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Deflation Revisited
If we look closer at the Hall of Mirrors in the Fed and Treasury and most municipalities, we may think twice about government bonds.
On top of the new $14.3 Trillion debt ceiling, we see another $5 Trillion owed on FNM and FRE government mortgage guarantees, and $104 Trillion in present value of other unfunded government agency mandates, according to the President of the Dallas Fed. ($90 Trillion of that is Medicare.)
Then we have $197 Trillion of Derivatives at the five largest US Commercial Banks. These big bad banks bent the accounting rules, law and nonparametric math to continue the fiction that their net credit risk is ‘only’ $425 Billion and they do not have to mark toxic assets to market because the Fed and Treasury Taxpayers will support them indefinitely.
In other words, Corporate Welfare replaced Citizen Welfare.
But wait, there’s more: $171 Trillion of the American OTC unregulated off-balance sheet derivative obligations are interest rate sensitive.
This means higher interest rates will give big banks recurring death of a thousand cuts.
While broken banks and corporate junkyards out-performed everything else in the March 2009 death reflex rally, we would not tarry long.
The Fed and Treasury recently warned banks to prepare for a doubling of interest rates despite FOMC minutes to the contrary.
Dr Bernanke had announced the Fed was going to support bonds and mortgages until March 2010.
The few mortgages issued these days are priced on Ten-Year Treasuries that called his bluff by losing half their value and almost doubling their yield last year.
It did not help Shalom that Mr Geithner announced last fall he was going to extend the average maturity of Treasuries from 49 months to 72 months before interest rates rose.
