Central Bank Machinations with No Exit: ECB Leaks New Thingy, It’s Doing Yield Spread Control

This is not your grandmother’s “yield curve control.” There is only one thing that could force this ECB absurdity to end: a big bout of inflation.

By Wolf Richter for WOLF STREET.

The ECB, which is already infamous for imposing negative interest rates, has been doing something new, something no other central bank has done before or even needed to do before. Sources familiar with the matter told Bloomberg that the ECB is controlling the yield spread between the government bonds of the 19 euro states, for example the spread between German and Italian government bond yields. According to one of these sources, the ECB has specific ideas about what yield spreads are appropriate. And to heck with any kind of market.

The ECB isn’t doing “yield curve control” as the Bank of Japan and the Reserve Bank of Australia are doing, but effectively “yield spread control.”

Bloomberg reached out to the ECB, but a spokesman refused to comment on it. The fact that this strategy has now been leaked is part of the effort to accomplish the goal – with communications, whether directly or indirectly, all being part of “jawboning” the markets, what’s left of them, into doing what the central banks want them to do. Jawboning is an official tool in every central bank’s official tool kit and often works better than actually doing something.

The ECB has long been doing “whatever it takes” to keep the currency union with 19 nations glued together, dodging its legal limits against monetary financing and shrugging off court challenges.

But unlike other central banks, it faces a complex situation. Each of the euro nations is issuing its own government debt. And the ECB has limits on how much debt it can hold of each country. It has been buying government bonds to manipulate down bond yields – not the German yields, which were already low, but Italian, Spanish, and Portuguese yields, the yield of countries with the weakest economies and the most indebted governments. It succeeded years ago with this goal, which had been thoroughly communicated.

What’s new is the “yield spread control” – and that it has a specific yield spread in mind. This is different from your grandmother’s “yield curve control.”

Yield curve control was used by the Fed in mid-1942 to reduce the borrowing costs of the US government during the war. The Fed set the short-term yields at 0.375%, the 10-year yield at 2.0%, and the long-bond yield at 2.5%. It explicitly communicated these yields, and communicated that it would buy whatever it took to maintain those yields, and that’s how it went. By 1947, inflation was 18%, and the Fed gradually undid yield curve control.

The Bank of Japan followed suit in September 2016 when it introduced its “QQE with Yield Curve Control,” targeting a 10-year yield of “around” 0%, and committing unlimited purchases to obtain this yield. Between the BOJ’s holdings of government bonds, and the bond holdings of government institutions, there is no government bond market left to challenge the concept.

The Reserve Bank of Australia followed suit in March 2020 by announcing a target of “around 0.25%” for the three-year yield, which it reduced in November to “around 0.1%.”

The Fed was expected to follow suit with its own yield-curve control late last year, but has moved it off the table for now.

Yield curve control has the advantage, from a central bank point of view, that if it is credible, the central bank may not have to buy a lot of securities to enforce it, since the market knows the target, and knows that’s what a central bank with unlimited buying power can achieve, and therefore falls in line. The results of jawboning are marvelous.

And now we got the leak from the ECB about its yield spread control, which is part of its efforts to jawbone the markets where it wants them to go.

“My feeling is that this is an important thing for the ECB, they’re looking at it and they’re actually envious of the BOJ. They would love to have something like that,” Christoph Rieger, Head of Rates & Credit Research at Commerzbank, told Bloomberg.

But the ECB can’t just announce a universal target for the 10-year yield because they’re dealing with the sovereign bonds of 19 nations – forcing the Italian and German yields to be the same would apparently be a step too far. So instead, they decided what the spread between them should be.

During the Pandemic, there is no way the bond market will be allowed to have a will of its own. When a central bank pushes down yields, bond prices rise, and bond traders bet on these falling yields, and bet these yields will continue to fall. They can make money even at negative yields, as long as yields become more negative.

All heck would break loose if bond traders thought that yields would be allowed to rise, which would create a bout of selling, and yields would thereby come unhinged, and fearing this, institutions would try to unload their bond holdings, and there would be a classic bond bloodbath. But that’s not going to be allowed to happen. There is only one thing that could force that to happen: a big bout of inflation.

Since the end of January 2020, the German 10-year yield has ticked down 9 basis points, from -0.43% then to -0.52% now. The Italian 10-year yield dropped 33 basis points over the same period, from +0.92% to +0.59%. And the spread between the German and Italian yields narrowed from 135 basis points to 111 basis points. Italy is already borrowing at negative yields on debt of five years and less. All of this is a masterpiece of central bank absurdity.

Rates for trucking, ocean containers, airfreight, parcels, you name it, the costs for shipping consumer & industrial goods are surging. Read… Massive Inflation in Shipping Costs. And the Reasons

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  186 comments for “Central Bank Machinations with No Exit: ECB Leaks New Thingy, It’s Doing Yield Spread Control

  1. raxadian says:

    So… what happens with UK bonds? Since the UK is outof the Union and that? Will people buy because they are not being pushed down?

    • Joan of Arc says:

      The UK has its own central bank, the Bank of England. They will do their own “thingy”.

      • One suspects the reverse of beggar thy neighbor to occur, as central banks raise rates (incrementally at first) to attract foreign investment. Who is going to pay for all this, familiar Covid refrain. Despite the massive bubble in the global monetary system nations will need to compete for a larger share of foreign investment, ie printed money. The catalyst for this is a collapse in the value of their own regional or sovereign currency. Negative rates imply a stronger currency, forex aside, these policies hide the underlying economic weakness. Zero interest rests equal zero growth. When yuou reverse that process out, even incrementally, capital seeks the higher growth nations, and deficit dogs like the US must reach out. The analysts call it a rotation into the EMs, which implies higher consumer growth. and the latin Euro will not have a chance to attract investment in this instance, as their “spreads” are linked to DM rates. At some tipping point forcing every EURO country to accept one economic model is going to destroy the system. This takes away their power to attract investment.

        • Basically, Ambrose, all of the nations of the Eurozone are homogenous in their Overall Credit Risks! Or in their inflation rates! Just not reality, and has never been so in the history of Europe.

        • FDR says:

          Ambrose, Why do you think the US armed forces have at last count over 800 bases in Europe, Asia, Africa and the Americas?

          Hint: It isn’t to spread freedom and democracy.

        • EU Outlier says:

          Always look forward to any well researched ECB comment on the 19 nation eurozone. The House of Cards analogy.

          So how long before it all goes pearshaped ?

          Falling back initially onto the broad shoulders of the older Germans, many still feeling a twinge of guilt at their parents and grandparents temporarily rearranging Europe’s deckchairs x decades ago.

          Then more and more younger Germans objecting. Why should they continue to hold back from owning the latest Mercedes / BMW / Porche just to prop up the bandit ridden, uncontrollable, southern EU?

        • NBay says:

          FDR,
          Yeah, that may be the price for being pretty much the world’s biggest natural resource pigs since WW2, I guess.
          But you’d think we would divvy it up a lot better amongst ourselves. Have no idea what the end game is, way above my pay scale.
          A massive Green New Industry program IS the only rational next move….might even redeem our world standing. We made 50% of the world’s goods in the 50’s.
          Be a good way to see if we really are an “exceptional” Democracy experiment, too

    • Jeremy says:

      The UK was never in the monetary union (the Euro). If you look deep enough at foreign direct investment in the UK you can detect signs that it is going to come out of the pandemic “reasonably” well. I would suggest that means naturally yields will remain relatively low

  2. Joe in LA says:

    In the short run, slightly higher US yields will attract foreign buyers (dollar is cheap, positive yield), so the 10yr probably won’t go above 1.2 any time soon, even without Fed YCC. Then the Fed just pretends inflation isn’t happening and continues QE. Government stimulus spending should keep the dollar at least weak enough to not threaten the stock market.

    It’s a tightrope but the Fed might be able to stay on it long enough for US equities to churn up for some time, which seems to be the only thing they really care about.

  3. MCH says:

    “German 10-year yield has ticked down 9 basis points, from -0.43% then to -0.52% now.”

    And China’s 10 year yield is above 3%. Not Taiwan, mainland China, where the communists are in control. Somewhere a band is play The World Turned Upside Down.

    Yep, starting to wonder about the trade offs of purchasing power vs “freedom of *insert your favorite freedom here*”

    • MiTurn says:

      “Somewhere a band is play The World Turned Upside Down.”

      Nice!

      And so apropos….

    • NBay says:

      My favorite freedom is still “freedom fries”…..told someone I was gonna swipe that!

      Damned good Central Bank Article….think my time here is well spent….I get it, and with no econ classes or biz experience (at management level) at all.

      Us ignorant lifelong worker bees CAN learn this money games stuff.

      Mucho Gracias!

      • NBay says:

        And the dollar dropping against the Yen and Euro proves we need a Green New Industry as our main national fiscal policy, as services and trickle down are toast. Good thing we got lotsa extra rich folks here to tax, eh? Let’s go easy and start with JFK rate schedules and some big fat net worth taxes….start at $10+M and curve the % right on up from there.
        And also, just where else they gonna go? Those stupid islands off Dubai?

    • Lisa_Hooker says:

      The band played as the Brits packed up. Then they went home. Now, everyone is already home. Except for the sole self-named “superpower.” ???

  4. Franz Beckenbauer says:

    Try juggling 19 balls in the air all at once with strong headwinds blowing in your face and “little guys” kicking your knees.

    Good Luck Crissy.

  5. YuShan says:

    It is weirdly quiet around the problems that the euro area is facing. Italian debt/GDP is 160% and rising and their GDP growth has averaged zero for almost two decades. Their population is shrinking.

    On the other hand, there is the Netherlands that has 57% debt/GDP per end of 2020. Germany is at 71%. Of course they are going to foot the bill somehow. These frugal countries are a minority, so…

    It won’t be long till we get a new euro crisis.

    • Cas127 says:

      Yep, creating inflation in frugal, producer countries in order to keep *further* borrowing costs from increasing in debtor, non productive countries doesn’t seem like a recipe for “stability”.

      At some point the distortions necessary to keep the EU intact overwhelm whatever benefits there are of keeping the EU intact.

      In all seriousness, what exactly do the Germans think they are really getting from being chained at the neck to the Italians?

      Export mkt due to common currency and no tariff barriers? The Italians are friggin broke anyway…how much worse of an export mkt could they be?

      When you produce efficiently (Germany) somebody, somewhere in the world will buy your “excess” production…you don’t have to debauch your own currency to keep your biggest deadbeat customers (Italy) “buying”.

      • Wisdom Seeker says:

        Re “what exactly do the Germans think they are really getting from being chained at the neck to the Italians?”

        OWNERSHIP

        • Cas127 says:

          WS,

          That’s too vague for me. What *exactly* is in it for Germany?

        • Lisa_Hooker says:

          @Cas – stylish suits and shoes, fast cars, great food with tomato sauce. Used to be a nice place to winter.

      • NBay says:

        I’m still all for the Euro experiment and really hope it works, they have too long of a history of tribal wars.
        Besides, creeps like Vlad and Winnie the Pooh hope it doesn’t.

        • nick kelly says:

          Burying the hatchet between France and Germany is the original motive and heart of the EU project. WWII was their third war, post- Napoleon. All the rest could be shed and it will remain.

          BTW: The provinces of Alsace/Lorraine on their shared border have changed hands four times. Taken by Prussia (the founder of Germany) 1870, retaken by France 1918, taken back by Germany 1940, retaken by France 1945.

          I think it might be an idea to make it a shared region, more so than the normal EU.
          Semi- autonomous, maybe called Europa.

        • NBay says:

          Yeah, maybe even make that the new Brussels (with nice pagan name, that musty old desert God just isn’t in Europe’s DNA).

        • NBay says:

          Oh yeah, another good reason for name choice. Most all scholars now consider the Minoans to be the FIRST European civilization.

    • Wolf Richter says:

      There won’t be another euro debt crisis as long as the ECB keeps buying Italian government bonds. Even the “frugal” countries have no appetite for another euro crisis, and so they’re not opposing the ECB’s purchases of Italian bonds. That has now been firmly established.

      • YuShan says:

        I wouldn’t be too sure about that. There are many scenarios where the wheels could come off.

        For example, there were plans where the Italian gov would issue IOUs that can be used to pay taxes. The ECB and Italy disagree about the question whether that would be a parallel currency, which is illegal (of course it is a parallel currency!). Then Italy could default on euro debt, sticking massive cost to the ECB (i.e. other euro countries).

        Of course Portugal, Spain, Greece etc cannot bear those costs so the entire thing collapses. And they could do the same thing.

        The “frugals” might want to preempt that by leaving the euro, creating a northern block so that the southern countries can devaluate their currency.

        Of course nobody wants to do that at this moment, but there are limits to the price they are willing to pay. And the German high court has already ruled debt monetisation illegal (against German “Basic Law”). With this ruling in hand, certain German politicians have a powerful weapon (even if they are a minority), because if the Bundesbank is not allowed to participate anymore, the complete backstop disappears (everybody knows who is the paymaster).

        The ECB always argued that QE was no monetary financing because they bought debt according to ratio (same % of GDP for all members). But that is out of the window now, so it is even against their own rules.

        Nobody wants to rock the boat right now, but I’m expecting a high stakes pokergame once the pandemic is over.

        • Lisa_Hooker says:

          Yeah, 3% maximum of GDP hasn’t worked out. But hey, treaties are easy. All you need is a pen, ink, and some hubris-laden bureaucrats.

      • MCH says:

        Alright, if we can keep bailing out the Italians, our supply of pasta and pizza is assured. Long live ECB purchases, and ensuring our supply of Linguinnniiii and Rigatonnnniiii… darn, it just doesn’t sound the same without the live audio.

      • Cas127 says:

        Wolf,

        “Avoiding Crisis” suggests that Germany gets more out of the status quo (creating EU/domestic inflation in order to prop up long moribund Italy) than it would by letting Italy predictably tank (via soaring interest rates due to its debt to GDP of 160%+).

        I laid out the tradeoffs above…the “benefits” of union (common currency and no tariffs) are badly overstated if the cost of those benefits (inflation to finance another country’s debt) are higher than claimed benefits.

        The *gvts* of the frugal countries (visions of political engrossment dancing in their heads) may be in favor of Germany/etc bearing increased inflation to keep Italy barely on status quo life support, but how about the actual citizens of Germany…who will bear greater inflation due to Italy’s failures and the political egotism of Germany’s political class.

        A “crisis” isn’t a “crisis” if Germany would come out better on the other side.

      • Franz Beckenbauer says:

        Wolf,

        Euroland is currently disintegrating at a rapid pace.

        Netherlands has a massive political crisis with the whole corrupt government (including the so-called “opposition”) having to step down.

        Macron in France is history. He even tried to team up with the “Front national” to stay in what he perceives to be “power”.

        Italy will soon be ruled by the likes of Silvio Berlusconi (“He’s back !”) again.

        Merkel in Germany will step down (i hope) in September. After that the deluge.

        The balkan countries are looking very favourably towards russia again (see the latest visit of croatian foreign minister in Moswcow).

        Greece, Cyprus, Malta and Italy have had it with illegal immigration supported by Brussels to their shores.

        The baltic states have been robbed blind by the EU technocrats and are on their knees.

        Hungary and Poland are showing the big finger to Brussels.

        The brits are out.

        And in Brussels you have Ursula von der Leyen heading the Titanic who miserably failed in every single job she had and always managed to be promoted upwards.

        This ship is going down.

    • And the Banana States of America has a DEBT to GDP ratio of 130% and Joe Biden hasn’t even gotten started yet in jacking up the total U.S. Debt. Shiver me timbers!!!

      • Lisa_Hooker says:

        More Money Today might allow Joe to survive 4 years (if he lasts that long). However, under president Harris and Vice-President Occasional-Cortex the economy could collapse.

        • VintageVNvet says:

          TOO funny lh,,
          Thanks from this old guy who Loves WolfStreet, and continues to support with as much cash as possible while challenged to do as good as grandpa did living on income from SS only.
          And still hoping to learn where to put capital to help; mostly because ongoing and apparently legal degradation of dollar and the savings therein…
          Wolf and commentariat helping every day, with wit and wisdom and focused/moderated comments.

          Thank you all!

        • NBay says:

          Yeah, Hannity would be proud to use that “hubris laden” line you (maybe) invented. Maybe he’d send you a few under the table bucks if he used it in his monologue? Worth a try, eh? Nothing like a little more money, especially tax free.

    • Saltcreep says:

      Didn’t the criteria for entry to the currency union originally specify 60% debt/GDP ratio as only temporarily supportable and requiring actions to demonstrate that the issue is being addressed in such cases..? Now 60%, it seems, is the zone of utmost frugality and temperance, whilst most are rocketing off on the Magic Monetary Beanstalk.

      Personally I maintain a position claiming that the developments we see result from a bunch of clueless doctors trying to address and cure the symptoms of irreversible ageing, whilst we’re actually on an inevitable decline that cannot be cured, only perhaps abated, and that we simply should have accepted that the enormous energy boost we temporarily got from going from horses to coal to oil will fade with the declining returns on energy invested to energy returned.

      • Lisa_Hooker says:

        We also got a great boost with the scheme to sell more new bonds to pay off the old bonds. Much better than international postal coupons.

      • NBay says:

        Good last paragraph SC. Two of my favorite subjects; “clueless docs” and “temporary energy boost”. Very hard to unwind a “human endeavor” that so many people are getting rich off of, eh?

        See Upton Sinclair quote in recent WS posts.

  6. historicus says:

    Corn, Soybeans, Wheat, Lumber, Copper, Aluminum…..
    look at those charts for the past two months…and see what is in the inflation pipeline.

    First the central banks will paint the inflation as welcome and a victory for their policies of promoting an inflation (2-2.5%) . Those rates rip 22-28% respectively off the dollar in ten years…(63-68% off in 20 yrs). Stable prices?
    Then, the central bankers will “limp in” with little 1/4pt behind the curve raises that will do little.
    Finally, the backlash by the “people” will come into play, and Lord knows where that will lead.
    Central Banking is the anathema to free markets. Control by unelected committee, they themselves insulated from the ill effects of their own policies due to inflation protected pensions, courtesy of the tax payer. But what of us?
    And of what does that arrangement remind the economic/financial history buffs?

    • Cas127 says:

      And DC wonders why it will have to live behind a wall.

      Next up, a moat.

      • Mora Aurora says:

        A moat is hardly necessary when you are surrounded by ‘huge tracts’ of swamp!

        • Yancey Ward says:

          Too bad D.C. didn’t “burn down, fell over, then sank into the swamp”.

      • GotCollateral says:

        RE: “Not quite as horrific as it could be.” RE: Rehypothication

        Fed studys said in 2018 the avg amount of rehypothication of UST was around 6, however Raoul Pal (CEO of Real Vision) told Manmohan Singh, those were just quarter end numbers… when he was on the desk the avg amount was 30… Eurodollar University, Episode 42,

        Come on BOJ, ECB, FRBNY… keep buying… watch what happens… lol

        • NBay says:

          Rehypothication: Referring a practice when syringes were too expensive to be disposable, and the points had to be re-filed and the whole syringe autoclaved after use on an individual patient.

    • California Bob says:

      re: “… the central bankers will “limp in” with little 1/4pt behind the curve raises that will do little …”

      On the contrary: If history is our guide, the equity markets will throw a massive hissy fit and the CBs will back off.

    • Jon says:

      There won’t be any backlash by the people. People would be sedated by bread crumbs aka UBI, stimulus to subsist.

    • Memento mori says:

      Just came back from purchasing some ivy flats for our landscaping , we paid $16.99 for as long as I remember but not this time. $24.99 is the new price . Those were $16.99 I told the owner a month ago, he looked at me and said that was before sir, sorry.
      Inflation is coming back in force and we are about to find out that those central bankers that have been trying so hard to get inflation will get more than they wish. They will also find out that they won’t be able to control inflation and it will get out of control and make everyone miserable.

      • Lisa_Hooker says:

        Inflation won’t be a serious problem until it makes a sufficient number of people cold and hungry. Then things will become unpredictable instead of simply volatile.

    • NBay says:

      Moderation. Go for a Constitutional maximum net worth. $10M…plenty of incentive. Green New Industry and all it’s supporting elements. More Plato, less Aristotle. And can all the Calvinism, he was a diabolical a-hole, anyway….invited a disagreeing colleague for a debate and had him burnt at the stake.

      Just leave that to the kids and let them work out how to achieve homeostasis.

      No other rational choice. Many will take a financial hit. Still better than a sucking chest wound, no?

      Or party like there is no tomorrow and guarantee it.

      • Lisa_Hooker says:

        NBay, unfortunately $10M won’t buy what it used to buy, and doesn’t yield as much either.

        • NBay says:

          If you need more than $10M incentive to work, then truly I pity you. (And of course it will be inflation adjusted should this sick banker’s game somehow continue.) Hell, make it $15m? I’m flexible.

          And I didn’t say one was expected to stop working at $10M, and if you made that you obviously have a VERY marketable skill set, or connections. I for one enjoyed working, an art my dad taught me, there is even an art to ditch digging. Get INTO it!
          At tax time, anything over $10M goes to a VERY STRONG IRS, and you’ll just have to make do on the $10M left, will it be a big house and a pool? vacation home? an airplane ? travel? yacht? Maybe mix it up yearly and try it all over your lifetime?
          Budgeting $10M is not difficult.
          And if you really are shit hot and knock yourself out, at some level you get your name on a wall or a statue and become immortal, as one of this country’s best citizens….everyone admires you, maybe even while still living.
          Crawl out of your small mindset and enjoy your time here, both work and play are best when you really apply yourself. Trust me, the rewards are great.

  7. Giacomo Cambiaso says:

    No chance for inflation, ECB policy is causing deflation instead. None of these money reach main street so we can forget about inflation, deflation instead is what we can expect for the current economy depression. If inflation was what we need to stop this central bank madness, well, it is out there since years now, asset price inflation has never been so high but rather than trying to stop it what central banks do it’s try as much as they can to keep it going higher an higher

  8. MiTurn says:

    “targeting a 10-year yield of “around” 0%”

    This sounds like something out of SNL!

  9. Lou Mannheim says:

    Central planners making plans.

    I wish my finance and econ professors had not pushed the free market propaganda so much, there are a lot of people who still think they exist.

    • w says:

      Free Markets Never existed

    • Jack says:

      Lou,

      Yes apparently the”Free Markets” were a Figment of imagination, pity that!

      You heard the saying “In fighting the Monster…”?

      Looks like we fought the Communists so hard and long , only to emulate their Central control of the Economy!

      How about that eh?!

      The only thing to do now is

      “ Let the river of calamity take its course “

      nothing will cleans our economy/ies except for it to ( DIE IN ITS CURRENT FORM) .

      Only then we could expect to begin a new era.

      Everything that the CB’s are doing now is mental and vocabulary gymnastics NON related to reality of economic transactions.

    • Heinz says:

      After more than a decade of central bank shenanigans (QE, ZIRP, etc) I really wonder what the newest-published economics textbooks are saying about that mythical ‘free market capitalism’ these days.

      If this charade goes on, would future textbooks and courses be teaching revisionist eco tripe like ‘MMT 101’ and “Principles of Negative Interest Management” and just dispense with the outdated notion of ‘markets’?

      While the Fed continues to run its victory laps, inquiring minds wonder out loud.

      • David Hall says:

        What is supporting the euro? I read EU housing prices were up 4.9% in Q3. Are there any austerity measures, productivity increases, or will it continue to lose value?

      • Nathan Dumbrowski says:

        Don’t forget to mention the stock market that only went one way from 0….Googleeplex.
        What does a googleplex look like?
        A googolplex is a 1 followed by a googol of zeros.

        It’s impossible to write out, but in scientific notation it looks like 1 x 1010^100

      • Lisa_Hooker says:

        FYI – the latest from Paul Samuelson who taught a lot of us:
        Economics, 20edition – January 1, 2019
        by Anindya Sen and William D Nordhaus Paul A Samuelson, Sudip Chaudhuri

        I haven’t read it. I don’t intend to read it. But I can imagine, and it’s not favorable. The classical economic education system grinds onwards.

  10. Swamp Creature says:

    My One year CD at my Credit Union was just renewed for another year at the fantastic rate of 37 basis points. Wow!

    • doug says:

      with such poor returns, you might as well spend it? You will not miss the income. That has been our household logic lately.

      • YuShan says:

        I never understand this kind of logic. People save because they need the money to buy things in the future. If interest rates are low, that means that you have to save more, not less.

        • Lou Mannheim says:

          Risk-prone and risk-averse folks view the world very differently. The issue for me is that despite hating stocks, rate suppression is forcing me into more than I’m comfortable with holding. The real yields on cash and FI are negative. Time to buy the equity tranche of America, Inc..

        • YuShan says:

          @Lou Mannheim:

          “The real yields on cash and FI are negative.”

          If history is any guide, real returns on stocks are likely to be negative too over the next 10 years.

        • Lou Mannheim says:

          With all the monetary inflation, I agree, it’s a high hurdle. I think the market is discounting a longer scenario than “back to normal soon.” That means a lot more printing, or troubles. It also means more retail and ad dollars going to big tech and layoffs for the rest.

        • YuShan says:

          It has mainly to do with the extremely high valuations. It’s really quite simple: if you pay more for the same shares, the returns will be less. If some mean-reversion happens to more normal valuations, you are probably looking on negative average returns over the next 10 years.

        • Engin-ear says:

          – “People save because they need the money to buy things in the future. ”

          A very healthy practice.

          Mostly because an asset you buy might loose 10-20% the moment you buy it in taxes and/ or resale value (car, house) sending underwater your net wealth.

          Another advantage, after many years of savings, you might realize that you never needed this “asset” in first place…

        • But put the dough under the proverbial “mattress” because the banks are sitting on Trillions of bad loans related to residential mortgages, vehicle loans, and commercial mortgages that have not been accurately labeled as “Bad, Badder, and Forget About It!” The FDIC is grossly undercapitalized in relation to the bodies ready to float to the surface of Reality of the Pandemic Income Extinction swirling about today’s U.S. Banking system. The Fed’s limit on money creation is just around the corner.

        • roddy6667 says:

          Saving more is all you can do to counter low interest rates. Moving to higher risk vehicles just means more chance of a big loss.

    • MiTurn says:

      I cashed mine out and bought silver. I might just be able to beat your 0.37%.

    • Swamp Creature says:

      All the lemmings will see these 37 basis point returns and take the plunge into the equity markets and other high risk assets like junk bonds. And don’t forget Real Estate and REIT’s. When all are fully invested at these inflated asset prices, then there is no one else to buy, then the bottom falls out.

      That 37 basis point CD yield is going to look mighty pretty by then.

      • Harrold says:

        If you think long term, there is nothing wrong with investing in equities.

        Its only those people looking for short term gains that need to worry.

        • nick kelly says:

          If you bought the Dow in Sept. 1929 and held, you didn’t break even until 1954.

          By any metric this bubble ranks with or exceeds 1929.

        • Wisdom Seeker says:

          @Nick – incorrect. You need to include inflation (deflation in the 1930s) and dividends (much higher yields then vs. now) to get to total real returns – the breakeven point came much sooner.

          That said, a similar issue plagued the markets from the 1970s to 1982.

        • Joe in LA says:

          Maybe not. The S&P500 is basically a carry trade in which the Fed covers market losses during the inevitable crashes. The Fed always does this in the name of “providing the necessary liquidity to save the market.”

          Volatility has been suppressed for a long time now. If this system stops working, people stuck in the market at the wrong moment will experience all of the suppressed losses at once — an epic, lights-out crash.

          Will it stop working? America is being steadily ground down by the socialization of speculative losses. The country is a complete mess as a result of this misallocation of capital.

          How long will people put up with it? Your guess is as good as mine, but the idea that this system is “safe” in the long run is, I think, a bit naive.

        • nick kelly says:

          WS: true this stat does not bake in deflation. But if it is entered into the equation, there is even more reason not to buy stocks in 1929, in favor of the investment that would trump all: cash.
          A very large amount of desirable real estate went for back taxes in the 30’s.

        • roddy6667 says:

          People talk about “the market this, the market that”, as if being in it means you receive the same return. There are lots of fees and taxes and losing years.
          The market went up over 10% a year from 1985 to 2015, but the average investor made just 3.66 % in this period.

        • Swamp Creature says:

          Short term may be good. Its the long term I worry about.

        • Wolfbay says:

          The Japanese bubble popped in 1989 and stock indices still aren’t back to break even. That’s really long term.

      • Canned soup is probably a better investment in the next several years!!

        • WES says:

          In the early 1970s, I bought a years worth of subway tokens in the fall while going to college.

          Subway fares were then being increased 10% to 15% each year!

    • Anthony A. says:

      I let my matured CD (1/7/2021) go to cash. I might just need to spend it soon.

    • Argus says:

      Buy a few pieces of silver.

      • Saltcreep says:

        As the all-seeing Argus you know you’ll need to save one for Charon when the time comes!

        • NBay says:

          Or two, and in gold….if you can afford to ride first class…..according to the movie “Troy”, anyway.

    • Old School says:

      I top ticked my credit union 5 year CD at 2.8% a couple of years ago. I was determined to hold out for 3% , but it never came.

    • Lisa_Hooker says:

      The cost of holding highly private and mobile currency is now pretty much negligible.

  11. Endeavor says:

    Yes, the rising cost of living that will crush us all will not officially exist.

    • MiTurn says:

      Right on! Btw is there a hedonic for food?

      • Heinz says:

        Fasting.

      • Anthony A. says:

        There’s plenty of things one can eat out in the woods….mushrooms, roots of certain bushes, berries (but not in winter), bugs, frogs, etc.

        • WES says:

          I ate frog legs by the dozen for appretisers while working in the Congo!

          The waiter would then ask us if we wanted a half or a whole free range chicken for dinner!

          We joked it didn’t matter, as there was no meat on either side!

      • Yaun says:

        Aren’t the burgers getting better and better all the time according to advertisement? The BLS needs to account for that.

    • h says:

      I lived through the stagflation of the 1970s, which is a very loose proxy for what we are headed for.

      Inflation rose above 10% and unemployment was around 8%. I mostly remember that jobs were hard to find, because I was a young job-seeker back then.

      The salient difference between then and now is that today gub and central bank interventions are off the charts, and debt overhang is colossal. That does not point to a safe landing like we had when 1980s got underway.

      What is coming will make 1970s look like a sunny day picnic in park.

      • Seneca’s Cliff says:

        Plus in the 70’s we had much better music.

        • Lisa_Hooker says:

          Thank you Seneca. Lyrics with meaning and the best recording engineering ever.

      • NBay says:

        Not if your place of employment was busy burning up our national capex stash on something to be blown all to hell in Vietnam. Had to get a secret clearance (done by the Navy) to work on what I found out later was Pave Knife optics. First smart bombs. Swiped a reject piece that went in the aircraft. 1″ thick 6″ long “stretched” octagon, quartz (synthetic). It impressed everyone that cut their toot of coke or meth on.
        And yeah, better music, along with 60’s.

    • Petunia says:

      They keep promising stimulus but have suppressed increases for SS and wages for years. They could adjust SS and wages, to the real cost of living for the last 5-10 years, but they won’t. They will keep promising UBI and student debt relief, which will never happen, because they all voted for the increase in the student loan interest and to keep SS low.

      • Anthony A. says:

        Petunia, at 77 years old, I have come to the conclusion that the Gov would really like to see the group I am in dead so the SS checks would stop.

        • Danno says:

          Don’t laugh…when my parents turned 90, they both received letters from The Canadian government proving they were still alive twice a year….

        • Petunia says:

          I think they want people to wait until 70 to collect because they know most will die, before or within a short time, and they get to shorten the payout.

          I calculated my payout and the difference between 62 and 70 is very small, if I live to be 80. If I live a lot longer, I plan to be a burden on the state, subsidized housing, food stamps, medicare, free phone and internet, energy subsidy, bus pass, senior discounts, and more. It pays to plan.

        • Heinz says:

          For some dead people in USA, the SS checks actually keep coming.

          Who says you can’t take it with you!

        • Swamp Creature says:

          Anthony A

          100% correct

        • NBay says:

          Not until the Medical/Insurance/Managed Health Care bunch gets all they can out of you and your Medicare…it’s kinda like a balanced equation….public/private

        • Lisa_Hooker says:

          @Petunia – did you also calculate what the coming inflation will do to dollars you receive after you reach 70 and beyond? The most efficient solution for the government is an early die off.

  12. cdr says:

    Fake economics combined with fake math = yield spread control

    Remember grade school math a + b + c + d = (a+d)+(b+c) (the associative law)

    The above arithmetic lesson illustrates the difference between yield curve control and yield spread control. The latter required a little mental gymnastics. Apparently the ECB has added advanced concepts in grade school math to its tool box.

  13. Andrew says:

    Not sure how loud of a message the Bitcoin haters need that now is the time to buy Bitcoin.

    • Wolf Richter says:

      🤣🤣🤣
      Bitcoin crashed nearly 20% since Jan 9, compared to the hated US fiat currency. I have no idea where bitcoin is going, but it’s not a replacement for the euro or the USD. It’s just a gambling token.

      • Lou Mannheim says:

        Why even allow it to exist? It’s a capital flight risk.

        • YuShan says:

          Not to mention environmental risk! BTC uses as much energy as Chile or Ireland! I’m amazed that Greta hasn’t spoken out against BTC yet.

        • Jack says:

          Lou said:

          “Why even allow it to exist? It’s a capital flight risk“,

          There is every reason to believe that Bit Coin is being used as a template by governments worldwide and their central banks over the Next phase of the implicit rollout of the BS called MMT!

          Make No mistake, the Digital currencies are the future by which our societies, international trade, daily transactions, corporate business transactions and general business related transactions will occur!!

          How this will pan out? Heaven’s only knows.

          Bit Coin will remain an outlaw and never admitted to the wider use.

          The whole idea behind BC is( as mentioned in this thread, freedom from government/s control of commercial transactions).

          So I find it really curious that a high number of high profile people advocate for such lunacy!!

          Our societies have evolved to what we now and are aquatinted with by the means of delegating task like ( law and order, commercial regulations and many aspects of running a STATE to government/s hence the relinquishing of many of our individual freedoms to the state ,

          ( take the current situation with COVID CRAP)!

          If government/s now was/we’re inclined to close the exchanges that facilitate BITCOIN and other alt Coins the whole of their operations would be disrupted in an instance!!!

          No self respecting FUNCTIONAL STATE , would allow a parallel universe to occur outside its realms!

          The Fancy bubble would return back to a ( SILK ROAD STYLE) underground outlawed shit show.

      • Wolf, could someone please explain to me what stands behind this Crapto-currency called Bitcoin??? Smells a heck of a lot like Tulip Bulbs to me.

        • MonkeyBusiness says:

          The word “freedom” has been bandied about.

          Freedom Coin!!!

          Not sure why it’s still dominated in US Dollars. Why not in Freedom Units?

        • p coyle says:

          it’s backed by wasted energy

        • nick kelly says:

          It’s easier to say what it’s not than what it is.
          It’s not a currency, root word ‘current’ as ordinarily routinely currently acceptable as a means of exchange. One of the ironies of the BC story is what a great investment it is but with predictions of ‘how great’ all over the curve.
          Therefore: it can’t function as a medium of exchange. Buyers and sellers of anything want to use a currency, which is the opposite of an investment. If you are selling a car and want X US$, your negotiations will not include the Forex outlook for the US$. (There are exceptions: currency traders, Swiss franc bulls etc. The comment is about usual commerce)

          Another problem. A BC transaction can never be fast, It’s currently 10 minutes, but if the network is busy, as the distributed ledger checks for a ‘double spend’ it can take days. Of course, since virtually no one actually buys something with BC, the network has never been ‘busy’ in the context of, for example, debit card volume.

          Finally, the BC promoters and the pilot fish seem to think that central bank discussions of a digital dollar are bullish for BC price. This is a contradiction: the digital dollar transactions will transmit dollars. They will be a currency not an investment.

        • NBay says:

          Unfortunately p coyle probably nailed it. Don’t know who designed that algo, but he’s a real global juvenile delinquent.

      • sunny129 says:

        Speculating on the mkts when the Mkt cap to GDP is closer to 200, is NOT far fetched from investing in major crypto currencies.

        Lately institutional interest in crypto currencies is rising.
        A tiny fraction of a diversified portfolio as a part of uncorellated assets in my portfolio. Selling part of the profit when ‘frothiness’ makes it’s head has worked for me( only ETFs – GBTC and BITW)

      • roddy6667 says:

        It seems that every couple of months there is another news story about millions or billions of dollars in bitcoin disappearing along with a few people managing the companies. This does not inspire confidence.

        • NBay says:

          I learned some real old money trivia. In Sumeria (first bookkeeping known, with clay tablets and reed stylus) they used base 60. They figure it came from merchants counting fast to 12 on one hand (use thumb to count finger bones) x 5 fingers on other hand. Still around in some places, and we use dozen and 360 degrees (60×6) today, plus our time, 60 min, 60 sec, etc. Cool, huh?
          Was new to info to me, anyway.

        • nick kelly says:

          Nbay: since we’re into trivia. You can count to 30 with yr fingers but with base 5. Say yr right hand is the units (ones) the other is the fives. So when your right hand hits ‘five’ you clear that register ( put fingers down) and raise one finger on left hand.

        • NBay says:

          Nick, cool. Can’t resist these.

          Local Pomo Indians used base 8. They counted spaces between fingers. They had real solid concept that numbers didn’t exist in their more real world….unlike us invading bean counters.

          Remember those stupid rhymes you were taught for
          remembering which months had 31 days?
          Put fists together, knuckle months have 31, spaces between 30…or less, Feb.

      • Lisa_Hooker says:

        I wanted to throw some bitcoin out the window so I could climb the stalk for the harp and goose. But I couldn’t put my hands on any bitcoins. Doesn’t matter. I don’t want to be bony bread.

    • Kielbasa says:

      Looking around for a greater fool, eh?

      Your timing will probably prove pretty good.

  14. Petunia says:

    Here’s a window into the future of inflation in Europe. As everybody already knows, I follow the fashion markets around the world. The luxury handbag sellers have increased their prices, many times, over the last two years. These are not products being purchased by the downtrodden, such as myself. These are products costing $2K-$15K apiece.

    Well, there is now general acknowledgement in the fashion community, that enough is enough. The subject is openly discussed and there is consensus that most will not be buying these products in the retail stores. Some have left open the possibility of buying in the secondary market, but only for good pieces being sold at discount.

    If customers with money are rebelling against these price increases, I doubt inflation will takeoff in Europe, where many of these brands are based.

    • Anthony A. says:

      Possible eBay market for slightly used (maybe need a better word than “used” here)?

    • Bobber says:

      The goal of an expensive handbag or other good is to garner envy of others, so they should be cheering when prices of handbags rise.

      • Petunia says:

        I consider fashion an art form, so no different than a painting or vase. To the extent that the fine arts are also used to garner envy, your statement is true. There are many women who exercise power thru their use of this stuff, because they don’t know any better.

        I enjoy the beautiful pieces and cringe at the crap, just like I do when I see a Britto or a Twombly.

        • Old School says:

          I have an engineer’s mind, so it’s all about function. But I love women and their way of looking at things, except I don’t want to be married to one anymore. Most know what I mean.

        • A coutre woman’s handbag is an anti-feminist statement. A lot of consumers buy this stuff and don’t know what it means or often the meaning becomes camp. I don’t’ think Sontag knew what camp meant, but she knew what it was. In that regard the buyer of high fashion is intellectuelle.. .

        • Lisa_Hooker says:

          For some haute couture is more fun than burning cash in the fireplace. Same effect though.

    • nick kelly says:

      My sympathy here is with the high- end counterfeiter, as long as he uses top quality materials and workmanship. Needless to say it is ridiculous to suppose a functional superiority between a 500 hundred dollar bag and a 5000 dollar one. The ONLY extra thing the 5 G one has is the name which says ‘I am richer than you’.

      There are many examples of higher priced objects d’art not passing the test of time. Paintings in the formal styles prevailing up to the 19 century have been pretty much overtaken by naturalism. The ones from earlier periods that have wildly appreciated were early adopters of naturalism like the Dutch and Flemish schools. Going way back, Mona Lisa’s smile (or any smile) is very unusual for the period.

      Not very natural is the painting recently sold to MBS, the de facto head of Saudi Arabia, for an all time record of 500 million. Supposedly an over- restored work by Da Vinci, it is now suspected of being a fake.
      Money did not equal value, even for bragging and the painting has disappeared.

      Even in machinery and tech, cheap, even very cheap units have sometimes proved better value than expensive ones, e.g. “There are only two cars that can stand up to desert warfare, the Rolls Royce Silver Ghost and the Model T Ford.” Colonel T.E. Lawrence

      BTW: I’m sure Petunia is right about the dubious future for retail luxury sales.

      • NBay says:

        Off the quite interesting fashion topic, but I wonder if nasty MBS disappeared anyone involved in causing or disclosing his stupidity, e.g., shoot the messenger.
        Must be a tough guy to work for.

      • NBay says:

        along that line, I think I recall the (cheap and ugly as sin) Citroen 2CV being famous in Paris-Dakar Rally.

  15. Bob Hoye says:

    Wolf
    Good update.
    At one time, compared to bond traders, central bankers were naive in thinking that just lowering short rates was the elixir for unrelenting prosperity.
    Now, they finally realize that it is the reversals in Credit Spreads and the Yield Curve that signals the recession.
    This was the case in May-June 2007.
    The Curve has reversed but the trend in Spreads is still heading for La-La-Land.
    Interesting times.

  16. GotCollateral says:

    20 Year UST toilet paper auction today… lets see if some more broke dealers get some 8bps pick up… gotta compete with Jerome trying to gobble it up a 0bps… lol

    • Old School says:

      You could say the same thing about the sp500. Dividend yield 1.5% with the asset value that could be chopped in half next month.

  17. Harvey Cotton says:

    How weird it will be for today’s children to read about historical events like crown debt before the French Revolution, the Weimar Republic, the Suez Canal pound crisis, or the currency exploits of George Soros.

    What’s a currency run? Why didn’t the government just buy the government debt? Don’t Central Banks have unlimited power?

    • SpencerG says:

      Forget the World History… will today’s children ever believe that not long ago banks used to pay you interest if you had your money deposited in a checking or savings account with them?

      • Lisa_Hooker says:

        I was explaining to the neighbor’s kids that if they put some of their money in a savings account they could get more money without doing any work. When I told them they could double their money in 400 years they lost “interest.”

  18. Bobber says:

    I’m not sure yield curve control changes much, assuming central banks have the option of increasing interest rates in the face of high inflation. Central banks can reverse course, like they have done many times in the past.

    If you buy a 30-year bond at 1% today, you’ll be worry if and when the central bank increases the LT rate 5 years from now.

    The central banks cannot commit to keeping LT rates low for a long period of time, because that will blow up all the pension assumptions out there. Your average pension fund currently thinks it will generate a 6% long-term return.

    • Petunia says:

      They will mark to model and change the models everyday if they have to, to get the results they want. Once they start model manipulation on the fly, they will lose control, because they will not be able to test the models, and the mistakes will compound.

      See the California unemployment system for a very mild example of what I mean. Or see the GFC of 2008 for an average case example.

      • DawnsEarlyLight says:

        Oh, how I miss those Pre-Loved time tested models!

      • I think you could buy some of her 50 year bonds on the come, for a pop in principal value when rates go negative on her watch. Yellen came out with a statement, “not supporting a weak dollar”, which is not supporting a strong dollar either. She said that the MARKET should price the dollar, so at least she is marginally in favor of free markets. The dollar is set by policy, and fiscal policy is what it is. Chinas currency has been rising while we run record trade deficits. Maybe that will break. Something is going to break. I have zero faith in her, and her whizbang academics.

  19. Martha Careful says:

    Since about 1990, Japan’s inflation rate has remained substantially lower than the USA rate. ZIRP policies and their lost decade have simply resulted in a reasonably strong Japanese economy for almost 3 decades.

    Does it makes sense? Does the last 30 years in America make sense? Has the dollar crashed in value, has the US economy collapsed at some point, to a point where it hasn’t fully recovered?

    The printing money bogey monster seems like a ghost not worth chasing at this point. America and every economy in the world needed to find the means to stimulate a crisis — by doing nothing, we’d be in a serious Depression today — take your pick.

    It’s also easy to forget and forgive the amount of impact that tax cuts had on our economy and that game of pretending that trickle down economics is in some way useful to stimulating GDP:

    “That’s not how it played out. When Trump took office in January 2017, the nonpartisan Congressional Budget Office was projecting that federal budget deficits would be 2% to 3% of our gross domestic product during Trump’s term. Instead, the deficit reached nearly 4% of gross domestic product in 2018 and 4.6% in 2019.”

    • Lisa_Hooker says:

      The US economy has not recovered from 2007. The creative management of economic statistics has exhibited substantial growth.

      • NBay says:

        Still think US economy never recovered from Vietnam, downhill ever since. 2/3 of WW2 in current dollars, and no geographical manufacturing advantage as a result.
        But, we can still kick most anyone’s butt, and often do.

  20. Crush the Peasants! says:

    I am continually amazed the hear people say there is little to no inflation. RE, equities, automobiles, education, healthcare all have gone up in price beyond the magic 2%/year inflation target.

    In the US, the median home price today is about 300% in real dollars (not nominal) what it was in 1960. The median family income, now commonly provided by two wage earners, has risen by only 36%.

    1960 median home price = $11,900 1960 dollars = $104,000 2020 dollars.
    2020 median home price = $300,000 2020 US dollars.
    1960 median family income = $5,600 1060 dollars = $50,000.
    2020 median family income = $68,000 2020 dollars.

    • NBay says:

      Yep, 1960, exactly what homes in our Fontana tract were going for. Most everyone worked at big Kaiser steel mill there. First Kaiser HMO hospital free for employees and even took others for higher fees, I believe.

      Not associated with present Kaiser HMO, in fact the Kaiser family has a GREAT website (Kaiser Health News) that’s damn good and analyzes other “managed health care” goings on with jaundiced eye.
      Family has some guilt over mess they started, I figure, they really were just into steel stuff, anyway.

  21. Engin-ear says:

    The EU is still young, and some people (not all), who remember the life before EU, question the necessity to stay with it.

    The guaranteed low-rate access to the debt market for all EU members is probably the most powerful argument for EU promoters.

  22. The yield spread between Teutonic German Debt and Crater Prone Italian Debt is a total joke. Any investor today that buys the overpriced Garbage (pronounced the French way: Gar-baj) of the Shaky States of Southern Europe, will undoubtedly be holding the equivalent of expensive toilet paper in the years ahead. The defaults that have already occurred, ipso facto, and those destined for the quarters ahead will be mind numbing.

  23. SpencerG says:

    I am reminded of that phrase… “It is a Feature not a Bug!”

    From what we can see, aren’t ALL central banks trying their best to create some inflation?

    • WES says:

      Actually central bankers are just trying to increase the price of toilet paper!

  24. RickV says:

    Why no talk about the effect of CB actions on the stock market.? Last year I had a triple, an 80% gain, and a 50% gain with only one small loss. This year the markets continue to go up, now my triple is a quadruple. Sure glad I didn’t $hort the S&P at 3100, I’d be looking at a 30% loss. Oh well, Live and Learn.

    • Yort says:

      RickV – in an 80% lose vs 20% win (with only the top 1% really winning as the median Vanguard 401k is only 92kK for top 20%)…we all lose in the long run. Note only 1 out of 100 is actually “winning” the stock market right now. A 50% gain on $92k nominal 401k fund, for the (80th to 99th precentile) will buy you a mid-sized sedan after taxes…not really life changing to be honest.

      Below is a link to Fed chart data from Bloomberg that visually shows the bottom 80% losing the last 10 year stock and house market Fed monopoly game (maybe Wolf will allow this chart at it sums up some serious future societal consequences to unlimited Fed printing):

      https://pbs.twimg.com/media/EsAn1EkXcAIhE-m?format=jpg&name=medium

      • RickV says:

        Yort,

        This is the greatest bull market of our life times. Looking back 10 years is irrelevant. An investor of any gender, ethnicity, or religion, with wise decisions, can make enough to provide financial security for the rest of their lives. Oh yea, in the past two days my quadruple turned into a quintuple. I will now sell off my original investment and “play with the houses money”.

    • Wolf Richter says:

      RickV,

      First thing you gotta do in terms of “live and learn” is learn how to do the math: if you short the S&P 500 at 3,100 and cover at today’s price, 3,851, you bought at 3,851 and sold at 3,100, which is a 19% loss, not a 30% loss.

      • RickV says:

        Wolf, my math is a bit different than yours. 3100 invested, covered at 3851 is a $751 loss on a 3100 investment, or 24.2% loss plus dividends paid to shareholders of shorted stock of say 2.5%. So 24.2 + 2.5 = 26.7% loss rounded up, I admit to 30% for brevity. And I take your word you had no other costs such as interest, except of course there is opportunity cost! You are a great analyst, but I would repeat “Live and Learn”.

        • NBay says:

          100 – 20% = 80, but 80 x 120% = 96…..

          I quit letting that bother me long ago, and just learned algebra and calculus exactly like they taught me, and forgot most of it.

          But I still know my speedometer is a “mechanical derivative taker”, no paper needed, no y= (f) of x

  25. Yort says:

    Wanna know what else is absurd?

    Almost 70% of US debt since 1776 has occurred in just the last 13 years.

    It all started with “Trickle Down” economics in the early 80s…

    Reagan 1: $0.8T
    Reagan 2: $1.0T
    Bush 1: $1.5T
    Clinton 1: $1.1T
    Clinton 2: $0.4T
    Bush 1: $2.0T
    Bush 2: $3.4T
    Obama 1: $5.6T
    Obama 2: $2.1T
    Trump 1: $7.8T

  26. PaulT says:

    Allegedly the Reserve Bank of Australia will own nearly all April 2024 (3 year) government bonds by the middle of the this year.

    https://www.abc.net.au/news/2021-01-20/rba-bond-purchases-point-to-low-fixed-rate/13070512

  27. max says:

    Mr. Wolf maybe you should put this company in WTF moment:

    Nio, the ‘Chinese Tesla’

    Nio shares reflect that progress, rising 28-fold from a low of $US2.11 in March to more than $US60 today, valuing Nio at $US96 billion ($125bn) – more than General Motors at $US74bn, or Ford at $US40bn. According to Scottish Mortgage’s most recent filings, its stake in Nio was worth £857 million ($1.5bn) on November 30.

    • Wolf Richter says:

      There are so many of these stocks that belong on a WTF chart. And don’t forget the thousands of cryptos. I should hire someone full-time and put together a compendium of all the stocks and cryptos and other stuff that each belong on a WTF chart, then print up all the charts on glossy paper, one chart per page, and sell it as a 2,000-page book or work of art or something :-]

      • Wolf, wouldn’t it be grand if GDP and Employment and Personal Income all had rocket ship graphs like the stocks in you upcoming pictorial tome. The southbound fundamentals are soon to knock some sense into stock prices and momo investors. Reality eventually has its day.

      • YuShan says:

        Exponentially rising WTF charts everywhere. In other words, a classic bubble.

      • too$hort says:

        Are you still shorting the mkt? I’ve given up and started following the wallstreetbet trend…

  28. WES says:

    While the ECB maybe constrained by being the currency of 19 countries, it is not constrained in other areas like the US Fed is.

    The ECB has been able to introduce nominal negative interest rates.

    The US Fed isn’t desperate enough yet to introduce nominal interest rates. With the US dollar the world’s reserve currency, the Fed is constrained by the current contango trade in commodities priced internationally in US dollars.

    If the Fed makes US nominal interest rates negative, this would flip the time preferences of commodity traders, causing the commodity markets to go into permament backwardation!

    Commodity traders would dump US dollars in favor of buying commodities instead. US bond holders would also start selling their bonds.

    The Fed/gov gets it’s power from everyone holding US dollars/bonds so that isn’t likely to happen, until the very end.

    Another issue the Fed faces is competition if China’s bonds are more nominally positive.

    For now, the Fed has instead settled for negative real interest rates of about minus 1%. The Fed wants higher inflation to drive real interest rates more negative, to increase the negative compounding of existing US debt!

    In other words, the rule of 72, in reverse!

    • Yort says:

      Wes – Your theory would support why Corn prices are up 75% in 5 months, I actually printed your post and put into my farm contracts file. I’ve calculated out the crop damages from 2020, the dollar depreciation, the foreign drought issues, etc…..and there is a huge percentage of that gain that seems is likely pure “speculation”, which could be hedging for a negative rate future Fed policy. Either way, I’ve put off 2021 grain contracts until I see prices stabilize and other landowners are doing the same right now. Having to hedge via options and futures, which is fun as I actually can deliver real product which makes it easier than for most. I really think it is a dangerous game when the Fed draws speculors into food pricing. Air is free, water is free, yet food is tied to USD Fed monkey business and unfortunately there are really serious consequences for food inflation on a global scale. All fun and games until people go hungry…

  29. Swamp Creature says:

    My banker at the credit union said it was a good idea buying short term CDs maturing at different times of the year.

    Reason: We have a lot of uncertainty out there. This is not the time to gamble your life savings. We could have massive inflation due to the money printing, or a deflation due to a complete meltdown of the debt ridden economy, especially in the commercial real estate sector. The later could overwhelm the former an occur very quickly. Best to lock in what you can and ride it out for 1 year or so.

    I’ll leave the lemmings to take their crap shoot in stock market. I’m staying out. I’d rather go to the racetrack and bet on the horses. Its a lot more fun to boot.

    • WES says:

      Swamp:

      My Grandfather said if you are going to bet, bet on the dogs, since there is only one variable! The dog!

      The problem with betting on the horses is there are two variables; the rider, and the horse!

      • NBay says:

        And the trainer and the pedigree and the owner. My uncle used to race $3000 claimers at Agua Caliente in TiAjuana in the 50’s.

      • Swamp Creature says:

        One of my Uncles left his entire estate to the Dog races in West Palm Beach Fla or wherever they ran these in South Fla, and cut out his own kids. I’ll stick with the horses. Grew up with the trotters in Roosevelt Field, Long Island.

  30. Sir.PiratePapirus says:

    Fantastic article Wolf. What spread are they talking about? There is no spread is there, they have flattened every yield within the eurozone with QE. Greece is as ‘creditworthy’ as Germany is and more than the US even.
    I don’t think inflation is a realistic risk, not in this environment, at most a temporary insignificant spike, but i do think political instability is a risk and a big one at that, and with countries like the PIGS and even the ones higher up the food chain such as France, political instability is a certainty. What happened a few days ago to Italian yields speaks volumes about the gargantuan risks involved, and i think the leaking of this by the ECB is aimed at sending a message to the markets with regards to the PIGS.

    • DawnsEarlyLight says:

      I always thought for every gain, there is a loss. On WTF chart is this displayed?

      • Sir.PiratePapirus says:

        The spike a week ago because Italy decided to change their prime minister for the 100’th time is not yet up to WTF standard, but telling nevertheless especially given the relentless buying from the ECB.

  31. YuShan says:

    What is in fact happening here is debt mutualisation.

    Democratically elected governments in Germany and The Netherlands are fiercely against this (and their electorates even more!). So this cannot be done in a democratic way.

    So the ECB, not accountable to anybody, introduces debt mutualisation through the backdoor. Profit and loss of the ECB goes to the taxpayers in the member states, so there really isn’t much difference between “officially” sharing the debt what the ECB is doing right now.

    It is however against European treaties and also against German Basic Law. The ECB is really overstepping its mandate in a massive way. Nobody wants to stir the pot during a massive crisis like this, but I’m expecting a showoff when things start to normalise.

    • YuShan says:

      Showdown I mean ;)

    • Sir.PiratePapirus says:

      There is no doubt YuShan the ECB is the worst central bank in the world by far, the least transparent and the least accountable. It’s how it was set up from the beginning, the Germans exchanged the unification yes of France for the European central bank, and so they let the ECB in the hands of the French and Italians. The mutualisation drive will most probably end with the brake up of the EURO zone altogether because it’s not that they are trying to get the PIGS at the level of Germany and the rest but rather get Germany at the level of the PIGS and it will not fly, eventually the pain will be to big to endure.

  32. WSKJ says:

    Jan. 21. 2021
    “Absurdity”, Wolf ?

    But, but, don’t you see that the ECB is only putting up a scaffolding- or is it flying buttresses ?- of toothpicks, to support their house of cards. Doesn’t it make perfect sense ?

    Thx, Wolf

  33. DanS86 says:

    I always wondered how the Euro Union thought it wise to introduce the Euro with no Euro Bond. Of course, that would have removed some country sovereignty.

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