Treasuries Taken Out And Shot

Looks like the Fed could have a problem on its hands. Not surprisingly, considering it’s been playing the short game for years. But eventually the long term gets here.

The choice may come down to whether to save the bond market or the dollar. While it may seem odd to worry about the bond market when the ten year yield is only in the 1.5% zone, this is a multiple of that only months ago, and we know Congress plans truly epic supply over the coming months. The Fed will either have to let bond prices continue to fall or escalate already massive purchases even further. The former would also mean crashing the stock and housing markets. The latter would mean crashing the dollar itself.

But this is the corner into which the Fed has painted itself. For Greenspan’s repeated missions to support stock prices, for Bernanke’s introduction of a 2% “inflation” target, for Yellen’s waiting-for-Godot failure to normalize rates when the getting was good, for Powell’s caving in his attempt to normalize on a mere 20% pullback in stock prices, the Fed bought the dilemma it faces now. On the installment plan. But the price wil be paid by ordinary people.

The banking system creates money by lending.  To create more money, the Fed cuts rates, prompting more borrowing.  The ratcheting down of rates over a period of decades has resulted in an epic mountain of debt.  The debt represents demand for money, a deflationary force, which the Fed then addresses by more rate cutting.  A patently unsustainable model.  No Monday morning quarterbacking involved. As the record on this site attests, we’ve seen it coming for years.  

Can the Fed muddle through? Anything’s possible. My guess is it will try to have its cake and eat it, threading the needle by trying to partition the pain between both the bond market and the dollar, like the kid who spreads the peas around his plate to make it look like there’s less.  That could build a bridge to a longer term solution if the Fed sends a clear signal that it’s willing to change course, to abandon its view that lower rates are the solution to every problem, that if something didn’t work, it only needs be done more forcefully. More of the same kind of thinking that led to this point, however, will not.

5 thoughts on “Treasuries Taken Out And Shot

  1. Bill Terrell says:

    Follow up … not surprisingly we’re seeing speculation the Fed will step in to support the bond market:

    The Fed is on a collision course with the $20 trillion Treasury market
    The $20 trillion Treasury bond market is getting jittery. The question is what is the Federal Reserve going to do about it? As vaccines get jabbed into arms and Congress prepares to dish out another $1.9 trillion of support for the economy, investors are starting to fret about inflation. That has sparked a selloff in…
    Read in Quartz:
    Shared from Apple News

    Don’t know about the timing or means (could be as little as jawboning at first), but if the Fed wants inflation, it’s going to have to keep pressure on Treasury yields. It will be courting a deflationary accident if it doesn’t. Jay Powell may claim to be fine with rising yields in the middle and long end of the curve, but he’s already shot his credibility. He can’t have it both ways. His institution has nursed into being a pile of debt like an overheated reactor core in search of a couple stray neutrons.


  2. cb says:

    Bill – You know that they started their assault on the dollar, and savers and the working class, long ago. They will of course try to thread the needle. They have little choice – ruinous, larcenous bastards that they are.

  3. cb says:

    The Quartz article claims: “That has sparked a selloff in government debt that is driving up interest rates: 10-year Treasury bonds yields touched 1.6% yesterday, the highest rate in a year, and yields on five-year notes, seen as more sensitive to changes in monetary policy, had one of the biggest jumps in a decade. The US Treasury’s auctions of five- and seven-year securities were poorly received by investors.”
    I doubt the author knows a selloff to be the cause. It seems more likely that the bid on new issues was such that the settled interest rate was 1.6%. That is still a very low, call it an interest rate suppressive rate. I would like to know who the buyers were, and if the FED was a buyer. Then we might know a thing or two.

  4. cb says:

    Bill said: “The debt represents demand for money, a deflationary force,”

    Would you please explain how this works?

    1. Bill Terrell says:

      Good question, CB. People who have a lot of debt know it instinctively, but those who don’t may need to reflect a bit. If you owe money, you need to obtain money. For instance, if you have a $1500 mortgage payment and a $500 car payment to make next month, you will make an effort to obtain the $2000 to make these payments with. If you don’t come up with the dollars, you may eventually find yourself homeless and carless.

      You will do what it takes. It might be trading your time to an employer in exchange for dollars. It might be selling something for dollars. Either way, you are demanding dollars. The more debt you have, the stronger your motivation to obtain dollars, the more pronounced your demand is … the more valuable those dollars are to you.

      Because of this, and because the banking system creates dollars by lending them into existence, the very process of creating inflation sows the seeds of its undoing. The initial impulse of the creation of new dollars (supply) reduces their value (inflation), but once that impulse subsides, the debt remains, creating demand that drives up their value (deflation). So another round of inflation is needed, which creates a rebound of deflation … round and round we go.

      If you sat down and designed a monetary system deliberately to be unstable and unsustainable, you would be hard pressed to come up with something that fit the bill better.

      It is remarkable that we literally have people running this system with PhD’s in economics that, instead of looking for ways to reform the system, seem intent to merely try ever more forcefully to get the faulty model to work.