1. Fed/Treas. money flooding is not working–no one still wants to lend.

2. Fed interest rate cuts are irrelevant–market has already priced Treasury paper to yield zero.

3. Fed/Treas. handouts aren’t causing lending to happen–receiving companies use the money for cash reserves (deleveraging), paying off gambling debts on CDS, bonuses, dividends, retention payments to executives.

Theory: No one with money believes anything or any representation. They are hunkering down and not being a lender. They have sought refuge in the mattress (zero percent yield at least means return OF principal). Why? No one can see any counterparties’ true risk position, and indeed it is unknowable in the current environment, because any counterparty could be upset by their counterparty. It’s a hall of mirrors.

Solution: All this bogus gambling paper needs some sunshine on it. Force it all to the surface by law. Let’s see what everybody is holding. Whatever the answer is, however uncomfortable it is–that is the way forward. Everyone needs to see what is what, and who is holding what.

4.

http://www.economist.com/research/articlesbysubject/displaystory.cfm?subjectid=2512631&story_id=12700894

“Paradoxically, the real problem for governments may only occur if they manage to revive their economies. At that point, deflation worries will disappear and investors will switch to riskier assets. Given the deficits in both Britain and America, it seems unlikely that any cyclical rebound will be strong enough to bring the budget back to balance. In 2010 or 2011, issuing government bonds may prove a much harder (and more expensive) task.”

“December 9th, 2008 at 7:22 pm
Dollars and Treasuries are indistiguishable from each other. “

Haven’t run it through any computerized grist mills, but SRS is intuitively appealing at this time. Which is why I bought some.

@WM
I think the deleveraging is effectively forced; perhaps the party which ends up with whatever is left buys t-bills. No idea about the “who” of it. But dollar bears are an endangered species, for now.

@SB
I’m not buying all this xmas rally talk.

@WM
A low treasury supply? If that’s the case, I’m sure they’ll be plenty more available soon.

Many in the Chinese government are desperate to keep their exports up, thinking that they can export their way out of trouble.
http://mpettis.com/2008/12/china%E2%80%99s-exports-contacted-in-november/

Thus, they will try to keep the dollar up relative to the yuan. And they have lots of $’s.

And, the other half of the story is that the FDIC guarantee is only good to 250k. If you have 10’s of millions, how many banks do you need to keep it below the limit?

I’ve been looking at this -> http://www.comstockfunds.com/files/NLPP00000/292.pdf and this graph does not tell the story the way you suggest. Maybe without the CDS/MBS fiasco we would be at 4x (housing above median income) in Cali, but looking at the chart, it doesn’t seem like we were about curb our debt appetite either way. The story I keep trying to spin is that this all started with AGspan lowering the fed funds rate, causing fund managers to look for higher yields, leading to MBS and bad lending followed by CDS and the decision (lack of understanding) to allow something called a swap to not be regulated like any other insurance/hedging instrument. But the chart suggests we’ve been in trouble for a while. So the story does not start with lowering the Fed Fund rate, that seems to be the middle part. I guess the story has to begin somewhere around 82 when we started eating debt breakfast lunch and dinner. Could the whole Ayn Rand inspired “self regulating markets” just be a compounding factor and not the true story?