I have tried to read and process this article:

(Reuters) - Debt may be everywhere but there's a scarcity of bonds.

http://www.reuters.com/article/2013/05/15/us-investment-bond-scarcity-analysis-idUSBRE94E07P20130515

I just can't get it. I don't understand squat. Let's start with central banks owning bonds.

Quote :

"JPMorgan estimates that the world's central banks and commercial banks alone now hold some $24 trillion worth of bonds - or 55 percent of the entire $44 trillion universe of government, asset-backed and corporate bonds as captured by Barclays Multiverse Global Bond Index."

Who owns the central banks?! I mean, they have to have deposits, otherwise they couldn't have bought the bonds. Are these deposits by citizens? Or are they by corporate banks? If that latter, that makes zero sense. Why would the government sell bonds to a central bank, only to have that central bank sell itself to normal banks? Why not just sell the bonds to normal banks? If the central bank printed money to buy the bonds you didn't actually borrow.

Ok, let's move on

Quote :

"And as both the Fed's and the Bank of Japan's bond buying will exceed new bond sales by their governments by at least $100 billion this year, there will be fewer bonds around this year than last despite all the new debt sales."

Central banks are buying bonds faster than governments issue them (borrowing through the fiscal deficit). Where is this money coming from?! I don't understand.

Quote :

"It concluded that with AAA- and AA-rated sovereign borrowers selling an estimated $2 trillion of new bonds annually, supply of this high-quality collateral would probably be two to three times demand in normal conditions. However, it said demand could well approach $10 trillion in "stressed markets"."

So is this just all a liquidity problem? The market is bidding up cash relative to other assets, it's just that we substitute bonds for cash? The bull market for bonds is... deflation?

Quote :

"International Monetary Fund economist Manmohan Singh has in a number of papers over the past year estimated that interbank mistrust and banks' narrowing definition of acceptable collateral reduced the re-use or re-pledging rate by the big banks to about 2.4 times from 3.0 before the crisis, involving a drop of up to $5 trillion in the cash generated by the banks."

This also sounds remotely plausible, that it's not so much about the economy, as it is the delivering of banks. Great, so now instead of underwater banks we'll just have underwater governments

I'm still not getting this. The article clearly state that it's the central banks that are buying all the bonds, and between them and the government there's not a net outflow of bonds. How is there a growing demand of bonds from central banks? I mean, what?

Okay, my head is done exploding now.

5/17/2013 9:15:59 AM

Central banks buy bonds with money that didn't exist prior to the purchase. Its what puts money in circulation.

Bond sellers that get the new money are supposed to lend it out.

http://www.npr.org/2013/04/08/175950416/the-alchemists-who-control-the-purse-strings-of-the-economy

[Edited on May 17, 2013 at 10:19 AM. Reason : a]

5/17/2013 10:13:55 AM

Quote :

"Central banks buy bonds with money that didn't exist prior to the purchase. Its what puts money in circulation."

http://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab1

(in millions)
U.S. Treasury securities 1,860,584
Treasury currency outstanding[15] 45,052

Now, the money supply here isn't sufficient to account for their bond holdings. Other metrics for money supply range from 100s of billion to 10 trillion. In terms of currency your statement is clearly false. I don't know what other terms you might intend.

5/17/2013 10:29:36 AM

I know at least in America, each Federal Reserve Bank is owned by the nationally chartered banks in its district, which must each invest 3% of their capital as stock in that Federal Reserve Bank, and cannot sell or trade or even use it as collateral (State-chartered banks may also purchase shares, but no other entities, whether individual, corporate, nonprofit, or foreign, are allowed to own shares in a Federal Reserve Bank); from this investment, all member banks receive an annual dividend of 6%, by law.

5/17/2013 2:02:10 PM

^^

Those numbers show the currency supply increasing, but I'm not all clear on how to read the chart in terms of bond holdings. Supply increases by bond and securities buying.

Let's say there is $10 in circulation and the Fed owns $2 in bonds. There is a $1 bond for sale. It buys it with $1. Now it owns $3.20 (or some change in the value related to inflation) in bonds and there is $11 in circulation.

That's how I understand it, but I could be totally wrong.

5/22/2013 11:24:42 AM

So basically, it sounds like the Central Banks are trying to force greater investment the private sector by sucking up most of the safest, conservative investments. Without these places to hide, (theoretically) banks are forced to start loaning more money to the private sector.

5/23/2013 10:32:42 AM

If government is running a deficit then it's either:
- competing for investment through bond issuance
- inflating the money supply

My mental picture was that our federal government is competing for investment through bond issuance. That's neglecting de-leveraging on the state and local level, but I don't that changes the balance.

But by the current article, on-net the Fed and federal government are buying bonds. So the collective whole of government institutions are buying back bonds, and deficit spending. I guess both of those should spur the economy. I just don't think that demand for USD should be able to support that much printing. Nor do I think it's accounted for in growth of money supply.

So I guess Bernanke just invented perpetual motion.

5/23/2013 11:37:24 AM

^

The book/NPR article above says as much. "Inside Job" also claims that after the 2008 debacle the Fed was just throwing it's arms up and saying, "Fuck it. It's worked before." and has continued doing pretty much the same.

5/23/2013 12:48:02 PM

^^ this has been going on longer than Bernanke.

5/24/2013 9:30:01 AM

Quote :

" I just don't think that demand for USD should be able to support that much printing."

It's not like we're going through a worldwide economic slump and the USD is the global reserve currency or anything.

5/24/2013 12:34:41 PM

sigh.

It's only a few posts before the anti-intellectualism pops into the thread.

Quote :

"It's not like we're going through a worldwide economic slump and the USD is the global reserve currency or anything."

This statement is implying something that is false. I know it to be false because we have the exact numbers that show the currency in circulation. Here they are.



Of course the money supply is growing faster than inflation, and of course this is because we're in recessionary conditions, and foreign demand is a component of that. But regarding what you're implying

a) the rate of money printing was not abnormal in any way
b) federal government deficits (even just recent years) are in the Trillions

That's trillions with a plural "s" on the end. Just imagine, if we printed exactly 2 Trillion dollars right now. At the normal rate of printing, it would take about 15 years to reach that.

I know it sounds nice to imagine that we're printing lots of money to finance our debt. It really would make sense, but it's just not the reality. The demand for our dollars themselves is woefully insufficient to support any major fraction of our debt.

5/24/2013 1:16:00 PM