The rise in yields does not appear to be driven by the concerns expressed by some that the asset purchase program would unleash a considerable rise in U.S. inflation and inflation expectations to levels well above those consistent with the Federal Reserve's mandate.
Sack dismisses the rate rise and basically calls it “a good thing”.
The upward movement in longer-term interest rates in large part reflects the greater optimism among investors about the outlook for economic growth and the gains do not signal greater worry about inflation.
Well it would appear that I have it all wrong. I am convinced that what Brian is doing is a monetary “unnatural act”. These guys are manipulating the bond market three times a week. They are doing this manipulation in biblical amounts. They have maintained ZIRP for three years. In my way of thinking this much liquidity pumped into the system has to create steam in the boiler and that steam has to come out. Yes some of it is coming out in the bubbling stock market. But where is the fairness in that policy? Some of the steam also has to come out in the form of higher commodities prices. To me this is textbook Economics 101. I guess I should get a new textbook.
Actually I don’t think I am wrong. Mr. Sack can say as he wishes. To me his credibility just goes out the door when he attempts to sell this drivel. There are only a few possible conclusions that I can reach.
-Mr. Sack actually believes what he is saying. That there is NO connection between monetary policy and inflation. This would imply that he is ignorant as to the basic laws of economics. I doubt this very much. Sack is no dummy. I would dismiss this one.
-Mr. Sack is doing what he is told to do by his boss. Bernanke used almost the exact words when he spoke before Congress. So this was just a setup for the media. Sort of a double dose of “Don’t worry, we have this completely under control”. This is not Fed “spin”. It is propaganda. And a well organized effort at that.
I don’t believe that Sack or Bernanke go to bed at night believing in the fairy tales that are trying to sell to the American public. At this point I think they are functionally lying. They are too smart to believe what they are saying. They are too informed to ignore the mountain of evidence that proves they are igniting a fire that could end up starving people.
I think the problem is they are too stubborn to admit that they made a mistake. Eight months ago Bernanke misjudged what was happening in the economy. He thought he could be the savior and rescue an economy that was headed into a double dip. But he was wrong. The economy was just giving a head fakes. The recovery we are seeing today is not born from QE. It is born from the fact that 300mm people have to buy cars sooner or later. They can’t put off needed repairs or even a holiday. Sure there is a ton of people out of work. There is also 130mm people who are working. Yes real estate sucks, but a large number of companies are making very big profits and sitting on mountains of cash.
QE is an emergency tool. There was no emergency in the fall of 2010. There is none today. If there is an emergency in 2011 it will be that inflation gets out of control and the Fed has to do a 180 on monetary policy. That will almost surely bring us another big recession. Should that happen the fault will lie squarely on the Fed’s shoulders.
I hope Mr. Sack does read Zero Hedge and I hope he reads this. If so I have a message for him:
I have been investing money for 40 years. I watch markets every day. I am scared to death of what you are doing. I vote with my feet. I will not buy your manipulated yield curve. (I can’t for the life of me understand why anyone would). You have already raped savers for years. Now you are going after our food supply. What you are doing will ruin this country. When that happens those that invented and implemented these polices will be disgraced. Your only option is to man up and admit that you have erred. End this madness. Do it now or suffer the consequences of your actions.
Posts
Amen.
ReplyDeleteThe only thing I would amend is "Do it now or the rest of us will suffer the consequences of your actions." I'm sure Mr. Sack himself will be fine.
ReplyDeleteI find it risible that the Fed can decide that although its QE program is forcing bond yields higher (contrary to their stated goals in implementing it), it's all good because it means investor have "more optimism"--as if higher bond yields were always equated with optimism.
These people are academics. Their theories, their book learning and established expectations as to how the economy should behave are paramount to them.
ReplyDeleteIt's DOUBLESPEAK: Sack no doubt knows that the policy is currently "not working" and either, as per the standard textbooks, disregards growth in the money supply or believes that investors really DO expect economic growth and that at some level success will be attained...sometime.
Maybe he would say, "give it time!" I don't think so; this is classic "talking your book".
Orwell said you could simultaneously hold two opposing ideas in mind.
Sack is often the first to bring up certain "technical" issues. He makes some key statements toward the end about realizing capital losses and the effect of rising short term interest rates. He even mentions the possibility of halting remittances to Treasury as the Fed goes cash flow negative (footnote 17). The Fed appears to be getting ahead of these issues.
ReplyDeleteHowever, Sack stops short of taking this possibility to its logical conclusion. Because of recently disclosed accounting changes, IOER and other interest rate paying facilities are a hyperinflationary death trap in a persistent cash flow negative situation, to which there is exactly one alternative: sell assets to become cash flow positive. What happens when the world's largest Tsy holder starts selling, putting upward pressure on LT rates while simultaneously withdrawing liquidity? Of course, the operative word is "persistent", and that depends on how quickly short term rates rise.
i think you're overlooking a rather obvious alternative. in your presentation you don't buy the swampland the fed is peddling under the guise of prime farmland. you are correct to do so for, obviously they have ignited the inflationary fire and refuse to concede the point .... as if they really care about this at all.
ReplyDeletewhat you're overlooking though is that you're taking them at their word as to their reasons for embarking on the current phase of QE∞ ... personally i don't think it had anything to do with the ongoing depression or their perception of a double-dip. its just more of the same. they're funneling money to the banksters at an accelerated rate to help shield them from the impacts securitization/robo-signing/etc mess AND attempting to deflate away the debt.
just my increasingly devalued 2¢
cheers ... love your writing and your observations!
michaelD
Hubris! perfectly defines the political class.
ReplyDeleteapparently google eats comments on your blog as well
ReplyDeletemichaelD expresses my sentiments precisely. This is just a cover-up. The Bush/Greenspan administration covered the dot.com fraud (and what would/should have been monumental prosecutions followed by a significant recession) with the housing bubble. The banks couldn't resist playing both sides of that trade, but now that their greed is out in the open, the bankers' stooges at the Fed have to cover again. Gotta keep the ponzi alive.
ReplyDeleteSack and Bernanke know what they're doing, and their buddies are quite pleased.
We continually shake our heads at the words they exude. They say one thing one day and construct something else another. Simply stated, they are liars, and liars don't have a conscience.. that is part of the danger.
ReplyDeleteExcellent post, Bruce.
Bruce, I am watching the non-resignation of Muburak and am thinking of you. All those upperclass Egyptians must be in a panic to get their money offshore. 20 years ago most of them would have been trying to get their money into the US. Today I'll bet most of them will be putting it in Switzerland and Singapore.
ReplyDeleteIs this evil? Should these countries refuse to accept this windfall to see the money flow somewhere else? If Switzerland should accept money from Ben Ali, should they accept money from Muburak cronies? Wealthy Egyptian doctors and Lawyers? Where do you draw the line?
I like your letter, Bruce.
ReplyDeleteSo what do you think about Warsh's resignation? Abandon all hope?
If one were to look at QE2 as the attempt to prevent a sovereign bond crisis in the United States, I think this would be closer to the real reason and motivation. In this regard it is quasi successful as Long term rates have risen regardless, but at least there is a buyer for US bonds, the Fed.
ReplyDeleteWho else would buy any, let alone that quantity, if they had a choice?