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The Fed selling bonds
Old 12-16-2014, 08:49 PM   #1
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The Fed selling bonds

Ok, I apologize if this question makes the "dumb question of the day" but it has piqued my interest and I only know the basic mechanics behind it all.... I caught the tail end of Cramer mentioning the Fed should be selling it's bonds that it had bought heavily the past few years now and make a profit on it while taking advantage of the current bond market. 1) Besides maybe causing rates to move up some, what would be the reasons not to? 2) If they did start selling them, and booked "profits" on them, who gets the money? Does the Fed keep it or does it go to general treasury? Would selling them at profit have any positive benefit for our country as opposed to just letting them mature on their own to be bought later?
It just seems odd that you can borrow money to pay for your own spending needs then be able to book a profit from it all.


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Old 12-16-2014, 10:06 PM   #2
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The profit would be just like any other - if the Fed sells the bonds for more than they bought them for. I'm not a big Cramer fan but I saw that part too and thought it is an interesting idea.
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Old 12-16-2014, 10:29 PM   #3
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By now the ink should be dry on the money they printed to buy the bonds.

If the Fed sells now they could start another chapter of QE utilizing the profits and return of capital from the sale and maybe rebalance their portfolio to include stocks and oil futures.
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Old 12-16-2014, 10:53 PM   #4
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I saw what Cramer said, does he really think the FED could sell 4 trillion dollars worth of bonds on the open market? Once word got out and the US FED was selling, how much could they sell before their position would be at a loss? This is no different than when the Hunt brothers held most of the silver and then once they started to sell the price went from 50 to 20 dollars in a couple days.

The selling of even a few hundred billion would result in a rapid escalation of interest rates as everyone involved in holding these would dump their bonds in fear of rising rates due to the expanding supply you would be taking money from the private sector in a very contractive manner for the economy and into the bond market and doubling the available float in the private sector. This is a hair brained idea, the Fed has no idea how they are going to unwind this, their position is 4 times as large as the Chinese governments, does Cramer think if the Chinese government sold theirs it would be good for China?
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Old 12-16-2014, 11:39 PM   #5
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Quote:
Originally Posted by Mulligan View Post
2) If they did start selling them, and booked "profits" on them, who gets the money? Does the Fed keep it or does it go to general treasury? Would selling them at profit have any positive benefit for our country as opposed to just letting them mature on their own to be bought later?
I'm sure the money will go straight back into the Social Security trust fund, and all the old people will get a nice little bonus from the profits.
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Old 12-16-2014, 11:59 PM   #6
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I saw what Cramer said, does he really think the FED could sell 4 trillion dollars worth of bonds on the open market? Once word got out and the US FED was selling, how much could they sell before their position would be at a loss? This is no different than when the Hunt brothers held most of the silver and then once they started to sell the price went from 50 to 20 dollars in a couple days.

The selling of even a few hundred billion would result in a rapid escalation of interest rates as everyone involved in holding these would dump their bonds in fear of rising rates due to the expanding supply you would be taking money from the private sector in a very contractive manner for the economy and into the bond market and doubling the available float in the private sector. This is a hair brained idea, the Fed has no idea how they are going to unwind this, their position is 4 times as large as the Chinese governments, does Cramer think if the Chinese government sold theirs it would be good for China?
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Old 12-17-2014, 12:21 AM   #7
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I have to admit that I did not see the cramer bit, but sooner or later the fed needs to unwind the QE. I would think that dumping all the QE in a short time would not be good. However, unwinding the increase may be a good thing over the long haul. From what I hear we have a reasonably high rate compared to some of the "safe havens" like Japan. Remember during 2008/9.. japan was holding up better. I would think that dumping this many years of QE at once would not be good, but some unwinding has to be done sometime.
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Old 12-17-2014, 07:00 AM   #8
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I read a few articles I found after Googling "unwind QE".

The jargon is daunting - overnight reverse repos, interest on excess reserves, etc. - but I was able to learn a few things. (Be kind if I have it wrong. I'm not a finance guy.)

As with any portfolio of bonds, so long as there isn't a program of reinvestment the Fed will recieve cash as bonds mature and are paid off. IIRC, the fed's QE and Twist programs bought long-term bonds, so this effect will be take a long time to have much effect, perhaps decades. Especially for the treasuries, which always pay off at maturity. Less so for mortgage-backed securities, which can return capital as underlying mortgages are paid off by borrowers.

I didn't find it listed in any article, but I would also think there is a 3% +/- per year reduction in the balance sheet as interest payments are received in cash.

There isn't any rush to reduce the balance sheet. It took six years to run up the balance; there's no compelling reason at this time to set a specific time table to unwind. In fact, because "dumping bonds on the market" would spike interest rates, there isn't much of a case to be made for an aggressive unwinding. Which is related to this point...

Who buys bonds by the billions, anyway? Banks, hedge funds and other governments. If the overall economy and the profitability of such entities isn't good, there's less chance that there would be buyers for the Fed to sell to.

We've already passed one hurdle, completion of the taper for new bond purchases. The biggest buyer of treasuries and high-quality MBS's has left the trading floor, and the market disruptions have been fairly minimal. That's a good sign that a measured approach to unwinding will be a tool that the Fed can use in the future.
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Old 12-17-2014, 07:48 AM   #9
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Maybe the Fed thinks their is too much liquidity in the M1 and M2 money supply and by selling bonds they will soak up some of that liquidity.

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Old 12-17-2014, 08:00 AM   #10
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Unwinding
Attached Images
File Type: jpg Dec 2014 Derivatives.jpg (11.7 KB, 105 views)
File Type: jpg Unfunded Liabilities.jpg (21.7 KB, 106 views)
File Type: jpg Debt.jpg (17.3 KB, 9 views)
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Old 12-17-2014, 08:18 AM   #11
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They will never sell bonds, this would suck credit out of the system. In fact they will have a problem when the bonds mature, since maturity will suck out credit as well. They must continue to buy bonds to make sure the Fed balance sheet does not shrink. Shrinkage = credit contraction.

The Fed bought every bond with a check that they created out of thin air. Any normal institution would be locked up for check kiting and fraud. The profits they make are returned to the Treasury every year. Hard not to make money when you buy bonds for nothing and then get the interest.

Most all credit (money) is created via interbank fractional lending, not Fed open market action. The reason deflation is so hard to stop is because in order to create credit (money) the public must be willing to create additional loans from the banks. If they do not do this sufficiently the system can find itself in a deflationary collapse, since the existing loans are impossible to pay back due to the interest demands of the loans. The expansion of credit pays for the existing interest demands of current credit.

The system will eventually end in a deflationary collapse. No one can see the 800 pound guerrilla known as deflation. Once the powers that be see it, they will overreact and go into panic mode, which will be outright monetization of debt. Once this stage is reached a hyperinflation may happen. This usually lasts for a short time, until pricing becomes impossible, then we head for a MadMax worldwide collapse.

Just hoping this happens after I am gone. They have been kicking the can down the road for years. One day they will kick the can, and it will not budge. Then we have a problem.
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Old 12-17-2014, 09:23 AM   #12
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After the end of the year, Fed profits are sent to the US Treasury. The attached article has a small chart of Fed profits since 2004. Profits have risen sharply since the financial crisis and in 2013 the Fed sent $77.7 Billion to the Treasury.
Fed Sent $77.7 Billion in Profits to Treasury Last Year - Real Time Economics - WSJ
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Old 12-17-2014, 09:33 AM   #13
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It just seems odd that you can borrow money to pay for your own spending needs then be able to book a profit from it all.
Not that odd.

People borrow money to buy a home then invest other money making a higher return and use the profits to pay the original loan.

It doesn't always work out as planned and it might not end up working out for the Fed either one day.
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Old 12-17-2014, 09:40 AM   #14
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Not that odd.

People borrow money to buy a home then invest other money making a higher return and use the profits to pay the original loan.

It doesn't always work out as planned and it might not end up working out for the Fed either one day.

I thought about that prior to original post, but to me it didn't seem like a true comparison, as you already have assets to begin with to make the investments. Though I guess you could say the "full faith and credit" is the underlying asset for government.



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Old 12-17-2014, 09:41 AM   #15
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IMO if conditions were such that the Fed could create so much money without triggering massive inflation then conditions at some time can be such that the Fed can remove that money without triggering the opposite.
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Old 12-17-2014, 09:57 AM   #16
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I thought about that prior to original post, but to me it didn't seem like a true comparison, as you already have assets to begin with to make the investments. Though I guess you could say the "full faith and credit" is the underlying asset for government.



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Maybe a better comparison would be a seller of cash secured puts. No money outlay and a potential gain if the price of the underlying security goes up. I can actually sell puts secured by $200,000 in a margin account that only contains $100,000 of cash and pay no margin interest because money has not been lent by the broker (yet).
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The Fed selling bonds
Old 12-17-2014, 10:55 AM   #17
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The Fed selling bonds

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Maybe a better comparison would be a seller of cash secured puts. No money outlay and a potential gain if the price of the underlying security goes up. I can actually sell puts secured by $200,000 in a margin account that only contains $100,000 of cash and pay no margin interest because money has not been lent by the broker (yet).

I understand your analogy, Fermion and thanks. I guess the simpleton in me wants to transfer the process to a personal one which is not correct. That being, me borrowing money from myself, even though I do not have the money to begin with. Then spend it on everyday needs that are consumed, and still receive the interest from the money I borrowed from thin air. On top of it all, I can sell it with a capital gains too!


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Old 12-17-2014, 02:01 PM   #18
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Macro Economics is not my thing. So here is my question:

What if the Fed just burned the bonds, i.e. forgave the debt? I would assume they could do this is small quantities or all at once if they wish.
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Old 12-17-2014, 03:02 PM   #19
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I understand your analogy, Fermion and thanks. I guess the simpleton in me wants to transfer the process to a personal one which is not correct. That being, me borrowing money from myself, even though I do not have the money to begin with. Then spend it on everyday needs that are consumed, and still receive the interest from the money I borrowed from thin air. On top of it all, I can sell it with a capital gains too!


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They create the money out of thin air, like virtual photons, which then vanish when they are no longer needed to carry the force of money.
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Old 12-17-2014, 03:15 PM   #20
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They create the money out of thin air, like virtual photons, which then vanish when they are no longer needed to carry the force of money.

Well Ms. Yellen doesn't pay attention to Cramer either....I just heard her say that she is reinvesting all money and interest, so she is doubling down and doesn't want to lock in any long term capital gains.... I guess taking profits from the virtual photons and reducing the deficit is not one of the Feds mandates.


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