Tuesday, October 22, 2013

Not Much Bang per Buck or Yen (excerpt)

Now that Washington’s latest fiscal impasse has passed, federal debt is also gushing. According to figures posted online by the Treasury Department on Friday, US debt jumped $328 billion Thursday, the first day the federal government was able to borrow money under the deal President Obama and Congress sealed last week. That shattered the previous record high of $238 billion set two years ago. Debt now equals $17.075 trillion, well exceeding the official, but temporarily suspended, debt ceiling of $16.699 trillion.

Friday’s Washington Times reported: “The giant jump comes because the government was replenishing its stock of ‘extraordinary measures’--the federal funds it borrowed from over the past five months as it tried to avoid bumping into the debt ceiling. Under the law, that replenishing happens as soon as there is new debt space. In this case, the Treasury Department borrowed $400 billion from other funds beginning in May, awaiting a final deal from Congress and Mr. Obama. Usually Congress sets a borrowing limit, or debt ceiling, that caps the total amount the government can be in the red. But under the terms of this week’s deal, Congress set a deadline instead of a dollar cap. That means debt can rise as much as Mr. Obama and Congress want it to, until the Feb. 7 deadline.”

Of course, all this debt hasn’t boosted bond yields because the Fed continues to purchase $85 billion per month in US Treasuries, Agencies, and MBS. As a result, the monetary base continues to gush. It soared to a record $3.6 trillion during the week of October 16, up $2.1 trillion since the first round of QE started on November 25, 2008. There hasn’t been much bang per buck in all this “high-powered money.” That’s because as it soared, the M2 money multiplier plunged and so did the velocity of money (i.e., nominal GDP divided by M2).

Today's Morning Briefing: Not Much Bang per Buck or Yen. (1) Texas is gushing oil. (2) Washington is back to gushing debt. (3) Monetary base is gushing, but both M2 multiplier and velocity are falling. (4) Stocks getting most of the bang per DC bucks. (5) Krugmanomics here and Abenomics over there. (6) Weaker yen boosting the cost of imports more than lifting exports in Japan. (7) Focus on underweight-rated S&P 500 Energy. (More for subscribers.)

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