Posted at 11:51 AM (CST) by & filed under Jim's Mailbox.

Dear Jim,

Here come the first downgrades of Commercial Mortgage Backed Securities. These are certain to play out just like the MBS downgrades, with billions of dollars worth more announced each week.

Best wishes,
CIGA Richard B.

Fitch Warns on $18.1B in Recent-Vintage CMBS
by Paul Jackson, HousingWire.Com
April 8, 2009.

Excerpts:

Fitch Ratings said Wednesday that it had placed 532 classes from 50 fixed-rate CMBS conduit transactions from the 2006 through 2008 vintages on Rating Watch Negative — meaning downgrades are highly likely in the next few weeks for affected deals. The rating agency said a recent review of the expected economic conditions and their effect on CMBS performance led the firm to estimate performance closer to a ‘moderate to severe’ scenario the agency had outlined last July, with commercial property values falling as much as 35 percent. . . .

A sharp decline in economic conditions and the lack of available real estate financing have begun to impact commercial property and CMBS loan performance, Fitch noted — echoing comments earlier in the week from Standard & Poor’s Rating Services, which said Tuesday that it, too, was likely to begin downgrading CMBS credits.

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Jim,

The key element of this report is encapsulated in the following; “it is possible that Treasury’s approach fails to acknowledge the depth of the current downturn and the degree to which the low valuation of troubled assets accurately reflects their worth.”

Congressional Panel Suggests Firing Managers, Liquidating Banks
by Robert Schmidt
Bloomberg, April 8, 2009,

The Panel’s views are refreshing in that they do not sign on to the ‘throw as much money as possible at failed management of failed banks’ approach espoused by Treasury and the Fed.  However, what I found most remarkable was the degree of understatement.

In the report, Warren’s panel said “it is possible that Treasury’s approach fails to acknowledge the depth of the current downturn and the degree to which the low valuation of troubled assets accurately reflects their worth.”

Two panel members found even that mealy-mouthed language too strong and wrote separately,

“We are concerned that the prominence of alternate approaches presented in the report, particularly reorganization through nationalization, could incorrectly imply both that the banking system is insolvent and that the new administration does not have a workable plan,” the two wrote.

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Perhaps the word "incorrectly" in that quote was a misprint.

I am extremely grateful to you and other contributors to this site for giving us the straight story. We are certainly not getting it from our representatives in Washington.

Best wishes,
CIGA Richard B.

Dear Jim,

The dreadful effects of OTC paper hit charities too…

The issuers must have no soul or conscience!

Click here to read the article…

Maybe they will have to get treatment in one of those hospitals someday?

Best,
CIGA BT

Jim,

Regarding the Lori Montgomery piece on the strain lowering payroll taxes puts on the SS fund:

I’m sure the consternation In Washington is much greater about the lack of funds going from the SS tax into the general fund. Now it’ll be even harder to get money for earmarks.

Also, you were spot on on the halo in the Obama picture. However, what is also unnerving is the pose he is in. Instead of facing the camera he is looking slightly above, probably seeing a vision of the ‘promised land of dollars and cents’ in the future.

Speaking of body language, what is it with our champion Tim. Every time I see him on TV he seems to be hunched over head cocked up wrinkling his brows akin to your dog guarding a favorite bone when you try to take it away.

CIGA A-Non-A-Mouse

Posted at 11:34 PM (CST) by & filed under In The News.

Dear CIGAs,

The geopolitical potential prior to January 14th, 2011 has been described here as:

  1. Pakistan goes Taliban.
  2. Israel makes a significant miscalculation.
  3. Turkey is a victim.

This article reveals the real G20 accomplishments and outlines Turkey’s present place of honor in the USA.

Obama’s Strategy and the Summits
By George Friedman
April 6, 2009

The weeklong extravaganza of G-20, NATO, EU, U.S. and Turkey meetings has almost ended. The spin emerging from the meetings, echoed in most of the media, sought to portray the meetings as a success and as reflecting a re-emergence of trans-Atlantic unity.

The reality, however, is that the meetings ended in apparent unity because the United States accepted European unwillingness to compromise on key issues. U.S. President Barack Obama wanted the week to appear successful, and therefore backed off on key issues; the Europeans did the same. Moreover, Obama appears to have set a process in motion that bypasses Europe to focus on his last stop: Turkey.

Berlin, Washington and the G-20

Let’s begin with the G-20 meeting, which focused on the global financial crisis. As we said last year, there were many European positions, but the United States was reacting to Germany’s. Not only is Germany the largest economy in Europe, it is the largest exporter in the world. Any agreement that did not include Germany would be useless, whereas an agreement excluding the rest of Europe but including Germany would still be useful.

Two fundamental issues divided the United States and Germany. The first was whether Germany would match or come close to the U.S. stimulus package. The United States wanted Germany to stimulate its own domestic demand. Obama feared that if the United States put a stimulus plan into place, Germany would use increased demand in the U.S. market to expand its exports. The United States would wind up with massive deficits while the Germans took advantage of U.S. spending, thus letting Berlin enjoy the best of both worlds. Washington felt it had to stimulate its economy, and that this would inevitably benefit the rest of the world. But Washington wanted burden sharing. Berlin, quite rationally, did not. Even before the meetings, the United States dropped the demand — Germany was not going to cooperate.

The second issue was the financing of the bailout of the Central European banking system, heavily controlled by eurozone banks and part of the EU financial system. The Germans did not want an EU effort to bail out the banks. They wanted the International Monetary Fund (IMF) to bail out a substantial part of the EU financial system instead. The reason was simple: The IMF receives loans from the United States, as well as China and Japan, meaning the Europeans would be joined by others in underwriting the bailout. The United States has signaled it would be willing to contribute $100 billion to the IMF, of which a substantial portion would go to Central Europe. (Of the current loans given by the IMF, roughly 80 percent have gone to the struggling economies in Central Europe.) The United States therefore essentially has agreed to the German position.

Later at the NATO meeting, the Europeans — including Germany — declined to send substantial forces to Afghanistan. Instead, they designated a token force of 5,000, most of whom are scheduled to be in Afghanistan only until the August elections there, and few of whom actually would be engaged in combat operations. This is far below what Obama had been hoping for when he began his presidency.

Agreement was reached on collaboration in detecting international tax fraud and on further collaboration in managing the international crisis, however. But what that means remains extremely vague — as it was meant to be, since there was no consensus on what was to be done. In fact, the actual guidelines will still have to be hashed out at the G-20 finance ministers’ meeting in Scotland in November. Intriguingly, after insisting on the creation of a global regulatory regime — and with the vague U.S. assent — the European Union failed to agree on European regulations. In a meeting in Prague on April 4, the United Kingdom rejected the regulatory regime being proposed by Germany and France, saying it would leave the British banking system at a disadvantage.

Overall, the G-20 and the NATO meetings did not produce significant breakthroughs. Rather than pushing hard on issues or trading concessions — such as accepting Germany’s unwillingness to increase its stimulus package in return for more troops in Afghanistan — the United States failed to press or bargain. It preferred to appear as part of a consensus rather than appear isolated. The United States systematically avoided any appearance of disagreement.

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Jim Sinclair’s Commentary

The Times of India is one of the most respected publications internationally.

Pakistan could collapse within six months: US expert
7 Apr 2009, 0149 hrs IST, TIMES NEWS NETWORK & AGENCIES

NEW YORK: Pakistan could collapse within six months in the face of the snowballing insurgency, a top expert on guerrilla warfare has said.

The dire prediction was made by David Kilcullen, a former adviser to top US military commander General David Petraeus.

David Kilcullen is the best known practitioner of counter-terrorism and counter-insurgency operations and had advised Gen Petraeus on the counter-insurgency programme in Iraq. Few experts understand the nature of the insurgency in Af-Pak as well and he is now advising Petraeus in Afghanistan.

Petraeus also echoed the same thought when he told a Congressional testimony last week that the insurgency could "take down" Pakistan, which is home to nuclear weapons and al-Qaida.

Kilcullen’s comments come as Pakistan witnesses an unprecedented upswing in terror strikes and now some analysts in Pakistan and Washington are putting forward apocalyptic timetables for the country.

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Jim Sinclair’s Commentary

Estimates of Toxic paper has grown from $2.2 trillion one week ago to $4 trillion today.

Toxic debts could reach $4 trillion, IMF to warn
Gráinne Gilmore, Economics Correspondent

Toxic debts racked up by banks and insurers could spiral to $4 trillion (£2.7 trillion), new forecasts from the International Monetary Fund (IMF) are set to suggest.

The IMF said in January that it expected the deterioration in US-originated assets to reach $2.2 trillion by the end of next year, but it is understood to be looking at raising that to $3.1 trillion in its next assessment of the global economy, due to be published on April 21. In addition, it is likely to boost that total by $900 billion for toxic assets originated in Europe and Asia.

Banks and insurers, which so far have owned up to $1.29 trillion in toxic assets, are facing increasing losses as the deepening recession takes a toll, adding to the debts racked up from sub-prime mortgages. The IMF’s new forecast, which could be revised again before the end of the month, will come as a blow to governments that have already pumped billions into the banking system.

Paul Ashworth, senior US economist at Capital Economics, said: “The first losses were asset writedowns based on sub-prime mortgages and associated instruments. But now, banks are selling ‘plain vanilla’ losses from mortgages, commercial loans and credit cards. For this reason, the housing market will play a crucial part in how big the bad debt toll is over the next year or two.”

In its January report, the IMF said: “Degradation is also occurring in the loan books of banks, reflecting the weakening outlook for the economy. Going forward, banks will need even more capital as expected losses continue to mount.” At the same time, there is a clear shift in congressional attitudes in the United States about simply pumping money into the system, Mr Ashworth said. The British Government is also under pressure to repair its tattered finances. Injecting more money into the banks could further undermine its fiscal position.

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Posted at 11:30 PM (CST) by & filed under Jim's Mailbox.

Dear Mr. Sinclair,

There is the Black Hole solution proposed by a CIGA yesterday. Here is another tack at how the world’s problems will be solved, economic and otherwise… by Orwellian re-branding (spell: SPIN). Examples:

War on terror is over… it is now officially an "Overseas Contingency Operation."

No more terrorism… it is now "man caused disasters"

Toxic assets are now… "legacy assets."

Click here to view the video…

Unfortunately, it is not funny, it is sinister.

Warm regards,
CIGA Annette

Posted at 10:14 PM (CST) by & filed under In The News.

Dear CIGAs,

Now that the G20 has saved us all it might be interesting to consider every OTC derivative still out there as the small size of a little penny. You must keep in mind that upon designation as an OTTI, other than temporarily impaired assets, (previously known as PIA, "permanently impaired assets") the value of the obligation moves from nominal to full value. The others will move there as a percentage of their worth.

It is so good to know that the G20 have saved our souls.

Look at the OTC derivatives illustrated as little pennies all piled in a brick. Nominal to full value would engulf the planet deeper in this crap.

pennies

Jim Sinclair’s Commentary

All G20 deficits are going to be larger than predicted for years to come, upward adjusted of course after shockingly large releases of data.

UK deficit ‘more than predicted’

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The government may have to find an extra £39bn a year by 2016 to bring borrowing under control, the Institute for Fiscal Studies (IFS) says.

This is on top of the £38bn of fiscal tightening the chancellor announced in the pre-Budget report (PBR).

If the money were raised entirely through tax-raising measures then families would face an average increase of £1,250 in taxes a year.

Alistair Darling is due to present his Budget on 22 April.

He has warned that the recession will be more severe than forecast.

He may also be forced to revise his forecast for public sector net borrowing, with the IFS forecasting that the budget gap could reach £150bn a year (more than 10% of GDP) over the next three years.

He and Gordon Brown will meet the Bank of England governor later to discuss measures agreed at the G20 summit.

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Jim Sinclair’s Commentary

Less Bats, less bees, less food, more costly corporate farming rejoices.

Georgia might close caves to protect bats
Disease that’s killed critters in 8 states could head here
By MARK DAVIS
The Atlanta Journal-Constitution
Monday, April 06, 2009

A disease is heading toward Georgia, and state officials say they may close caves to stymie its arrival.

Yes, caves. The disease is white-nose syndrome, and it has decimated bat populations in eight states from New Hampshire to West Virginia. If unchecked, it could reach Georgia, home to 16 species of bats.

It’s such a mystery that the U.S. Fish and Wildlife Service has urged cave explorers to stay away from caves in those states, plus those in adjacent states.

The disease is apparently not harmful to humans, but scientists don’t know if cavers help transfer the disease from one site to the next, said Diana Weaver, a spokeswoman for the agency.

The Georgia Department of Natural Resources might follow the agency’s suggestion and close caves on state property, said DNR biologist Katrina Morris.

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Jim Sinclair’s Commentary

The odds favor the Taliban.

Zardari: Pakistan fighting Taliban for survival
Mon, 06 Apr 2009 22:28:33 GMT

Pakistan’s President Asif Ali Zardari tells top visiting US officials that his country is fighting Taliban insurgents for its ‘survival’.

"Pakistan is fighting a battle for its own survival," president Zardari told Richard Holbrooke, US’ special envoy for Afghanistan and Pakistan, and Admiral Mike Mullen, Chairman of the Joint Chiefs of Staff during a meeting in Islamabad on late Monday.

"The President said the government would not succumb to any pressure by militants," a statement issued by the presidency quoted Zardari as saying on Monday.

The US officials flew into Islamabad on Monday following two days of discussions in neighboring Afghanistan.

It is the first top-level US visit since President Barack Obama put Pakistan, along with Afghanistan in his new war plan against al-Qaeda and Taliban militants.

Pakistan has been hit by a wave of violence seven and a half years after US-led forces invaded neighboring Afghanistan in 2001 in a mission that was said to oust al-Qaeda and Taliban.

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Posted at 6:40 PM (CST) by & filed under Jim's Mailbox.

Geithner’s Stress Test "A Complete Sham," Former Federal Bank Regulator Says
Posted Apr 06, 2009 10:00am EDT by Aaron Task

GeithnerVid

The bank stress tests currently underway are “a complete sham,” says William Black, a former senior bank regulator and S&L prosecutor, and currently an Associate Professor of Economics and Law at the University of Missouri – Kansas City. “It’s a Potemkin model. Built to fool people.” Like many others, Black believes the “worst case scenario” used in the stress test don’t go far enough.

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Jim,

Today you challenged any of your readers to present a "practical method of draining $20 trillion from the international monetary system.” You offered one ounce of gold to "that person able to present a PRACTICAL method, not academic horseshit that draining this mad monetary expansion is possible."

Based on the illustration below, God has accepted your challenge:

OTC DERIVATIVES CAN BE DRAINED INTO OBLIVION

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"Black holes are places where ordinary gravity has become so extreme that it overwhelms all other forces in the Universe. Once inside, NOTHING can escape a black hole’s gravity." – not even OTC DERIVATIVES!!

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All the Best,
CIGA Wallace

PS – God said to tell you he’ll accept an I.O.U. for the one ounce of gold!

Jim,

Spin and currency devaluation are used to create the illusion of endless economic prosperity.

“You can fool some of the people all of the time, and all of the people some of the time, but you cannot fool all of the people all of the time.”

Updated through March 2009

The global quantitative easing (currency devaluation) can influence nominal returns as depicted by the U.S. dollar priced Large Cap Stocks Total Return Index (LCSTRI) and Long-Term Government Bond Total Return Index (LTGBTRI) charts. Unfortunately this influence on this trend is largely an illusion during periods of excessive currency devaluation. When LCSTRI and LTGBTRI are priced in a constant currency such gold, the illusion of nominal returns provided by quantitative easing (global currency devaluation) is revealed by sharp down trends. The downtrends reveal the consequences or price of global quantitative easing.

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Stand Tough CIGAs!

CIGA Eric

Jim,

The assumption is that the government reaction must produce inflation eventually. You’ve commented that it cannot be drained. I don’t recall what you were referring to.

Could you comment on the website about the following? Of course they may not drain, BUT the issue is whether they can or not.

Shelly

Bernanke: Many Fed lending programs extend credit primarily on a short-term basis and thus could be wound down relatively quickly. In addition, since the lending rates in these programs are typically set above the rates that prevail in normal market conditions, borrower demand for these facilities should wane as conditions improve

Bernanke: The Federal Reserve can conduct reverse repurchase agreements against its long-term securities holdings to drain bank reserves or, if necessary, it could choose to sell some of its securities. Of course, for any given level of the federal funds rate, an unwinding of lending facilities or a sale of securities would constitute a de facto tightening of policy, and so would have to be carefully considered in that light by the FOMC

Click here to read the full speech…

Dear Shelly,

Ok, you tell me by what miracle of divine intervention are we going to drain $12.7 trillion in the US alone out of the WORLD monetary system.

There is no practical system to do this. There will be none invented. It simply cannot happen and the consequences will result.

Are you going to ask the shadow trillionaires to return it?

Are you going to drain it from your Fed Member Banks?

Is Goldman going to give it back along with AIG if they are even still here?

Are you dreaming?

This is how the Sheeples are lulled to sleep to today throw away their lifelines.

I have to admit that I am getting so strained at holding the same hands all the time.

The Sheeple must start to think and simply not just feel fear and greed with my email address and phone number on their computerized Rolodex. Shelly, if you in your heart really believe you know more than I do and that all this monetary stimulation has any PRACTICAL method of draining please sell all your gold positions on the next rise, which is certain to come. That will save me the 30 minutes it takes to think out these answers and compose them.

I challenge anyone to present a practical method of draining what will be more than $20 trillion from the international monetary system. Hell, I challenge anyone to come up with a practical plan to drain even half of it I underscore practical because we are presently dying of lies, academic impracticalities and outlandish spin. One ounce of gold will be delivered to that person able to present a PRACTICAL method, not academic horseshit that draining this mad monetary expansion is possible.

Keep in mind the concept of "PRACTICAL," which means it does not kill any incipient recovery also due to come some day, somewhere.

Jim

Posted at 3:18 PM (CST) by & filed under Trader Dan Norcini.

Dear CIGAs,

The dollar was up today and that translates to everything commodity being down. Selling pressure was evident in nearly every single commodity futures market with only a bare few escaping the move out of those markets. Computer algorithms are what they are and have become a fact of market life.  Right now, those algorithms are keying on the level of the Dollar and  the level of the S&P. When the S&P moves lower, the Dollar moves higher and the computers then have orders flowing into the pits to sell commodities as “risk aversion” increases. When risk aversion drops off, as stocks move higher, the dollar then moves lower and commodity markets experience broad based buying. That old friend of ours, the Euro-Yen cross, continues to be a good harbinger of which way investor sentiment is leaning. Today it was lower which is another way of saying the investors were trying to avoid risk. In our brave new world, that means the “risky” asset known as gold (?) is a definite sell.

Down it went and into the sell stops and that was that.

I mentioned last week that support at $880 in gold must hold or gold will move sharply down to test the $860 – $850 level. That is where we are headed as we came all the way down to $865 before a bit of a session bounce occurred. The bounce was not enough to take it back up above $885 so the bears are now in control of the paper gold market. Technicians will point to a short term topping formation which was confirmed by the loss of support at $880. If bulls do not immediately (and that means tomorrow) push prices back above $880, then the move down to $860-$850 will gather momentum as additional long side liquidation will take over.

You have support at that level centered around $852 (see the chart) and then below that near the $816 – $820 level. Seasonally, this is not a particularly strong time of the year for gold so we have that workingagainst it in addition to the bearish technicals. Gold would have to recapture the $930 level to convince the “sell the rally” trade to abandon their logic and flip around to buying dips.

Gold deliveries were ZERO today which means that the longs are no where near threatening any Comex default as we are constantly being told by various internet essays.  The paper gold shorts are quite confident as they have little in the way of determined opposition that would threaten their complacency. Hedge funds who are determined to play the paper gold game against the bullion banks and employ momentum based strategies for the buy side will continue to lose money. It is really that simple.

To show you how effective the bullion bank short selling has been – open interest in gold, after bottoming out near 261,000 in December of last year, had been on a steady increase as gold prices moved off their lows and had reached to near the 390,000 level. It has now dropped nearly 40,000 contracts alone in the last 7 trading sessions and no doubt a substantial bit more than that after today’s debacle. The funds are getting flushed out once again with open interest now back at levels last seen in early February of this year. Another way of saying this – most of the buyers that had come into this market in the last two months were flushed out in 7 days with the bullion banks banking their paper profits thanks to the hapless longs.

I have given up on telling the hedge funds what they need to do to turn this loser’s game around (buy into the weakness and hold the contracts into delivery) but they will not change tactics so that is that. Gold will need India to rescue it.

Silver is even more peculiar than gold since it too is getting whalloped even in the face of three successive days of 2 million ounce out-movements from the Comex warehouses.

I am particularly confused by today’s price action across the gamut of markets because there was NO SAFE HAVEN that I could point to based on the price action. Equities got hit pretty hard today but bonds also went down. Crude oil was down and most of the grains were down. Copper was down after touching the magical $2.00 mark on Friday. If money was flowing into some sector for safety today, I sure as heck could not see which one. That is why the move higher in the Dollar is so opaque. Maybe people were buying US corporate debt; I am just not sure what they were doing other than sticking cash under their mattresses.

The HUI and the XAU, after only last week setting up bullish chart formations, have now completely broken down once again. Both look to be headed back down towards their March lows. Perhaps they can set up a sideways trade after moving down towards that level and uncovering some buying.

Click chart to enlarge today’s hourly action in Gold in PDF format with commentary from Trader Dan Norcini

Posted at 2:47 PM (CST) by & filed under General Editorial.

Dear CIGAs,

The COMEX manipulators are taking gold out to the shack for a whipping.

Is this payback for taking delivery? Are they really the boss they are claiming to be today?

TIPs are indicating the strong expectation of higher inflation. Please read this article so you can understand there is no practical means of draining all the liquidity. There are academic plans but they are just that – useless.

Why are you letting the COMEX manipulators whip you for calling their hand at the last delivery? Yes, this weakness is showing us all who is boss in gold, the COMEX gold banks.

Are you going to allow this forever or are you going to continue to stand for delivery.

This weakness in gold is a paddling for taking delivery.

There is no reason for gold being lower today whatsoever.

The Gold Banks are giving us a lesson of how dare we take delivery.

Screw them and continue to take delivery.

Treasury Inflation Protected Securities – TIPS

What Does Treasury Inflation Protected Securities – TIPS Mean?
A special type of Treasury note or bond that offers protection from inflation. Like other Treasuries, an inflation-indexed security pays interest every six months and pays the principal when the security matures. The difference is that the coupon payments and underlying principal are automatically increased to compensate for inflation as measured by the consumer price index (CPI).

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The Fed’s Dilemma
Will the central bank withdraw inflationary liquidity too soon, too late, or just in time?
April 3, 2009 7:00 AM
By David Gitlitz

During the credit crisis, the Federal Reserve has gone to unprecedented lengths to provide the financial system with abundant supplies of liquidity. There are two purposes behind these actions: to guard against the risk of systemic failure and to root out the deflationary forces that appeared in conjunction with the risk-abhorrence of last fall. Up to this point, these efforts have mostly worked.

It is likely, however, that this extraordinary exercise in monetary ease will at some point have significant inflationary consequences. And the Fed will face a big dilemma if this happens before the market is restored to stability and the economy has emerged from recession. In this scenario, the Fed would have to either tolerate significantly higher inflation for a period, or tighten its policy in the face of still-significant weakness in the economy and markets.

The Fed’s task was made no easier when Treasury Secretary Tim Geithner unveiled the details of his bank-rescue plan — the Public Private Investment Program — which makes the Fed a major supplier of financing to support purchases of toxic assets that are now clogging the banking system. Excluding this program, the Fed’s own rescue plans could force its balance sheet to balloon to near $4 trillion over the next several months, up from less than $1 trillion last September. Including the Treasury program, another $2 trillion could be added to the total.

Some of this liquidity could be offset through a program whereby the Treasury issues debt and deposits the proceeds with the Fed. That would serve to drain funds from the system, partly sterilizing the Fed’s asset acquisitions. But the Treasury’s capacity to issue debt to fund this program may be limited. The first sign of resistance to the massive borrowing requirements being borne by the federal government came at a recent auction of five-year notes: Demand for the debt was less than expected. So it’s questionable whether the Treasury will essentially want to compete against itself by floating a large amount of additional debt to fund the Fed.

And even if that Treasury assistance goes through, it would account for a relatively small part of the total liquidity that has been added to the system through the Fed’s acquisition of assets.

The Fed is now proceeding on the explicit assumption that once the crisis fades and the economy enters recovery, it can unwind its balance sheet quickly enough to avoid a significant breakout of inflation. But that assumption may rely on faulty premises.

For one thing, the Fed is aggressively expanding a program that provides loans with three-year terms. Unless there is some way of sterilizing the impact of those loans, it will be impossible for the Fed to withdraw that liquidity until the loans come due. At the same time, the Fed is acquiring mortgage-backed securities, assets that may prove difficult to unload at a later date.

There’s also a larger issue at stake: Will the Fed actually know when it’s the right time to unwind its balance sheet? And since it has gone to unprecedented lengths in carrying out its extraordinary monetary ease, how easily and quickly will it be able to shift from an anti-deflationary to an anti-inflationary mindset? When that choice arrives, the Fed may opt for what it considers the least risky solution: tolerating a higher-inflation environment in the interest of market and economic stability.

On that score, a surprisingly honest acknowledgement of the potential quandary facing the central bank came last month from Jeffrey Lacker, president of the Richmond Fed. Lacker told a group at the College of Charleston that the potential inflationary impact of the Fed’s actions “depends on our skill at the Federal Reserve in withdrawing the stimulus in a timely way. That is a very delicate, very hard policy.”

Lacker referred to the “spotty” nature of an economy in recovery, and asked, “Do we keep policy easy and stimulative because of the sectors that are lagging behind . . . or do we get ahead of the curve? It’s going to be a tough call.”

Lacker has strong anti-inflation credentials. So to hear him describe the Fed’s looming choice as a “tough call” seems to raise the probability that the Fed will accede to an inflationary — and unnerving — outcome.

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