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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: RJA_ who wrote (67877)	8/10/2006 9:56:30 AM
From: bart13	Read Replies (2) \| Respond to of 110194

bart13, can you interpret or provide additional information re this graph for us? SOMA is short for System Open Market Operations and is basically composed of treasuries that the Fed has bought over the decades. In very broad terms, when it goes up significantly, in my opinion it indicates that the Fed is "monetizing" the US debt - in other words, buying direct from the Treasury and creating that money out of thin air. The graph shows two rate of change measures of how fast the Fed is doing that monetizing, and shows a relative drop over the last 2-3 years - but is running at about 12% for the last 18 months or so. Here's the Fed's SOMA page: ny.frb.org Did that answer your question?

To: RJA_ who wrote (67877)	8/10/2006 10:13:50 AM
From: mishedlo	Read Replies (4) \| Respond to of 110194

"Monetize: Printing money to pay off some type of government debt or obligation. When the U.S. Treasury receives money from the Federal Reserve system, this is known as "monetizing the debt". The debt referred to is the U.S. Government debt and is caused by the government having spent more than it takes in for many decades. The basic transaction of monetizing that debt is literally an accounting entry in a computer at the Fed - one side shows the purchase of U.S. Treasury paper securities (bonds and notes) and the other represents the Fed literally creating money out of nothing. The long term effect is inflation. " Exactly. In fact, the long and short term effect is inflation. It does not cause inflation it is inflation. Will it continue? Yes, so will it be inflation? In and of itself in isolation - yes. The words "in isolation" are important If credit contracts faster than government printing and velocity of money drops, the net total will be deflation, regardless of the price of oil or copper or anything else. In such an environment asset prices (houses, land, equities) are likely to get hammered. I also believe the prices of goods and services will fall but perhaps not oil or natural gas. I expect credit to plunge, via demand alone and also thru bankruptcies. Mish