Posted on 02/22/2015 8:13:01 PM PST by Jack Hydrazine
Actually, Sir Alan wasn't a 'low-rate' guy. In fact, it was his hiking 'em up from 1% to 5% right before he left that was a big factor in the big crisis that began the following year. It's true there's a big list of goofy things Sir Alan did (like his war on Y2K) but low rates wasn't on it.
You mean by writing mortgages?
the Fed is still printing money faster than the donuts disappear at Rosie O'Donnell's favorite breakfast bar.
QE ended, they're holding their balance sheet steady.
Derivatives are still based on nothing
What are they supposed to be based on?
infomercial? Comments?
>>It’s unclear to me whether anything the Fed does ever costs it’s anonymous members anything.<<
It’s unclear to most people. That’s the reason you don’t read any articles describing their current predicament.
If people understood the tremendous conflict of interest the Fed has created for itself, they’d be factoring that conflict into their discussion as to why the Fed has held rates near zero for so long. They don’t understand it, however, and so you never see it mentioned.
Essentially, if the Fed ends up with a 5% fed funds rate in, say, two years, their cash flow, which has always been positive, will go negative, and at the same time their long maturity portfolio will be far, far, underwater, possibly to the tune of as much as half a trillion dollars because it could drop as much as 20%, or more for that matter.
And they could also possibly generate some significant inflation pressure at the same time, although that’s not inevitable. The negative cash flow and the extensive portfolio losses would, however, be inevitable if they raised rates back to historical norms.
If you’re wondering about the implications, here they are:
Regarding their cash flow going negative, the Fed has always operated at a profit, but because the Fed is a creature of Congress it has always remitted those profits to the U.S. Treasury each year (after deducting operating costs.) Imagine the day that they are forced to go to a GOP-controlled Congress and have to ask for operating funds for the next year because they’ve managed themselves into a negative cash flow position for the first time ever and now need taxpayer funding to operate.
Regarding their potentially massive portfolio losses, consider this: The Treasury has been diligently extending maturities on the publicly-held national debt at these extremely low long term interest rates, which is an excellent move, locking in those rates for decades and reducing the exposure that would come from having to roll over maturing debt at higher and higher rates. Yet the Fed has offset that move, and then some, by purchasing even more long term maturities than the Treasury has extended, in net terms. So the Fed has more than unwound the Treasury’s move and thereby exposed the federal government (as an entity) to the risk that the Treasury has been trying to avoid.
As I said, few really understand this and it’s received very little attention thus far.
I thought we were talking about Blood Moons.
And Bibi is set to speak to congress the day before the fast of Esther and Purim
No.
"QE ended, they're holding their balance sheet steady."
That's nice. However we still issue bonds and t-bills to pay debt which creates even more debt and as such, each time you do so, you create more dollars in the system. Now if you pay down the debt you destroy those created dollars BUT our debt grows which means more and more dollars in the system.
"What are they supposed to be based on?"
Most of them are based on glorified mathematical equations involving interest rates and swaps and options and mortgage backed securities etc. The problem with them is most of it is traded by people who have little understanding of what exactly the product is. It is more algorithm than product. When you buy stock in Pepsico you look at a balance sheet and see how they are doing see if sales met expectations any huge law suits looming etc. In essence it is based on tangible physical things. Derivatives aren't based on real things but more on pure math.
No.
Why not? That's what caused all the problems. Mortgages. Mortgages that they could have written under Glass Steagall.
That's nice. However we still issue bonds and t-bills to pay debt which creates even more debt and as such, each time you do so, you create more dollars in the system.
That's nice. But you said the Fed was printing money. They're not. They stopped.
Most of them are based on glorified mathematical equations involving interest rates and swaps and options and mortgage backed securities etc.
You said they were based on nothing.
The problem with them is most of it is traded by people who have little understanding of what exactly the product is.
How do you know? Do you trade them?
Derivatives aren't based on real things but more on pure math.
They are based on real things. Real commodities, real interest rates, real stocks, real bonds.
Money is created by way of policy involving interest rate manipulation etc. by the FED. Lower interest rates allows more borrowing and allows the Gub'ment to issue more debt than the could at a higher rate. It]s all connected my friend and the FED is at the heart of it.
"You said they were based on nothing."
Yes, exactly. Pepsico makes physical things. Most companies do and when you buy stock in them you can measure their worth in physical output. Derivatives are not, they are mathematical concepts, they are vapor much like our dollar. You can create them out of thin air by moving numbers around.
"They are based on real things. Real commodities, real interest rates, real stocks, real bonds."
No they are not. They are math formulas using other things like interest rates. (BTW calling an interest rate a real thing is funny. Do me a favor find me a physical interest rate. Not numbers on a page of text etc. a physical from not a representation)
And no I do not trade in derivatives. I don't invest in things that can't be described in a simple single sentence. It's why I didn't jump on the ENRON bandwagon even though all the brokers I dealt with at the time said it was a sure fire bet. Many of those same guys are telling me derivatives are the way to go right now.
No they are not.
Sure they are. I can buy (or sell) a derivative based on wheat, beef, oil, US Treasury rates, the S&P 500 and many more.
They are math formulas using other things like interest rates.
And wheat, beef, oil, etc.
BTW calling an interest rate a real thing is funny. Do me a favor find me a physical interest rate.
Interest rates aren't real? Are they imaginary? That's funny.
And no I do not trade in derivatives. I don't invest in things that can't be described in a simple single sentence.
I can find you plenty of derivatives that can be described in a sentence or two.
Many of those same guys are telling me derivatives are the way to go right now.
Really? What are they telling you to trade?
I agree with you, you definitely shouldn't trade derivatives.
....”I think the whole world is at risk, and as a father it concerns me like nothing else”....
There’s a true worldwide “shift” happening which of course includes the markets. This shift, imo, is all about nations and country leadership positioning themselves for world governance and who gets to sit at the top of that once it’s in place.
Gold has been moving about from one country to another, the “landscape” of countries in conflict, the trade deals etc. all are moving parts of this.
The EU is shifting as well ...not to mention Euoasia etc.....Nobody is on solid ground currently...and this is because of this “shift” to another system.
Yeah I can buy Gold certificates OR I can buy Gold.
Why do I need a derivative on US treasury rates when I can just buy a US Treasury Bond?
Gold certificates aren't real gold, Treasury Bond derivatives aren't real Treasury Bonds they are vapor.
"Interest rates aren't real?"
OK give me the physical dimensions of one how much does it weigh how many inches long etc.
Derivatives are basically a way for the institutions in the financial sector to create wealth for themselves by creating a math formula instead of buying and selling an actual stock etc.
So you do understand they can be based on real things. Excellent!
Why do I need a derivative on US treasury rates when I can just buy a US Treasury Bond?
One reason could be leverage. Another could be ease of trading. Lower commissions. Hedging.
Gold certificates aren't real gold, Treasury Bond derivatives aren't real Treasury Bonds
Who said they were?
OK give me the physical dimensions of one how much does it weigh how many inches long etc.
Only things with physical dimensions or mass are real?
I could show you how they increase my mortgage payment or my IRA balances. Really.
Derivatives are basically a way for the institutions in the financial sector to create wealth for themselves
How does creating a derivative create wealth for an institution?
So I can leverage my bet on a mathematical formula that involves a treasury bond. Yup I see now. Not only are you wanting me invest in vapor you are now setting me up to lose more money than actually paid down.
"Who said they were?"
You did, you said they were real. They aren't glad you are finally catching up.
"How does creating a derivative create wealth for an institution?"
Oh you mean they do it all for free? Hahahaha Tell me how they make no money on trading derivatives they just do so from the kindness of their hearts. This should be good.
Yeah basically. An derivative exists only in the mind. It is a mathematical construct. Same for interest rates.
It's possible.
Not only are you wanting me invest in vapor
No. You should never trade a derivative.
Gold certificates aren't real gold
"Who said they were?"
You did, you said they were real.
Nope. Never did. Not now, not ever, never.
They are based on real things. Real commodities, real interest rates, real stocks, real bonds.
No they are not.
LOL!
"How does creating a derivative create wealth for an institution?"
Oh you mean they do it all for free?
Your first silly claim doesn't make this silly claim correct either.
Tell me how they make no money on trading derivatives
See, creating a derivative doesn't make them any money, they have to trade it.
Good, you're learning.
Derivatives exist on paper, they're a contract.
Oy!
Nice job. I believe you’ve laid it out so concisely, even a caveman could understand it.
Can't trade it till they create it. QED.
Bottom line the are not ownership in a company or ownership of a government backed financial instrument. They are nothing but a bet on a mathematical formula.
"Nope. Never did. Not now, not ever, never.
Well good then. You finally understand. Derivatives are not real. they are just a vehicle to create an income stream instead of actual investing in companies and such. Glad you finally got it.
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