Saturday, August 10, 2019

What does the IOER cut tell the bankers?

According to the fiscal theory of rates, it tells the banker to prepare for Ned's liquidity twist, Ned is going to borrow ling and deposit short, so short rate go down.  The one year was headed down since the year start, mainly due to a dismal global outlook in Europe. Ned wants liquidity, and will mortgage the farm to acquire the stuff, so he is twisting the curve.  I dunno how it turns out. Ned ends up holding a lot of liquidity, and liquidity is conserved. But the ten years should pop pack to 2.5% and slightly under.

I do not think Congress works when the ten years goes much above 2.5%, the goal posts have narrowed, and the can kick needs another 40 yards.  However, the additional debt lowers the upper bound. What follows?   Ned has to keep the ten year under 2.5, he has 75 basis points. I is not just the new debt he is twisting, he also has to twist 100% of the GDP over a six year period. Keep the ten year under 2.5.

No comments: