John Hussman makes two excellent points…whether you are a bull or a bear, you have to accept the cold facts and see the forest as well as the trees:

1. “So where does the money come from to buy [all] these new Treasury securities? Clearly, the sale of those securities must absorb the savings of someone in the economy whose savings have not already been claimed. Alternatively, the Fed can directly purchase those Treasury securities and literally print money. In practice, we have a third option. The Fed can acquire $1 trillion of commercial mortgage-backed securities and other assets from banks and create an equivalent amount of “reserves” (which is essentially printing money) at the same time that the Treasury issues the $1 trillion in new Treasury securities. In this case, which is in fact exactly what has happened, the banks that previously held $1 trillion in commercial debt securities can now use their newly acquired reserves to buy the $1 trillion in newly issued Treasuries. Having done this, they have no more money to lend than they had before. There is no more “liquidity” in the system than there was previously, except that the “quality” of the bank balance sheets has improved.”

2. “It is an error to view outstanding debt securities as if they are “liquidity” poised to “flow back into the stock market.” The faith in that myth may very well spur some speculation in stocks, but it is a belief that is utterly detached from reality. The mountain of outstanding money market securities is the result of government debt issuance that must be held by somebody until those securities are retired. It is not spendable “liquidity” – it is a pile of IOUs printed up as evidence of money that has already been squandered.”

Zero Hedge ran a post this weekend revisiting Friedrich Hayek’s seminal Prices and Production,  in which the professor recognized that when total debt outstanding rises, whether through conventional banking or shadow banking, that increased credit has been used to bid up consumer goods and investment asset prices:

“There can be no doubt that besides the regular types of the circulating medium, such as coin, notes and bank deposits, which are generally recognised to be money or currency, and the quantity of which is regulated by some central authority or can at least be imagined to be so regulated, there exist still other forms of media of exchange which occasionally or permanently do the service of money. Now while for certain practical purposes we are accustomed to distinguish these forms of media of exchange from money proper as being mere substitutes for money, it is clear that, other things equal, any increase or decrease of these money substitutes will have exactly the same effects as an increase or decrease of the quantity of money proper, and should therefore, for the purposes of theoretical analysis, be counted as money.

…but once they have come into existence their convertibility into other forms of money must be possible if a collapse of credit is to be avoided.”

In point 2, above, Hussman is emphasizing this point:  when debt is created, it is simultaneously “attached” to some consumer good or investment asset, it is not sitting “idle” on the sidelines in liquid form…waiting to be attached to (say) stocks.  To be attached to stocks, bonds, consumer goods or whatever it was previously attached to, must be sold down first.   In point 1, above Hussman, is emphasizing that the recent FED activities has provided no new credit to the banks…only the opportuntity to “swap” a toxic asset for a US Treasury security.  Currently,  if the banks decide to sell the Treasuries to raise cash to lend or to invest in stocks (like Goldman)…the price of Treasuries goes down and the yields go up.  If yields go up, the “recovery” is jeopardized.