A Perspective on Collateral and Liquidity

U.S. collateral, together with G7 collateral in general, consists of premium funding sources for banks. Today the key is to support yields on strong banking collateral. We've seen a collapse of liquidity in Euorope, and a collapse in interest rate arbitrage in the U.S.

Where the Eurpean Central Bank engaged in heavy bond purchases and LTRO, the U.S. Fed previously engaged in heavy rounds of QE. All provided untold amounts of liquidity into the international system--and pricing increases, with yield declines.

Where the fight in Europe was to support bond prices and keep down European bond yields, the fight in the U.S. has been to sustain yields and increase pricing.

Reported globally as a liquidity consequence are negative yields in the U.S., which compares to returns on various yields against depostis. Especially in view of FDIC fees on deposits.

Ultimately, the goal has allways been to keep U.S. collateral healthy, and to support European collateral.

Due to central bank efforts, and to their support of economies and collateral, lots of liquidity must be absorbed. Asset yields must be increased and prices decreased in the U.S. In Europe, however, the worry is that U.S. goals will become Europe's hardship. In Europe, bond yields must stay below a ceiling and prices above a ceiling.

Countervailing goals exist in that the U.S. wants to set a ceiling on bond prices, while Europe needs to set a floor. And, the U.S. wants a floor on bond yeilds, while Europe needs to enforce a ceiling.

Between the two countervailing goals, a symbiosis seems to exist, given the ECB's previous rounds of liquidity infusion.

Bottom line for business is that U.S. and European economies compose the lion share of economic activity. While the two economies don't grow at rates observed in smaller economies, they still compose the largest demand in the world. Like it or lump it, we have a reality knocking on our back door. Make it work is what needs to be said.

Any opinion is welcomed. We appear to be in a state of reality, unless I'm mistaken.