Keeping yields on long MBS serves as a cap on the long bond.

If the Fed stick to their word and stop purchasing MBS, or worse, start unwinding their MBS in an open market, long yields will rocket, with predictable effects on inflation.

The only bright spot is that lending might actually increase, since banks would have to put some reserves to work.

The downside is rising yields might lead to further selling and a bond meltdown, perhaps wiping out US banks who are sitting on billions of QE-propped up paper.

This is a serious and ongoing problem, as Garrett Hardin pointed out many years ago. Because of the economic and political power of the elites, who benefit from it, it is difficult to combat. Unfortunately, change often comes through crisis and catastrophe. Yet in the current crisis the justified anger of the public has been directed at a few individuals or channeled towards the government.

I use the price of an engineer to evaluate currencies. Engineers are mobile and socially “sticky”.

In other words, engineers are mobile (like capital) but you can’t speculate in engineers because the transaction costs (moving them, working them into an organization) is too high. They will only move to a different country if the target economy has developed a significant productivity delta.

Second – engineers are people. They value more than money. If an economy offers a good social environment for them (by birth ie family, nice surroundings, etc) then they will factor this into their economic equation automatically.

Put it all together and you have a good measure of the value of a currency?

Just thinking about it : this might be a good theme for a blog post here? The cost of an industrial engineer in various countries (including benefits if possible)? The new Big Mac index?

Namke von Federlein

Lower US wages and devaluation of the USD act to correct that.

– What about the fact that a declining dollar will make US exports cheaper and thereby increase US exports?

– What about the fact that we have a huge reserve of unemployed people, and a huge reserve of empty manufacturing space waiting to be mobilized in response to growth in US exports?

– What about the fact that most recent research on the subject of the pass-through effect between exchange rates and inflation has found a very weak link, and so it is unclear whether a decline in the USD will cause a significant surge in inflation. Look at history of the Yen/USD; why haven’t previous substantial devaluations of the USD caused massive inflation?

– What about the fact that China is refusing to let the USD devalue against the RMB?

– What about the fact that our economy is at over 10% unemployment even with crazy low interest rates, suggesting a lot of weakness, and making a serious effort to balance the Federal budget now will almost certainly trigger another recession?

Just because we did not try that during the Great Depression doesn’t mean it will work. Just because Bernanke’s career is based on hypothetical printing as the solution to the Great Depression doesn’t make it true. Numerous economists with sounder mathematical background like Steve Keen has pointed out the faults in bernanke’s helicopter theory. Just because bernake ignores them doesn’t make Japan and Zimbawe’s experiences irrelevant to us.

In Mathematics there is a method of generalization call proof by induction. Bernanke and the likes of Krugman and Keynes, obviously weak at Mathematics, cannot understand proof by induction. Yet we trust them with the printing press and our future generations, that is how absurd America is. Train more lawyers, train more economists and accountants, import engineers from India – failure of our education system.

I can’t wait to hear what Sheila Bair has to say. She’s one of the few in Washington who is actually doing a bang up job. Such a shame that what she does has an essentially small effect on things.

I think that his may put us on the brink of the new exchange currency gaining traction globally. Next year should be an amazing roller coaster ride, with states failing, foreclosures heading upward, and joblessness getting worse. Wonder where the Fed will find props for our poor dollar?

Be practical.

The following is a fictitious scenario full of exaggeration to make a point.

Example : Here’s the deal. I’m the Fed. And I’m going to buy this blog.

I’ll offer you 10 trillion US dollars for this blog.

You think about if for a while, weigh the pros and cons, impact your options and finally decide to say “ok”.

Now, here is the sum total of all of the work I need to do to take ownership of this blog : I need to type $10,000,000,000,000 into my computer and hit send to bloggy.

If the dollar crashes tomorrow, so what? I own this blog and the biggest army in the world (with thousands of military bases around the world) which I can use to resolve ownership disputes.

In other words, the faster I can type money, the faster I can buy the world. It leads to a crash – but – it makes the American Dream of the common citizen finally come true.

The crash of the USD destabilises the US; martial law is declared; MSM plus *perfect* Internet surveillance; and dependency on centralised water and food production allow perfect population control. And the only job in town is working for the military/police/security teams. A total lock-down.

Which means : Peace, security, full employment, no trouble-makers can budge an inch (literally) and military glory. The American dream finally comes true. Law and Order to the highest degree. Like Goldman’s HFT trading record : absolute perfection.

Now, about the dollar carry trade : do you think anybody actually plans on paying back a penny of that money? Do you think : There will be a race to unwind the carry trade OR everybody is now planning on defaulting?

How can you enforce your loans when the entire world is defaulting on debt issued in USD at the same time – including the USA?

Not one single US economic policy decision made any sense. Find me one person who thinks that the Obamarama economic team is making sense? They aren’t stupid. But their policies sure are – if you want the US to continue to be a free nation?

I would suggest : the USD is long past the devaluation phase? It seems to have become a global race to see how much bogus money can be traded for hard assets before the Big Default and littering is finally punished with lethal injections?

There is no way that the swaps and derivatives can be closed out in an orderly fashion? So, print like crazy, build up your military and enjoy the show?

And all this coming from a person who feels that there is actually a simple, quick and practical solution to the US economic problems.

Oh well, just thinking out loud here…

May all beneficial wishes come true in beneficial ways!

Namke

GDP………….14 trillion baked 30% with imputations & Hedonics
Debt…………12 trillion
Social Security.18 trillion
Medicare A……37 trillion
Medicare B……37 trillion
Medicare D……16 trillion
TARP/TALP/PPIP..11-22 trillion
2 Wars………. 2 trillion

We owe $144,000,000,000,000.00 (trillion) and we earn 14,000,000,000,000.00 (trillion.) Debt-to-GDP less than 100%.

Ha, funny! By my math we owe 1,028% more than we earn. And, oh by the way, I’m not backing out Clinton/Boskin Hedonics (Greek for “feels good” or weighting or imputations or the bogus deflater). Let me explain this more clearly: You own a house? Yes? They BEA figures you’d pay 3,000 a month in rent (just a guess as I don’t know your region) and then they add that 3,000 to GDP.