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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory

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From: russwinter	4/29/2005 11:35:10 AM
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The Drain Begins by Steve Northwood, Friday April 29 2005 wallstreetexaminer.com Yesterday marked the end of $133 billion in liquidity flows from the Treasury and the Federal Reserve. Given the weakness in the markets, you may be wondering: "How Can This Be?" Well, it hasn’t happened in a vacuum. Over the last three weeks, the Treasury has paid down or lent out a total of $122 billion ($75 billion pay down of debt and $47 billion via TIO lending). The Fed has kicked in an additional $11 billion in high powered money through net increases of repurchases and coupon passes for the total of $133 billion. Over this same period, the Treasury has collected $130 billion in payments from individuals to settle their 2004 tax bills. The net big picture effect is the government has taxed away $130 billion+ and lent it back. So, instead of having $130 billion that individuals own, the markets now have $130 billion of borrowed money. It makes a huge difference. Over the next four weeks, all of that TIO lending ($47 billion, the Fed money ($11 billion) and some of the paydown) will be recalled by the government as bills are paid by the Treasury and the Fed tightens money supply to increase interest rates. The churn and balance sheet deflation we have seen over the last week was only a pause in the downtrend. As the liquidity drain resumes, overinflated financial assets will be re-priced lower.

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