Rates improved this morning as mortgage bonds and Treasuries got a boost from Fed Chairman Ben Bernanke’s comments on CBS citing additional Quantitative Easing (QE) is certainly possible if necessary. QE3 Anyone? Interesting to see the bond market respond so positively to Ben’s intentions when the very QE that he is promoting will ultimately destroy bonds as it destroys their value by debasing the underlying currency they are denominated in as it massively increasing the supply of money and credit. QE makes bonds feel good in the short term because it creates distorted demand for the debt instruments, pushing up their price and holding down their yields. Its all a very misguided approach to our economic problems and one that has been implemented many, many times throughout history and every time, without question, it ends in the tears of an inflationary induced monetary and bond market collapse. Anyone ever hear of the historic inflation created in the Weimar Republic of post WW1 Germany?
Our fearless Fed Chairman indicated that without QE and the Fed’s response to the crisis, unemployment could be 25%, not the 9.8% currently (was 9.6%) and that it is likely not to decrease down to the normal 5%-6% for 4 or 5 years. It is his strategy to scare people with these apocalyptic retrospect views without anyway of actually proving his claims with the goal of manipulating public opinion to accept the economic medicine (QE) that he is peddling. He sees inflation concerns overstated, won’t allow it to go above 2%, and believes the tax code must be revised. Fat chance on reforming the tax code. It will be very interesting to hear him explain how the massive money and credit creation he is instituting in the form of QE actually isn’t inflationary and exactly how he is going to ensure inflation doesn’t go beyond 2%. Hmmm … all of this from a man that was completely blindsided by the current economic and credit collapse and now he is in charge of fixing a problem that he didn’t have the foresight or intelligence to see coming?
Lets examine his contention that inflation concerns are overstated … take a look at oil prices…. up over $90.00 per barrel…. Cotton at 130 year high and wheat, soybeans, gold, silver…. etc. etc. etc. All of these commodities are traded in dollars and have seen their prices soar as the value of the dollars they are traded in has been debased through massive money and credit creation. Inflations is already here people and your illustrious central banker, “helicopter Ben”, knows it. Remember the Consumer Price Index (CPI) excludes energy and food and when they are squished back into the inflation algorithm…. it’s running close to 8% right now. Take a look at the following chart from “Shadow Government Statistics”.
You can see where the numbers began to diverge in the early 80’s as our government began to “cook the books” with the intention of understating the real inflation rate to avoid the political blow-back on policy and to avoid paying hefty cost of living increases for a myriad of government programs not the least of which is Social Security. The blue line represents the traditional inflation algorithm used by government for many years prior to 1983 and represents a far more accurate measure of real inflation. So when the Fed Chairman says he won’t let inflation go above 2% and will protect us all against the corrosive effects of his QE monetary scheme, you can see we are already way past that point as most of us in the real world feel every time we fill out gas tanks up or go through the check-out line at Costco.
There is no economic data scheduled for release today as stocks are slightly negative and the 10-year Treasury yield is near the 2.95% mark. This week brings another round of Treasury auctions as our bankrupt government borrows billions to keep its doors open. In that spirit, the Treasury will issue $32 billion in 3-year debt on Tuesday, $21 billion of 10-year Treasuries on Wednesday and $13 billion of 30-years T-Bills on Thursday. The Federal Reserve bought another $2 billion this morning and will purchase most all of the debt set for auction this week… anyone know where the Federal Reserve will get the money to buy those Treasury Bonds? Remember the Federal Reserve is no more Federal than Federal Express and there is no Reserve. All money the Fed uses to buy this debt is “brought into existence” with the stroke of a key on a computer … as this continues, it won’t even be worth the paper its not printed on.
In the news today…
- Bernanke Says More Fed Purchases ‘Certainly Possible’
- Treasuries, Dollar Rise on Prospect of Fed Buying; Euro Weakens
- ECB’s Quaden Says He Favors Increasing Size of EU Rescue Fund
- Germany Snubs Pleas to Boost Aid, Sell Joint Bonds
- Obama Calls Hu to Urge China to Assist in Restraining North Korea
Reading Suggestion for today: The Federalist Papers by Alexander Hamilton, James Madison and John Day.
Take away: The pronouncements that all our economic woes will be miraculously fixed by massively creating money and credit are going to ultimately drive bond prices up as investors demand a premium to offset the risk that the bonds may default or that the currency the bonds are denominated in will be debased effectively paying back the bond debts with worthless paper money. All this means mortgage interest rates will NEVER, EVER be this low in a very long time. How long can rates stay low is anyone’s guess but the actions of central banks around the world with collective QE will ultimately drives rates much higher. Use this information to get your reluctant borrowers off the fence and to new attract borrowers.
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