While You Were Cliff-ing

The force feeding of the budgetary process, now called The Fiscal Cliff, has knocked everything but philandering general's off the news cycle. I cannot get worked up over The Cliff [all you have to do is turn the trend not solve] but a couple of important developments have taken place elsewhere.

The BOJ has for the first time in 15 years of QE, coordinated its response between all 3 government ministries. On Friday, the BOE moved to "extinguish" the Gilts that it buys in the Asset Purchase Fund (APF). The BOE and the Fed set up facilities during the crisis that were innovative and had defined wind downs. The Fed takes the bonds it purchases on to its balance sheet but the BOE opted for a facility.  By extinguishing coupons (principle next?) the interplay between the CB and the government becomes direct (and the temporary nature of the facility moves to the term structure of the holdings). Clearly, a currency adjustment is hoped for (initial reaction was a dud). If the Fed and Treasury were to openly play in this game, the outrage would be deafening and the buck would be smoked. As it is now, Ben is content to wire over a budgetary sleight of hand to Treasury of about 80B a year. (The Fed maintains basis risk on its carry, however, and if it went bad they would request capital back. Thus, the Fed "promise" of extended period acts as an insurance policy on its lengthening duration and average maturity)

Out of the deep weeds of global monetary policy pornography, central banks and governments are wrapping themselves together under the blanket of QE. These events have moved the competitive devaluation of the currencies under the spotlight for 2013.

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