I see a blow up coming in treasury issues, even though Ben will print and issue like crazy to try to prevent it. If a treasury implosion happens the credit and budget of the US will be destroyed. I cannot imagine the consequences of such an event. In time maybe my brain can think about it but now I don’t want to go there.

Be a good boy/girl scout and ‘be prepared’ as best you can.

Would also add that the comparison with the Japanese case seems quite inappropriate.

Once they hit ZIRP, monetary policy for the BoJ became an FX policy to prevent yen appreciation. Domestic liquidity was generated straight out of export revenues. That mechanism stabilized the system for a long time due to the large trade surplus.

In the US instead, there is a large trade deficit which naturally applies negative pressures on the exchange rate. Not only, the unwind of decades of yen-carry trade compounds that.

I can’t see what will keep ZIRP in the dollar from causing hiperinflation. Zero rates per se are unstable for an economy that is not entirely export driven.

ZIRP makes sense only as a temporary move toward substantial negative interest rates [i.e. capital taxation]. That would be a stabilizing solution. There are talks about it in Japan now . But I wonder whether anyone is considering this possibility seriously in the US.

The Fed continues treating savers like two dollar wall street whores while treating the two dollar wall street whores like savers.

The treasury markets will begin to disappear at 0 pct interest. The Fed has been forcing people into the hands of the merchants of risk for the last 8 years. This is one of the principle causes of this mess. Here we go again.

Sandi Rubinspan

Why is this a concern? We have low trading volumes in repo because repo rates are low. At the same time, Treasury rates are also low which makes it cheaper for the Treasury to finance. This increases the supply of Treasury collateral, increases repo rates, and improves repo market functioning.

I don’t get what the FT is trying to say here, at least from a market functioning perspective. Unless they’re asserting that the Treasury’s financing need is insufficient.

You can see this operating in the higher-risk markets like A2/P2 and junk bonds. Even though interest rates on most cash equivalents is at or approaching 0, high-risk spreads are at records and volumes are low. Cash has to be secure and is only loaned to top-quality borrowers. Those borrowers (normally) then assume the credit risk to everbody else. But right now they’re not getting cash to make loans with.

In our case all the problems are magnified by overpriced assets. Assets are overvalued; everybody knows that (although many with assets pretend otherwise) and so that adds a huge premium to all credit risks.

IANAE but I don’t see the logic in what you are saying. Why would you say that there is no interest in lending if rates fall? I personally think that it would induce more people to lend. Maybe not to the government at almost 0% but to others at higher rates. I think dropping the rates to 0% will induce savers and investors to shift up the risk curve and start buying non-govt bonds (this is basically lending), stocks, real estate, etc.

To make an analogy, low interest rates are a stimulant. But if you overdose on a stimulant, you die and the stimulant doesn’t help anymore. 0% is the death of credit. The Fed should have gone to quantitative easing at 2% at the lowest.

Gentlemutt, you may be surprised. The money supply might well contract at this point due to the liquidity trap plus debt deflation plus general deflation. If the liquidity trap really sets in the Fed will have to print enough cash to replace almost all of M2 – over 5 trillion, as against 900 billion out there now. I don’t think Bernanke has the nerve to do that, partly because it would condemn us to a massive inflation once we were out of the trap.

So, there is less incentive to use treasuries a collateral in repurchase agreements – do I have that right?

Why is that first? Why does the interest rate paid by the asset matter?

Second, less repos hurts liquidity. That makes sense. But how could this outweigh the effects of more reserves?

Couldn’t you replace repos with a line of credit from a deposit institution and secure the line of credit with treasuries?