial saying the US should not expect China to endorse unlimited borrowing - or unlimited T-bill purchases. These warnings are getting stronger and more frequent. I hope Dr. Bernanke and Mr. Paulson are aware of them.

Also, here's an article on the Treasuries bubble, at Reuters. Brad at the CFR says basically that the Fed is trying to make up for the collapse in agency purchases with the Treasuries swaps.

Mish talks about this as a component of quantitative easing, American style, and the differences between Japan's efforts in the 90s and US efforts now. The section on the free-money machine the Fed has set up for banks is of particular interest:

The Fed is looking at the "benefits" of purchasing longer-term Treasury securities. The benefit is to banks who are front running the trade. Banks can now borrow from the Fed at the discount rate of .5% and invest somewhere out on the yield curve at a higher rate.

And as long as the Fed is not going to contract credit, banks can hold to maturity and pocket "free money". The odds of Bernanke contracting credit any time soon are essentially zero.

Bernanke hopes ZIRP will spur lending. But why lend in the middle of a recession with credit spreads blowing sky high and consumers walking away from mortgages, when you can borrow from the Fed at .5% and have guaranteed free money?

There is infinite demand for free money. But note that only banks can get it. Citigroup is not going to get a margin call from the Fed no matter how many treasuries it buys. You or I would get one in a flash if the rates went against us. ...

Yes, this is artificial demand. And no, this is not going to help the economy. But [don't short this;] standing in front of a freight train does not make a lot of sense. And although the treasury trade will at some point blow sky high, that point will probably not happen until shorts give up trying.

eta: Dr. Roubini has more concerns than I might have expected. He's still onboard with the reinflate plan, but is increasingly worried about the severe recession extending well past 2009, and worries about monetisation.

Eight days meme

Tagged by lyonesse: the Eight Days Meme posting something that made you happy that day each days for eight consecutive days. Then you tag eight people to do the same.

Today (Wednesday 17 December):

1. Sparrowspheres at the bird feeder.
2. This new pick technique I'm screwing with that makes sounds kind of liquidy. Not something to use everywhere, but it's definitely a tool I'll use.
3. 16 bars of Bringing It-class^* intro for a new song. I have no idea what's next yet, so actual success in actually Bringing It is still entirely up in the air and worrisome. Awesome is a heavy burden. -_^

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^*: A couple of times now I have written songs with openings that in my head are essentially saying, "Okay, listen the fuck up: I'm bringing it. Seriously, are you ready? Because I am goddamn Bringing. It." These are the kinds of things that when I play them in crowded spaces people across the room turn and stare. "Stars" has an intro that says I am goddamn Bringing It. "Artifacts (You'll Never See)" has an intro that says I am goddamn Bringing It, with the codicil of And It Doesn't Like You. (This was the thing where I proved to annathepiper that Summer, my mandolin, could in fact be played with nasty intent.) This new thing may be in that general class of thing. We'll see.