Exigent Circumstances

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De Graaf
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De Graaf

Exigent Circumstances
« on: June 24, 2020, 08:53:33 PM »
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Hello friends,

I wanted to bring a question to the community that's been on my mind recently, if you indulge me and can spare the time. It is the following:

What does it mean* for a central bank to own (large) parts of the private sector?

*Clarification: you can switch the homely word "mean" with the more proper "imply", as in what are the implications (the causality) of it.

To give some context to the question, the title refers to section 13(3) of the Federal Reserve Act, allowing the FED to intervene when things are dire. It has been discussed multiple times, such as in the OP here https://arbusers.com/index.php?topic=7174.0, about the amount of money that are printed in the world today. In the US, we are seeing all time highs in stock indexes while the economy is collapsing, all due to this single entity.

What will happen when these assets are on the FEDs balance sheet in late fall* and no one wants to buy them, potentially. What does it even mean for a central bank to be selling something other than money? (10y Treasury bonds yield is ~0.75, astonishingly).

*Clarification:  programs expire on Sep 30, , Nov 3rd is election day, meaning they might be covertly bying the elections.

It's been a delight to see the comunity pay closer attention to the crypto domain, and I implicitly bring up this broad question with a particular interest in said domain, namely I see two positive scenarios for the price of crypto assets:

1. There is so much money around that entities leverage up even more and start to speculate on this charade, including crypto.

2. A global collapse occurs, unprecedented is the epithet, and people flee to anything that remotely resembles trust, including crypto, while the social institutions and markets do not provide any.

Thanks in advance and cheers.
« Last Edit: June 24, 2020, 08:57:05 PM by De Graaf » Logged
arbusers
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Re: Exigent Circumstances
« Reply #1 on: June 25, 2020, 08:14:51 AM »
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Once again, great questions that require a multidisciplinary approach. What I don't like is that we are touching many issues at once, making commenting more difficult and complex than what it could be if each issue was approached separately.

Section 13(3) of the Federal Reserve Act, was aggressively written to avoid loans backed only by securities. Section 4003 of CARES, requires that any use of CARES funds must adhere to 13(3), "including requirements relating to loan collateralization, taxpayer protection, and borrower solvency". SPV purchases using CARES funding from Treasury are subject to 4003(c)(3)(B) protection against "losses to taxpayers,”. The Fed use of "leverage" must still take 13(3) collateral. Neither stocks nor bonds are their own collateral.

To sum up, my opinion is that the FED is acting illegally.
In times like these, I would understand a little illegality if the results were holy, but FED’s policies are failing to bring down unemployment while simultaneously inflating financial asset values. As such, they are having a profound effect on the distribution of wealth and they are ballooning moral hazard, where millions of people opt to stay at home instead of going to work, by basing their own well being on PPPs and other programs like this.

This is communism under orgasm.

And yes, the FED is buying the elections. Not only by saving multibillionaires, but by sending paychecks to millions of Americans who prefer to stay at home than go to work. Over the years, we have seen situations like this, where governments are trying to buy elections through stock markets. I personally have seen this situation in the Greek stock market and the elections of April 2000, when state funds were buying stocks to keep the index up. This irrationality stoped the first Monday after the elections. However, no-one went to prison, simply because the government won the election and because banana republics operate like this. No wonder why Greece went bankrupted some years later.

Now you asked what is going to happen if these assets stay under the FED’s balance sheet and no-one wants to buy them. Rational thinking gives 2 answers:
a. The FED is ordered to sell them, creating a collapse unseen in modern history.
b. The FED is ordered to keep them, but rolling over the burden to the American people.
I believe the next POTUS will opt for option b. To avoid a collapse in American society, the system will roll over this burden in the depth of time, sharing the problem among decades and generations. This will have a profound result, as decision-makers and people all over the world will realize that the American era is gone. It will take some (but not many) years until the US steps down as the leading nation of the world.

There is a big possibility that cryptos will be one of the safe heavens that people will run to. However, there are preconditions to be met for that. One of these preconditions is what I call the escape velocity of the price of Bitcoin, that can be seen here: https://arbusers.com/index.php?topic=7174.msg77668#msg77668

Cryptos should definitely be on the table, but a prudent investor should not put much of his portfolio in them. I would say that anything between 5 and 10% of the investing portfolio should be in cryptos, but not more than this. Maybe, in the future we have some better conditions for a bigger part of an investment portfolio in cryptos.
Cryptos markets is not mature. That means that the temperament of investors in this market is very unstable. This instability creates bigger dangers and rewards. The prudent investor should look for a good entry point and then stay there to enjoy the ride. I take this as a task for my self, identifying the good entry point, because I put my money where my mouth is. Like in the stock markets, most Bitcoin’s gains come in the cryptocurrency’s 10 best days of the year and this highlights how difficult it is to time and trade the market. In the end, holding is indeed tough, much tougher than trading. But holding pays far more than trading. Time in is more important than timing. I know it is not sexy, no Hollywood here, but investing pays more than trading, and it allows to sleep calmly at night with no intensive heartbeat.
« Last Edit: June 25, 2020, 08:17:02 AM by arbusers » Logged
turbobets
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Re: Exigent Circumstances
« Reply #2 on: June 26, 2020, 02:53:06 AM »
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A little above my head but fascinating. Can you give more detail on election buying, are they propping up the economy for Trump re-election?
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arbusers
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Re: Exigent Circumstances
« Reply #3 on: June 26, 2020, 09:28:36 AM »
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are they propping up the economy for Trump re-election?

Absolutely no. They are not propping the economy. As you see, the real economy goes from bad to worse. What they are doing, is buying votes. They do it with the following ways:
With the PPP and similar programs that allow people stay at home and receive paychecks far above their previous salaries.
By supporting the stock market, guaranteeing that pensions and 401ks will remain very high, even if the real value of them will be depleted by inflation.
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