It's All In The SPIN, Baby!

                                                       'Tis but thy name that is my enemy;
                                                       Thou art thyself, though not a Montague.
                                                      What's Montague? it is nor hand, nor foot,
                                                      Nor arm, nor face, nor any other part
                                                      Belonging to a man. O, be some other name!
                                                      What's in a name? that which we call a rose
                                                      By any other name would smell as sweet;
                                                      So Romeo would, were he not Romeo call'd,
                                                      Retain that dear perfection which he owes
                                                      Without that title. Romeo, doff thy name,
                                                      And for that name which is no part of thee
                                                      Take all myself.   (is a citation necessary? lol)
 
The spinmeisters at the Fed and in the media have put some new spin on money printing. It was released today through the Fed's chosen outlet, Wall Street Journal monkey Jon Hilsenrath, that the Fed is considering a "new" way of putting "credits" (printed money) into the system using a method of "sterilization."

Funny thing, it says right in the text that Fed "prints" the money in order to implement the operation. The "spin" on it is that the Fed swaps "electronic credits" - aka printed money - for Treasury and mortgage bonds sitting on bank balance sheets. This would be not much different than the Fed coming to you and saying, "hey man, put up your IRA as collateral and I'll put some money in your bank account that you can spend."  This IS Bernanke's famous "drop money from helicopters" speech from 2002 that helped him pave his way to the FOMC Chairman appointment.  This is IT in action.

The Fed effectively creates "bank reserves," and calls it electronic credits that are "sterilized" because the Fed has taken a "similar" asset off the bank balance and simply replaced it with cash. The obvious reason for this is that the bank can spend the cash more readily than it can spend a 5yr Treasury bond. Recall I was was wondering aloud just last week how the Fed would make sure Treasury auctions were funded w/out driving rates through the roof and without printing: 

Many Fed officials believe strongly the bank reserves it has created as part of this money creation aren't an inflation threat. But they are acutely aware of a popular perception, also held by a few inside the Fed itself, that the money the Fed has created could cause an inflation problem down the road. An approach that limits the amount of new money flowing into the system—through another Operation Twist or a sterilized operation—could help them manage that perception.

Here's the LINK (if you copy the title into a google browser and click on the WSJ link that comes up, you can get a free copy of the entire article).  The key phrase in this article is "manage that perception."  Put the right spin on this and the market will swallow it hook, line and sinker and go back to watching the Peyton Manning news conference...

Think about that description of what the Fed is doing for a moment and then think about the actual flow of funds through the system that is created by this. 1) the Fed uses "electronic credits" to replace the longer term Treasuries/mortgages sitting on bank balance sheets. This is no different than printing money. The perception difference is that this is "sterilized" because the Fed is just exchanging bonds for "credits," which is the same as cash. Here's why. This maneuver now allows banks to first, go takedown more Treasury paper, thereby financing the Government deficit spending; and second, to a much lesser extent, gives the banks capital ratio room to issue more credit card debt and mortgages.  If banks had to sell outright existing Treasuries in order to buy new Treasuries, in other words if the free market we allowed to function properly, it would drive interest rates up by a significant amount.  The creation of "electronic credits" prevents the widespread selling of existing Treauries.  The Fed's balance sheet thereby becomes nothing more than a junkyard of Treasury bonds funded by "electronic credits." 

Let's look at both of those combined, but keep in mind that the primary reason for this is to finance new Treasury issuance. The Fed does the above, and then the banks turn around and buy more Treasuries at auction, likely financing close to 50% of all new auctions. The Government then gets the "electronic credit" moved to its bank account and can go and spend it like it's cash. Someone please explain to me the difference between that outright printing? Please.

Essentially what all this "sterilized" QE does is give the Fed a different "spin" on financing Government deficit spending and injecting a meaningful amount of cash stimulus into the system. In perfect Orwellian fashion, the Fed throws up a semantic smokescreen by calling it "sterilized" QE.

How many of you out there think the Government will start reducing its debt load within the next 3-5 years. Anyone? The only difference between equity (cash/"electronic") and debt is that debt has to be repaid. In other words, debt repayment is "sterilization" of cash creation because at some point the borrower - in absence of printing - has to go get the cash from the system and repay the debt. No new "credits" were created to take care of the debt repayment. Defaulted debt - assuming the Fed refuses to print to avoid default - is the same thing as printing up the original cash that was circulated from the debt issuance because that cash is never removed from the system in order to reduce the debt. Capito?
 
Bottom line is that this nothing more than money printing in disguise.  I'm sure somewhere Shakespeare is cringing because of my associating his writing with Fed "spin" language, but Orwell has a big grin on his face...