Seven Years of Monetary Quackery; Can the Federal Reserve Admit It Was Wrong?
By Mike Whitney
Global Research
January 30, 2016
America’s richest investors are betting trillions of dollars that the US economy will stay lousy for years to come.
Who are these wealthy investors?
Bondholders. And their views on the state of the economy are reflected in the yields on long-term US Treasuries. At present, the yields on long-term debt are very low which means that investors think the economy will continue to underperform while inflation remains in check.
This pessimistic outlook is not new for bondholders, in fact, yields have remained stubbornly low since the onset of the financial crisis in 2008, which means that investors were never swept up in the hype about “green shoots” or an “economic recovery”. They knew it was baloney from the get-go and their opinion hasn’t changed. There’s no sign of recovery anywhere except for the fake government payroll numbers that don’t jibe with any of the other data. By any rationale measure, the economy is stuck in a long-term slump that shows no sign of relenting anytime soon. Bondholders seem to grasp that fact and have made a ton of dough betting on crappy growth and perennial stagnation, which are the logical corollaries of the Fed’s goofy monetary policies. (Stephen Roach explains low yields on 30-year USTs here.)
In any event, bond yields are a heckuva lot more helpful in forecasting the future than the cheerleading pundits on the business channel. Yields–which are the amount of return that bondholders receive for lending the government their money–reveal investors expectations of future economic activity and inflation. They are a barometer for measuring the health of the economy. If growth is strong and the future looks rosy, yields will rise as the demand for money increases and the prospects of higher inflation seem more likely. But if investors expect growth to fall-short and disappoint, then yields are going to drop reflecting lower expectations for future activity. The fact that the yields on 30-year USTs are below 3 percent at this phase of the game suggests that policymakers either don’t understand how the economy works or simply refuse to initiate the changes that will spur growth. Either way, it’s a damning indictment of the Central Bank’s role as steward of the system.
At present, (Jan 26) the yield on benchmark 10-year Treasuries is just a whisker below 2 percent at 1.98 percent. That means that investors will get 1.98 dollars annually per every $100 invested, which is nearly nothing. Think of it this way: Let’s say your buddy Ernie wants to borrow $5,000 to open a Gelato stand in Granite Falls. So you’re wondering how much you need to charge him above the price of the loan to be fairly compensated for the risk you’re taking. (since Ernie has had a few bad ideas in the past that blew up in his face.) If you decide to charge him 2 percent per year, then you’re barely making ends meet since inflation is currently running at roughly 1.5 percent. So you need to charge something above 2 percent or you won’t even break-even.
The point is, when you lend your money to the USG for a paltry 1.98 percent, you’re basically getting bupkis on your investment. The only upside to the deal is that you can be reasonably certain that the government will pay you back, unlike Ernie.
The focus on interest rates as the only means for fixing the economy should have run its course by now, but, of course, it hasn’t because the Big Money that runs the country likes things the way they are. Low rates and easy money mean bigger profits for Wall Street regardless of their impact on the real economy. What matters most to bondholders is not growth or inflation, but policy. That’s what keeps the boodle flowing into the coffers. Policy. And as long as they’re confident that the Fed’s “accommodative” policies are going to be coupled with fiscal belt-tightening (which has been adopted by both Dems and Republicans), then they can rest assured that the economy will continue to sputter while bonds “rip the cover off the ball”.
The Rest…HERE
