Bond Market Has Been Clueless about Inflation for Decades, Now More so Than Ever. The Meme the Drop in Yields = End of Inflation is a Fantasy

Even before QE, the 10-year yield lagged years behind CPI, up and down. And now, the Fed manipulates the market with QE.

By Wolf Richter for WOLF STREET.

The 10-year Treasury yield was 1.75% at the end of March, but by July 19, it had dropped to 1.19%, and on Friday it closed at 1.30%. This drop in the yield occurred even as inflation spiked. On a month-to-month basis for the past three months, and annualized, the Consumer Price Index spiked by 9.5%, the red-hottest since 1982. Year-over-year, CPI in June jumped 5.4%.

But the new meme now is that the drop in the 10-year Treasury yield is telling us the spike in inflation is nothing to worry about, and that by next early year, CPI will be at 1% or 1.5% or whatever. The meme now is that the bond market is right and CPI is wrong or something.

Historically, for much of the time, the 10-year yield is higher than the rate of annual CPI, meaning the “real” 10-year yield (after inflation) is positive. But there are periods when the 10-year “yield” is below CPI, for a negative real yield. Currently, with the 10-year yield at 1.3% (black line) and annual CPI at 5.4% (red line), the 10-year “real” yield is -4.1%, the most negative since June 1980:

Now the most manipulated markets in the world.

The Fed controls the short end of the Treasury market through its policy interest rates, and it manipulates the long-term bond markets with its bond purchases. QE is designed to push down long-term interest rates, and there has been $4 trillion in QE over the past 16 months in the US alone, and it has been pushing down interest rates just fine.

The Fed is currently buying a lot more than $120 billion a month; it is adding $120 billion a month to its pile, but it’s buying a lot more to do so.

It’s buying $80 billion in Treasury securities and $40 billion in MBS to add to its pile, plus it is also buying Treasury securities and MBS to replace those that have matured and come off its balance sheet, plus it’s buying MBS to replace pass-through principal payments of the MBS it is holding. Therefore, the monthly intervention in the bond market is closer to $200 billion than $120 billion.

When a homeowner refinances a mortgage, the original mortgage gets paid off, and that payoff amount is passed through to the holders of the MBS. The current refi boom has turned pass-through principal payments into a tsunami. The Fed has to replace these pass-through principal payments with MBS purchases. These replacements run at close to $60 billion a month.

For example, in the two-week period between July 12 and July 23, the New York Fed purchased a total of $51 billion in MBS. This makes for a monthly run-rate of over $100 billion, with $60 billion replacing maturing MBS and pass-through principal payments, and with $40 billion making the pile grow.

This is why the Fed’s interventions in the bond market (Treasury and MBS) are closer to $200 billion a month than just the $120 billion a month.

In addition, the Fed doesn’t trade. It just buys. This $200 billion a month is a one-way demand. And it pushes up the prices of those bonds, and it pushes down their yields.

In addition, other central banks, such as the ECB and the Bank of Japan, have repressed interest rates into the negative, and so there are also some spill-over effects into the US bond market.

In addition, the trillions in liquidity created by global QE since March 2020 is chasing assets and yield, and this has led to the craziest phenomena, in terms of pushing down yields, such as BB-rated US junk bond yields dropping to 3.15% currently, producing a negative real yield for junk bonds even!

None of this is a reflection of inflation going negative, but of central bank manipulations. The bond markets are reacting exactly as central banks are working so hard to get them to react. Bond markets are the most manipulated markets in the universe, manipulated by unlimited central bank money-printing. And these markets are silent about inflation. They don’t care. They only care about the Fed.

So this notion that there is a bond market that is allowed to react to surging inflation is rather quaint and outdated. The Fed and other central banks that inflict QE on their realm are making sure that the bond market does not react to inflation.

But even before QE, bond markets got inflation wrong, in both directions.

Below is a chart of CPI (red) and the 10-year Treasury yield (black). Back in the early 1970s, CPI surged due to the oil shock, part of which unwound, but not all; it bottomed out at 5% in 1976 and then spiraled higher and deeper into the economy. Throughout that time as CPI was spiking, the 10-year yield predicted nothing. It was lagging behind, leisurely trying to not fall further behind CPI.

In November 1980, the 10-year yield finally caught up with CPI, after CPI had peaked in March 1980 (14.6%) and was coming down, while the 10-year yield was then surging, peaking in September 1981, a year-and-a-half after CPI.

From September 1981 on, for nearly 20 years, the 10-year yield followed CPI down with a long lag, instead of predicting anything. So this notion that today’s red-hot inflation will vanish soon because the bond market says so is just another fantasy:

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  226 comments for “Bond Market Has Been Clueless about Inflation for Decades, Now More so Than Ever. The Meme the Drop in Yields = End of Inflation is a Fantasy

  1. Eastern Bunny says:

    You gotta love the circular logic here.
    Fed buys treasuries lowering the yields across the curve.
    Policy makers look at the low yields and exclaim : look, the bond market says there is no inflation, we need to borrow and spend more.
    And the debt monetizing by the Fed carries on undisturbed.
    For how long, that is the question.

    • gponym says:

      Or a related question: Right now the Fed seems to be dancing to the tune of Yankee Doodle Dandy, but what if someone else starts calling the tune?

      How to protect oneself against that?

      • fajensen says:

        Go out and Enjoy life. The time that’s spent well is not going to come back bad later.

        There is nothing within our power that will change anything in the slightest so worrying and “preparing” for the unpredictable is just wasting time.

        • cas127 says:

          “Worrying about” is pointless.

          “Thinking through/planning for” isn’t.

          It is a subtle but important difference.

          One involves undirected anxiety, the other involves a more detached review of the options.

        • VintageVNvet says:

          Thanks again C10!
          Once again you are commenting on the very basic ”rules and regulations” for a long and happy life.
          Will only add another basic ingredient:
          Forgive your self!!
          ( And, to be sure,,, very likely YOU will/might have to forgive everyone else first,,, but well worth the effort IMHO…
          Forgiveness of self is the real key to being happy, and has been clearly proven in my extended lifetime, and similarly with SO many of my old and older friends…
          Not to mention tons and tons of the ”sacred” texts, etc., of the last couple thousand years or so,,,

      • roddy6667 says:

        You cannot magically protect yourself against government malfeasance by clicking a mouse.

        • cas127 says:

          Roddy,

          Actually, every time you exchange government fiat for a real asset (much, much better? A basket of well diversified real assets…) you are taking a step away from government malfeasance.

          And if you did it online…you *did* do it with the click of a mouse.

          Ditto even merely spreading the word on a blog…why else do you think corrupt, authoritarian governments go to such lengths to control citizen-to-citizen communications online?

          It is because even an empire of lies gets undermined by a little truth.

          Thanks, Wolf.

      • The Real Tony says:

        Just short the U.S. dollar. The Fed isn’t telling everyone they want to kill the dollar the public gets the line “we want inflation” instead. The real line is “we want to destroy the dollar as fast as we can”.

        • Rcohn says:

          A lower dollar means higher prices on any imported goods- higher inflation
          A lower dollar means diminishing the positive effects of being the only reserve currency . This in turn means less demand from foreigners to buy anything denominated in dollars – like Treasuries
          Among the disadvantages of no longer being the reserve currency is that all of the BS of economic sanctions will have a diminishing effect as the power of the US diminishes both economically and militarily .
          As the US devolves to no longer being the world’s reserve currency , allies will question our ability and political commitment to our large number of treaties.
          The USSR ( Russia ) had/ has a similar number of nuclear weapons , yet it has been a second tier nation economically.It has been the reserve status of the dollar that is the lynchpin of US s domination since WW2. Without it the US will devolve just as Great Britain did after WW1, when the pound was replaced as the world currency .
          The FED is in a no win situation . If it does not raise rates and continues QE, the dollar will tube resulting in the all of the problems mentioned above plus many more . If it does raise rates , asset prices will tube
          Either way the incredibly stupid policies of the FED and the US Congress will exact a price that is going to be very painful

      • K says:

        Some one else was always calling the tune. The banksters’ privately owned, “Federal” Reserve has always just looked out for the banksters and their Wall Streeters-cronies.

        They kept real inflation secretly higher and interest rates lower to scam pensions and poor Americans out of their meager savings. Their banks were simultaneously charging 23% on Americans’ credit cards and profiting. Watch “Reversal of Fortune: Inside Pensions and the Erosion of Retirement” in Real Vision Finance. It does better journalism than PBS journalists, who must have brown bottomed pants when investigating banksters and Wall Streeters. It discussed even the HUGE, hidden, fraudulent fees of pensions’ Wall Street financial advisors paid to “reward” them for milking the pensions by investing their funds in mortgage backed securities, CDOs, etc.

        • K says:

          Keep in mind that the Trillionaires who own the world have used the ultra low interest rate of 2.5% from their “Fed,” and from its suppression of interest rates, at which their banks and financial institutions can borrow to then funnel to foreign entities (or to replace capital funneled to foreign entities.)

          Thus, via what amount to artificially low interest rats, they finance their debts to invest in the quasi slave factories in the CCP’s China and create below US cost products that they then import into the USA via other, US entities, which by their foreign partner entities’ artificially inflating the prices charged the US entity, do not have to pay US taxes.

          For example, one foreign subsidiary can raise the price it charges a US entity owned by the same trillionaires for a TV to $500 to leave just enough “profit” to cover the US entity’s operating expenses. Most of the profit is then kept in the foreign subsidiary, which may have paid the CCP factory-or CCP linked entity $50 for the same TV product that is then sold at fake, high prices (e.g., $650) to the US entity to make it seem unprofitable. See PBS “Corporations go overseas to avoid US taxes.”

          Remember, so long as the trillionaires’ foreign entities are not technically US persons and do not bring foreign income back to the US formally they have not had to pay US taxes. They have put such foreign-earned funds in foreign (e.g., Irish based) trusts, etc., which invest in the US.

        • K says:

          Correction: the CCP entity may charge $50 for a a TV to a trillionaire owned, foreign subsidiary that is sold at an artificially high price of $500 to a US entity that is owned by the same trillionaires. That trillionaire – owned, US entity then sells that TV bought for an inflated $500 price for $650, which would be below the cost at which US based factories could produce it but by pretending that it negotiated the $500 price that it connived with its secretly-related entity, the US entity can report a loss to offset other earnings or a small profit and pay no or few, US taxes.

          That is why a wealth tax is feared so much: it would force disclosures and so unveil these secret conspiracies to avoid US taxation.

        • Dan Romig says:

          K,

          To add to the analysis regarding quasi slave factories in the PRC, small businesses and the American consumer are part of the problem too.

          Maybe I am an outlier, but I had a choice between many high-end home audio sub woofers to buy recently.

          An option which I went with was designed and built in-house in Miramar, Florida.

          An option which I avoided was designed in Youngstown, Ohio and built in the PRC.

          This isn’t the domain of Billionaire Business Tycoons, but a decision by a manufacturer (who shall remain nameless) to have a slightly lower cost of production, and in turn, customers to have a slightly lower price of purchase. But the true cost is to have Chinese made instead of USA made speakers.

          In the words of Rodney Dangerfield: “No respect. No respect at all!”

        • Mira says:

          I can see the compulsory superannuation scheme coming to a screeching halt in Australia.
          “they” never knew how to work it .. how to invest the monies to advantage .. they were a bunch of wannabe cowboys pretending that money did not scare them.
          “What are ya doin’ love?”
          “Nothin’ ma.”
          “You sure about that son?”
          “Absolutely mum.”

    • Panamabob says:

      Everything seems crazy from my viewpoint at 72. At this time I accept that it can get 2-3X crazier yet but something has to give the way back to some kind of “almost sane”.
      Maybe that’s just a hopeful dream.

      • Panamabob says:

        Eastern Bunny, it works until it doesn’t, think Madoff, Enron, etc.

        • cas127 says:

          That which can’t go on…stops.

        • Depth Charge says:

          “That which can’t go on…stops.”

          Right. But they may be able to push this for another decade or two, until the entire country fails.

    • 2banana says:

      It’s perfectly logical.

      QE started in earnest in 2009.

      It is a political tool to avoid any kind of recession or stock market correction .

      No party in power wants that to happen on their watch, because as they assume, they will be voted out if that happens.

      So it keeps getting pushed to the right as the consequences mount.

      Now, instead of having a short and sharp recession, the consequences is a massive depression.

      So the Fed cannot stop and no politician is going to make them stop.

      • Brant Lee says:

        Meanwhile, whenever, whatever happens, it’s all in favor of the ultra-rich. They can’t lose.

      • gametv says:

        actually, what has allowed the Fed to engage in this financial chicanery is the deflationary effects of the internet. any product which has many competitors producing it has seen deflation in pricing, which allows the government to pretend there is no inflation. the internet is great for price transparency.

        the areas where inflation has really hit – healthcare, education, housing – are all not properly represented in the CPI. housing in particular has not reflected true inflation in home prices since the monthly payment is reduced with the lower interest rates.

        inflation is the one thing that can force the Fed to stop this insane monetary intervention. that along with higher interest rates in foreign countries.

        deflation is actually a VERY good thing. look at the tech industry. deflation for long periods of time as each new upgrade reduces the price of previous products and/or increases the performance or features. if we stoked real competition in other areas, like healthcare, insurance, real estate, internet services, education, etc – we could have a virtuous cycle of more value creation for consumers and a higher quality of life attainable for the vast majority of people, not just the uber-rich.

        • Mick Didge says:

          Agreed. Regulatory overreach and/or government intervention is responsible for inflation spiraling out of control.

          You make a great point about price discovery. When free markets are embraced and are allowed to work without interference, prices naturally fall; as competition enters the marketplace.

      • Mira says:

        So QE is a kneejerk reaction .. for times when no none knows exactly what to do .. that has become a filthy habit ??

    • David says:

      Another circular logic: Gov encourages people to live on unemployment benefits instead of taking jobs with less pay and Fed then points to the high unemployment number as reason to continue easy monetary policy which helps Gov borrow at low rates and spend more :)

      • Eastern Bunny says:

        Or the 2% inflation mandate.
        The Fed logic goes like we need to get inflation higher in order to have room to cut when recessions hit.
        A little like your catholic friend who needs to commit some evil for the sake of confession and redemption.

      • historicus says:

        David…Bingo!

      • Mira says:

        It come to this ..
        what is most important to us here ??
        taxpayer money or the capacity to borrow !!
        who need taxes right .. right
        the rich don’t pay .. the chicken feed that the low paid worker contributes coast more to collect than it’s worth ???
        logic is everything today ?

    • Bobber says:

      The Fed is attempting to solve a debt problem by encouraging more debt.

      That’s about as circular as you can get.

      • cas127 says:

        Tool-wise, in practice, the Fed really only has one big PRINT button.

        Which it has been smashing our heads against…impotently.

        So, the beatings will continue until morale improves.

        DC has all the intellect, insight, and human understanding of the military generals in WW I.

        • VintageVNvet says:

          Need to be more clear on Which generals OF Which Army/nation involved in WW1 C10:
          While I would tend to be in agreement with the UK and EU generals on all sides, IMHO,
          US Army General Black Jack Pershing had a very very clear view based on very very clear insight from his and Patton’s G2(s) both of whom had been with them from the fight across the south border,,,
          and maybe the same G2 with Patton who predicted the ”bulge” in WW2 that ”Patton” brilliantly anticipated and stopped with his 3rd army…

        • cas127 says:

          I was thinking of the UK generals specifically.

          Famously, the UK army in WW 1 were “lions led by donkeys/asses”

        • 91B20 1stCav (AUS) says:

          cas/VVNV-hard, in any era, to find ‘average’ general staffs not basing future strategies primarily on national conceits wedded to experiences obtained in prior conflicts…

          may we all find a better day.

      • MyLadyHumps says:

        The Fed is attempting to solve a debt problem by debasing the currency.

        The problem is a debased currency is worse for an economy than a high debt burden.

        What power will the government have when the money they hand out has zero value?

        • cas127 says:

          “What power will the government have when the money they hand out has zero value?”

          They’ll start executing people for being “domestic terrorists” “trafficking in unAmerican money”.

          But considering the history of drug and prostitution laws (having infinitely more acceptance and infinitely less impact on the average citizen), compulsory use of a ruined USD will fail too.

          Historically, the citizens of banana republics always preferred use of the then stable USD to their own domestic banana money (immediately and continuously debauched by corrupt and incompetent governments).

          The only difference will be that the US will be the banana republic, secretly trading in gold, AltCoin, whatever.

    • historicus says:

      Bunny
      Exactly…
      Powell has admitted that PERCEPTION is what they wish to control….and this game of pointing to a manipulated market as an indication of anything other than manipulation is an intentional misdirection play.
      Seems there is a lot of intentional misdirections coming from Washington DC…and their ilk.

    • MyLadyHumps says:

      Exactly on the nose.

      Because the population is overall ignorant, the bureaucrats and politicians who are causing the collapse of the monetary system seem to think they will be able to obfuscate and cloud the truth to escape blame as the consequences become evident.

      … working people don’t need to worry about the cost of housing. Houses are assets. Assets are for the wealthy class to worry about. A working person’s asset is his job. – wage slavery endorsed by Neil Kashkari of the Fed

      We know who you are:
      Allan Greenspan
      Ben Bernanke
      Janet Yellen
      Jerome Powell

      I don’t know whether society will let these corrupt, incompetent clowns escape justice, but I’m certain history will not.

    • Nick Kelly says:

      The Fed has to realize that doing its job, ‘taking away the punch bowl’ will be unpopular. It will be unpopular with markets of all kinds: stocks, housing speculators ( the people’s favorite) boats, RVs, crap coins, etc. etc.
      Most of all it will be unpopular with government. The new ruling party will say: why us ? Sure, the free money thing has to end sometime but why now?

      It’s unlikely the President would descend to the endless personal, public, badgering that Powell took from the former Pres for his baby steps to taper during the boom BEFORE the pandemic, but he won’t be happy.

      It will also turn out to be unpopular with some who now criticize the Fed for not tightening. The reason: a short, sharp, recession is now impossible. There are at maybe 3 corrections that should have happened but didn’t. We would be very lucky if the final result is merely the sum of them. Falling from thirty feet is not the same as falling 10 feet three times.

      Anecdote from the Crash of 29: ‘My family owned a hardware store. When the October Crash hit my dad said: ‘Good. It’s time those parasites got it in the neck.’ Six months later we lost the store.

    • Saltcreep says:

      I suspect a delayed easter bunny just may have just brought us a nice time to put some gold in our baskets. Rising prices, deteriorating base measurements, maybe we even dare say the ‘stag’ word at some point here..?

  2. kkk says:

    FED works like a criminal enterprise

    • 2banana says:

      Everything the FED has done with QE has been approved by congress.

      I think there is a legal term for that…

      • Ed C says:

        Do you really think Congress understands what the Fed is doing? How many in Congress have degrees in Economics of Business Administration or anything related to finance? I’m going to say none.

        • Don says:

          “How many in Congress have degrees in Economics of Business Administration or anything related to finance?” I recently learned that Jerome Powell is a lawyer with a degree in politics. So, it’s not just congressman that don’t have degrees in a field that’s related to economics.

      • Aaron says:

        Agreed. Predecessors of the current Congress designed the current monetary system through a series of decisions. Irredeemable paper currency is nothing new, and it ends the same way every single time…without exception.

        • Aaron says:

          Download The Federalist Papers on .pdf and search for “paper money.” Nothing new under the Sun.

      • historicus says:

        Approved by Congress? You mean there was some approval process?
        That’s news….for the independence of the Fed is celebrated in Congress…and they all happen to likely be FULLY INVESTED.

      • The Real Tony says:

        But only the Fed and the bankers know when the ponzi fraud stock market is going to be imploded by the bankers. Tell me that’s legal? The bankers make all the money and the rest are all bag holders who lose everything.

    • historicus says:

      Organized theft…
      5% inflation promoted by the Fed.
      0% interest rates promoted by the Fed.
      Flat out THEFT….promoted by the Fed.

      • 3D Modeler says:

        All true, but then the federal government steps in to pick winners and losers with select stimulus for unemployed workers, families with children, student loan borrowers, renters in default, etc. So taken as a whole, both the Federal Reserve and the federal government together decide who wins and who loses.

        • 3D Modeler says:

          By the way, speaking of winners and losers, keep a watchful eye out for manipulation of the third-quarter inflation numbers. The BLS uses YoY third-quarter CPI-W to determine next year’s COLA for Social Security. The Treasury is loathe to pay out more in Social Security than it absolutely has to. The actions of both the Fed and the federal government over the past decade have demonstrated that senior retirees on a fixed income are clearly not in their “winner” column.

        • David W. Young says:

          And there are no examples in recorded history of a Government successfully running a nation’s economy for any length of time. Politicians always have special interest groups to dispense goodies to in return for campaign contributions and under-the-table freebies.

          This will not end well and July 19th was just an initial shot across the bow. Oh, and Unemployment Numbers were not good this past Friday, were they?!

        • 3D Modeler says:

          David, you need to be a bit more perceptive. I’m certainly no fan of the ways in which the Fed nor the federal government have dealt with this entire mess. You’re preaching to the choir.

    • cas127 says:

      Counterfeiters, specifically.

    • Anon1970 says:

      Don’t forget that the Fed has a major responsibility to promote reasonably full employment (under the Humphrey-Hawkins Full Employment Act of 1978) as well as low inflation. Often it is hard to achieve both goals at the same time. We appeared to be living in such a period over the past decade. Don’t expect any Fed member to go to jail for punishing seniors with low interest rates on their savings accounts. After inflation, they are earning a negative return on their money.

      In 1975, interest rates on CDs were still subject to a maximum interest rate (under something called Regulation Q) which was below the rate of inflation.

  3. Masi 1979 says:

    Not certain the bond vigilantes still exist as heralded in the ’90’s. Very compressed OAS’s, absolute low yields (yield per duration unit) and much more leverage in the markets argue otherwise.
    It is interesting that everyone seems to assert that CPI is largely accurate as to underlying inflation measurements. CPI understates inflation as Wolf as pointed out: owner’s equivalent rent vastly understating RE price appreciation, hedonic adjustments decreasing actual price changes for consumer goods, estimated substitution adjustments…
    The assumption is that macro econ aggregates as presented are near absolutes in accurate measurements. Macro series are estimates and over time can vary increasingly from underlying phenomena.
    No, consumer inflation has not averaged 2% over last decade for many consumers.
    The Fed has succeeded in flooding the markets with liquidity: levels of reverse repos at the Fed; loan-to-deposit ratios at banks; OAS levels that will not be sustained; large Fed balance sheet expansion to manage rising fed debt (incl. inter-agency totals).
    Suspect also that institutions are buying to immunize interest-sensitive liabs as funding ratios have improved, aiding demand.
    Who would buy 10-year T at 1.3%? Dur of approx. 8.5 years, implying price hit of approx. 17% with 200 bps increase (offset would be positive convexity but the hit is still substantial). Perhaps, as a hedge for general markets’ implosion- good luck with the timing.

    • Djreef says:

      It’s no wonder why many of the old pros won’t touch a Treasury with a 10 foot pole.

    • MyLadyHumps says:

      Two questions:

      1) Why would an individual own a bond (currency) that is being rapidly debased.
      2) Why would an individual buy any US assets that sell at already wildly inflated prices and providing negative real yield?

      There are many other countries where one can invest hard earned pay. It seems like a bad idea to be investing any of your hard earned pay in a country that is undergoing fiscal and monetary collapse and is quite happy to stab it’s working class in the back.

      The answer is to get out, leave the sinking ship while the band is still playing. Your window of opportunity is closing.

      • sunny129 says:

        ‘There are many other countries where one can invest hard earned pay’
        Wow!
        Which ones? I am all ears! Thank you!

        Investors Are Buying American
        Money managers world-wide put more than $900 billion into U.S. funds in the first half, a record amount
        WSJ July 25, 21
        fyi

    • Anon1970 says:

      The term “bond vigilante” was coined by economist Edward Yardeni, probably in the 1980’s. It is hard to be a bond vigilante when the Fed has rigged the game. I have not bought a bond since 2011. I have been in run off mode since then. Fortunately, many of my earlier purchases were non callable or at least had decent call protection. I still have a few positions left.

      • sunny129 says:

        Anon 1970
        fyi
        Fed had NEVER bought the MBSs until March of ’09. QE has no prior record or research. Fed had never suspended Mkt to Mkt accounting standard, before. Capital retemtion ratio is xero now!

        We are in Alice wonder land of Mr. Powell & Co

    • Bam_Man says:

      “Hedonic” adjustments to CPI should be ADDING to inflation, since so much of what we are forced to buy these days is complete and utter crap.

  4. 2banana says:

    That’s a heck of a market in system that is supposed to be capitalism.

    Oh wait…that’s not a market.

    And that’s not capitalism.

    “So this notion that there is a bond market that is allowed to react to surging inflation is rather quaint and outdated. The Fed and other central banks that inflict QE on their realm are making sure that the bond market does not react to inflation.”

    • Aaron says:

      By law, legal tender is composed of coins and federal reserve notes. The increase in coins is minuscule in relation to the creation of FRNs.

      Every single FRN is borrowed into existence, including those initially issued by the Treasury to the Fed.

      The collateral for every single FRN is largely a security, which is some type of debt. Every single bank is sitting on large numbers of securities, which are the collateral for all their loans. Those securities are assets on their balance sheets.

      Because nearly all of our legal tender is a debt, discounting the relatively small amount of coin, if credit contracts by any overall significant amount, the entire monetary system is subject to cascading defaults and margin calls. That is what the Fed has been trying to avoid with each crisis.

      QE simply takes collateral that has dropped in price and swaps it for FRNs at a price no one in the market is willing to pay. True, QE is not spendable currency for me, but it is for whatever entity swapped their damaged collateral for them.

      For a monetary system based largely on debt, the debt and credit must continuously expand for obvious reasons, or the result is contraction and cascading defaults. Left to run its course, the end result would likely be nearly complete destruction of all debt securities. That is what “Fed heads” mean when they say the monetary system was on the brink of destruction in 2008 and 2020. No shit it was. This sucker was about to go down…. big time and on 2 occasions.

      Fed governors are not dumb. Not by a long shot. They are dealing with a monetary system that is the result of many decisions made over a couple of centuries. Those decisions have left them with a debt based monetary system that must increase or die. Those are their choices.

      What would one expect them to say? “Well sure, this system is incompatible with a society whose fundamental premise is based upon securing liberty. I mean, if the bedrock of liberty is that you tax yourself through your representatives, but the government in conjunction with their central bank, are obtaining their purchasing power by increasing the money supply without limit, this surely can’t be securing the blessing of liberty to ourselves and our prosperity.”

      Of course not.

      • Carl Wilson says:

        Yes, we have a debt based monetary system. No, “debt and credit must continuously expand”. No, because debt can be retired by taxes. But that would require an honest tax system and equities that were not priced on the assumption of ever growing credit.

        • Chris Herbert says:

          Exactly. The fiscal tools are spending and taxation. People don’t like paying taxes. And if you run for office saying you would be conservative, as in paying the bills, you won’t get elected. We’ve met the enemy and it is us.

        • Dan Romig says:

          Yes. An honest tax system would not require so much legalese writing and text as the current IRS code does. It would not fit, if single-space line printed, inside my house.

      • Freedomnowandhow says:

        Aaron. Very astute comment,I must say, and according to our Constitution the Federal Government, including the Federal Reservs Bank has the right to monatise debt. Public Banks always will have the ability to increase debt with loans which are far greater then the supposed National debt. The Federal Reserve Bank can and does extinguish the money supply, our personal debt. Without a gold standard there is no comparable resource or asset to the Federal dollar. Full trust in the Federal Government is all that backs our private and personal debt and growth. Well said, as without continued Federal creation of debt via dollars in the economy growth would have to be paid back with taxes, the Fedral Reserve Bank with the Federal Treasury destroys debt, and removes dollars from the economy. The Federal government creates and destroys debt as it always has. Nothing new here except peoples personal understanding of their liberties.

      • Gold digr says:

        The problem is that corrupted unelected and elected officials are in control of the money supply. For the ever expanding monetary (bubble) system to be stable, money needs to be independent and scarce, ie gold, or crypto.

        • Spencer Hall says:

          Damn straight.

        • AlexW says:

          The Problem here is that the creation and distribution of the money/profits of American economic activity are no longer passing through, or anchored by the economic participation of the majority of the American working population.

          I would characterize the core of this problem as the imbalances created by pursuit of profits through financial means, “financialization,” replacing the classic, “addition of value,” model of profits through traditional labor/manufacturing processes as the foundation of the profitability of American economics and markets.

          Thus the expansion of both debt & profit has become detached from any basic real national economic activity, radically altering the balance between the American worker’s, “production & consumption,” activities, which previously to, “globalism,” almost directly linked American economic activity, and its participating workers, to the prices and profitability of American Markets. These aspects of econ activity have become detached and deeply divided from one-another.

          We have moved from a productive to a speculative, “economic,” model, which has detached the soaring speculative, paper profits of markets from the actual stagnant productivity (and mal-distribution of “oppertunity) in the manufacturing-industrial-value-added American economy.
          Actual declining American industrial production has long been detached from these soaring speculative markets. When will the gap be too large to be, “papered-over,” seems to be the pertinent question on everyone’s lips. I believe, “how did we get here,” is the question leading to the vital info, which is how we get out of here!

          The actual earning power of the America worker, the demand and consumption the current worker’s, “deindustralized” status generates, their, “demand,” cannot support these market prices, nor come even close to supporting the amount of debt required to put and keep these market prices at their current lofty levels.
          Thus all this, “funny stuff,” with manipulating money, interest, and debt, to keep an already long-failed globalist ever-expanding economic-demographic model, and the evil elite that created it, in place.

          The Central Bankers, along with their political and financial masters/partners, better keep the dollars flowing to the poor, to maintain the image (and the artifical reality) of, “demand,” from the working classes while simultanously keeping the dollars flowing to the rich (QE, low interest, ect…), to maintain the market’s image of ever-expanding, “profitability.”

          If this economic SIMULATION (These Fed, “policies,” are not “stimulus,” but they have crossed the Rubicon from stimulus into the realm of unreal simulated economics & markets!) fails, the American working poor will see (and bitterly feel) how bad of a situation they are really in, while the Corporate Aristocrats will see that their fiscal castles are built on a paper-mache foundation whipped-up by the Fed…

          We (Fed & Associates) have papered-over the asset-stripping of the real productivity and profitability of the USA with these ever-expanding piles of public and private debt.

          This has resulted in recession-style, even depression-style conditions emerging on the streets as these programs get, “long in the tooth,” while the financial markets show not a sign of recession nor depression (Big Cracks,yes). How long these simulated economics and markets can persist measures all sorts of human traits, the most pertinent being how deeply perception is tied to self-interest, and how deeply the one affects the other.
          See what u wanna see & ignore the rest…Dollars Look Good!! Look: Squirrel…!

        • Nick Kelly says:

          How can money be an asset like BC that lost 50 % in 6 months?
          Gold? Sure, the golden era of the Industrial Revolution with zero UK inflation in 100 years was under a gold standard. It doesn’t replace paper, it keeps it honest.

          There have been comments about BC that are off the wall: what if anyone can create more than 21 million etc.
          To repeat, the BC math checks out. It’s the TRADING that reeks.
          The same thousand guys sell to each other, at no risk, creating the illusion of a market. These would be illegal with a stock but BC is unregulated. Manipulation is legal.

          Prediction: watch next, now that a fresh load of mullet is in the net, for a big sell off.

      • Wisdom Seeker says:

        Aaron, loved your comment but one major error:

        “They are dealing with a monetary system that is the result of many decisions made over a couple of centuries. Those decisions have left them with a debt based monetary system that must increase or die.”

        This is wrong. The only decision that mattered was Nixon’s taking the US (and by extension the world) off the gold standard on August 15, 1971. The prior system did not require “more debt or die”.

        Nixon’s fatal error will reach 50 years of age in 3 weeks. Over those 50 years the dollar has lost over 90% of its purchasing power against most items. US Workers’ labor has also lost purchasing power, resulting in declining standards of living only partially offset by technology.

        The maldistribution of wealth has reached levels not seen since the 1920s, driven by “more debt or die” policy solutions which consistently favor the already-rich due to structural flaws (including near-monopoly markets for most goods and services).

        We need to return to a firm currency within a production-oriented economy where businesses actually need to compete for both workers and sales.

    • Samms says:

      Be sure it is capitalism. But not the shiny capitalism in the ads to sell capitalism to the masses. Remember, some are more equal than others.

    • historicus says:

      “Oh wait…that’s not a market.”
      and neither is the stock market…a market

      Both are arrangements, managed by central bankers to the great benefit of a few. Societies end this way.

  5. simonyoosen says:

    We know the FED is manipulating the bond market since long long time ago. But the mainstream financials outlet continuously made a daily discussion about the “Yield” almost now and then, what the points for these discussion while you know the answer is certain, “YIELD” must be down. Are there no more topics for discussion since you knows FED is manipulating the bond market. Anyone who trade in the Treasury mainly trades for a short term profit, investing is out of picture.
    On the other hand, bureaucrats in FED, ECB, BOE & BOJ keep telling the whole world they could keep printing because the world keep buying their “trash” as shown in low interest rate in their debts. Elementary level of thinking should detect such flaw that further propagate by their media outlets. It is hard to imagine when the developing world starts to detect the same flaw and determine to print as much as they can and manipulate their own rate. At the end of the day, the modern finance will collapse and revert back to “TANGIBLE ASSETS”.
    At the end, will these major central bank once again setting a new set of rules that protecting themselves? Answer is clear.

  6. GBC says:

    Real rates have gone negative due to perceived risk. The Covid risk, the climate change risk, the stock market risk. Bond investors are willing to take a negative real return in exchange for the security of holding government debt, plus there are those who believe the price increases are temporary and the return will be positive.

    • 2banana says:

      In a market based system:

      Increased risk means increased premiums.

      Not the other way around.

      • cas127 says:

        Right you are.

        So vastly increased government debt means much higher Treasury rates.

        Hmm.

        Something seems to have gone amiss.

        The G’s ability to print unbacked money (to neuter interest rate increases) and then frame innocent actors for the resultant inflation is the axle upon which this rusty gerbil wheel spins.

    • MonkeyBusiness says:

      Why not just hold cash? At least you’ll be getting par no?

      • MyLadyHumps says:

        Why not just hold old, dirty underwear? At least you’ll be getting par, no?

  7. cb says:

    Wolf said: “The Fed has to replace these pass-through principal payments with MBS purchases.”
    ———————————————
    Shouldn’t that be — “The Fed chooses to ………..

    • Wolf Richter says:

      No. It decided to add $40 billion a month in MBS, so it must replace the pass-through principal payments with MBS purchases plus buy an additional $40 billion to get there. It cannot get there without replacing the pass-through principal payments.

      • historicus says:

        But isnt a larger question why the Fed is pumping money into the mortgage market, way below inflation, and with a real estate market up (name the %) in the past year to record highs?
        They must be getting bad advice from their “advisor”….or is it good advice FOR the “advisor”?

        • YuShan says:

          There is another circular logic in play: they are supposedly making housing more affordable through cheaper mortgages.

          In the UK, the government temporarily suspended stamp duty (tax) that is charged on buying a house, with the argument that it “helps” buyers. Of course, in this red-hot market the advantage (and more) goes straight into the pockets of current owners/sellers, because in this red-hot market if buyers can bid more, they will. And it gets even worse, because it induces more FOMO which leads to ridiculous prices. As a result, buyers are much worse off instead of better.

          Of course, if you look who are the biggest sponsors of the politicians involved, you’ll find out that this is not a case of stupidity.

        • Petunia says:

          After WW2 housing became the economic engine of the economy, it remained that way until the 1960’s. The fed supports housing because the collective memory of the organization is that nothing has happened to change those underpinnings. Look at the ages of the people at the fed, it speaks volumes. The biggest growth areas, in their collective memory, are housing and stocks.

          Some things really are simple.

        • Wolf Richter says:

          historicus,

          The Fed doesn’t care about profits. It prints its own money and can lose all the money it wants to. Its sole objective with the MBS purchases is to repress mortgage interest rates. That’s its stated policy. No “advisor” involved.

        • David W. Young says:

          The U.S. Fed does not HAVE TO continue to create humongous bubbles in the debt markets. This is a policy choice, not a legislated mandate from Congress or the Money Tree Gods. The question still remains: Why are these Financial Lightweights continuing to artificially suppress home purchase borrowing rates when the housing market is the most overpriced in modern history. Just compare the whopping gap in Growth in Home Prices to the piddly Growth in Personal Income. Timberrrrrr.

      • cb says:

        @ Wolf –

        Thanks. So they have committed to add a Net $40 billion a month in MBS. That is potentially orders of magnitude greater than a flat $40 billion, and provides a feedback loop through continued interest rate suppression via almost continuous housing refinances.

        Good attention to detail.

        • historicus says:

          Wolf

          ” Its sole objective with the MBS purchases is to repress mortgage interest rates. That’s its stated policy.”

          To what levels? The third mandate of the Fed is to promote MODERATE long term interest rates. Moderate meaning, “not extreme”. All time lows are EXTREME by any metric. And they keep pouring on the gas at all time lows. A clear violation of the mandate crafted to prevent the pulling forward of wealth from future generations to fluff the present.
          As for the advisors….who a coupled with the Fed in unprecedented fashion……we can only guess what sway they have on the Fed. You don’t know for certain, and neither do I.
          But this arrangement is unprecedented…
          These conditions are unprecedented..
          And the “advisors” are in the Fed “tent”…
          All undeniable.
          Now, is the combination coincidence or causal?
          IMO, it is scandalous….and will eventually be revealed. For the advisor, coincidentally, seems to have the Fed doing things that makes them lots and lots of money.

  8. otishertz says:

    Man, the mental gymnastics of these policy dinks. Lower rates reduce inflation. OK.

    At this point, the markets (choose any) are nothing more than memes.

    Ephemeral and transitory. Set to run their course.

    • The Real Tony says:

      Lower rates with high inflation leads to hyperinflation because keeping rates too low promotes inflation. In two years or so the U.S. will start to resemble Argentina. The DXY index will be around the 40 level.t

  9. MonkeyBusiness says:

    Wait till old Joe puts his own man as Chair of the Fed. It’s going to be Magic Money Tree Times 100.

    • historicus says:

      Kashkari is dying to be Fed Chairman….
      and he fits the bill you describe.

      • Wolf Richter says:

        Kashkari is a Republican, known locally for his failed attempt to run for governor of California as Republican. He is totally out of contention for the Fed chair post under the current administration. Brainard is not out of contention.

        • Eastern Bunny says:

          Do not rule out Stephanie Kelton

        • MyLadyHumps says:

          Kashkari appears to openly support wage-slavery. He seems to view working people as a tool to support the growing ranks of wealthy people who don’t work and poor people who don’t work.

          The pool of available people still willing to do work to earn money is shrinking because the value of their wages is shrinking and it is because of policies promoted by the likes of Kashkari.

          Politicians and bureaucrats need to stop attempting to control free markets, they are actively destroying the greatest economy in world history. It would seem the consequences will be horrendous.

        • Wolf Richter says:

          MyLadyHumps,

          Your last paragraph totally nails it.

        • Dan Romig says:

          Every time I ride my bicycle along West River Road next to the Minneapolis Federal Reserve headquarters and Mr. Kashkari’s office, I do offer up some advice for him and his boss.

          “Raise rates f#$@heads.” I don’t think he hears me though.

      • MonkeyBusiness says:

        I think it will be someone unexpected …………….

        Maybe Janet Yellen will hold a dual post. She will crush inflation and instead create a hyperinflation in its wake. Plus it will be woke as hell!!!

  10. Brady Boyd says:

    On a positive note, SF unveils $20,000 trash cans…..

    • Wolf Richter says:

      Brady Boyd,

      ZH clickbait braindead BS headline. Why don’t you people actually read the original source of the article, and read the entire original article, before posting this shit here???

      The $20,000 was the cost of designing and making the PROTOTYPE of the trashcan, which is handmade. The actual trashcan, if and when mass-produced, will be much cheaper. NO decision has been made and the final price of the mass-produced trashcan hasn’t been negotiated yet. But it will be a small fraction of $20,000.

      For extra credit if you had read the original source: this is a “smart trashcan” that communicates with DPW, for example to let it know when it needs to be emptied.

      Every time I see one of these toxic braindead moronic clickbait headlines on ZH, or elsewhere, I know some headline-reader who refuses to read more than ten words in a row feels compelled to regurgitate that headline here. And sure enough, never fails….

      This braindead crap destroys comment sections.

      • Ozmunky says:

        Bravo Wolf

        Needed to be said.

      • California Bob says:

        This will be a lead story on Fox News (if it isn’t already).

      • David W. Young says:

        Wolf, take two aspirin and see us in the morning. Save your strength for the Tsunami of Crap coming to a venue near you and us very soon. Riots in Europe and South Africa related to re-instituted Lock-downs and the prospect of rioting here in the States over Vaccine Passports and Lock-down U.S.A., Act II, should have most of us not sleeping at night.

      • billytrip says:

        Tell it. There was a time, long long ago, when ZH was an interesting source of information. Now it is a joke. Why bother when 2/3 of the content is pure bullshit.

        • Wolf Richter says:

          ZH still has excellent stuff, arcane financial stuff that practically no other media report on, and that not many people read, and that practically no one shares, because it’s complicated. These types of articles are the reason I go to ZH. But some of the other stuff is just nuts, especially in the titles; and when you read the article, it often further down contradicts the title.

        • MyLadyHumps says:

          Some of their content is substantial and factual and some is partisan fluff – you just have to have a functioning bullshit radar.

          I think most people are suspicious of ZH because they don’t just have articles that report the facts but instead the articles often report facts with an editorial partisan spin. They they often overlay they own spin on the significance of the facts.

          But facts are facts none the less.

    • Old School says:

      Anybody old enough to remember when standard garbage cans were left over oil drum. That’s before we got wealthy enough to have designer garbage cans.

      One thing that is different in private sector. If you want someone to supply you with a new widget, the suppliers make the prototype for free as that is a cost of getting new business.

  11. Augustus Frost says:

    Central banks can get away with it until their currency starts crashing. Then they have a choice to reverse course to save it or continue the insanity to collapse.

    It’s primarily if not entirely psychology and confidence. That’s what was lacking prior to the current unprecedented mania. Central bankers didn’t suddenly become geniuses by discovering something no one knew before.

    Just wait until confidence fails, whenever that happens. No policy prescription will make any differences then and living standards will take a noticeable if not drastic turn lower to catch up with decades of collective living beyond this country’s means.

    • YuShan says:

      Correct. And once confidence in the value of the currency goes, it is extremely difficult to reverse it. History has shown that time and again.

      The crypto boom has already changed people’s paradigm that money doesn’t have to come from the government and that private currencies can have value. And perhaps more important: that people can decide by THEMSELVES whether to adopt them or not.

      Personally, I don’t believe cryptos backed by nothing are the answer. But I do believe in the future of private asset backed currencies. In practice that will mean 100% gold/ silver backed and redeemable for the metal itself.

      • David Hall says:

        The 17th century Dutch were into investing in tulip bulbs as a currency. In 1637 the tulip market crashed. During WWII there was famine in the Netherlands. People ate tulip bulbs.

        Two brothers stole $3.6 billion worth of crypto in South Africa. China cracked down on crypto mining. Miners moved out of China. They need cheap electricity to keep it going.

        • georgist says:

          The tulip bubble is a bit of a meme IMHO, not as bad as “we’ll be like Zimbabwe” when USD is the reserve ccy but still.

        • Sams says:

          The tullipcraze in the Netherlands was as I view it an asset bubble, boom and bust. To much money searching for capital gains with no decent ivestment options.

          Now, how do that compare to todays inflation of every asset price?

    • David W. Young says:

      Augustus, the eventual Loss of Confidence in a financial system, an economy, a Government, or a sovereign currency has historically been one of the most devastating Black Swans to have ever landed on a country. This one circling overhead will block out the sun.

      This is one ingredient you seldom see mentioned either on financial sites or via the heavily biased news media.

      • sunny129 says:

        AS long as US$ accepted as legal tender for exchange goods here and elsewhere, no one cares about loss of confidence of Fed as an institution or the Banking system. Beside what other system ‘out there’ going to replave the current one?

        I have mulled over this issue, many a time, then have to accept TINA!

        I have strated buying a few PE Companies ( with div ) listed on exchanges after due diligence. Most of them are pricey but they employ defensive measures ETFs and MFs won’t or cannot! Just a part of diversified portfolio with uncorrelated assets.

  12. WES says:

    Nothing the government produces is true anymore. Only the size of the lie is left to be determined.

  13. Bull&Bear says:

    Wolf,

    I have a question about the assets on the FED balance sheet. Is the 8 trillion on the balance sheet a market value of the assets? For example, if a crisis like that in 2008 hits and the MBS will lose 50% of value, will that automatically reduce the assets under FED’s balance sheet given that FED holds hundreds of billions in MBSes?

    Thank you!

    • Wolf Richter says:

      The only MBS that the Fed is buying are government guaranteed MBS (“Agency MBS”). The government (Fannie, Freddie, Ginnie, etc.) takes the credit risk and the loss, not the Fed.

      The Fed has been holding its Treasury securities till maturity when it is paid face value for them, and there is no market loss at that time. The Fed does not adjust its Treasuries to market prices. However, the Fed carries these securities at cost, and it may at times pay a premium or a discount to face value.

      • Carl Wilson says:

        “The government (Fannie, Freddie, Ginnie, etc.) takes the credit risk and the loss, not the Fed.”
        Interesting that you see Fannie, Freddie, Ginnie, etc. as part of the government but evidently do not see the Fed as part of the government.

      • historicus says:

        Do not banks have a choice of marking to market or securities marked at cost?

      • RightNYer says:

        Right, but what if they’re to sell off some of the holdings to reduce the balance sheet. Doing so will likely decrease prices, meaning they won’t be able to sell them for what they paid. How does that work?

        • 80s_Guy says:

          The Fed wouldn’t sell the securities on its balance sheet. If it ever reduces its balance sheet, it would let the securities mature and have them “roll off” its balance sheet by not buying new securities to replace those maturing.

        • Wolf Richter says:

          Yes, they could do that. Which produces a mix of gains and losses. The Fed bought a lot of long-term bonds at much higher yields, and those would produce gains. The bonds that it bought at low yields would produce losses.

          One way or the other, the Fed doesn’t really care about gains and losses. It prints its own money and will never run out of money. It’s not a profit-oriented enterprise.

      • Winston says:

        “The government (Fannie, Freddie, Ginnie, etc.) takes the credit risk and the loss, not the Fed.”

        Shouldn’t we replace “government” with “US residents” in many cases?

        • Wolf Richter says:

          Ha, yes. Of course. You and me and everyone else out there.

        • MCH says:

          When the government gives out money, just remember, it’s your money.

          The most appropriate equivalent comment I can think of is from Rounders; Teddy KGB:

          “Fine, it’s a f***ing joke anyway. After all, I am paying you with your money. Your money, I am still up twenty grand from this last time I stick it in you.”

          Except unlike Teddy, the government doesn’t bother to tell you this fact, instead they tell you it’s money from rich people or corporation or some other things. They don’t tell you that how they finance this handout or that from your future earnings in the form of taxes and destroying the value of your work.

      • georgist says:

        Surely this is like me saying I own two companies and each guarantees the loans form the other? Oh and both companies can create credit!

        Not sure it’s “guaranteed” to be a successful outcome.

  14. Old school says:

    Ten year Treasury has world wide buyers for many reasons. The compounded inflation from 1918 to 1941 was 0%. If history rhymes even 1.3% might be OK.

    Of course we have a lot more Phd’s at the Fed now to make sure that deflation doesn’t happen. They have done such a wonderful job so far.

    • historicus says:

      File deflation with the Loch Ness Monster, Big Foot and the Easter Bunny

      • Old School says:

        That’s probably true for goods and services, but I do expect asset deflation. The good thing about financial history is we can be pretty sure what will happen eventually. Japan stock bubble is our future most likely.

      • cas127 says:

        The Fed has spent the last 20 years warning of the horrors of the Easter Bunny.

    • Anon1970 says:

      If history rhymes, we could also end up with a dictatorship. Economic events from about 1918 to 1932 resulted in a dictatorship in Germany soon afterwards. Of course, the US economy would have to get a whole lot worse before the two old line parties are both rejected by American voters.

  15. hidflect says:

    Interesting. People like Steve Van (sic) Metre believe the bond market is the smart money in the room and always leads the stock market by 3-4 months. He’s a perma-bull on bonds believing that yields will never stop going lower. We’ll see who’s right soon!

    • Wolf Richter says:

      hidflect,

      I didn’t say yields won’t go lower — that’s not what the article was about. What I said in the article was that these lower yields mean nothing in terms of CPI, that the bond market lags behind CPI by a fairly long time, and is clueless about the future of inflation.

      • historicus says:

        Wolf..
        can you dig up a Fed Funds vs CPI chart ?

        I think that would really demonstrate what a weird world the Fed has created.

        Thanks

        • Old School says:

          I heard Stockman say that real yields on Fed Funds rate has been negative 95% of time since GFC. Grandma is tired of losing money and will get talked into being a bag holder before the crash.

    • Old School says:

      The current system is running out of gas. What is going to happen depends on who is in power. Anybody remember Gerald Ford the Veto president and “Drop Dead New York City” headline. Bondholders and NYC had to work it out without printed money.

      • cas127 says:

        Good example with NYC.

        That which can’t go on, stops.

        Unless it is subsidized.

        Then it goes on.

        • David W. Young says:

          Cas, until the currency collapses, which it always does in these scenarios.

      • Jon says:

        The current system can keep on going for decades before it blows out.
        That’s why FEd is so content not to taper or raise rates .

        The bond market is complete rigged and controlled by fed.

        I don’t think fed is going to taper or even raise rates anytime soon
        Usd is a reserve currently and there is no other alternative

        Inflation can run hot say 15 percent but fed would still keep rates low

        • MyLadyHumps says:

          If inflation runs hot, at 15% or much higher, the Fed will say that the government published rate of inflation is just 2% or less (as can be witnessed by what has occurred for decades).

          The solution to high inflation is to simply lie about the true rate of inflation. This is the plan the Fed has in place to fight inflation. This is the Feds inflation fighting “toolbox” – lies.

  16. Bobber says:

    I’m still trying to figure out why it’s legitimate for the Fed to have a 2% inflation target when they don’t have the tools to achieve it.

    The only mechanism by which the Fed, on its own, can create inflation is QE, which results in interest rate suppression and more debt in the economy, which accelerates demand forward and creates inflation. However, once interest rates hit the zero bound, interest rates cannot be reduced any further via interest rate suppression, and the Fed is powerless to meet its 2% inflation target.

    At the zero bound, inflation can only be created through deficit spending or other forces outside the control of the Federal Reserve, and Powell basically admitted this by calling for deficit spending.

    So, why does the Fed think it has a 2% inflation mandate at the zero bound when it has no means to achieve 2% inflation through its own actions?

    Either the 2% inflation mandate makes no sense (and the mandate really calls for 0% inflation), or the Federal Reserve is dependent on Treasury to deficit spend so that resulting debts can be monetized by the Fed. However, if the Fed can meet its 2% mandate only by monetizing Treasury debts, it seems the Fed has incorporated an independence violation within its own mandate.

    I’d love to see somebody inquire about this at Powell’s next press conference.

    • Sams says:

      One of the main culprits are the definition of inflation. The central banks measure the CPI and adjust the monetary inflation. Now, to make that work CPI and monetary inflation must be dependent variables. Problem is, the copupling may not be strong.

      • historicus says:

        Or another culprit…the Fed watches PCE which allows for the substitution OUT of items that rise “too much” in price.
        How’s that for a fair barometer?

      • Jon says:

        The fed depends upon the inflation metrics which is highly manipulated and in some case outright lie.

        Even if the inflation shows up there as well them they have this word called transitory

    • historicus says:

      “I’m still trying to figure out why it’s legitimate for the Fed to have a 2% inflation target when they don’t have the tools to achieve it.”

      I’m still trying to figure out why its legitimate for the Fed to have a 2% inflation target…..when they are mandated to “stable prices”? 2 rips 22% off the dollar in ten yeas….stable? 2.5%, the alleged upper end of acceptable rips 28% off the dollar in ten years. But apparently even 5% isnt the upper end of acceptable.

      • YuShan says:

        People will have to protest with their feet. Instead of savings accounts or bonds, they should adopt private forms of SOUND money such as precious metals (PM based digital currencies) for savings and payments.

        Of course the problem is that the gold market is manipulated too, and volatile relative to fiat, in which all stuff is still priced. So unfortunately this prevents many people today to adopt sound money. But nevertheless, this is money that cannot be debased and when enough people adopt it, it WILL become a stable means of exchange and store of value.

        Bitcoin has done us a great favour, because it has sparked innovations in blockchain technology, which has enabled re-monetisation of gold and silver. Unlike a decade ago, it is now possible to make payments in gold and silver, just as easy as with fiat currency. It has also shown that you don’t need the government to provide currency. We can by ourselves decide to embrace one or more of the available private sound money initiatives.

        • Btant Lee says:

          YuShan,
          Explain a little more about how to make payments in gold and silver and your ideas about it.

        • YuShan says:

          Btant Lee,
          Blockchain technology has enabled tokenization of vaulted gold and silver. Your direct ownership of the metal is registered on a distributed ledger and this ownership can be transferred to somebody else in tiny fractions. This makes it possible to use it for day to day payments.

          While this exists and is fully functional, there are still very few merchants today who accept direct payment in gold/silver, but it is coming. Right now, almost all payments are still done as a hybrid, i.e. gold/ silver is used for saving (so wealth is protected against debasement) and is sold for fiat at the time of (or just before) purchase of goods, so the transaction itself still takes place in fiat.

          But that is just an intermediate step that can be skipped in the future. You will soon see direct payments appearing first in the precious metal space. I know of at least one shop that sells silver that will soon accept direct payments from customers in Kinesis KAG (silver), which actually works out cheaper than paying in US$. Of course this makes a lot of sense because paying silver with silver removes their need for hedging.

          I mentioned Indonesia before, where the government works with private parties to introduce tokenised gold (essentially Kinesis KAU) as a parallel currency for savings and payments. Many people there are unbanked but do own a smartphone, which is all you need to transact with tokenised gold.

          Interestingly, they also believe that it this strengthens their own national currency. Because now they often use dollars as stable currency, which makes them dependent on a foreign country that just prints them out of nothing. If they use gold instead, at least they build wealth that is owned by Indonesians.

          In countries with weak currencies, when inflation is high, chances are that merchants will start pricing in gold instead of their local currency when that is more stable. And since everybody with a smartphone can transact in it, it is very easy to make that transition.

          So this is a big change with, say, 10 years ago when it was not practical to pay with gold and silver. But now it is just another currency. If the other guy accepts my gold or silver as payment, he can receive it within seconds on the other side of the world.

          So, when we are fed up with the current monetary system (as I have been for some time), we can abandon it. The alternative is already there and the more people accept gold as payment, the better it will work.

        • billytrip says:

          I don’t believe in these scenarios any more than I believe in countries like Argentina storing their gold at a vault in England, which they now cannot get for made-up reasons.

          Cryptos backed by real metals is a fantastic idea that will never work in practice because one way or the other, by outright physical theft or re-re-re-hypothecation the metals will not be there should large numbers of people demand possession.

          IMHO, if you want to invest in metals you are going to have to store them yourself.

        • Brant Lee says:

          YuShan,

          Thank you. Your reply is very informative and thought provoking. We’re all just looking for a way to at least preserve our savings and labor from inflation, much less possibly draw a bit of interest.

      • Spencer Hall says:

        Yes, me too. We should file a class action lawsuit against the Biden Administration.

        I’m just blown away that Powell thinks money doesn’t matter. It’s an outright lie. So far, even with the changes to the money stock definitions, there is a perfect correlation between money and inflation. Right now, August looks like a peak, with not much downside until FEB 2022 (but we haven’t seen June’s #s yet).

        I’ve been watching the money supply since Arthur Burns first stepped into the Chair. I can say that the FED’s 400 Ph.Ds. in economics are literally mentally retarded.

        The distributed lag effects of money flows are not “long and variable”. They are mathematical constants and have been for > 100 years. That means the FED’s technical staff is deaf, dumb, and blind.

    • Old School says:

      2% is made up number. No data to support it from what I can tell. I think they just wanted to make sure they could get real rates at negative 2% if they needed to repress system.

      • Bobber says:

        My point is that the 2% mandate is illegitimate because the Fed can only meet that mandate, when at zero bound, by jointly operating with Treasury to facilitate deficit spending with QE.

        I agree the 2% target is a made up number, which is a problem, but it’s also a violation of Fed independence, which is another problem. The Fed should not be agreeing to fund Congress’ deficit spending as part of its mandate.

        The Fed shouldn’t be monkeying with the money supply at all, except when the economy is on the brink of disaster. A recession is not a disaster.

        • historicus says:

          Bobber..
          Indeed.
          The Fed has morphed, with each emergency, from a short term provider of liquidity for banking issues…to a grand manipulator of rates, central planning, laying inflation taxation, and controlling the nation’s money supply.
          Problem is Congress loves the arrangement…the free money for socialistic programs and vote buying schemes.

      • historicus says:

        2% is Stable Prices in anybody’s “real world”.
        How can a Fed Chairman say he promotes 2% inflation when the Fed is mandated to “stable prices”? No rules. A bad sign for our system of government and the nation.

    • Spencer Hall says:

      re: “and the Fed is powerless to meet its 2% inflation target”

      That’s wrong. Operations between the trading desk and nonbank counterparties, RPDs, creates new money.

  17. porque says:

    Thanks Wolf. Great analysis and insight, once again.

    So if we find ourselves in a centrally managed economy, and not one reflective of price discovery, open markets, and potential for business and investment cycles, then what should we now call ourselves?

  18. Willy2 says:

    Wolf Richter is still stuck in the 1970s. When both inflation & interest rates went through the roof. And he is not the only one who is still stuck in the 1970s. There are droves & droves of people who still believe this (inflation drives interest rates) nonsense.

    • Wolf Richter says:

      Willy2,

      Nope, not what I said. If you had read the article, you would have seen that I said that the Fed drives interest rates and that the bond market is the most manipulated market in the world, and that the current 10-year yield says nothing about inflation.

      • The Fed could empty its’ balance sheet tomorrow and markets wouldn’t blink. They are truly a backstop at this point, not needed. Fiscal policy rules. Corporations see their bread buttered on both sides, if the Fed pulls the monetary rug, the competition for easy money gets political. McLuhan likened stock traders to arboreal monkeys, the process of grasp and release. The Fed is holding on to two vines at once. That’s a problem, which be alleviated when they let go.

    • sunny129 says:

      Willy2

      Be aware that in 70s, there was NO QEs or MBSs bought by Fed to suppress interest rates until March of ’09! Fed even bought Corporate/Junk bonds under the fig leaf of SPV funds. Fed is manipulating rates and mkts unlike anytime in US history!

      Only For those interested only, otherwise ignore the below

      Judge Refuses To Identify Five Market Participants Accused Of VIX Manipulation (ZH)
      {the judge refused to name the VIX “counterparties” not out of concerns about “good cause” or exposing trade secrets, but because if the judge had revealed the identities of those trading the VIX, it would have had a profound adverse impact on market confidence. Which can only mean that among those “trading” the VIX were none other than the Fed, via its market-facing entity, the New York Fed trading desk, or even more likely, the Fed’s market proxy – Citadel}

      Decide yourself with your critical thinking filter as it is from zh!

      I believe that FED cannot be ruled out, for NOT doing anything illegal. My confidence level on their integrity is zero!

  19. Norman says:

    The notion that the Fed controls the whole of the Treasury bond market and therefore all global US denominated debt of all qualities which trades of it is as stupid as it sounds.
    All bond traders would follow the Fed and become rich which of course is not true.
    Bond yields will move way higher in which case you should buy TMV, or still push lower as deleveraging continues.

    • historicus says:

      Indeed, the Fed can indeed lose control….or at least they have in the past…
      This new Fed will create Trillions to make themselves right…..
      this wasnt the case under Volcker or Greenspan…

    • Wolf Richter says:

      Norman,

      The Fed has bought $8 trillion of Treasury securities and MBS. The Fed owns nearly one quarter of all marketable Treasury securities — one single relentless buyer with unlimited means and a single purpose, namely the repress yields. If you think that the Fed doesn’t control the Treasury market and the MBS market, you’re nuts.

      • Eastern Bunny says:

        I think there is no question the Fed controls the treasury market.
        They can buy 100% of issues and own everything, similar to BoJ when there are days not a single government bond trades. We could be headed there.
        Nevertheless, I do not understand who in their right mind is buying corporate debt at yields below 1% when inflation rate is above 5%? And we are talking trillions here.
        Surely it’s not the Fed.

        • Old School says:

          Same could be said for stocks. It’s all priced to perfection or reasonably priced if the Fed has your back.

      • cas127 says:

        “one single relentless buyer with unlimited means and a single purpose”

        The Fed is like the dead girl crawling out of the tv set in The Ring.

        She Never Sleeps.

  20. Giorgio says:

    I guess that T-Bond Yield is dropping because of the Reverse Repo. Nothing else. We are in the Unknown and the effects of this massive Financial manipulation and distortion will show up, sooner or later, as Financial Dictatorship and the CBDC will be the beginning, then the Social Score, and then… I forecast much more military in the streets, quite soon.

  21. Dazed And Confused says:

    I thought that market expectations for future US inflation are represented by the yield spread between regular (nominal) treasuries and TIPs of the same duration (e.g. 10 year).

    So for example if 10 year treasuries yield 1.5% and 10 year TIPs yield -1%, then the spread between them is 1.5-(-1) = 2.5% and so that implies market expectations of annual inflation averaging 2.5% over the next 10 years.

    While the Fed through its massive QE program is clearly impacting the absolute yield on both 10yr regular Treasury bonds and TIPs (assuming it’s buying them too), it’s not obvious that it’s impacting the _spread_ between these yields.

    For example, if Fed QE has caused 10 year regular Treasuries to yield 1.5% whereas market expectations are for annual inflation to average 5.5% over the next 10 years, wouldn’t market participants sell their regular 10 year treasuries and buy 10 year TIPs, bidding up the value of the TIPs until their yield dropped to -4% (the same real yield as the 10 year Treasuries).

    So the _spread_ between the nominal Treasury and TIPS yields may still be a useful measure of the market’s inflation expectations despite the massive Fed market intervention and manipulation artificially lowering both Treasury and TIPs yields.

    • Wolf Richter says:

      The Fed has also purchased a large amount of TIPS, and they no longer reflect market expectations of inflation either, but expected Fed actions.

      • Dazed And Confused says:

        Yes – agree that both Treasury yields and TIPS yields are much much lower than they would be without massive Fed QE.

        However it’s not clear if Fed QE is impacting the _spread_ between the Treasury yields and TIPS yields which is normally interpreted as the market expectation for inflation and is currently about 2.6% for the next 5 years and 2.4% for the next 10 years.

  22. Landlord Investor says:

    The notion that the 10 year rate doesn’t reflect backward looking measures of inflation is a strawman. No one ever said it’s supposed to. Forward looking inflation expectations are reflected by the difference between the 10 year and TIPS. It’s reasonably accurate historically.

    • Wolf Richter says:

      Landlord Investor,

      Apparently, you haven’t read the media recently (good for you). The drop in the T-note yield is constantly cited — WSJ, Bloomberg, CNBC, etc. — as evidence that inflation is transitory and that the market expects inflation to go away next year. I posted the article to counteract those claims. As I said, the T-note yield lags way behind inflation data, up and down, and doesn’t predict it.

      The Fed has also purchase a large amount of TIPS, and they no longer reflect market expectations of inflation either, but expected Fed actions.

      • MCH says:

        Wolf,

        Here is a question, is the media just too ignorant to understand this or is it deliberately withholding facts hoping that it can depend on the ignorance of the people to eat their lie wholesale.

        I guess it doesn’t really matter, because in the end, the result is the same. I had no idea the Fed bought TIPS too. Interesting.

        • Jon says:

          You just can’t trust the mainstream media
          They are not stupid or ignorant but what they are doing is well thought out propaganda

      • David W. Young says:

        Wolf, and the recent dip in yields could more accurately be credited to a true Flight to Safety (yet Bonds provide no protection from Default Risk today!!!) when stock investors start seeing the garbage trading in the equities markets such as Crypto’s, meme stocks, Profit-Less Rocketships, and other shaky Eddy securities come crashing back down to Earth on a regular basis since March.

        A bond trader might say that this is just an intermediate correction in yields rallying since late 2020.

        But we can all agree that today’s Bond Yields and imbecilic actions by the Fed tell us nothing about Today or the Future of anything.

        • Wolf Richter says:

          David W. Young,

          But wait… I don’t see ANY flight to safety in the junk bond market or in the stock market or anywhere else. What I see is yield chasing, risk-taking, and betting-the-farm on the Fed.

        • Swamp Creature says:

          These fund managers have to provide yield to their investors or else they will be looking for another job. That’s why they are doing what they are doing. The hell with the risk. Its not their money and not their problem. When the markets turn and start going south you’ll hear that they “no longer work for the company” . Sort of like that used car salesman that sold you a lemon.

      • Landlord Investor says:

        “ The Fed has also purchase a large amount of TIPS”

        Fair point. I wasn’t aware of that until I read the comments to this article.

        “ The drop in the T-note yield is constantly cited — WSJ, Bloomberg, CNBC, etc. — as evidence that inflation is transitory and that the market expects inflation to go away next year. ”

        They know what breakeven inflation expectations are but dumb it down for their audience. Breakevens have declined alongside the 10 year. Maybe the Feds QE makes breakevens no longer accurate but too early to say whether that’s the case.

  23. 2BFrank says:

    Regarding inflation, the cure for high prices is high prices, eventually price inflation does come to a stop, granted it may stay at those levels and not drop for some considerable time, but eventually price inflation stops.

    Meanwhile the AVERAGE increase of the price of gold since 1971 – present is 7.9% compound, get yourself some physical insurance, I suggest about 10-20% of your wealth, and relax.

    • Old School says:

      I imagine social security funds going to take another step backward if increase is going to be 5.9% and 10 year Treasury at 1.2%.

    • historicus says:

      “the cure for high prices is high prices,”
      Indeed, in a free market.

      Is that what we have now?

  24. Micheal Engel says:

    1) The 2020 recession was the deepest, yet the CPI was > zero, a higher low.
    2) The CPI trading range is 1987 lo/1991 hi, or 1%/6.5%.
    3) The last jump, though impressive, is still under 6.5%. It
    might get there, but not yet.
    4) The nadir was 2009 low. It it’s a failed spring. It didn’t sent
    the CPI > the trading range.
    5) We might cont to operate in semi comatose economic mode, while the CPI flare in a low flame.
    6) US Gov General Account is minus : (-) $4.65T.
    7) The Y/Y inflation rate : 5.4%. US 10Y = 1.4%. Real CPI : (-) 4%.
    8) $28T x 0.04 = (-) 1.12T/Y. Cut it by half for 10Y :
    $0.6T x10Y = (-) $6T.
    9) With higher taxes and less socialism, along with negative real
    CPI, the gov might save the General Account.
    10) RE real value will deflated by the accumulated low flame CPI and become more affordable.

  25. Max Power says:

    I find it baffling that the FED is even allowed to purchase TIPS. Given how huge their intervention is (they now own approximately a quarter of the market!), the entire stated purpose behind this security is essentially null and void.

    • drifterprof says:

      Hmmm, I wasn’t aware of that. Thanks for pointing it out. Here is quote from a Forbes article:

      “…the Fed has bought more TIPS since the coronavirus crisis started last year than the total amount issued. Digest that for a moment: the Fed bought over $175 billion of TIPS from March 13, 2020 to the end of February, 2021, whereas only $150 billion or so of new TIPs were issued (Source: Bloomberg, Federal Reserve). In percentage terms, the holdings of the Fed have gone from less than 10% over the same period to over 20%. Of the over $1.5 Trillion dollars of outstanding TIPs, the Fed owns over $300 Billion.”

      So it seems like the FED is manipulating the TIP yield as part of their 2% inflation goal. And in the process of reducing the yield, screwing investors who want inflation protection.

      • Dazed And Confused says:

        Thanks for sharing that – it’s fascinating.

        According to Bloomberg, the current 10 year TIP yield is -1.1%. As you stated this is clearly being artificially suppressed by Fed QE.

        If the current CPI of 5.4% is not transitory but expected to persist for the next 10 years, this means these TIPs will have a nominal yield of 4.3% which is over 3% more than the current 10 year treasury yield.

      • historicus says:

        I encourage you to go to the PBS website and watch their documentary on “The Power of the Federal Reserve”.

        Fisher admits the FED implements policies that are intended to FORCE investors in one direction. I am guessing the word “force” does not appear in the Federal Reserve Act in regard to cattle driving the investment decisions of the people they allegedly serve.

  26. David Hall says:

    According to the U.S. Bureau of Labor Statistics, prices for housing are 799.29% higher in 2021 than they were in 1967. This is why I do not think it is a good time to sell my home and rent.

    The stock market was another place to invest as it often outperformed real estate. Many in Congress own real estate and/or stocks.

    Gold, platinum and silver outperformed cash since 1967. There are a bunch of empty pits and mine shafts where the gold used to be.

  27. Marco says:

    I think the data and graphs also may indicate that the Bond Market moves more retroactively and sluggishly than the real-time data. Maybe it’s just a case of awaiting a couple more months for the next big move ?

  28. Yancey Ward says:

    The bond market is predicting GDP, not inflation.

    • Wolf Richter says:

      The bond market is not predicting anything other than what the Fed is going to do next. And the Fed is still buying.

      • Yancey Ward says:

        And the Fed will buy so much more in the next recession.

      • Yancey Ward says:

        In short, the people buying the bonds today aren’t doing it for the interest income- they plan to harvest the capital gains.

        • Wolf Richter says:

          Yes, that’s been the game for years, in terms of Wall Street.

        • Swamp Creature says:

          They are buying these long term bonds with huge leverage, like 5% down. It used to be called “shooting the treasuries” . Only this time you’d better not miss.

  29. Yancey Ward says:

    When the next recession comes, it will plunge the 10y under zero, and the 30 year will go under 1%.

  30. Swamp Creature says:

    The Fed is following the Havenstein playbook. Back then, 1923, there was a shortage of purchasing power because money was depreciating and spent faster than it could be printed causing labor unrest and work stoppages all over the Weimer Republic. They could not even maintain essential services. To maintain law & order the solution, print more and print it faster. It was a binary choice. Either do that or have chaos and riots. We are not even in an election year and our current Fed is acting like we’re in something similar. I hate to see what they will do next year. As bad as things are now these may be looked upon as the “Good times”

    • Old School says:

      Once you get to that stage you have got to get a new currency and convince everyone you will not abuse it this time. Happens nearly every year somewhere in the world.

  31. jrmcdowell says:

    “The Fed and other central banks that inflict QE on their realm are making sure that the bond market does not react to inflation.”

    Exactly. And without all the central bank intervention, there wouldn’t even need to be inflation for the bond market to react with higher yields to all the new debt issuance.

  32. Micheal Engel says:

    1) US gov will shrink it’s global profile, cut it’s DOD budget, dissect from the rest of the world, delegate leadership to regional powers, while on diet.
    2) The fake infrastructure bill will go to the abortion clinic.
    3) The recon + infra bills are born to fail, to blame the other side, an alibi for the inflated left, the brainless.
    4) US gov debt ceiling is under repairs. Congress will be waiting in vain for roofers. The summer will be over. The job might be completed next year, or perhaps two years. Meanwhile use a bucket. US bills & notes will mature and expire without replenishment, lowering total debt.
    5) Low end chips for cars industry, a 20Y old technology, will not attract investment.
    6) Let Chins export inflation, aggravating consumers, but not the Fed, BOJ and the ECB.

  33. jrmcdowell says:

    “It’s buying $80 billion in Treasury securities and $40 billion in MBS to add to its pile, plus it is also buying Treasury securities and MBS to replace those that have matured and come off its balance sheet…”

    This is an important point. Even if a central bank stops current asset purchases, QE is still effectively ongoing as maturing assets are replaced on the balance sheet. In other words, the only way to end QE is for the Fed to unwind the balance sheet and not replace the maturing bonds.

    • 3D Modeler says:

      Which is what Jerome Powell initially tried to do until T and his administration started clobbering him over the head virtually everyday to lower interest rates. Yeah, Powell uses the excuse that the Fed observed some tightness in the credit markets as a reason for the 180, but that was bs. The Fed is simply not immune to political pressure. Watch for them to cave to political pressure in time for the 2022 midterms just like they did back then.

      • Micheal Engel says:

        Don’t blame T. The DET10Y didn’t care !

      • historicus says:

        T did indeed jawbone Powell, who at one time was actually doing the proper thing….getting Fed Funds up to the then inflation rate in 2018 (2%).
        But something larger happened IMO. Powell seems to have been captured by aliens and the Fed hijacked. Either he took the MMT oath or he is being misguided by certain “advisors”.

  34. Micheal Engel says:

    1) Frog cooking Fed printing increase the risk of a financial crisis.
    2) The slow frog cooking increase good collateral in the o/n market to abort a financial crisis.
    3) If the Fed sell MBS, or US treasuries, it’s not tapering. Neither about fighting inflation.
    4) Selling indicate ==> troubles.
    5) The Fed RRP reached $1T. RRP is not about sucking excess liquidity from the banks.
    6) RRP is not about 5.4% inflation. It’s about deflation.

    • historicus says:

      Micheal
      “It’s about deflation.”
      You’ve never seen deflation, nor will you ever…
      File deflation with the Loch Ness Monster and Big Foot.

  35. Chauncey Gardiner says:

    IMO negative real interest rates, along with trillions of dollars in corporate stock buybacks funded with debt, are a key component of the stock market elevation strategy that has gradually come into focus.

    Their “Inflation is transitory” argument, rather than responding with a modest rate adjustment, indicates that they won’t willingly give QE-ZIRP up. As Michael Pettis recently observed, by implicitly guaranteeing the liquidity of illiquid and risky assets, and even effectively committing to protect banks from taking major losses, central banks have set off a feedback loop process in which the financial system automatically responds not just by ramping up ownership of illiquid and risky assets, but worse, by increasingly mismatching the liabilities used to fund the purchase of these assets.

    The Dec 1989 Nikkei index sequel vividly illustrates what happens when it finally crashes. Japan’s Nikkei index is still well below those levels well over three decades later.

    Really too bad the many trillions of dollars have gone into raising passive asset prices rather than productive investment in corporate R&D, the nation’s infrastructure, public education, addressing climate change, etc. But I suppose the upside is a narrow segment of the population that is privy to policy formation, well-networked, who enjoy Cantillon Effect distributional advantages regarding the creation of money, and provide significant political funding, have personally become very wealthy.

    Maybe we’ll ultimately come out of this with a better financial system where the extraordinary privilege of credit creation is balanced by a responsibility to prudently manage risks.

    • George says:

      We are not going to be Japan, we are Japan with the only lesson learned is you raise asset prices first because that is what gets all the others to follow, which you are beginning to see. They looked at Japan trying to produce inflation for years and did a work around. Inflation, as seen in ridiculous real estate and stock prices is just now increasing the price of everything. That is the intended outcome.

      Also, to YuShan : it takes over thirty pieces of paper with the word dollar printed on it to purchase one silver coin with the word dollar on it, what’s left to be said?

    • sunny129 says:

      Chauncey Gardiner

      {“by implicitly guaranteeing the liquidity of illiquid and risky assets, and even effectively committing to protect banks from taking major losses, central banks have set off a feedback loop process in which the financial system automatically responds not just by ramping up ownership of illiquid and risky assets, but worse, by increasingly mismatching the liabilities used to fund the purchase of these assets}

      The inherent more complexity of the system is already destined to crack once the first domino falls! Just when Not if! Expect volatility unlike any time before in the coming months! Increasing Delta variant will accelerate it! Good trading!

  36. Spencer Hall says:

    It’s supply and demand. The public sector overtaking the private sector. The economy was a closed circuit, now it’s an open circuit. The trend ends with negative nominal rates of interest.

    I.e., the Keynesian economists have achieved their objective, there’s no difference between money and liquid assets. That implies debt deflation.

  37. Yort says:

    The Bond Market is clueless, yet so is the fed as they will be the high inflation scapegoat next year before Mid-Term elections, by which inflation has been proven to be anything but Transitory. The Fed will have to cave to inflation pressures by early next year, due to midterm elections and the pre-election blame game that has already started…

    Per Bloomberg – note the Fed is already being set up in May of this year, and last week, as the scapegoat for higher inflation:

    White House Press Secretary Jen Psaki, asked on May 12 about a spike in the consumer price index, released earlier that day, responded that inflation “is obviously something we monitor quite closely,” while noting that it’s the job of the Federal Reserve “to manage all aspects of inflationary pressure.”

    On Thursday, Psaki, when asked about inflation, said “We do take it incredibly seriously.” While again noting that handling it was the “purview” of the Fed, she also highlighted “steps we’re taking,” including expanded child tax credits — which can help bolster household spending power in face of cost-of-living increases.

  38. Swamp Creature says:

    I can’t wait to to see faces of all these people that bought gas guzzeling SUVs and trucks financed with 10 year loans when gas hits $10/gallon. Can you imagine pulling up to the pump and watching your 50 gallon gas tank getting topped off and running up the tab to $500 a fill-up just to commute to work for 1 week for some s$it job that you can’t stand anyway. There’s going to be a lot of whining and complaining like you have never seen.

  39. Beardawg says:

    So keep buying stocks, not bonds – got it.

    • sunny129 says:

      Don’t forgot to add ‘hedges’ along the way!
      What goes up, far above over valued zone, has ALWAYS come down in the 200 years of Mkt history. Reset can be delayed but cannot be banned!

  40. Ole C G Olesen says:

    There was once an extraordinary financial Writer out of Australia with a Blog called ” The Privateer ” … He translated actual Bond Price movements into corresponding Losses and Gains. I miss his sharp and analytical Brain… sorely !
    Try and calculate the LOSSES incurred by the current Interest Rate Moves on USA Bonds…. The Losses should be STAGGERING for those DUMB ENOUGH to have bought these Bonds between close to ZERO and 1,5 % and until now… WHO ARE THE LOOSERS ? The BANKS ? The PENSION FUNDS ? INSTITUTIONAL INVESTORS ? …. WHO … WOLF …. ?That is a highly interesting Question !

  41. Auldyin says:

    Great item, I agree with the conclusions, I can see no correlations to my eye and I’m too lazy to do the math.
    If there was such a thing as a link to predict the future, everybody would know it and it would no longer be of any use to make money.
    It’s all just witch doctors reading the bones and talking their book.
    It’s great to see the old 70’s charts again after all these years.
    What’s interesting to me is that the first smaller peak was a supply shock due to OPEC, but the second bigger one was a Keynesian demand cock-up where wage rises were consistently validated due to strong trade unions. I’m thinking of UK where I was but I’m presuming US was similar.
    At the time. (IMF) Healley, the most infamous of UK chancellors, from a gallery of infamy, said trying to control the economy was like driving a car by looking out the rear window. With the super-computers now I suppose it might be like looking out the side window, you can stay in the middle of the road but you can’t see the cliff coming.
    What’s interesting about the comparison to the 70’s is that the first peak was the supply shock, the second was the demand shock. What if that is repeated now and we’re just seeing the first peak coming , then, whatever they do about excess demand will decide what the second peak will be like.
    All speculation, of course, but so is the BS about yields in a fixed market predicting inflation.
    You bets your money and you takes your chance.

  42. Danny says:

    I doubt this will be able to continue. We will see 3.5% 10 year US treasuries and 4%+ 30 year US treasuries I give that 2 years tops. I would not be surprised we see back to 2000 of 6.25% to 6.75% US treasury yields again.

  43. Art says:

    Wow, Danny, I was only 17 in 2000 and that recent interest rates on US treasuries were 6%+. How low we have fallen on interest rates. It looks like the biggest, price fixed, rigged market to me. Us treasuries now in the 1.2% to 1.9% range. What a big loss in annual interest for seniors, retirees, fixed interest rate investors, savers.

    The responsible are truly being punished big time for years now.

Comments are closed.