Bond Massacre, Inflation Prick Biggest Bond Bubble in History

The dollar’s role as dominant global reserve currency is at risk if the Fed fails to crack down on inflation.

By Wolf Richter. This is the transcript of my podcast recorded last Sunday, THE WOLF STREET REPORT.

We’ve seen the headlines in recent days. “Worst Bond-Market Drawdown on Record.” Drawdown means drop in prices. “Global Bond Market loses $2.6 Trillion,” was another one. This was based on the Bloomberg Global Aggregate Bond Index, which tracks total returns of government and corporate bonds. And this index of global bonds has plunged 11% from the high in January 2021, the biggest percentage decline in the data that go back to 1990.

The drawdown has now edged past the 10.8% drop in the global bond index during the financial crisis in 2008.

In the US, the bond market peaked in August 2020 and is now down 8.7%. The drawdown has lasted 19 months so far, the longest drawdown in the data going back to 1996.

Long-term bonds got hit particularly hard. We can see that in the iShares 20-plus Year Treasury Bond ETF, which tracks Treasury securities with 20 years or more in remaining maturities. And it being a Treasury bond fund, it’s supposed to be conservative and save. Its price plunged by 24% since the peak in August 2020.

But wait… don’t cry for bondholders. They had it so good for so long. The biggest bond bull market ever started in October 1981, when the 10-year Treasury yield peaked at 16%, and when the Volcker Fed was beginning to cut interest rates in large chunks after CPI inflation had peaked at nearly 15% and were coming down. That was the end of the worst and most brutal bond bear market anyone today can remember. And it was the era of the infamous double-dip recession.

What followed was the longest bond bull market that then turned into the bond bubble. In the US, that bond bull market, interrupted by some notable sell-offs, lasted 40 years, from October 1981 to August 4, 2020, when the 10-year Treasury yield closed at 0.52%, the lowest closing yield in history. That was the peak of the bond bubble.

In many countries, central banks pushed the bond bull market to even more ridiculous highs by cutting interest rates below zero, and using QE to push the yields of a whole spectrum of government bonds and corporate bonds below zero.

By December 2020, the total amount of global debt with negative yields reached $18 trillion, according to Bloomberg.

Negative yielding bonds are complete insanity. But that’s how far central banks went to whip the greatest bond bubble ever into frenzy through interest rate repression and money printing. Money printing means that central banks are buying bonds with newly created money, and this drove up bond prices and pushed down yields below zero percent in those countries.

And then, inevitably, came global inflation, a massive spike of inflation that just keeps getting worse and worse.

Among the developed economies, the United States CPI inflation is on top. You have to go to Brazil or Russia to get more inflation. In Russia, the central bank policy rate is now over 20%, and Brazil’s policy rate is nearly 12%. But in the US, the policy rate, the upper limit of the range, is just 0.5%.

So now the bond market is reacting to the Fed’s jawboning about its coming crackdown on inflation, which will be too little and too late, as it’s trying to engineer a soft landing.

By Friday May 25, 2022, the 10-year Treasury yield had spiked to 2.48%, the highest since May 2019. And nearly five times the yield on August 4, 2020.

But in the 16 years between 1965 to 1981, bonds got massacred as a result of huge bouts of rampant inflation that became huge bouts of double-digit inflation. Bond yields shot higher, as did the Fed’s policy rates, interrupted only by false-hope drops in yields and interest rates.

When yields rise, bond prices fall. And between 1965 and 1981, bond prices fell and fell and every rally was crushed, and rampant inflation ate everyone’s lunch.

Over those 16 years, the 10-year Treasury yield rose by 12 percentage points from 4% in 1965 to 16% in October 1981.

And it burned the bond market so badly that when the Fed started lowering interest rates in mega-cuts in the second half of 1981, the bond market said, nah, we’re not buying it, and yields remained stubbornly high for years and came down only slowly.

This was when the term “bond vigilantes” was born – meaning the bond market that had gotten clobbered and crushed over and over again in the prior 16 years had become careful, conservative, and suspicious, and wanted to be compensated properly via adequate yields for taking risks. Those kinds of scars don’t heal quickly.

But they did heal. And then in 2008 came QE, when the Fed stepped into the bond market and just bought trillions of dollars of Treasury securities and mortgage-backed securities, and the remaining bond vigilantes were mopped up, taken out the back, and shot. QE was the end of the bond vigilantes.

Interest rate repression continued, except for a three-year period from December 2015 through 2018, when the Fed raised interest rates ever so slowly and then in late 2017 started to unwind its balance sheet. By November 2018, the average 30-year fixed mortgage rate hit 5% again.

Now we’re back there. On Friday, the average 30-year fixed mortgage rate was nearly 5%, but the 10-year yield was still half a percentage point below where it had been in November 2018.

So when we read in the headlines that this is the worst bond-market drawdown in history or in the data or whatever, it excludes the 16-year bond massacre between 1965 and 1981 that gave birth to the bond vigilantes.

But here is the thing: This is just the beginning. Unlike the Financial Crisis, which was a financial panic combined with a housing bust and mortgage bust that brought the banking system to the brink, today’s problem is rampant massive global inflation, with CPI inflation in the US heading towards the double digits.

This is a huge effing problem, created in part by the Fed that printed nearly $5 trillion in the span of two years, and just now stopped printing money, despite inflation raging for over a year, and that repressed interest rates to near 0%, and just this month raised them by a minuscule quarter percentage point, and so they’re still near 0%, even as inflation is spiraling out of control. For this reason, I call it “the most reckless Fed ever.”

But the Fed has now gotten the memo. And they’re going to raise short term interest rates and they’re going to shrink their balance sheet, and they will do this a lot faster than folks imagined just a few months ago.

This is happening, and the Fed is doing it, because inflation is the biggest effing problem this economy is now facing, and will face for years.

And the Fed has shot its credibility as inflation fighter that the Volcker Fed painfully built 40 years ago, and it has instead gained rock-solid credibility as inflation arsonist, having lit this inflation fire back in March 2020 with its radical money printing scheme and then pumping gasoline on it with more money printing and 0% interest rates for two years, and it’s still pumping gasoline on it with these ridiculously low interest rates, and it will continue to pump gasoline on it, even as it jacks up interest rates by 50 basis points at a time, because CPI inflation of nearly 8% now is running away from them.

The wage-price spiral has kicked in, and trillions of dollars in excess liquidity from the money-printing binge, and from the federal government giveaways, are still floating around out there among businesses, state governments, and consumers, and they’re going to spend this money.

And the inflationary mindset is now blooming, with businesses confident they can pass on the price increases, and with consumers paying no-matter-what, and CPI inflation is heading for the double digits.

And the Fed has now acknowledged that this is the #1 problem and it’s going after it, even if it’s still too slowly.

What this means is rising yields and rising interest rates going forward, and lower bond prices, and lower home prices, and lower stock prices. A lot of assets will be repriced in this new era of much higher interest rates.

But with the Fed being so far behind the curve and still acting way too slowly, the crackdown will drag out for years, and the Fed will be chasing inflation for years, interrupted by periods of false hope, like we’ve seen between 1965 and 1980.

The period that compares to today’s situation isn’t 2018 or 2016 or 2008, but 1965 through 1981. That’s the most recent historic parallel to the rampant inflation we now have.

There is one big difference: The Fed’s toolbox has a very powerful inflation-fighter tool in it that it didn’t have back in the 1970s: its $9-trillion balance sheet. The Fed can shed part of those $9 trillion in securities by letting them mature without replacement and by selling them outright.

This Quantitative Tightening, or QT, is the opposite of Quantitative Easing, or QE, and if the Fed goes at it hard enough, it will push up long-term yields, which will raise the costs of borrowing across the board, from mortgages to junk bonds.

And so the Fed won’t have to raise short-term rates as much as it did back in 1980. If the Fed raises short-term rates to 3% or 4%, enough QT will see to it that long-term yields, such as the 10-year Treasury yield, may be in the 6% range or higher. This would mean 30-year fixed mortgage rates in the 7% range and higher. This would mean a massive repricing not only of the bond market, but also of the housing market.

If the Fed sheds $5 trillion in securities over the next few years, it will take $5 trillion in liquidity out of the market, and it will undo the psychology of the market, and it will undo the effects of QE since March 2020. And that’s a huge thing. And it will trigger a massive repricing of the stock market.

I’m not sure this will be enough to tackle this rampant inflation, but it will be a start.

And folks who made so much money since March 2020 that they decided to just day-trade stocks and cryptos, instead of working, well, with much of that wealth gone, they’re going to rejoin the labor force to reduce the labor shortage, further taking some inflationary pressures off. And that would be a good thing too.

There are some fireworks associated with QT and higher interest rates, just like there were fireworks associated with QE and interest rate repression, but in the opposite direction. If the Fed actually does this, if it has the fortitude to go through with it and take the fallout, and there’s going to be some fallout, it would calm inflation down over the span of a few years.

If the Fed doesn’t have the fortitude to do this, inflation will bloom and blossom, and the dollar’s role as dominant global reserve currency – which has been shrinking for years – will shrink a lot further, a lot faster. And the dollar’s role as dominant global investment currency will fizzle. And the dollars role as trading currency will take a serious perhaps irreparable hit. All kinds of issues will pop up that could jostle the US economy in seriously unpleasant ways.

So the Fed has all the reasons to get this inflation under control. For current bondholders, this would mean a lot more pain.

But for future bond buyers, those buying bonds with much higher yields in the future, it would mean returns where yields might even beat inflation. And borrowers would be forced by the market to actually pay bond buyers for the risks and compensate them for inflation on top of it. It would mean the end of free money. And that would be a good thing too.

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  173 comments for “Bond Massacre, Inflation Prick Biggest Bond Bubble in History

  1. Raj says:

    Another Fed President wants only 0.25% rate hike. So 10 year is back at 2.33%.

    • andy says:

      In good news, Tesla will sell more shares to raise money to pay dividend. Why can’t the other 499 in the S&P500 think outside the box for once.

      • joedidee says:

        here’s nice INFLATION
        have leak in hydraulic arm of backhoe
        needs new seals
        1st quote $120, 2nd $150+freight costs(weighs less 1 lb)
        actual ?? $250 ++++++
        simple $200 repair gonna cost $500!

      • cas127 says:

        I’m hoping this is day trader sarcasm rather than Ponzi runner perfidy.

    • J-Pow!!! says:

      I won’t have anyone calling me “inflation prick”!!! Won’t stand for it!!!!!

      • VintageVNvet says:

        don’t be silly jp,,, it’s just another example of that name,,, but spelled with a K

      • Wisdom Seeker says:

        Latest core PCE running 6.2%, highest since 1982.

        Lots of people being pricked by inflation…

    • Wolf Richter says:

      Raj,

      Don’t be silly. Look at a six-month chart of the 10-year yield and tell me if the mild pull-back over the past three days in yield was anything unusual in the overall trend.

      As I said on March 26, in advance of the pull-back in yields, because this stuff is so predictable:

      “But as the WOLF STREET dictum goes, “nothing goes to heck in a straight line.” It is very likely that Treasury yields will pull back some, after this run-up. And hedge funds that are short Treasuries – the most obvious no-brainer in the history of mankind – are going to get whacked around. That’s always how it is. One thing we know: it’s going to be volatile, with massive moves in both directions. And the 5% mortgage rate is sort of the sound barrier, and it will take a while to move beyond it in a significant way. But its impact on the housing market is already being felt.”

      • Raj says:

        I agree its within volatility range of WS dictum “Nothing goes to heck in a straight line.”

        I do worry that while these rate hikes may be able to contain high end housing prices, it seems too little and too late for controlling general inflation.

        Also Biden approval that popped with start of Ukraine conflict has already given up all those gains. Soon the conflict will end or takes back seat with expected outcome, and we will no longer be able to blame all inflation on Putin. So, I think, If fed doesn’t do more, democrats are looking at unprecedented landslide losses in midterm (not that I am a Democrat, but I expect them to atleast try and not give up).

        So why not force Fed to do more for inflation?

        • Wolf Richter says:

          Agreed that runaway inflation is going to whack the party in power. Reagan, by cracking down on inflation via Volcker (a Carter guy) in a very public way early on in his presidency, got another 4 years. I have no idea why the White House chose not to learn from this example. Maybe they thought it would just blow over on its own. Huge miscalculation.

        • Winston says:

          “I have no idea why the White House chose not to learn from this example. Maybe they thought it would just blow over on its own. Huge miscalculation.”

          Maybe that’s because that’s what The Fed was telling them AND because of the very nasty effects on stocks, bonds, and home prices you point out as being a result of The Fed using its most effective tool to actually stop inflation?

          And since it’s a no-win situation just kick the can down the road AGAIN and hope that the ping-pong power swap will fall on the other corporate owned half of the UniParty in 2024 due to extremely bad times by then?

        • SnakeEater says:

          If only there was a QE for approval ratings.

        • cas127 says:

          “I have no idea why the White House chose not to learn from this example.”

          I’m pretty sure that it is because ZIRP has done such a poor, poor job of igniting traditional job growth over the last 20 years, DC is terrified of moving away from it (ie, “If job growth has been half of historic norms with ZIRP, what horrors await us if we stop!!!. If allowing tiny rate hikes dropped the S&P 500 by 20% in 2018, our political existence will be snuffed out if we allow much more!!!).

          ZIRP is/was the lazy/corrupt “fix” that DC coagulated around in 2002 or so (coincidentally “solving” DC’s already enormous debt service problem).

          It didn’t solve anything (simply deferring and greatly worsening the core problem of the US’ inability to compete, especially in manufacturing) but it bought 20 additional years of political “peace” (translation: continued careers for incumbents and bureaucrats, continued trough service for the aged pigs of K Street, the Pentagon, AARP, etc.).

          DC knows full well the nation ending nightmare it has cultivated and profited from – that is precisely why the current coven is so terrified of taking steps away from ZIRP.

        • John Galt says:

          “SnakeEater
          Mar 31, 2022 at 10:30 am
          If only there was a QE for approval ratings.”

          There is, it’s called Stimulus Checks.

        • Swamp Creature says:

          I thought T would crack down on inflation and pop the bubble like he promised in the campaign. He didn’t do that and kept the easy money policy flowing even more so than before. Not a single government agency was eliminated or even cut back. Spending on defense and other programs went from bad to worse. That was the major failure of his administration.

        • Flea says:

          Watch what happens from June- November probably best stock market turnaround in history = fraud

        • Pea Sea says:

          “I thought T would crack down on inflation and pop the bubble like he promised in the campaign. He didn’t do that and kept the easy money policy flowing even more so than before. Not a single government agency was eliminated or even cut back. Spending on defense and other programs went from bad to worse. That was the major failure of his administration.”

          Disappointing, yes. And he had such a sterling reputation for keeping his promises before!

      • Jay says:

        Wolf,

        Correct me if I’m wrong:

        “if the Fed goes at it hard enough, it will push up long-term yields, which will raise the costs of borrowing across the board, from mortgages to junk bonds” + US GOV INTEREST EXPENSE

        So, if the fed goes all in, our cost to run deficit spending goes up dramatically as well. And it’s averaged $545B over the last four years, I believe:

        https://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm

        • Wolf Richter says:

          Jay,

          Not on my worry list for now because… Only bonds that mature and have to be replaced with new bonds are impacted.

          So at first, an increase in long-term yields will not increase debt service in any visible manner. Gradually, over the years, as maturing bond issues are refinanced at higher rates, interest expenditures will increase. In addition, the US is still carrying 10-year Treasuries and 30-year Treasuries that were issued years ago with HIGHER coupon interest than today. They will be replaced with lower-cost debt at least at first.

          And when interest expenses rise by $300 billion a year, well, so no biggie in the $7+ trillion budget (in 2021, the budget was already $6.8 trillion). So who cares if it’s a few hundred billion higher?

          Debt out the Wazoo already.

      • Swamp Creature says:

        Wolf, there is no effect of the 5% mortgage rate here on the housing market. If fact its busier than ever. People are desperate for housing and will do whatever it takes to get into the housing market. First time home buyers are now buying townhouses vs single family homes. If the can’t afford a townhouse then they buy a condo. If they can’t afford that they rent with the option to buy. More affluent people are buying houses that have not even been built yet. I may add that any condo in a good location sells quickly if priced fairly. That realtor who works DC and posted on your site that “no one wants condos” doesn’t know what she is talking about.

      • Dan Romig says:

        And at the end of the day; at the end of the month of March 2022:
        The 3 Year Treasury @ 2.45%
        The 30 Year Treasury @ 2.44%

        • Dan Romig says:

          And one day later on market close, Friday, 1 April:

          The 3 Year Treasury @ 2.58%
          The 30 Year Treasury @ 2.44%

          As I’ve commented, I keep my eyes on the 3 year more than any other time duration.

    • historicus says:

      From the article…

      “By Friday May 25, 2022, the 10-year Treasury yield had spiked to 2.48%, the highest since May 2019. ”

      That is incorrect. A mistake.

      • SnakeEater says:

        Technically, until after that date it’s not a mistake. Wolf might be able to see the future. Can’t rule out that possibility.

  2. drg1234 says:

    But the Fed is buying 40 BILLION of MBS every month!!!

    (for the record, I think Wolf is nowhere near as harsh as he should be- this ignorant bullshit has gotten really old)

  3. Gandalf says:

    Yield curve inverted.
    Recession coming.

    • Raj says:

      Not so soon, the fed has manipulated the yield curve to such an extent by repressing yields that I have doubts on its character now.

      I feel we will not see a “new” recession wrt drop in productivity. We will see one with drop in consumption (GDP).

    • Wolf Richter says:

      Gandalf,

      Nonsense. The yield curve is inverted because the Fed locks down the front end and sits with its obese balance sheet on the back-end, and the middle is allowed to move up a tiny little bit. The Fed manipulates the yield curve, and therefore the yield curve cannot say anything other than what the Fed is doing. I have no idea why this is so hard to grasp, especially since the very same recession mongers today are the ones that yelled in prior years about the Fed manipulating the bond yields.

      • Wisdom Seeker says:

        Re “The Fed manipulates the yield curve, and therefore the yield curve cannot say anything other than what the Fed is doing.”

        I think this is over-stated. The Fed is capable of a lot, and it definitely controls the short end of the curve, but I doubt it has such control over the long end curve that the market cannot say otherwise.

        Right now the Fed is not making any new purchases. Prices are being set by the marginal buyer and seller, and the Fed is not either one at the moment.

        Expectations of future Fed action influence market participants’ choices, but the Fed is also data-dependent and reacts to the market behavior – that’s a complex loop but not the same as “the market only says what the Fed is doing”. Wasn’t it Bernanke who called it a “conundrum” when their policy wasn’t having the expected impact on longer-term rates?

        Finally, the current Fed policy discussion has explicitly indicated a desire to avoid a yield-curve inversion. There have been suggestions to accelerate QT from the long end bonds that they hold first, while going slow on raising short term rates. That implies that they haven’t currently got control over long rates yet. (If they try it and it doesn’t work, then what?) And they haven’t done anything yet, but the market has already inverted.

        The Fed is a huge whale in the tub, but it’s a big hot tub, not a tiny bathtub. Japan is a different story.

        Finally, I’m reminded that when the government tries to control anything, it usually does so poorly, and the market has a way of reasserting itself in interesting ways.

        • Peanut Gallery says:

          Does anyone know what % share of bonds the Fed holds by tenor along the YC?

        • John H. says:

          Good post, WS-

          Especially “… when the government tries to control anything, it usually does so poorly…”

          Reminded me of this quote:
          “ The public at large have learned to understand, and I am afraid a whole generation of economists have been teaching, that government has the power in the short run, by increasing the quantity of money rapidly, to relieve all kinds of economic evils, especially to reduce unemployment.  Unfortunately this is true so far as the short run is concerned. The fact is, that such expansions of the quantity of money which seems to have a short run beneficial effect, become in the long run the cause of a much greater unemployment.
          – F.A. Hayek, A Free Market Monetary System, lecture Nov. 11, 1977

          Unemployment is not a problem now, but if past is prologue, it will be after high interest rate therapy kicks in. That’s part of the nature of fighting inflation…

        • sunny129 says:

          Wisdom seeker

          ‘and the market has a way of reasserting itself in interesting ways’

          but ONLY when Price DISCOVERY was allowed, unlike since ’09!
          Without inflation flaring and also sticky, Fed would have done nothing except repression the rate for savers!

        • Gandalf says:

          WS,

          Agreed.

          Wolf has ripped into the meaning of the inverted yield curve before, but I have yet to see any explanation of anything that the Fed has done or is able to do to control the auction prices of long term bonds.

          The Fed absolutely totally manipulates short term yields with its Fed Fund rate, but long term bonds are sold at auction.

          Nobody is forcing the financial markets to suddenly buy 10-year bonds at a LOWER RATE than what they were paying just a few days earlier.

          So the yield curve inversion was caused by a DROP in the auction price of the 10-year bonds, and NOT anything that the Fed was able to manipulate in recent days.

          The Fed’s giant balance sheet will in general cause a suppression of long term bond yields, but it could hardly cause such a sharp and sudden drop in the auction price of the 10-year bonds in a matter of days.

        • Wolf Richter says:

          What you guys need to understand is the difference between “control” and “manipulate.” The Fed “controls” the front end of the curve and “manipulates” the long end (QE, forward guidance, etc.). “Control” provides precision. “Manipulate” is messier, but it works over time just as well.

  4. andy says:

    Yield curve is more like a sine wave. I think it’s a good sign.

  5. realist says:

    This article is a tour de force. It summarizes much of financial history since the 1960’s in a few paragraphs, as well as predicting the future. And interest rates are the key. Bravo!

  6. Brent says:

    Cue:

    “1994 Great Bond Massacre”

    Mastro Greenspan raised Fed rate from 3% to 3.25% …

    And Vanguard Long Term Investor Grade Bond Fund where I parked about $10K lost 8% that year.

    F… The Maestro…

    • SocalJimObjects says:

      He played you like a fiddle, didn’t he? Cheer up, just imagine what happened during the Volcker era when he raised rates upwards to 20% ….

    • Anon1970 says:

      When the bond market experiences a sharp decline as it did in early 1994, bond mutual funds have to sell bonds to meet fund redemptions. Fund managers usually sell their most liquid names as the bond dealer firms are not interested in illiquid names at such times except at very depressed prices. Buying bonds or bond funds these days is like trying to catch a falling knife. Interest rates still have a long way to go to catch up to inflation.

  7. Michael Gorback says:

    Higher rates are inevitable.

    In 2018 they tried a baby step of QT. They learned that markets were too leveraged to drain liquidity. Now asset prices and leverage are far higher and they think they can unwind this in our lifetimes with a soft landing?

    They can tighten two ways. One is to let the bonds mature and not replace them. Over half of their bonds mature in 4 years, and only 25% run beyond 10 years.

    Let’s assume a $1T run rate annually. Letting bonds mature off the balance sheet would be about $83B per month. Looking ahead, there will be times they have to buy bonds. In April $150B in bonds will mature. In order to maintain the target run rate they will have to buy $67B to get the target of $83B. In 2023 if they are still maintaining a run rate of $1T there will be several months where they will have to sell bonds.

    This process would have to run for years to get just the last $5T out.

    A second possibility is to sell long bonds to manipulate the yield curve, but the amount of long bonds the Fed holds is not enough gunpowder and would be a disaster for mortgages. It would be a blessing for banks that borrow short and lend long, and the Fed is owned by banks.

    Who’s going to absorb all this new debt? The government will continue to borrow but what happens when the Fed isn’t buying? It still looks like higher rates will result as bonds become a glut on the market.

  8. Prophet says:

    Typo, 5th paragraph. junks should be chunks, I think.

    • Root Farmer says:

      Typo, paragraph 26 – “rock-solid credibility has inflation arsonist,” “has” should be “as”

  9. FDR says:

    The Fed can’t raise rates to correct its malfeasance due to causing a deep recession if they are lucky. The financialization of this economy starting slowly with Carter has created a false economy that only 20% of America participates in. If this 20% cuts back its consumption of goods and services due to loss of in income and wealth, it is a woo Nellie economy on steroids.

    As to yankee dollar losing reserve status it is like going broke : at first slowly then suddenly. At this time TINA to yankee dollar.

    If the FED raises rates to radically reduce inflation by tightening and selling long term securities , the US deficit and debt will rise significantly. FDI will question the nation’s ability to pay the premium thereby exacerbating the rise in rates a fortiori. Moreover as asset prices fall due to QT, FDI and the domestic capitalist class will not try to catch a falling knife. This may cause a loss of confidence in yankee dollar which may precipitate a the dumping of the Eurodollar for commodities and assets not linked to the dollar.

    The US is in for difficult times and so is the rest of the world I fear.

    • Wolf Richter says:

      Nah.

      1. Much of the debt outstanding has long maturities, and the interest rate on it won’t change until it matures and has to be refinanced with new debt. You’re talking years and decades.

      2. The US government can always issue debt. But the yield will have to be higher to be attractive. If and when the yield gets high enough, I’ll back up the truck and buy along with the entire rest of the world. Yield solves every demand problem. And it can pay the higher interest payments by issuing a little bit more debt, no problem.

      3. Eventually, the problem will be reduced by inflation, and that’s the phase we’re in right now. But if inflation gets out of hand, which it already has, it can destroy the economy and the currency.

      • Michael Gorback says:

        The debt outstanding owned by the Fed beyond 10 year Treasuries is only 25%.

        All of the exits are roads to hell. There’s no coming back from this without huge amounts of pain.

        • Wolf Richter says:

          Might steal that from you for a future mug: “All of the exits are roads to hell.” Might even use HELL instead of HECK.

        • VintageVNvet says:

          Good one MG,,, works well with:
          ”The road to hell is paved with good intentions.”
          WE are getting some really good comments on this one,,, thanks to all!

        • Michael Gorback says:

          I’m just channeling the spirit of Ludwig Von Mises.

      • suny129 says:

        I welcome the REVERSION to the MEAN , by whatever event or mechanism! This surreal bull mkt now has expiry date!

        Recession is essential and necessary to get rid of zombies and imprudent companies and also many financial frauds will be uncovered. Madeoff was exposed in the DEc of 2008!

    • phleep says:

      > The financialization of this economy starting slowly with Carter …

      Thinking of the period preceding that, the US Gov was engaging in a form of “financialization” I think, printing and spending dollars globally without (political nerve to be) taxing commensurately.

      For this reason, and cultural reasons I think (the masses partying and drifting away from the WW2-1950s mindset), the New Deal and postwar setup was fraying and coming undone. Cars we made sucked, even as a rising Japan and Germany made better ones. US workers in some industries were not competitive.

      We had inflation awhile before then. Carter and thereafter, realized they could not micro-manage (and prop’up while manipulating) so much of the economy, and started deregulating. This gave a fresh wind to the economy even as it started some trends that would, much later, visibly show their age and problems, as you are observing. A big factor I think was the wildness and poor discipline of the masses in that time. They lost the Depression-WW2 rigor, and so many were in for a free ride. Resentful too. Stoned, going through wives like new car models. They needed a dash of cold water.

      These trends always have winners and losers, and something works until it doesn’t. There is no single simple critique, I think, that explains such big and complex things (such as plastering a sign on, labeled “financialization bad.”).

      • COWG says:

        So are you saying that my cash that lost 8% is going to be able to buy your asset that I want which lost 50%….

        I can see it now..

        “Whaadya mean I got to give you $100,000 to buy my house…”

        So much of what people think of as “normal” , which truthfully has been for them, is going to go away because they are going to get monkey hammered by the interest rate reset and inflation…

        Everything, literally, everything from social programs, student loans, cheap financing and loans has been financialized by low interest rates… soon to be gone…

        Zombie company layoffs will kill wage inflation in many areas…desperation will make a lot of people work for a whole lot less…

        20% inflation over a 3 year period is going to cost many services and restaurants their livelihood or force them to reduce costs the easy way (people )…

        Too bad… should have been paying attention to even very basic finance and pulled your app outta your ass…

        Pocketful of that nasty fiat is going to go a long, long, way…

        It’s going to be very tough for a whole bunch a folks to adjust to a world where stupid is painful…

        • JeffD says:

          The economy is more resilient than you believe. The dust would sttle quickly. People always believe recessions are the end of the world, which is just not true. A few percent of the population is devastated and starts over, while the vast/overwhelming majority does just fine. People stand right back up more often than not when they get knocked down.

  10. Stan Sexton says:

    Raise interest rates? You mean “Retail” interest rates to 5%+ ? What about the huge .5% rate the Elite get at the “Primary Dealer Credit Facility (Fed Window)? This is why since 2013, they can buy Grandma’s house for 75k over list price and All-Cash. This juggernaut is not going to stop until the Fed closes this door to cheap easy money. And the Fed and their member banks don’t want to stop the party. After all, by 2030, “You Will Own Nothing and You Will Be Happy”. The Fed is an instrument of the Great Reset.

    • Wolf Richter says:

      Stan Sexton,

      “Primary credit” is not being used, and hasn’t really been used in years. During the March 2020 crisis, there was a small amount of usage (black columns in the chart below). It topped out at $40 billion, for a few weeks, and then petered off to near-zero — $40 billion in a $9 trillion balance sheet! And only briefly. Here is the Fed’s balance sheet. You can check it for yourself:

      https://www.federalreserve.gov/releases/h41/20220324/

  11. Prophet says:

    With the end of Q1 coming up, I’m wondering if the reverse repo overnight balance will spike to $2,000,000,0000,0000.

    • andy says:

      When dollar amounts are starting to look like the distance across the Milky Way Galaxy, you know something somewhere went off the rails.

  12. JJ says:

    If the QT’ing Fed outright sells debt beyond just ‘running off the maturities’, what happens if the Fed takes a loss on the mark-to-market price? How is that reconciled on the balance sheet? Would any nominal loss amount be considered the same as an actual welfare payment?
    Also, does the current economic picture herald a meaningful comeback for bond vigilantes?

  13. JJ says:

    The beginning year of the 1965-1981 inflationary bond massacre also marked when all the loose change minted in America were no longer silver and were switched to a cheap nickel-copper alloy, with the exception of Kennedy half dollars being hollowed out from 90% silver to 40% until 1970 or so.

    • SoCalBeachDude says:

      That loose change had practically NO VALUE WHATSOEVER in relationship to the US economy and the same is true now.

  14. Zark Muckerberg says:

    Would be great if the US dollar is colored like monopoly money

  15. Gen Z says:

    Why is the Fed letting inflation go amok while ignoring the Real Estate and Stock market bubbles? Is there a conflict of interest?

    High inflation usually leads to armed conflicts in some countries. It started with skyrocketing food prices which leads to 3 meals away from a civil unrest.

    • phleep says:

      I think there were 4 phases.

      First was the too-prolonged looseness before the pandemic. Not sure why this happened, but it weakened the patient before the illness even arrived.

      Second was the great unknown of the pandemic, the vast dip in March 2020, and the Fed came out with every tool in the box and all kinds of new ones (such as buying junk bond ETFs, I believe). The Fed was acting with its tools (it said) to help everyone not crater at once (an “armed conflict” scenario, to use your term). We came close, though.

      Third was the period of mid-COVID. the Fed carefully keeping up its extraordinary stuff in a continuing unknown (second wave, etc.) to avoid a second March ’20 style freakout.

      Fourth was the recent time when the Fed finally cut loose from any observable reason to keep spiking the punchbowl. So it wasn’t, IMO, just a string of continuous conflicted crookedness. We got here in stages and then it ran so much off the rails.

      • Bobbleheadlincoln says:

        You’ve got an undiscovered agent here also. A retrovirus known as demographic shift in non-advanced economies. Aging populations in China, Eastern Europe and lower population growth in China due to the 1 child policy will continue to decrease the deflationary benefit of our offshoring of production to China and Eastern Europe. From the 1990’s through 2020, this was a “one-off” benefit of globalization. The cost and bargaining power of labor has been essentially destroyed in manufacturing worldwide. That was very deflationary. And now you can’t just expect Africa to do the same thing China did for the advanced economies.

        In fact our debt-driven consumer economy cannot really abide that deflation forever. The inflation was intentional as per the Fed’s change to their mandate to allow it to ride above 2% for a while. That dilutes the value of the national debt so that it doesn’t weigh as heavy on the US.

        It’s a good thing Europe and US political systems have Ukraine to blame for this inflation now, or there might have been some real political upheaval and civil unrest if the ruling parties had to take the full blame without distractions. They should be thanking Putin. Maybe if there’s a recession, they will blame the sanctions…

  16. JeffD says:

    So why haven’t they had an emergency inter-meeting rate hike of 0.75%? It has been done many times before and is not hard to do. If tbey “get it” like the article implies, they would have no problem making that decision, given the fallout of *not* doing it. Sorry, but a journalist and some lawyers are not the right people to be sitting on the FOMC board to make clearly incompetent decisions as evidenced to date.

    • Depth Charge says:

      When the stock market started dropping, threatening their own wealth, they had an emergency meeting and immediately dropped rates to zero from 1.5%. Now that there’s an inflationary emergency that’s a massive threat to nearly the entire population, there’s suddenly no emergency to do anything at all. Get it? They’ll uncork another quarter point hike in May and snicker amongst each other as they tee it up at the country club. “Let them eat bugs” is likely a common refrain.

      • SnotFroth says:

        Three years from now BugMac combo with flies is $34.99 just watch

      • JeffD says:

        I think they believe they are doing the right thing, and will likely hike 0.50% at the next two meetings. The fact that they honestly *believe* they have a handle on things is what makes their decisionmaking even more frightening. They don’t even know what they don’t know, and the rank and file underlings at the Fed are too timid to emphasize reality to the FOMC board members.

      • phleep says:

        The zombies they have propped up could not take the shock of “an emergency inter-meeting rate hike of 0.75%.” In an aftershock of March ’20, “nearly the entire population” would go from heroically spending (as it is now) to heroically sleeping on a sidewalk. It is not just capital losses of the owner class, it is jobs too.

        • JeffD says:

          When you are propping a “kid” up to ride their bike when they are 20 years old, it’s time to let go of that seat. A lot of Chicken Littles act like a recession is the end of the world, when in fact, it is not. Far from it.

        • Depth Charge says:

          Pure, unfettered horseshit.

  17. Sams says:

    To the old definition «Money printing means that central banks are buying bonds with newly created money», is the inflation. Inflation of money by enlarging the amount of money.

    This inflation did first show up as rising asset prices and now also on the CPI. If the stock index is considered an inflation index it did lead the CPI that now play catch up. Same for house price indexes, they can be said to track the loss of purchasing power of money and that is what the CPI do too.

    Now, not all of the rise in prices may necessary be from inflation of money. Some may be of actual depletion of natural resources. What prices that rise of this cause may be discovered as relative prices between different commodities and products shift.

    Fighting “inflation” with higher interest rates may not help much on those items where the rising price is due to depletion of natural resources. The overall rise in prices may stop, but there will be a realigning of prices where necessaries stay expensive.

  18. Martok says:

    Wolf,

    Excellent history of bond history! – In the 80’s and in my 20’s was listening to my dentist talk about how he was very satisfied of getting 15% on his T-Bills, and have a pic of my wife who worked at a large bank with a chalkboard background in the 80’s with interest rates at about 17%, past days of the month rising rapidly, days market out!

    I recall plain old money market rates were paying good too, however I didn’t have much to invest, trying to make it was all I could do.

    The past .25% the Fed made is ridiculous, however war and financial chaos probably made them pause, IMO – they have to be scrambling, and don’t want the market to crash, all at once – 2000/2008/2020 style, – they are trapped and damn well know it, – their legacy or pride if they have any is at stake.

    I don’t believe the Fed members are that ignorant to understand all this and it’s given them lot’s of time for their big buddies/themselves to unwind – IMO – and believe they hope the market/housing/etc does a rickety landing at best, without a massive crash, – maybe a 30-50% correction.

    They have lots of world-wide events to blame now – maybe that’s why they have PR people, they can smoke screen thru it, and think we are bumpkins, as they kick the can down the road, – but that can is going to hit a brick wall.

    However, IMO – I think things will unravel quickly because the world/hedge funds/daytraders/reddit has too much info, can react at the speed of light using just a cell, and fear, greed, panic, will make this a epic downturn for the books.

    • Gabby Cat says:

      I no longer think it’s a brick wall but an abyss straight to hell. Perhaps all roads lead to hell is correct Wolf.

  19. Old school says:

    Bond market is above my competence level, so I stick at the short end where I don’t have much duration risk and I give up interest to get bond price stability. I am not convinced that long end is going up, but like I say I will not bet on it.

    The arguments that make the most sense to me is long end rates will not go up much because the debt can not be serviced by the economy as the total debt burden is too large and unproductive.

    Fed has done a lot of the tightening work already by laying out the rate hike plan and rates have that baked in by now. The latest data I see is GDP is losing momentum quickly.

    Also saw a good historical chart that inflation tends to peak in a recession and is killed by the recession. So that’s my base case that a recession kills inflation, unless Fed monetizes the debt again so Congress can give away trillions again to repeat the cycle one more time.

    • John H. says:

      Old School- “ I stick at the short end where I don’t have much duration risk and I give up interest to get bond price stability.”

      I agree with you on keeping bond durations short. You’re right on your concern about duration risk, IMHO.

      I’m sure you know this, but in addition to “giving up interest,” you’ve also lost 7% to inflation (or whatever your personal inflation factor might be).

      I just mention it for clarity to others who are considering how your comments fit their own circumstances.

  20. unamused says:

    Hmm. Long on problem analysis, short on solutions.

    Increasing interest rates don’t address the underlying problem. That’s just another float in the parade. You must bring the Financial Industrial Complex under control. Good luck with that. Issues of finance and economics aren’t your biggest problem anyway.

    It is a mistake to try to save the world. The world does not want to be saved, and it will hurt you if you try.

    • Wolf Richter says:

      unamused,

      “Increasing interest rates don’t address the underlying problem.”

      Yes they do. The underlying problem is grotesquely overstimulated demand (through QE, interest rate repression, and government pandemic handouts to businesses, states, and consumers). The way you get this to calm down is to remove the stimulus by raising rates and unwinding the balance sheet. And you keep doing it until demand slows down enough to where companies can no longer raise prices, but have to compete with each other on price. That’s the end of inflation. But it doesn’t happen right away. It may take years, in part due to the well-documented lag between monetary policy and reaction in the economy.

      • unamused says:

        “The underlying problem is grotesquely overstimulated demand”

        The underlying problem is that the avaricious are able to manipulate financial and economic factors to their own benefit and to the detriment of everybody else. Inflation, booms, crashes – these are the consequences of that.

        The biggest problem is that nearly eight billion people all need too much and want too much and are eating up the planet and there’s nothing for dessert.

        “Whoever controls the volume of money in our country is absolute master of all industry and commerce … and when you realize that the entire system is very easily controlled, one way or another, by a few powerful men at the top, you will not have to be told how periods of inflation and depression originate.”

        – James A. Garfield

  21. Xavier Caveat says:

    If you’re an American, you don’t have to be beholden to the almighty buck in this Buck Rogers (QE to infinity & beyond!) era of finance, why go down with the ship like every other dope in the country holding $ denominated assets?

    • SoCalBeachDude says:

      We are now in a period of QT (Quantitative Tightening) and will be for the foreseeable fut\ure.

  22. Beardawg says:

    So if I bought a 10 year T Bond in 1981 it would pay me 15% interest annually for 10 years ?

    AND

    Inflation was dropping from about that same level at a rapid pace ?

    I want that deal now !!

    • COWG says:

      Don’t we all…

      However, within a short time frame, the bond yield you can get are going to feel about the same as compared to the last 40 yrs…

    • Ron says:

      It was nice, bought them with my first investable earnings. Didn’t hold that long, plus some were callable. Actually bought 7.5% bonds for 50 cents on the dollar. I believe they were called at 115 or so, put the money into real estate. Those prices shot up as rates went down during the 80s. Overall, it was a nice 1st decade in investing. Then the post-cold war defense slump and savings and loan crisis kicked in.

    • Wolf Richter says:

      What you really wanted was to buy 30-year Treasuries in 1981 and collect 15% coupon interest for the next 30 years, and then get your money back after 30 years.

      • Anon1970 says:

        One of my relatives, who had no formal training in finance or investments, did even better by buying zero coupon, 30 year non-callable government bonds at that time. She kept them until maturity.

      • VintageVNvet says:

        10-4 Wolf, and looking forward to doing the same, or almost the same in the next few years
        thanks for the reminder (s)

        • Old School says:

          Volker said what he did couldn’t be done in modern world. World economy is too leveraged up. I don’t know what will happen, but I will be surprised if Fed gets to 1.25% without blowing up something big and having to turn tail.

          Ukraine situation is the perfect excuse to keep party going.

      • Michael Gorback says:

        Inshallah!

      • John H. says:

        …or 20 year zero coupon bonds: $10,000 in 1984 bought $100,000 due in 20 years. Yield to Maturity = approx. 12%

        With wild upside appreciation as market rates declined!

        Great for IRA’s

      • Ron says:

        Aha if hindsight were perfect. Sitting there at the time, inflation was high and we didn’t know if interest rates would still even go up. The RE I bought appreciated about 20-30% annually for a few years, then crashed.

        My wife did the zero coupon thing with her first IRA contribution, $2K yielded $15K in about 20 years.

      • Beardawg says:

        OMG !! That really existed ??!!

      • Seen it all before, Bob says:

        When should I put all of my money on 30 year Treasuries again?

        Does history repeat itself?

  23. Brant Lee says:

    “The dollar’s role as dominant global reserve currency is at risk.”

    But does that mean there will simply not be a standout dominant currency? It’s hard to see any other country taking the same role with such dominance unless by force.

    • Flea says:

      My thoughts IMF world digital currency,whole world is a mess fiat fake crypt can be hacked,gold and silver to hard to move ,

    • Peanut Gallery says:

      Many economists say a multipolar reserve currency is likely in the medium term. I’m not sure I agree with that, given how little the world is getting along these days

      However, given Putin’s recent statements and demands, it seems like that he knew the sanctions on Russia’s dollars would come with the war. Personally I think he knew that those reserves would be confiscated and this was part of his plan to show seeds of doubt and dissension in other countries regarding their own dollar reserves

      I don’t see how it makes sense any other way?

      • Mark Stoneweapon says:

        The confiscation of Russia’s foreign reserves is a default. Why would Putin not want to tokenize their energy/gas in Rubles?

        Selling gas for rubles created a market discount which was intended to get forex traders to bring the ruble back up with regard to the USD.

        The Bank of Russia pegged the ruble to gold ratio at a discount to the ruble/dollar trade.

        So what this means is traders can buy paper gold contracts with instructions to deliver the physical gold to the Bank of Russia for a discount on gas purchases (15% discount based on the ruble trading at 84 today)

        Once balance is achieved then when the ruble gets too strong versus the dollar the arbitrage play will be to pay at a discount in gold.

        This will drain the LBMA and CRIMEX of their physical reserves and force the liquidation of the paper gold markets over time gently deflating the ponzi scheme in proportion to Russia’s balance of trade.

      • SoCalBeachDude says:

        After the end of today, Russia will only accept RUBLES as payment for its natural gas and gasoline and diesel and other petroleum supplies to hostile nations including all of the European Union. The ruble has returned to exchange valuation as high or higher than it was prior to the vindictive US government putting sanctions on the Russian Federation, and the world will need to adjust to this new reality within a few hours.

  24. Mark Stoneweapon says:

    The FED appears to be accommodating a bipolar reserve currency system which will shorten supply chains, reversing the insanity of trade imbalances. The FED engineered an intentional inflationary objective. Eurasia will have a reserve currency apart from the USD, China and Russia will back the Euro.

    “We do benefit from being the main reserve currency for the world. The question is if some want to move away from the dollar, what would be the effect on us? They would have to create an ecosystem whereby another currency becomes a better currency for them to use. Over time, it would diminish our status as the reserve currency. It’s also possible to have more than one large reserve currency. There have been times when that was the case. It’s not really clear.”
    —Jerome Powell

    • unamused says:

      “Eurasia will have a reserve currency apart from the USD, China and Russia will back the Euro.”

      Those of you in Oceania will be sort of stuck.

  25. oldITguy says:

    Have long US bonds ever been called?

    I recall wishing I had the money to buy a 14%+ 30y back in ’81.

    I’m sure the wealthy can’t wait to restock on some high yield long bonds

    • Wolf Richter says:

      Yes, some Treasury bonds that were issued before 1985 could be called (they were “callable”), and some of them were called. The last one that was called was in 2009, when it ended. Calling long-bonds pissed a lot of bondholders off.

      It’s always a good idea to check if a bond or CD is “callable.” Treasuries are no longer callable, so no need to worry about that. But some other bonds and some CDs can be callable. This is disclosed, and you need to make sure to check it. Callable bonds and CDs usually come with slightly higher yields, so they’re seductive. I would never buy a callable bond or CD.

      • Anon1970 says:

        Until the Great Recession, zero coupon, non-callable bonds were often issued by California local governments. Investment bankers were able to convince many issuers that they were saving money by pushing debt service into the future. But in reality, they typically came with an extra 25 basis points for the investor and were mostly non-callable. During the Great recession, the Governor put an end to new zero coupon bond issues in the state as they were such a bad deal for the local governments that used them.

        • John H. says:

          CATS (TM) were widely available and heavily used.

          Backed by US Treasury securities, and were non-callable.

        • John H. says:

          CATS were Certificates of Accrual on Treasury Securities, and actually worked as advertised.

    • SoCalBeachDude says:

      NO.

  26. Xavier Caveat says:

    I was a little terror with a few hundred bucks in a bank savings account that paid around 5%, and thanks to the miracle of compound interest you could see your savings grow and in around 15 years double it!

    The interest rate on a ‘savings account’ currently, reminds me of the legal blood alcohol limit when driving… .08%

  27. DR DOOM says:

    I am a history consumer and can not find an example of a country with reserve currency status that reversed it’s course when high inflation and high debt to GDP appeared. It would be time well spent for the average person to try to “soft land” their standard of living than getting tangled up in waiting for the The Fed to “soft land” a 50+ year old Fiat Debt System that is now losing trust very rapidly. The Producing World has awoken from the spell Bretton Woods. Save your standard of living if you can.

    • Depth Charge says:

      “Soft landing” is just another gibberish term. Kind of like “transitory.” It’s all bullshit.

    • TheAltonRoute says:

      Is there anything similar to the US$ in economic history?

    • Anon1970 says:

      Wars tend to cause a lot of inflation, especially for the losing countries. Back in 1913, the English shilling, the Italian lire, the French franc and the German mark were all worth about 25 cents US. After the war, the US $ performed better than any of the other currencies and the German mark performed the worst. Yes, we have had a lot of inflation since 1964 (from your other post), but my own standard of living has greatly improved in real terms.

    • Anon1970 says:

      Wars tend to cause a lot of inflation, especially for the losing countries. Back in 1913, the English shilling, the Italian lire, the French franc and the German mark were all worth about 25 cents US. After the war, the US $ performed better than any of the other currencies and the German mark performed the worst. Yes, we have had a lot of inflation since 1964 (from your other post), but my own standard of living has greatly improved in real terms since1964 when I was still in high school.

  28. nsa says:

    Let’s hear from the godfather himself, Johnie Keynes: “By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of its citizens”. Get it? It’s called theft.
    Now let’s hear from one of the godfather’s consiglieris, Bennie Shalom Bernanke: “The US government has a technology, called a printing press, that allows it to produce as many dollars as it wishes at no cost”. Get it? It’s still theft.

    • SoCalBeachDude says:

      The US government has no way to create US Dollars, and that can only be done by the Federal Reserve along with corresponding bond purchases which are not free money injected into the US economy at all.

      • John Galt says:

        Oh Dude. .
        “Debt Monetization” ever heard of it?

        The Federal Government need only deficit spend to entities in the real economy. All of this spending is passed through the treasury and loaned via the federal reserve. It’s quite literally “money printing” and the best part? Whomever writes the bills that spend the money, gets to pick the winners and losers in the economy. Who lobbys the hardest gets the scheckles. Open your eyes man, it’s a big club and we ain’t in it.

      • Bobbleheadlincoln says:

        Huh? So you’re counting on the distinction that the Fed isn’t part of the government to be the crux of your argument here? I don’t think it matters that it is the Fed, technically not part of the government, who has been printing money. Semantics. US government will still shoulder the blame as they should.

        Bond purchases ARE free money injected into the US economy in the case of the Fed inventing bonds and allowing the Big Five Banks to “sell” them to the Fed for money at the same time they create them. They are never actually sold because they were created at that moment and the Fed is holding them the whole time and the money from the “sale” is in the Big Five’s Bank accounts in that moment. That is printing money. I would do some research into how this happens with QE prior to trying to make a point here.

  29. GSH says:

    We are forcing the world to come up with payment systems avoiding the dollar. Inflation and sanctions are dismantling the dollar reserve currency at an alarming rate.
    This is creating a multi-polar world where more of the trade is transacted in currency pairs without the dollar. What does this mean for us? Eventually, this will limit our ability to run enormous deficits.
    Cuts will be very painful. No soft landing.

    • Peanut Gallery says:

      Maaaaybe. A big maybe.

      Let’s wait and see what the IMF reserve currency share numbers say later when Wolf reviews them.

      If we see USD drop then maybe that thesis holds water. But what if USD share surges???

      • DR DOOM says:

        USD surges? A quarter of a dollar from 1964 silver content smelt value will buy you a little over 1 gallon of gasoline in N.C. A 2022 quarter of a dollar will not fill up an 8oz coffee cup. 94% has been stolen by de-basement. With this finding of fact you want to see what the IMF says? F&$k the IMF, they have already done it to us with direction from our government.

        • SoCalBeachDude says:

          You can’t use any of the metals to buy anything in the US or the rest of the world. Those metals are merely insignificant collectibles amounting to less than 1% of global asset values, and you will need to use US Dollars to purchase nearly everything in the world and everything in the US. By the way there is a 28% federal collectible capital gains tax on any metals that you convert to US dollars to make any purchases.

        • Depth Charge says:

          “You can’t use any of the metals to buy anything in the US or the rest of the world.”

          BS. I accept silver and gold for both services rendered and goods sold.

        • OutsideTheBox says:

          DC

          Congrats !

          You have to be the only carpenter in the USA getting paid in gold & silver.

    • Brant Lee says:

      “Forcing the world”. What country wouldn’t be printing to high heck if they had the world reserve currency? Every country just wishes they could because they would. Like there are honest politicians or dictators somewhere out there.

      Some form of currency backing is the only solution and always has been. A bottle of Coke cost a dime from the 1920s until the mid-60s. Gold and silver at least contained inflation and kept the politicians from printing away our savings for themselves.

      • VintageVNvet says:

        coke cost a nickel, not a dime when i was a kid,,,
        pepsi entered the competition with, ”twice as much for a nickel too, pepsi cola is the one for you

      • John H. says:

        “If you have the power to print money, you’ll do it; that’s one of Rothbard’s Laws.”
        – Murray Rothbard, Lecture in Houston, Tx, 10/27/84

    • Gattopardo says:

      “Eventually, this will limit our ability to run enormous deficits.”

      Sounds good! Maybe then we’ll have to live within our means. But Euro economies seem to be running fat deficits.

  30. Peanut Gallery says:

    Biden to tap strategic oil reserves because the price of lattes at Starbucks are too high and too many millennials can’t schedule their therapist appointments due to labor shortafes

  31. Wisdom Seeker says:

    This was a great podcast, and the written version is brilliant.

    But one small, gentle suggestion for future podcasts – instead of pronouncing acronyms, just say the whole term. When I listened to this, hearing “CPI” and “QE” and “QT” was awkward and I was only able to follow along because I already knew the terms really well. Acronyms in print are easy to process visually, but spoken acronyms are harder to comprehend, especially if one isn’t familiar with the lingo.

    Some other names and terms that are easy to read tend to become “tremendous mouthfuls” that could be simplified for listeners. The first 4 paragraphs are done really well, with enough repetition and clarification for listeners to get comfortable with the content. But in the 5th paragraph, “Volcker Fed” maybe could’ve been better said as “Federal Reserve Bank led by Paul Volcker”. If someone knows what the Volcker Fed was, then “Volcker Fed” makes sense, but until you do it’s confusing. Volcker is not a familiar name to anyone who doesn’t already know who he was, and Fed has a large number of meanings in common English. (Interestingly, we don’t hear so much about the “Bernanke Fed” or “Yellen Fed” or “Powell Fed”…)

    Finding a way to convey complex issues in simple, easy-to-hear English is really hard, and overall I think these are best-of-their-kind, but maybe there’s still room for minor improvements. Always looking forward to more of what you have to say!

    • VintageVNvet says:

      AGREE wiseer:
      What a lot of folks do NOT understand is that anyone and everyone has their own style and rhythm of speaking, and it is definitely not always easy to distinguish when ”listening” as opposed to reading the same words, especially for older folks who have hearing challenges.
      From what I have heard and read from serious scholars, German is actually a better language with which to discuss complex and complicated concepts,,, but not being too serious since sophomore year in college, I never considered that language.

  32. Michael Gorback says:

    Every trade guild has its own specialized jargon. If you want learn the trade learn its language. Don’t expect articles about the 2s/10s spread to explain what it means.

    Wolf does a good job breaking it down but if he goes into what CPI or the Volcker Fed is every post he’s off into the weeds and the message is lost.

  33. SoCalBeachDude says:

    The Russian Federation reaffirmed today to its unfriendly hostile nation customers including the entire EU that it will either pay for its gas and natural gas in rubles by the end of the day or the valves to the supply of those products will be entirely shut off.

  34. joe2 says:

    “But the Fed has now gotten the memo.”

    Wolf you have a lot of misplaced confidence in the Fed. And the US government for that matter. Who would call increased spending and debt and promoting a war with sanctions that create shortages, as tools to fight inflation?

    “The Fed can shed part of those $9 trillion in securities by letting them mature without replacement and by selling them outright.”

    Letting them mature without replacement sounds like MMT to me. The obligations disappear? Sounds inflationary to me.

    Selling them? The market value will be well below the face value with higher interest rates and the Fed losses money. Can the Fed go bankrupt?

    “For current bondholders, this would mean a lot more pain.”
    Like the Fed?

    • SoCalBeachDude says:

      The Federal Reserve does not sell US Treasuries prior to maturity so has no losses whatsoever on any US Treasuries that it owns as yields rise.

      • joe2 says:

        That has been historically true during QE. QT, supposedly coming soon, is when they are supposed to do that as they reduce their balance sheet as Wolf said. If they do that after raising interest rates they will sell for less than they paid. However that loss will just get chalked up to monetization – money injected into the economy but not sanitized – ala MMT.

        • SoCalBeachDude says:

          The Federal Reserve will simply reduce their balance sheet by letting US Treasuries mature and refrain from purchasing new ones. It may sell off mortgage bonds prior to maturities as they want entirely out of that investment opportunity.

        • joe2 says:

          Beach Dude
          The Fed paid cash to the government for bonds. When bonds mature they are supposed to get their cash back and retire it to where it came from – thin air.

          Will the government pay back the cash for the loan to the Fed when the bond matures? Where will it get the cash? Usually they sell more bonds and rollover the loan. But now at a higher interest rate. What do you think of over $1T/yr for US debt maintenance? Where does the $1T come from? Traditionally selling more bonds. To who? The definition of insolvency is borrowing money to pay interest on your debt.

          If the government does not pay back the cash, the Fed has monetized that debt. How does that lower inflation?

          Are you planning on keeping all your savings in cash?

  35. kitten lopez says:

    off topic but not really because we’re all gonna have to learn to get along once the rest of us are living in barns with the animals.

    i’m feeling kinda shy so James wanted me to tell you all our first podcast is up at Record Scratch Radio dot substack dot com.

    that’s for you too, COWGirl. (wink)

    x

    • Tony says:

      …It’s more the guys who work on the Dutton Ranch.
      We’ll need a bunch of land owners who we’ll work for in exchange for a place to live.

    • COWG says:

      I wanna be in there with you !!!

      Please, please, please…

      I have a radio voice, sarcastic and funny, see the world through a warped lens and best of all, I hate everybody !

      I’d be perfect (especially if I could cuss)….

      It would have to be remote though, cos my happy ass isn’t getting within a hundred miles of that freak show you live in… okay, maybe if “ Dirty Harry” was doing a remake and I could see that….

      pssst… a little secret…. COWG…

      CynicalOldWhiteGuy….

      • kitten lopez says:

        COWG=CynicalOldWhiteGuy

        ah! i thought you were working a very tentative Rachel Levine female-ish thing and would eventually add a new letter …I…R…L… the way Rachel Levine traded the bars for a new cardigan or chunky necklace to The Commitment and says “Ta dah!” once the last letter’s finally in.

        and no more room for cynicism! it’s such a boring CHOICE, don’t you think? let’s go back to the fun and opportunity of COWGIRL. i don’t like your acronym. my take is better and will make you much more interesting to be around than who you THINK you are.

        (you cannot even SEE me anymore and be cynical, COWGirl. i’m invisible to the true cynics. they’re the ones who blur past my words whether it’s online or in person. they’re easy to smell from a block away. they’re bitter and salty and not in a good salty way of sexy love or humor.)

        x

        • COWG says:

          “ you cannot even SEE me anymore and be cynical, COWGirl”

          Sure I can… :)

          You’re the woman in the tie dye muumuu and the used tire sandals walking down the sidewalk when the cops stop you and ask you where you got the tires from… )

          Cynicism serves a good purpose against false prophets and the uninformed whom blindly ignore the physical world and reality around them…

          However, as being a complicated human being, my bible is the book “Illusions” by Richard Bach ( he of Soulmate fame)…

          Not to take up the Wolfsters podium, I think it would be fun to communicate off blog… I told you I like eclectic….

          Feel free to get my email address from him or change your podcast to accept…

          Ciao !

        • kitten lopez says:

          Dear COWGrrrl–

          thank you but i’ve no room for new friends right now AND i only want to know real people locally because i have a vision i’m fulfilling that i was born for and all else is fuzzy. you get it, yeah?

          so please; it’s not personal. it’s witchy; i’ve come to the place where i figure i’ll meet whomever i’m supposed to meet because i always do i never have to look up or for anyone because they show that’s why i don’t NEED magic phones… people actually appear after i wonder how they were doing but then they wanna keep in further touch and i say no it’s okay because i don’t LIKE to keep in touch everything suddenly gets hella dull.

          and i don’t worry about ever finding or needing friends because people–especially cynics– are vampires to me and the tire slippers and muumuu and dentures, bald head covered tin foil hat (you forget!) are to protect me and all that i am in plain sight but no one can see for the cynicism is thicker than any forest.

          who i need to know will find me, like when Wolf sought me out for real. it was mad respect. and his eyes got me he didn’t seek to photograph capture keep or even explain me because he gets the same “i wanna punch you” look James gets and i LOVE because it IS love to put up with me.

          and i’m no prophet. i’m as blind as the rest of us i just know this all how this is… can’t be…. IT. i refuse to acquiesce when i have crawled back from hell like others here like Viet Nam Vet, Petunia, and Wolf himself… and our anger isn’t really cynicism at all… .make no mistake tending this site is gardening, hardly an act of acid death but GROWTH… and Petunia shows up and stays long after many of us need gut breaks to make it through the day without shots of vodka first thing…

          so we know it can and should be otherwise… even and ESPECIALLY if we’re making it all up.

          all this sucks. the reason for this column sucks.

          i cannot help you, dear COWGirl. you would only kill what you seek. it’s habit. you cannot help yourself so i forgive you in advance.

          (smile)

          but the world is more interesting than we can imagine and miracles happen and you don’t have to be stupid or CYNICAL… i am skeptical because i AM magic i make magic so i know when it’s real.

          you can only inoculate yourself from hustlers and Jim Jones and from ceding your very RIGHTS by knowing yourself your cheap tricks and realizing the ego shtick is played out. no one knows ANYTHING. no one.

          at this point we’ve gotta start sword fighting or pitching and testing out the best new STORIES.

          so if and when you shed the cynicism and realize there’s a difference between stupidity and a sense of wonder, we’ll be far apart and you will repel me for it’s ANIMAL now. that’s why i can’t know most people.

          the way people live and think is actually painful like acid and spikes to me. i FEEL it. i’m a total pussy. that’s why i’m a bitch in a muumuu and tire sandals.

          it’s only worth being pretty for the ones who make it past the phlegmy rants and fetal screams.

          but thank you very much, COWGrrrr. i’m flattered. as i said it’s not personal, i’m done belonging to people. at this point i’m just public about all THIS because people need new IDEAS on how to be with each other.

          and anonymous people…? nah. one of my first tests of knowing me is a gauntlet of public shame. no lie. ask Wolf about it.

          (giggle)

          because one of the prerequisites to merely being a platonic friend is fear from what ANYONE thinks of you …besides ME at that moment.

          Wolf knows way more than most and he’s seen ’em connected where i hide pieces of recipes. i trust him. he never runs. he’s solid. that’s why i say he’s like James Bond.

          i cannot scare the man. not in person nor via private writings.

          that’s why James is known as Saint James ’round these here parts.

          (wink)

          x

  36. SoCalBeachDude says:

    How low could the Federal Reserve balance sheet fall from its current nearly $9 trillion amount?

  37. SoCalBeachDude says:

    If the Federal Reserve balance sheet fell down to $5 trillion over the coming few years, would that have any impact whatsoever on inflation in the US or world?

  38. SoCalBeachDude says:

    Mortgage refinance demand plunges 60% as interest rates spike – CNBC

  39. TimTN says:

    Excellent post. Great summary of the current situation.

  40. Seen it all before, Bob says:

    Thank you, Wolf!

    So, my crystal ball told me to put all of my money into 30 year treasury bonds back in 1981 at a 14.5% rate. It served me well for 30 years.

    The same crystal ball fell off a shelf and broke in the 1994 Northridge quake.

    When should I put all of my money into 30 year bonds again?

    Should I wait for 14.5% again?

    • SoCalBeachDude says:

      I’d consider waiting for US Treasury yields to soon hit 25%!

    • Anthony A. says:

      “When should I put all of my money into 30 year bonds again?

      Should I wait for 14.5% again?”

      I have the same questions.

      I was “there” in 1981 buying 12% CDs. But I am not counting on seeing 14.5% ever again (well, my lifetime, anyway).

      • Seen it all before, Bob says:

        My problem is that I don’t know how many more of these 30 year bonds that I can outlive and enjoy.

    • Wolf Richter says:

      I’m not seeing 14.5% in my crystal ball. But I got one of those cheapo crystal balls from Walmart, made out of plastic, in China, may not work very well :-]

  41. SoCalBeachDude says:

    US MARKET CLOSINGS – 1:04 PM PDT 03/31/2022

    Dow 34,678.35 -550.46 -1.56%
    S&P 500 4,530.42 -72.03 -1.57%
    Nasdaq 14,220.52 -221.76 -1.54%
    GlobalDow 4,098.35 -55.05 -1.33%
    Gold 1,941.00 2.00 0.10%
    Oil 100.71 -7.11 -6.59%

    • Hal says:

      Well, then… Maybe Jerome should only use a 10 basis point hammer next time.

      • SoCalBeachDude says:

        I would strongly suggest that the FOMC do precisely what the Russian Central Bank did when they raised their reference policy interest rate from 9.5% to 20% in one fell swoop overnight recently. The Federal Reserve should follow the Taylor and just get the Federal Funds reference rate up to 9.5% in a single move. That will provide the appropriate and proper guidance to the US Treasuries markets and just get it over and done with overnight.

        • Hal says:

          Agree completely. But, we don’t choose the hammer. Or Nerf thingie… Whatever it is.

        • Gattopardo says:

          That’s totally psycho. And I dig it. There’d be no constant wishy-washy conflicting statements from fedheads or analysts or Bill
          Gross about how many bps the next meeting might bring, no need to jawbone, no volatile markets. Just a one-time surprise bone job.

          I think it might be a lot like a big dentist appointment. The fear leading up to it is way worse than the actual momentary pain of that root canal. So let’s take away that angst and go straight to the surgery.

        • Wolf Richter says:

          SoCalBeachDude,

          That would be a hoot!!

        • joe2 says:

          You guys are in dreamland and have not thought this out.
          Hey. where did your retirement go holding all those 1% bonds now valued at 20% of face value? And you do hold or pay for those bonds as US citizens one way or another. Ever heard of inflation?

  42. unamused says:

    I’m not seeing any mention of Corporate Profits. Those are through the roof. Lots of profiteering going on at the expense of the proletariat.

    I smell a massive upwards Wealth Transfer, effected by the usual boom-bust cycle.

    • SoCalBeachDude says:

      That just more evidence of nothing but MASSIVE PRICE GOUGING which is just going to spur talks of massive future corporate taxation to put an end to that utter greed and idiocy.

    • Wolf Richter says:

      It so happens that an article on the record wealth disparity is coming soon to a WOLF STREET near you. In hours :-]

      • Seen it all before, Bob says:

        This would be very interesting.

        Is there a graph available showing wealth disparity vs year.

        How did the Dotcom and GFC bubble bursting affect the disparity?

  43. CCCB says:

    “and they will do this a lot faster than folks imagined just a few months ago” (Wolf referring to rate hikes)

    Anyone who is surprised by rising interest rates must have been hibernating in a cave with a grizzly bear since last fall. This “news” has been telegraphed by the FED for a loooong time.

    In fact, 99% of the comments here since last year have stated rates should be raised more and faster. Buckle up. Recession is absolutely coming. With the amount of debt both the private and public sectors have taken on during the past 10 years, there’s no way rates can go up enough to slow inflation and not slow the economy.

    • joe2 says:

      Yes. In a nutshell.
      I’m 75 and I’ve got 5 cases of booze in the basement. I should ride this out very well.
      Keep posting.
      There will come a new world. But like the Renaissance, it will take a while. So hang around a few decades.

  44. RemoteWorks says:

    Beyond institutional investors in Bonds, like insurance companies that really have no choice, what type of investors are still invested in bonds at this point?

    Wondering how many are exposed and how much of their portfolio is in this sector, it’s a clear bear mkt from now on.

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