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April 1, 2015

The Condundrum, Mk. II

Filed under: Forex Strategies — Tags: — admin @ 4:42 pm

The number of words that Ben Bernanke has written explaining why market interest rates are so low in his new blog: 2,560

Mentions of “asset purchases”:   0

Mentions of “QE”: 0

Mentions of “regulation”: 0

9 Comments »

  1. How quickly we seem to have forgotten that the entire social order would have ceased to be order without all of the bailouts and the massive UST deficits.

    Apart from laundering money through AIG, FNM, FRE, TARP and ARRA, it was all over.

    Donezo.

    People will argue the virtues of the money laundering for another generation, or so, but where we were is not really an open question anymore.

    Comment by Dan — April 1, 2015 @ 5:32 pm

  2. Wait, what? Rates didn't spur the shale revolution. Prices did. Rates were a rounding error.

    If it had been rates, you wouldn't be watching the North American rig count crater as we speak.

    Comment by wcw — April 1, 2015 @ 6:06 pm

  3. Deficit = Credit Instrument Supply
    QE = Public Sector Demand

    The private sector had no money to buy the deficit issuance without selling everything they had. By virtue of collateral/M2M values, that is a reflexive negative spiral and the private sector would quickly have had nothing of any marketable value to sell and buy a single bond with.

    Dumping that deficit supply on the market would've spiked rates, imploded all leveraged asset values and crushed the economy running all people into treasuries until the end.

    Comment by Dan — April 1, 2015 @ 6:45 pm

  4. Dan – therein lies the rub, because the fed, by keeping interest rates low, actually ended up subsidizing shale prospecting which unleashed a supply response – the key change in the last 10 years vs say the 80's and 90's is that on the margin, lower rates hasten technological innovation and outsourcing to EM, and therefore deflation, much quicker than they expand consumer credit. The Fed and other CB's, to their detriment, haven't yet figured out this rather profound difference. Everything else (including the asset inflation vs wage income divergence is essentially a corollary.

    Comment by washedup — April 1, 2015 @ 7:11 pm

  5. What BSB has shared is this: the Fed follows the market.

    The better question to ask yourselves is what would the front-end of the curve be priced at if the Fed wasn't paying interest on reserves?

    If the UST had not run a deficit the QE would have been relevant at all, but if the UST had not run a deficit what would that have meant in terms of all those refunds of prior-years taxes that corporation received post-2008? What would that mean for the biotechs and energy complex? What would it mean for the banks that held HARPed paper? Where would Apple, AMZN and NFLX be without loose student loan policy?

    The equity market is just the second most liquid savings class of the wealthiest institutions and individuals and the creditor class is senior to the equity class. Any subsidy given to the poorest demographic quickly ends up in the pocket of the owner of wherever they spend their subsidy at. All subsidies are subsidies to the asset owners.

    Deficit + QE pumped equities and until the snake (interest-bearing debt) swallows its tail, bonds are still in a bull.

    The Fed is the premier insider and it is massively long an asset, what, theoretically, do you think happens to that asset?

    It's not like banks have to settle for the 25bps at their friendly FRB. They can lend if they want to!

    Comment by Dan — April 1, 2015 @ 7:29 pm

  6. Two ways to deal with an unpleasant truth:

    1. Easiest way: ignore it.

    2. Plan B: complicate and obfuscate.

    Bubbles is starting the easy way, but eventually we'll see complication and obfuscation.

    Comment by Error403 — April 1, 2015 @ 7:44 pm

  7. whats the conundrum? he probably suspects QE will be remembered as not particularly effective at best, and a disaster at worst, in a few years, and wants to distance himself from that legacy.
    someone should mail him a link to red tube – bye bye blog, and no loss to the world.

    Comment by washedup — April 1, 2015 @ 8:39 pm

  8. "Planned oil industry layoffs in the U.S. are approaching 100,000 in the past four months with more likely to come."

    http://www.usatoday.com/story/money/business/2015/03/31/oil-job-cuts/70683670/

    Comment by Anonymous — April 1, 2015 @ 9:12 pm

  9. QE. It's just another tool in the toolkit. It's temporary. In the long run that is. When we're all dead. So who needs to mention that?

    Comment by Patrick G — April 1, 2015 @ 9:19 pm

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