By SD Contributor Eric Dubin
Six months from now, or sooner, we will start hearing about the latest bullsh*t exit strategy brought to us by the Federal Reserve. It will involve the brilliant idea of securitizing the “assets” on the Fed’s balance sheet and selling them off into the public markets. It will require packages sold at a discount because much of the stuff that’s marked-to-make-believe now on the Fed’s balance sheet (other than the Treasuries) will be offered to real investors and not governments with printing presses. Real investors, for the most part, demand satisfactory risk/reward — thus the discounted offerings.
But guess what? With that extra crap flowing to the public market, it will crowd-out existing ongoing debt offerings which are already having a hard time being sold at current interest rates. Thus, instead of the Fed claiming victory by not having the velocity of money go bonkers since sequestered “money” on their balance sheet is “sterilized” by “honest” purchases by new investors locking up the funds, in reality, interest rates will shoot higher because:
a) they have to move higher to improve the risk/reward of all credit offerings from the Fed or new stuff;
b) crowding out raises interest rates generically because there’s more competition for real buyers given the larger supply of paper up for sale, thus demanding higher rates to entice enough “real” investors to take on the massive supply.
So, the Fed will try to extricate itself from balance sheet purgatory and blow off its face as 300+ basis point higher long rates manifest across all credit, sending the economy into the tank. Heck, having real investors hold all that paper vs. sequestered on the Fed’s balance sheet doesn’t even give the Fed the benefit of velocity of money staying dormant because the real investors will use the paper they buy as collateral for even more investing, which is part of the mechanics of the so-called shadow banking systems’ expansion of the money supply (and thus, velocity will start to rise).
Bottom-line: The Fed is F*CKED.
At this point, we’d be better off with a goldfish as the Fed Chair.