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The Fed NEEDS Inflation Otherwise the Bond Bubble Will Burst
As we keep emphasizing, the Fed’s real concern is the bond bubble… NOT stocks.
We get more evidence of this from Janet Yellen’s press conference after the Fed’s Wednesday FOMC meeting.
During the conference, Yellen repeatedly stated that lower oil prices were “positive” for the US economy. This is simply astounding because the Fed has repeatedly told us time and again that it was IN-flation NOT DE-flation that was great for the economy.
And yet, on Wednesday, the head of the Fed admitted, in public, that deflation can in fact be positive.
How can deflation be both positive for the economy at the same time that the economy needs MORE inflation?
The answer is easy… Yellen doesn’t care about the economy. She cares about the US’s massive debt load AKA the BOND BUBBLE.
Yellen knows deflation is actually very good for consumers. Who doesn’t want cheaper housing or cheaper goods and services? In fact, deflation is actually the general order of things for the world: human innovation and creativity naturally works to increase productivity, which makes goods and services cheaper.
However, DEBT DEFLATION is a nightmare for the Fed because it would almost immediately bankrupt both the US and the Too Big To Fail Wall Street Banks. With the US sporting a Debt to GDP ratio of over 100%... and the Wall Street banks sitting on over $191 TRILLION worth of derivatives trades based on interest rates (bonds), the very last thing the Fed wants is even a WHIFF of debt deflation to hit the bond markets.
This is why the Fed is so obsessed with creating inflation: because it renders these gargantuan debt loads more serviceable. In simplest terms, the Fed must “inflate or die.” It will willingly sacrifice the economy, and Americans’ quality of life in order to stop the bond bubble from popping.
This is also why the Fed happily talks about stocks all the time; it’s a great distraction from the real story: the fact that the bond bubble is the single largest bubble in history and that when it bursts entire countries will go bust.
This is why the Fed NEEDS interest rates to be as low as possible… any slight jump in rates means that the US will rapidly spiral towards bankruptcy. Indeed, every 1% increase in interest rates means between $150-$175 billion more in interest payments on US debt per year.
If you’ve ever wondered how the Fed can claim inflation is a good thing… now you know. Inflation is bad for all of us… but it allows the US Government to spend money it doesn’t have without going bankrupt… YET.
However, this won’t last. All bubbles end. And when the global bond bubble bursts (currently standing at $100 trillion and counting) the entire system will implode.
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Question from a novice: when the bond bubble does burst, does that mean that many if not most permanent life insurance policies and annuities won't be worth the paper they are printed on?
n/t
"However, DEBT DEFLATION is a nightmare for the Fed because it would almost immediately bankrupt both the US and the Too Big To Fail Wall Street Banks. With the US sporting a Debt to GDP ratio of over 100%... and the Wall Street banks sitting on over $191 TRILLION worth of derivatives trades based on interest rates (bonds), the very last thing the Fed wants is even a WHIFF of debt deflation to hit the bond markets. (YES to ===>) This is why the Fed NEEDS interest rates to be as low as possible… any slight jump in rates means that the US will rapidly spiral towards bankruptcy. Indeed, every 1% increase in interest rates means between $150-$175 billion more in interest payments on US debt per year." ------------ If inflation increases the interest rates on bonds will rise to compensate the bond holders for the inflation and provide them with a postive real interest rate return ("real'= net of inflation). This is why many are worried the govt would inflate its way out of its debt. Yes the govt needs low interest rates on bonds and that means low inflation rates. Isn't the author confused? PS I have no clue what "Debt Deflation" is. Has he invented this term?
"As we keep emphasizing, the Fed’s real concern is the bond bubble… NOT stocks."
Yet they keep buying bonds, bubble-izing the price up (not to mention buying e-mini futures and gold shorts etc.....) They don't seem to be that concerned to me.
“The only way out for our USA Lords is to make 100 million Americans disappear. Preferably, 60 years and older.”
by mygameon
Actually, the SS Administration has been hard at work at this aim for the last 30-40 years.
The SS Admin has been cheating retired workers since around 1970; of course, this also includes those who EXPECT to receive retirement checks when they retire.
In fact, it is probably the grievance that impacts the largest number of Americans. There are some 50 million people now receiving retirement checks from the SSA. Each gets an adjustment on their amount each year based on the Consumer Price Index (CPI).
And here is the fraud: the CPI is currently reported as 2%; but according to its formula as of 1970, the CPI stands at 10%. This represents quite a lot of cheating on the part of the SSA.
If we were to correct for this fraud, how should it be done? Current options are, raise taxes, cut government expenses, or reduce retirement checks. Notably absent from this list is an investigation and recovery of $9-$11 Trillions that went missing from DoD, HUD and SSA (among other agencies and amounts).
Or what about the $2 to $5 Trillions in surpluses that show up on books of cities and counties, special districts and state governments. These surpluses are held as cash and bonds, real estate and stocks, domestic and international; they represent taxes over-collected… for who knows how many years? When I did my research on this (about 2000), such surpluses for California divided out to $20,000 for every man, woman and child in the state; then I factored in amounts hidden in footnotes, the “dividend” ballooned to over $40,000 for each individual. See, for example, “Who Owns City Hall?“ and Of Lords and Cattle.
These surpluses lead to a couple of questions, at least, ‘Who owns them?’ and ‘When do I get my dividend?’
It seems to me that recovering this booty would be more sensible than authorizing more debt. It would enable the government, for example, to cut taxes in half, or even collect no taxes for several years. It would make it easier for men to raise their children; for, when money is taken from men without an equal exchange, men are less able to provide for their children. The government has even acknowledged this in the Supreme Court, yet it still imposes confiscatory taxes.
Ah, the mind spins with possibilities.
Recovery of this plunder will favorably impact some 130 million Americans: 50 million private retirees, 60 million who work in the private sector and probably another 20 million who are looking for work. ACTIVE private workers will benefit from lower taxes enabled by recovery of such booty.
What I aim at here, is a tad bit more complicated and comprehensive than what I did before: the establishment and operation of a gold-based banking service. Here, I aim at nothing less than a re-establishment of ideals confirmed by the American Revolution, and immediately lost by lethargy and ignorance. The nation of America, as known today, is irretrievably lost (governmental debt is the means and measure of that loss). It is corrupt beyond recovery; after all, what less can be said about a nation that voluntarily, and ignorantly, allowed its following generations to be so badly used (by taxes made necessary by government debt), as I have described many times in other places; for example, Bad News….
The vast majority of affected following generations are not even born yet; they had no voice in the transactions that doomed them to a birth without promise; no voice, that is, but ours.
So, perform your due diligence, and act accordingly. (Complete article) SSA Redress
arent those money making state things called CAFR's?
Correct: Comprehensive Annual Financial Reports (CAFR).
The Global Monetary Reset is under way, but people have not noticed it yet. The key is the move to Zero interest rates.
Government debt almost everywhere is too high to ever pay off, let alone pay a traditional rate of interest on. As debts come due, including as bond issues mature, the only option governments have is to roll over the debt and accumulated interest, and the only way they can afford to do that is if money printing is a continued practice and interest rates are at or near zero. QE is the latest name for money-printing, inflating the amount of currency available. Logically, QE dilutes the value of a currency by inflating the number of currency units in circulation, and should lead to price inflation. However, if all nations engage in monetary expansion, the effects of money printing on exchange rates may be effectively concealed by a balance of expansion. Or, as in the case of the US dollar, a currency with the status of world reserve currency may be expanded with relative impunity by the nation creating that currency, effectively exporting its inflation to the rest of the world that continues to sell to that nation, or trades in a monetary system based on that currency.
Inflation has become a necessary element of economic life according to the mainstream meme of economists. Inflation is a key strategy in coping with immense and increasing debts. Debt so large that it cannot be paid must be inflated away or governments must default. Deflation makes current debt increasingly difficult to pay or service out of deflating GDP and tax revenue.
Exporting nations have engaged in competitive exchange rate reductions to gain or maintain competitiveness for their exports. A strong currency hurts export competitiveness but lowers the cost of imports. A weak currency raises the cost of living of residents who must buy imports - a common feature for nations that import oil, for example. There is a necessary balancing act between export competitiveness and consumer price inflation, regulated often through exchange rate manipulation. Some of the Euro zone nations are learning the painful effects of locking themselves into one currency and losing the ability to use exchange rates to maintain export competitiveness.
The monetary expansions of the past ( done to re-inflate the world economy when it met a crunch - thank you Greenspan and successors) have flooded the world with currency. That currency has expanded speculation portfolios to the extent that the volume of currency sloshing around in search of returns or safety can quickly overwhelm a country's financial system and trade relations (competitiveness impaired, artificial investment bubbles, sudden debt crises when money is withdrawn, etc.).
The international trade and financial systems have made most countries relatively defenceless against trade and, more critically, capital flows. Vast sums can flow in or out of a country and its currencies almost instantaneously via computer clicks. Huge profits and losses can be made betting on exchange rate fluctuations, and on manipulating those exchange rates. ZIRP and NIRP are now regularly employed, ostensibly to dissuade residents from hoarding cash rather than adding to monetary velocity by spending, but ZIRP and NIRP are also used to dissuade speculators from buying a country's currency and hence raising its exchange rate.
Traditional stores of value and media of exchange among central banks - precious metals- have been debased through price manipulation in paper markets.
The strategies that seem unique and strange, and contrary to tradition - rampant money printing, the monetizing of debt through central banks buying government bonds, ZIRP, NIRP, and the suppression of precious metal prices, are the necessary strategies of a new monetary system set up to cope with the problems arising from monetary excesses of the past. They are the new normal. By disabusing the public of the notion that currency should be a stable store of value, that saving is a virtue, and that money borrowers should pay a reasonable rent on the money borrowed, the monetary authorities are conditioning the public to the new normal. In the paradigm of Modern Monetary Theory, currency creation can continue to infinity without destructive inflation since interest rates and expectation of return on lent money can be maintained at or near Zero. Any interest rate significantly above zero will crash the system, so do not expect interest rate increases except as a short-term emergency strategy to counter a fall in the exchange rate of a currency.
Necessity is the mother of invention, and the necessity of coping with overwhelming debt and unfunded liabilities has led us to the invention of Modern Monetary Theory. Add to this the new rule of bank bail-ins, the rule that bank deposits are part of a bank's capital, and the pledging of the public purse to bail out bank losses. This is the public/government debt side of the strategy. For those with large sums of currency who wish to continue to speculate, there are the stock and commodities markets, and the casino is open for derivatives bets. To accomodate the speculators, we have seen the insulation of Wall Street from criminal liability for fraud, the repeal of Glass Steagall, the weakening of Dodd Frank, the delay of the Volker Rule, the use of the public purse to bail out Wall Street losses in 2008, and the recent pledging of the public purse to cover Wall Street losses from any future derivative bets losses - all in the CRomnibus bill. Welcome to the New Normal. We shall see how long it lasts.
LOL - well, we're probaby about 1 year away from the perma bears actually being right, but until till then, good luck shorting the market
Inflation good for TBTF bad for me.
Stagnation bad for TBTF bad for me as they ramp up the take to try and preserve their position.
Deflation bad for TBTF bad for me economically the whole thing globally collapses.
For a large %'s of all populations whereever youmay be in this central banker world you are sacrificed and it is a no win scenario for you. The question becomes why the hell should they have a supa-dupah life while so many suffer?
At that point the actions of all those that may commit atrocities anywhere no longer disturbs me because the action is against those that would destroy so many that radicals just kill physically before the TBTF do economically and potentially physically.
On the inflation thing the USA abused the creation of money to preserve itself over all other nations and exported the inflation when the dollar is the global reserve currency hence I see no criminal act if any other nation decides to create its own global reserve currency (= print your own dollars).
Deflation is Positive, And I am Positive, with Deflation the Banks will own every piece of real-estate on a mortgage. The Negative side is if you've got a Mortgage or a Loan your going to be Bankrupt.
Jump to gold backing, revalue gold at $20,000 oz and let money into the real economy. You wont get inflation with QE tpo banks to stocks. Let money flow into the hands of people who actually spend.
Anyway you look at it I have a problem lending my hard earned money out for a long period of time based on predictions of future government deficits. These forecast are often formed and made on assumptions based on rosy scenarios or politically skewed to benefit those in power. Like many investors I think the bond market is a bubble ready to pop and won't touch bonds with a ten foot pole. Knowing what we know about the effect that interest rates have on the value of bonds one might deduce that the 30 year bull run on bonds will have to come to an end the moment rates are expected to go up.
To give you a sense of what this may mean to U.S. Treasury Bond investors a 10 year treasury bond issued at a 2.82% interest rate could see a 42% loss in value from a mere 3% rise in interest rates. This means if you’d held $100,000 in these bonds prior to the rise in rates, you would only be able to sell those bonds for $58,000 in the secondary market after the 3% rise. Not only would bond holders be stripped of wealth if rates rise or even worse soar, but it would magnify the nations debt service and rapidly impact our deficit in a negative way. The article below delves into just how big a problem it could cause.
http://brucewilds.blogspot.com/2014/12/bond-market-bubble-has-ugly.html
You, Bruce and others are assuming that the FED will allow interest rates to rise, but doing so would be doom for the government's budget and the economy, and the all the politicians (which includes the FED) know it, so why would they do it ?
As Big Ben said after leaving the FED, interest rates will be at these levels for generations - that was his intention from the beginning. The FED is dominated now by academic hyper liberals, who despise free-market interest rates. We will all grow old and die if old age still waiting for the FED to raise interest rates - and your children too.
Interest rates will be at these levels assuming all things stay the same. We are to assume the debts just keep piling up and there is no monetary reform and we slog through decades of declining energy and harder and harder to come by commodities. Not realistic.
It is very realistic because middle & upper class white people only complain, they don't revolt.
You overlooked one thing.
Bond investors should be looking for YIELD, not capital gains, and Security. There are hunnerts of millions of human beans that would be perfectly satisfied to have the Treasury pay them back in the 2024 ALL their principal, and have earned the interest for ten years. Widows and Orphans of Trust funds, with substantial wealth who wish the protection of principal ABOVE ALL will not suffer a penny of loss (other than inflation should that occur, which we would all suffer, whether invested in bonds or not.
Lending money at 2.82 with no necessity to sell the bonds due to rising interest rates for the next 10 years is a perfectly good stragety for the right parties.
Much ado about nothing unless you are a bond trader.
Human beans, speak for yourself :-)
Nothing worth buying in the USofA..... outside of real estate?
Probably right. The corporations are all in debt, the Ca farmland is in drought.
NYC is faked-up prices, and McMansions are over-priced.
Maybe congressmen are worth buying.
If commodity price deflation continues and it begins to leak into the core price index, then they'll worry about debt deflation. They probably believe oil deflation is temporary. Will it be temporary? I think the answer is yes but greatly depends on your definition of temporary. If demand remains low Saudi Aramco can maintain production levels keeping the price low enough to knock off competion. How long will that take? Will demand rise and take them out of the equation?
Those gas prices are going back up. Count on it.
Thanks for this simply put analysis, every time the fed lowered the interbank lending rate by 1/2 they doubled the burden of debt. Now they are zero cost credit origination rates and the credit they have issued thus far doesn't have any additional future value than the day they issued that credit. We are swirling down a very large toilet bowl.
.
No thanks for this Oversimplified 'analysis' that conveniently left out a good piece of information about Treasury Bonds: They are paid back in full in ten years.
I have only condemnation and great wrath for the Treasury, Fed, and Seth Rogen, but this is poor analysis that leaves out the main reason folks buy bonds in the first place.
dupe
Jim Grant put it very well the other day. "Why shouldn't we expect prices to be falling?" We are told every waking hour about the great technological advances we are making. Shouldn't that be reducing costs? Shouldn't that be raising our standard of living? Then why do we have such a declining standard of living? Why so much poverty? Why is the theft being allowed to continue?
Guillotine every one of these fuckers. Every single one. 535 congressmen and all the bankers for a start
Good suggestion, but who is going to do the guillotining ??????
The sheeple ?
Do you think that they can break away from shopping, video games, TV, NFL, NBA, NASCAR, alcohol, mary jane, etc long enough to do something courageous, intelligent, meaningful and important ???
i honestly dont think many Sheeple WANT to know how bad things are......
Our SOL would only be considered lousy by spoiled brats who take for granted upward mobility, ever increasing asset values, and large screen TVs, computers, I-everythings and houses too large and expensive for two people to live in.
Even Poverty is being redefined to include those who are not poor at all.
Let's get a little perspective instead of the distortions that surround us masquerading as truth.
There are legions of problems and very serious ones that need solutions, like the Jobs and Careers markets, businesses the crush competition with the aid, nay, encouragement of government (but ever try to get a business going in Switzerland or Paris, Naples or Cameroon?).
Spankme,
+100, but you better get busy. The only way out for our USA Lords is to make 100 million Americans to disappear. Preferably, 60 years and older.
If you rapidly lower the number of long term liabilities, you change all debt related problems. I know it is scary shit to consider, but if I were one of the sadistic fucks in charge it would be my plan.
A nice biological weapon -high lethality, low transmission, put into a bunch of hypertension Meds would do the trick.
It will be a race to see whose blood flows in the street first....
or deliberately release Ebola...
Um, how about bird-flu?
High mortailty on kids and seniors... great thing about kids is you can always make more and everyone enjoys trying too.
Less so with keeping seniors around... damn benefits, they never hear what you're saying, and it's always: "when I was young, we respected [blah blah blah]"
Above is sarcasm, but likely to be an agenda on someone's docket... I'm just sayin'
Nage.
That's a frighteningly likely scenario . Legalized euthanasia
+100 Excellent reference from Grant. Would be great to know where you got it. I walways find that guy's work beneficial to my own understanding of things as I look into (as one ZH'er put it) the shit abyss.
I have to agree that the Fed must hold interest rates down because the current debt service is $.266 T while the total external debt is $18.017 for an effective rate of only %1.4. But, should the rates become 'reasonable' compared to the debt level a rise to %2.8 doubles the service to some$0.5T and at %5 almost exceeds a trillion dollars.
At a debt-to-GDP level of about 105% the rates should be higher in my view. The Fed cannot afford to further bankrupt the government with more debt service.
The rates have to stay low and monetizing the debt must continue until we crash.
The rates have to stay low and monetizing the debt must continue until we crash.
Yep and why whatever happens there will be some central bank around the world using QE from here on in to maintain the global economy. At some point the USA will be at the sweet QE again just to keep it inflating.
Overall the last 100 years the money creation rate has been increasing as our efficiency increased but because they used every economic trick in the book there ran out of tricks or cupboards to hide the economic skeletons in.
e.g. TBTF suggestion, oh dear we are in the shit again lets try derivatives? Done that! Okay lets load the population with debt just to keep it all going? Oh we done that too. Well what can we do ...I know lets just create as much as we want to keep this fucking economic system going.
QE to infinity and beyond where eventually like Japan currently in the race to the the destructively economic wall unless you overtake them of course.. ha!
Every action they now apply is having a smaller positive effect (illusion) that the previous application so at 80 billion QE MOM previously the next time it will be > 80 billion at today's value.
To me in 2008 the level of debt in the system reached a level and it will happen eventually if Japan is anything to go by the TOTAL DEBT IN THE WORLD WILL REQUIRE THE TOTAL GLOBAL PRODUCTION TO SERVICE IT.
THat last point under the current economic system is unavoidable a natural state of the current economic policy.
The like of Krugman is even now trying to rewrite the economic books to remove the concept of Japans technical default on debt to GDP ration. Can't wait :-)
When Japan 2 decades ago avoided the reset it just synched its reset with the next ones untill one day they will all reset at the same time. WONDERFUL, total chaos.
Only Iceland did the right thing, technically insolvent it then collapsed and rebuilt its economy so when the reset eventualy comes that little old island won't need the reset.
Every one percentage point rise in US interest rates cost the American government about $150 billion of additional interest payments. It doesn't take a math whiz to see where the U.S. goes belly-up if a single major holder of UST decides to liquidate.
"Yep and why whatever happens there will be some central bank around the world using QE from here on in to maintain the global economy."
That must now be Japan and soon the EU via the ECB and maybe later China.
This makes sense in a fantasy world, but soon some currencies must start to crash only because there are better options for investment.
A rational observation should be: that IF the real debt grows faster than the real growth then sometime the debt will tend to consume all government revenues. When that happens the need to run the printing presses at full speed become apparent and then inflation must follow and then currency collapse or default on government loans.
Time to look at gold again.
jmnsho
There are all kinds of insane terms used in this kind of dicussion...
'monetizing debt' for instance...
What the fuck does that really mean?
Real wealth can only come about by something REAL being produced by someone's efforts.
YOU CAN'T PRINT WEALTH
YOU CAN'T PRINT MONEY
You can, however print currency. You can even bring it into existence with a mouse click.
It's not that hard to understand.
'monetizing debt'
"
"Monetizing debt[edit]In many countries the government has assigned exclusive power to issue or print its national currency to a central bank. The government treasury must pay off government debt either with
Government bonds may be sold to the public directly or to the central bank when it needs money to repay bonds that have come due. In effect, these bonds are promises to create money in the future, causing monetary inflation."--http://en.wikipedia.org/wiki/Monetization
The simple way is to just print money to pay off the interest on the debt.
jmnhso, rycK
Correct me if I'm wrong but I thought the US was declared bankrupt at the Geneva Convention in 1929.
anyone who ever played simcity knows that its impossible to build anything using debt unless you have a perfect plan. Only buy creating the perfect layout for the city to get just the right tax base to service the debt was ever successful. Video games can teach you if you're willing to learn. We are operating now without a plan
My limited understanding on the expansion of the universe is that the expansion is slowing. OK But the intersting peice of the universe is that it will start contracting and ultimately be just a black hole.
Some things never change.
i think that is now being disputed.....
You are a bit behind the latest research into dark matter and dark energy.
But, if you think about it, we live inside something very similar, if not identical to, a black hole.
"The Fed NEEDS Inflation Otherwise the Bond Bubble Will Burst"
not likely to happen, yields will soon start rising exponentially as prices fall...
http://www.globaldeflationnews.com/10-yr-u-s-treasury-index-yieldelliott...
the auther of your link is a dumb fuck. he say that the fed has no control over the bond markets.
what a crook of shit. obviously the fed has complete control. for now anyways. when bonds start getting dumped we have a problems and bond dumpage is the reaction.
ebnough of the garbage. this shit show goes on for quite some time.
relax and quite the worry until a towel head blows up something near and dear to you...
+ 1 I tend to think you're right - its exactly what happened to the Russians. When commodity prices get crushed it kills those currencies most effected (Canada, Russians, etc.) Therefore, while it seems that rates will go negative (at least, thats what the debt and bond guys argue - and I very much agree with most of what they say), I think places like Canada will actually have to jack rates to protect their own currency in like fashion - perhaps not a 17% correction from/out of ZIRP, but, somethng that says clealy that money isnt free - that there is an opportunity cost - something greater than zero.
When I built my last house there was a interesting incident that is apropos. Some of the carpenters working for me had precut floor joists and had set them in place stood up. They were going to nail the joists down with a nail gun once they got the joists in place. One of the carpenters didn't know however, and started out on the standing joists. As he stepped on the first it flipped. Being agile he jumped to the next which immediately flipped. He jumped even faster to the next, and the next until the joists ran out... and he landed face first on the concrete slab. A 2X10X12 landed across his back. I thought he was done for. But... he hopped up, laughed, and like Benny Hill, wiped himself off and went back to work. God had saved him.
The point is, once you step on the first, and it goes south, you have to go ever faster to keep up... until you run out of joists. And, only God can save it, but only a fool expects him to.
I'm glad I don't sit around waiting for some imaginary deity to save my ass. smh.
Easy solution... raise interest rates unexpectedly soon and margin requirements on stocks and options... this should deflate stock prices and send money scurrying to the "safety" of bonds for a future haircut when interest rates are cut again and new QE is implemented.
And you thought volatility was high now...