Yahoo! Finance reported in “The $1 trillion reason why Bernanke’s critics were wrong,” that:
“Last week, NYT columnist Paul Krugman penned an ode to his former Princeton colleague. ‘And there but for the grace of Bernanke go we,’ Krugman wrote, reflecting on Europe’s economic morass.
“On Monday, Bloomberg wrote that Bernanke’s critics missed out on $1 trillion in potential gains in Treasuries since 2008. ‘The resilience of Treasuries represents a rebuke to the chorus of skeptics . . . who predicted the Fed’s unprecedented stimulus would lead to runaway inflation and spell doom for the bond market’.”
But how “resilient” are US Treasuries if nearly 90% of those sold since A.D. 2012 have been purchased at full face value by the Federal Reserve?
What would the price of US Treasuries be if those Treasuries were only sold on the free market and not on a market dominated and manipulated by the Fed?
The reason the Fed bought those bonds is because the free market would only agree to pay a fraction of the bonds’ face value. Rather than let the free market “discover” the true value of US bonds, the Fed intervened to overpay and thereby support the illusion of US Treasury value.
“Of course, it’s impossible to know if Bernanke’s critics have been actively shorting Treasuries or ever capitulated to the rally in bonds, but it’s pretty clear to say they were dead wrong about the outlook for Treasuries, the dollar and inflation—or at least so far ahead of the curve as to risk falling off.”
The Yahoo! Finance article appears to be correct to this extent: Despite Quantitative Easing, the dollar hasn’t died; inflation (although closer to 9% than the “official” rate of less than 2%) has not yet soared—and all dire warnings to the contrary have been, so far, mistaken or at least premature.
But why might those warnings premature?
A: Because most prognosticators didn’t anticipate that the markets would be “rigged” rather than “free”.
Those who offered dire warnings about the economy and/or about the rising price of gold were like statisticians who offered mathematical predictions of how often the marble would land on the “00” in a roulette wheel. Their predications were mathematically sound, but the statisticians didn’t take into account the fact that the particular roulette wheel was “fixed” in a way to defy mathematical probability and allow “00” to come up 50 consecutive times.
“The inflation hawks and bond bears were wrong for a number of reasons; most notably, they failed to understand the deflationary forces already at work in the global economy, which the “Great Recession” only exacerbated. Furthermore, those forecasting doom for the dollar and Treasuries failed to adequately consider that finance is global and that U.S. Treasuries looked good relative to the competition—and still do.”
Although a hyper-inflationary depression is possible, deflation is usually one of the hallmarks of an economic depression. Yahoo! Finance implies that, after A.D. 2008, the forces of “natural deflation” in the US and global economies (and our “natural” tendency to economic depression) were so great that the artificial stimulus of injecting trillions of inflationary dollars into the economy did little more than counter-balance and negate the existing deflationary pressures.
And that’s probably true.
In a sense, the Great Recession economy was dominated by 100 “units” of “natural” deflation and the Federal Reserve countered by adding 100 “units” of artificial inflation. The result was roughly zero and the economy did not soar into prosperity, but also didn’t sink into a full-blown depression.
The questions that remains is whether the 100 “units” of artificial inflation can permanently subdue 100 “units” of natural deflation—or whether the forces behind that “natural” deflation are still lurking in the shadows and waiting for an opportunity to break loose in the form of a global depression. In other words, did the QE creation of trillions of fiat dollars really control the economy on a permanent basis? Or did those trillions of fiat dollars only provide a temporary refuge from the inevitable?
If it turns out that fiat currency creation can actually control an economy permanently, Lord Maynard Keynes and Ben Bernanke will have finally created a viable “money tree” that can make us all rich forever.
If, on the other hand, it turns out that all those trillions of illusory, fiat dollars used to “stimulate” our economy did so only on a temporary basis, then a national and/or global depression is still waiting to strike.
Yahoo! Finance’s claim that “finance is global and that U.S. Treasuries looked good relative to the competition—and still do,” is silly. Yahoo implies that US Treasuries have genuine value because they “looked good” compared to other nation’s bonds.
For me, the idea that US bonds have value because other countries’ bonds are even worse is like a drowning man grabbing at straws. It’s evidence of desperation. If you’re grabbing at straws because you can’t find life preservers with a genuine capacity (“fundamentals”) needed to keep you afloat, you’re going to need a miracle to survive. Likewise, if the only reason you can come up with to support US Treasury prices is that they’re prettier than the other trash, you don’t have a viable argument.
While it’s true that the US Treasuries may “look good” compared to other nations’ treasuries, does that mere appearance prove that US Treasuries have significant value on the free market? It may be that today’s fresh “road kill” is more nutritious than that of last week, but does that make any road kill truly nutritious?
For the past several years, the Federal Reserve has been buying most of US Treasuries with fiat currency spun out of thin air. The purposes for these purchases were: 1) to sustain the illusion that US Treasuries were still worth their face value; and, 2) to avoid a significant fall in the market price of US Treasuries. If the Fed hadn’t purchased US Treasuries at prices much higher than the free market would sustain, the perceived value of US Treasuries might’ve fallen by 30% and maybe more.
How “good” would US Treasuries currently “look” if the Federal Reserve hadn’t purchased most of them at artificially-inflated prices for the past several years?
How “good” would US Treasuries “look” at this time if the Federal Reserve hadn’t essentially “rigged” the markets?
• Nevertheless, despite the market rigging, it’s still a fact that the Federal Reserve did purchase up to 90% of the US bonds sold over the past several years—and it therefore appears to be a fact that the US bonds are better than their trashy foreign competitors. It’s also true that those who’ve invested in bonds since A.D. 2008 have not been too badly damaged—so far.
But it’s also a fact that the current prices for US bonds are not based on their intrinsic value or the reality of the free market. Instead, their current prices are derived from the fantasy of manipulated markets controlled by the Federal Reserve’s purchases of US bonds with fiat dollars spun out of thin air.
• It’s another fact that, although the US government claims the national debt is only $17 trillion, it may be closer to $90 trillion (John Williams at Shadowstats.com) or even over $200 trillion (including unfunded liabilities as per the Congressional Budget Office and economist Laurence Kotlikoff). The US might be able to repay $17 trillion in US Treasuries. It will never repay $90 trillion or $200 trillion in full. It’s unlikely that the US will be able to pay even 10% of the $90 to $200 trillion debt estimates.
Therefore, if the $90 to $200 trillion estimates of the size of the national debt are roughly correct, the majority of US Treasuries will never be repaid in full and may be virtually worthless, even now.
Given the probable size of the National Debt, holding US Treasuries is somewhat like continuing to hold Confederate Dollars in the dim hope that the “South Will Rise Again!”
Indeed, the South may rise again—but if it does, it’ll do so without also elevating those old Confederate Dollars.
Likewise, the US gov-co may “rise again” but, one way or another, the enormous National Debt can’t be paid, won’t be paid, and current US Treasuries (regardless of whether they “look better” than the other governments’ trash masquerading as bonds) will be shown to be virtually worthless at some point in the future.
• And It’s another fact that the Federal Reserve has already begun to “taper” it’s purchases of US Treasuries and will soon completely stop purchasing US Treasuries. This “tapering” implies that either: 1) the Fed believes US Treasuries can now stand on their own in the Free Market and don’t need any more artificial monetary support to maintain their alleged value; or, 2) the Fed is, itself, nearly insolvent and can no longer afford to support the illusion of US Treasury value.
So—is the currently-perceived price of US Treasuries a “fact” in the sense that this “value” is set by a Free Market? Or is the currently-perceived value a fantasy based on the Federal Reserve’s sleight of hand in a manipulated market?
If the US Treasuries’ perceived value is a fantasy based primarily on a manipulated market, how long can that fantasy be sustained once the Fed stops buying US Treasuries?
• Those who praise Bernanke’s performance as chairman of the Federal Reserve regard the US Treasuries’ current price as an objective fact.
People like myself, on the other hand, are warning that the US Treasuries’ currently-perceived “value” is: 1) largely a fantasy; that, 2) may be temporarily impressive, but cannot be sustained indefinitely.
What do you think? Who do you believe is most likely right in their analyses?
Do you believe current bond prices are honest, built on reality (including a $90-$200 trillion National Debt) and therefore “factual”? Or do you think current bond prices are fantasies built on manipulation and certain to disintegrate like any other “bubble” in the foreseeable future?
Even if you believe that current bond “bubble” is based primarily on fantasy, you also know that it’s true that we don’t know when that bubble will burst. It could happen in the next quarter. It might not happen for several more years.
But, in the meantime, do you feel more comfortable investing in truth or lies? Free markets or manipulated markets? Objective reality or illusory “bubbles”? Facts or fantasy?