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Treasury Yields are Blinking Red
Here's an excellent article by Mike Whitney discussing what Treasury yields are telling us about Ben Bernanke's intentions. - Ilene
Treasury Yields are Blinking Red
Courtesy of MIKE WHITNEY, writing at CounterPunch
Treasury yields are "blinking red", but the Fed keeps acting like nothing's wrong. What's the deal?
Let's explain: Fed chairman Ben Bernanke's bond purchasing program (QE2) has sent the yield on the 30-year Treasury skyrocketing. At the same time, the the 2-year Treasury is stuck at a lowly 0.61. That means, the "yield curve" between the two bonds has grown steeper, which normally happens at the beginning of a recovery because investors are moving out of "risk free" bonds to riskier assets like stocks. Typically, the yield on the long-term bond will start to go down on its own because investors expect the Fed to raise short-term rates to curb potential inflation. But that's not happening this time. Why? And why should we care?
The reason we should care is because the yield curve is signaling one of two things; inflation or default. What it is not signaling is a robust recovery.
Remember, the Fed's main job is "price stability" which means keeping a lid on inflation. When the yield on long-term bonds spikes, then it's up to Bernanke to show the market he'll do what's necessary to fight inflation, that is, raise rates. It's a question of credibility.
But Bernanke isn't interested in credibility. In fact, he's not only said that he will keep rates low for an "extended period of time" but also pledged to continue his $600 QE2 program until there's a "significant improvement in labor market." He was joined in his commitment by all of the active members of the FOMC.
Now, granted, QE2 has boosted stock prices, but the extra liquidity has also inflated commodities prices (making it harder on consumers) and wreaked havoc in emerging markets forcing trading partners to control capital flows or raise rates to tamp down inflation. But QE2's greatest shortcoming is that is really doesn't create jobs as advertised. It's just more supply side, "trickle down" monetary theory designed to goose the market while workers languish in unemployment lines. Here's how the Wall Street journal's Kelly Evans summed it up:
"...the limits of monetary policy are becoming clearer. History suggests any further easing probably would do too much for the stock market and asset prices, and too little for jobs.
The only real fix is to lower the cost of U.S. workers relative to foreign rivals and machines, or else raise their bang for the buck. The latter, while clearly preferable, requires education and training that won't turn things around overnight." ("The Fed's Magic Show Appears to Be Over", Wall Street Journal)
In other words, the Fed is planning to give every working man and woman in the US a big pay-cut so they can go nose-to-nose with foreign labor. You can see how this blends seamlessly with Obama's State of the Union Speech where he focused on "competition" as his central theme. More importantly, Obama reiterated his pledge to double exports in the next 5 years. The only way that can be achieved is by destroying the dollar. Here's a clip from an op-ed by Judy Shelton that explains what's going on:
"Beware of President Obama's call for a doubling of U.S. exports over the next five years as a way to reduce the unemployment rate. The obvious quick route to export success for any nation is to depreciate its currency. Dollar depreciation is already being pushed by the Obama administration as the key solution for resolving our massive trade deficit with China.....
...The government will continue to run a large budget deficit, which must be financed by issuing more government debt. The debt is monetized when the Federal Reserve purchases it from the public. The effect is to increase the money supply. Inflationary monetary policy goes hand-in-hand with a falling dollar in foreign-exchange markets." ("The Wrong Way to Double Exports", Judy Shelton, Wall Street Journal)
So, while working people and pensioners see their savings sliced in half to accommodate the globalist dream of an evenly-depressed world labor market; the investor class will get regular injections of Fed liquidity via QE2 to keep stocks "bubbly" and profits high. But large-scale monetary manipulation does involve some serious risks, as Deborah Blumberg points out in her WSJ article "Is Steep Yield Curve Signaling Pain to Come?". Here's an excerpt:
"Some bond experts believe yields in the Treasurys market are signaling the U.S. could one day be stripped of its triple-A status as it confronts a bloated budget deficit with no clear plans to reduce debt.
A peculiar distortion in the benchmark U.S. government-bond yield curve, which is the gap between two-year and 10-year yields, is pointing to worries that the U.S. could see its top-notch credit rating downgraded within several years, according to some experts....
... "We've never seen these moves when we've had better economic data, and with Fed [rate] hikes on the way," she said. The yield curve is flashing "concerns about an unsustainable fiscal deficit and an eventual potential ratings downgrade," said Priya Misra, head of U.S. rates strategy at Bank of America Merrill Lynch....
In the past, steep yield curves have been associated with sovereign-debt-ratings downgrades. Japan was stripped of its triple-A status by Moody's in 1998 and Standard & Poor's in 2001....The consequences of a U.S. credit-ratings downgrade could devastate the economy, pushing up borrowing costs and threatening the dollar." ("Is Steep Yield Curve Signaling Pain to Come?", Deborah Lynn Blumberg, Wall Street Journal)
The United States will not default because it pays its debts in its own currency, (and the Treasury can always just print more money) but the prospect of a ratings downgrade is quite real. That means it would cost considerably more to finance the debt. Also, long-term interest rates will rise sharply. That will crimp consumer spending, slow economic activity, and deal a death blow to the struggling housing market.
Bernanke's playing a dangerous game. If he's not careful, he could trigger a run on the dollar.
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Hard to argue with common sense.
"Blinking red" always yields to printing green till the streets are paved with silver and gold.
Double trouble, let cauldron bubble. Give your opponent his 'putt', then 'call' his bluff when it counts most. That's poker for you in this casino world.
If inflation was included in calculating trade balances, Obama would have already met his goal of doublimg exports.
All the pieces are coming together. The QE-paradigm is a win-win scenario for TPTB-club. You export inflation at an advanced rate to the rest of the world, thus making the local labour more competetive, in hopes of reenergizing the labour market and solving this glaring social issue, which if left unchecked becomes a risk for the current status quo. Plus all your friends at the golf club can use the extra liquidity to make some quick and risk-free bucks flipping USTs to the Bernanke-Geithner tag-team. That's how it probably looks for the elite in their ivory tungsten-plated towers.
Unfortunately for them, reality is one mean bitch that holds projections and intention in small regard. First of all, I see it very difficult to ship back jobs where experience (you know, people that actually know how to get things done and solve tricky issues) and costly hard assets (industrial manufacturing) are required. USA shipped a lot of those in last 3-4 decades, and shipping them back (even if the whole world is drowned in inflation) in just a span of 5 years is unrealistic. Sure, some low-tech and service jobs could be sprung in USA pretty fast, but will it be enough to reinvigorate the economy? That's a big if, nobody has an answer to.
Second, let's not discount other countries becoming fed up with US inflation being constantly dumped on them and being lectured by the same dump-team on how to carry their internal fiscal affairs as well as foreign behaviour. For now we are seeing this slowly happening on the fringes (Africa), but it could spread further on to countries and trading partners with more weight, once they deem it's just easier to collectively squash this one irritating cockroach than to continue conform to it's threats. Just look at the recent wage increases happening in China, I'm pretty sure they are not happy about those - being stuck between a large mass of local populace on the brink of starvation and the necessity to keep it's exports competetive does that to a man, you know.
Third, even if USA will be unopposed in it's plans of inducing global inflation ther always remains the local populace whose discontent is growing. I know, I know, keep giving them UE benefits to eternity (really, that's chump money compared to all the goodies the money wizards get from QE) and make sure American Idol or somesuch is on TV all the time and they will stay mushroomed (as in, kept in the dark and fed shit). But sometimes, enough is enough. And enough it will be, because even with the reinvigoration of the local job market, the actual buying power will decrease thanks to the inflation coming to roost back home via vital commodities - oil, grain, sugar, cotton. Sooner or later the people en masse will realize that they are just barely above slaves and just a moderate paycheck away from extinction.
So, to reiterate. The Plan, as it was engineered, is getting clearer. The problem, as always, is in the implementation. The Chinese had a curse "May you live in interesting times". Looks like 99% of the global population has been cursed by the greedy and corrupted 1%.
The FED will simply pass the cost of funding the debt on to the individual citizen.
The FED will print, devalue the currency, buy equities and treasuries, engage in endless QE, while continuing to prop up the banks.
The "government" will simply raise taxes and cut promised (and already taxed) entitlements for the aging population.
Overall; the Kleptoligarchy via crony capitalism and the revocation of any individual rights to income, property, savings, and private capital - will bleed the citizenry dry.
The riots will come too late.
US can 100% default once creditors stop financing, in that case if the US prints hella lot more money...sure, then you have an hyper-infaltionary crash. either a reset or default is the outcome.
Yield increase should be a major cause for alarm as it's an interest rate inflation pass on, with food, with oil costs etc etc etc.
Total FUBAR
Nothing particularly new here, but its a well written article/explanation.
Long ammo, gold, Altria, and canned food.
The yield curve is flashing "concerns about an unsustainable fiscal deficit and an eventual potential ratings downgrade," said Priya Misra, head of U.S. rates strategy at Bank of America Merrill Lynch....
In the past, steep yield curves have been associated with sovereign-debt-ratings downgrades. Japan was stripped of its triple-A status by Moody's...
Methinks Priya is full of baloney. If steep yield curves signal "eventual potential ratings downgrades, then Japan's yield curve should be steep right? Or at least steeper than ours considering their debt has already been downgraded. And yet, japanese 2-10's is less than 200 bps. Way flatter than US. She's just repeating the theme of the day - no original thinking at all.
Tin-pot dictators monetize debt just before fleeing the country. Monetizing the debt is a desperate act, and, throughout history, NEVER works! Bernanke is letting the bankers steal everything before the system collapses. At that time, the financial elite will tell us to “fuck off,” just like Madoff. President Obama is only thinking how to placate the corporate media shills, to achieve reelection.
Yep, I think so too.
They're burning down the house for the insurance money (backdoor bailouts) and stealing everything that isn't nailed down on their way out.
They're setting up shop in Asia. What they can't take they're shutting down like coal, oil, gas so we can't compete.
To build a debt based fiat monetary system the central bank has to monetize to some degree doesn't it? How does it build it's capital base initially without monetization? In order to manage interest rates (which there are good arguments we probably shouldn't do) but in order to manage interest rates a central bank has to have a supply of debt to buy and sell. Monetization isn't always evil in intent, but it has been used for evil. All things in moderation!
Obama's real agenda is to have 30% on unemployment and 60% on food stamps so that a majority will gladly go for bigger government to sustain the illusion and he can win a 2nd term to complete the destruction of the middle class. His version of wealth redistribution is that we all become equally poor and more willing to accept the New Marxist World Order. HMMM; wonder what the pushback will be from the corporate fascist elites? It's going to be an interesting war for "the hearts and minds".
Obama has an agenda?
That's funny, because from my take on Barry is that he's an empty suit for hire that's skilled at empty rhetoric for empty heads.
A very dangerous man indeed...
The Bernank should google beggar-thy-neighbor and/or competitive devaluation. If he did the latter, he might find this link: http://www.zerohedge.com/article/albert-edwards-terminal-competitive-dev...
But then again, the Bernank never was the sharpest knife in the block.
The prospect of a ratings downgrade is NOT real. Moody's is part of the ponzi scheme.
*BINGO*
The Perp Skool/Ivy League Racketeers from Fraud St. to the District of Criminals are all part of one big tribe.
Think of it as the serial criminals code:
Honor Among Thieves
"...the prospect of a ratings downgrade is quite real. That means it would cost considerably more to finance the debt..." might be true if someone other than ourselves was buying it...right now we have the snake swallowing its tail cycle in full tilt boogey.
"The reason we should care is because the yield curve is signaling one of two things; inflation or default."
In my opinion, inflation is just default in sheep's clothing.
Price stability. LOL!
Savers income cut in half?! Try 90%
Double exports. For crying out loud
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Horse crap
The yield curve is not signaling "one of two things." This is the natural rise in the yield curve as a recovery takes hold. The differential in yields merely indicate that Bernanke can start slowly letting off the gas a bit. If he times this right then, as he tapers off the quantitative easing, the thirty year will start rising slightly and close the yield gap slowly and gently from both ends, as short term treasuries fall a bit from the let up in qe.
Yes this is trying to threat the eye of a needle with a camel, but the nice thing is that he can err on the side of inflation a little bit. As the spread starts widening he can let short term treasuries fall a bit. Don't let the spreads blow out, but don't let them come close to inverting. If the longer dated treasures rise too fast he can add some more quantitative easing, push down short term rates, and wait it out a bit longer.
We have a decent chance of muddling through the next five years with inflationary and deflationary scares moderating in frequency and duration until we achieve a new equilibrium. This is not going to be over next year.
What is the new equilibrium? When we get back to all the old ratios between housing and other consumer items. Unfortunately we have a ways to go in the biggest markets. This will all occur at a higher nominal price level on everything and we will all be a little bit poorer, but that is the optimistic scenario!
Ben, is that you?
lol! no, but I would like his job!
I'm long on torches and pitchforks too.
Is not that easy.
Me think that this is going faster than Bernanke's wishes.
He needs to debase the currency, nevertheless as a central planner as he is,
he must do it in a "orderly" way.
The TBill yields at these levels can imply that maybe a big correction in the
market is coming in order to defuse the pressure on those papers.
Only then, Bernanke can cry wolf to get his QE3.
QE3 = Immediate 30-50% devaluation of U$D...
Bought your gold and silver yet? What are you guys on the fence waiting for, a Chinese dragon sweep?
Oh, the gnashing of teeth and the wringing of hands over a situation that is beyond the control of mortal men. I'm with Hannibal -- go get some metal. And add a little Pb in the mix as well.
Just buy the (physical) silver dips. The rest is fluff and noise.
Bernanke wants a run on the dollar. It is all about the under water derivatives.Like an iceberg the small visible part sticking above the surface is unimportant. The only way to surface the derivatives is to make home prices rise and to do that the dollar must collapse. It is all for the banks which of course own the FED. The FED regards all else as only inconvenience.
so get on the phone to moodys and tell em u want a BBB rating. its not like their ratings are worth anything anyhow; but if it bumps up rates and devalues the dollar mission accomplished.
how many AAA companies go belly up? gimme a break USA is as likely to default on AAA as XXX
"technically" the US government is somewhere in BBB- territory. when one factors in the "ability" to print money (as a huge asset) then it causes people to be quiet. the fact that there's so MUCH currency in the system makes the incremental printing more palatable than if operations where conducted from a smaller currency base. ruinous yes, ruinous now? no. unconscionable? yes. human existance is judged and rated on a relative curve. this was the case 8,000 years ago, long before credit ratings were in vogue. we have long written and believed that the USA should be a BBB- credit but credit is a "relative assessment" and at this time, the rating agencies are absolutely grading these students on a curve.
shawn a. mesaros, pamria llc