The Fed has things under control

 Obviously, the Fed will never do anything that isn't also in the best interests of the financial elite (by which I mean those parasites upstanding citizens nematodes who typically spend more on a bottle of wine than the average chump earns in a year)(that's not hyperbole -- the median global per capita income is substantially less than 10k). That said, let's not be ungrateful. The Fed will do whatever it can to help the lot of the average American as well, once it sees to it that the best interests of the financial elite are well served. (The rest of the world is on its own and will certainly be spied upon and robbed, perhaps even killed.)

Anyway, there's a lot of online/social media chatter that the Fed will lose control of interest rates any day now and the dollar will lose its reserve currency status etc. But look at this chart of the ten year yield going back 30 years and tell me the Fed doesn't have things under control. The line of best fit (minimizing distance of squares of points) is pretty much the same whether we go back ~30 years or ~20 or ~10 or ~5 (see blue, green, red, yellow center lines respectively). A slow decrease of 23 1/3 basis points every year. Anything can happen, but sure looks to me like this thing's got legs. If we assume (perhaps foolishly) that there will be no demand for treasuries if yields were to fall below zero, this chart can still look very much the same in 5-10 years, and perhaps that's when commodity prices will be allowed to rise fairly rapidly, keeping the yields priced in real goods headed down even if the trend line of the nominal yield has to stabilize or even change direction.


Warren James said...

Agreed - the more I read opinion that 'they' have 'lost control' or 'are about to lose control', the less I believe it.

I have recently concluded that an understanding of the shenanigans currently in play, is also fractal in nature. i.e. the those same commentators aren't really even on the same dimension as the folk in control (just my two cents worth).

Anonymous said...

GM Jenkins,

the Fed has introduced a mechanism in order to prevent negative rates on short-term Treasury debt: the reverse repo facility.

This was discussed at FOFOA's. As a starting point, you can follow the links in this comment.


costata said...

Hi GM et al,

I want to share the results of an exchange with VtC on the issue of a potential shortage of USG bonds and to make a couple of observations about the Fed's control mechanism. I fully agree with VtC the Fed will be able to use it's new reverse repo facility to prevent interest rates on bonds etc from going into negative territory and staying there.

Consequently they can also prevent a shortage of these bonds from developing using two sources. Firstly they can use the reverse repo facility to maintain liquidity in the market and secondly they can draw on their own stock acquired through QE.

Another potential source of supply is China subject to a few specific conditions IMHO. If China's trade surplus with the US dollar block countries continues to fall and capital continues to try to leave China then this would free up supply of USD denominated debt such as USG bonds.

One last observation on this issue of control. The USG debt on the Fed's books has effectively been cancelled (at the discretion of the US Treasury). In other words if it stays on the Fed's books it has the same effect as a default. Since 1943 (if memory serves me) the Fed remits all profits over and above costs to Treasury. So nearly all of the interest paid by Treasury on its debt held by the Fed is rebated to Treasury.

If there is a bid for any of the paper held by the Fed and no-one else can supply then the Fed can supply it. So FWIW I agree with GM and Warren at present these boys and girls at the Fed and Treasury are firmly in control.

GM Jenkins said...

Great comments guys, thanks.

costata said...


I''m not sure if you want to continue this discussion on this thread or move it over to the new post. Let me know.

As a thought experiment think of USG debt as a storage medium. As the USA exercised its "exorbitant privilege" of exchanging US dollars for real stuff from the rest of the world the USG needed somewhere to store the US dollars that recipients might have otherwise sought to spend inside the US economy.

In other words the US exported monetary inflation (along with/within the US dollar exports) while preventing that inflation from infecting the US economy by being spent indiscriminately inside the USA. It funneled the returning US dollars into USG IOUs and the cash into the hands of the USG where it could be spent on consumption anew.

Would it be controversial to suggest that this created a dynamic where international investment in USG debt over the past 30 years was driven by weaker domestic currencies and downward pressure on the IR on this USG debt?

Another factor at work here is the impact of US dollar trade surpluses on countries such as China and Japan. As Michael Pettis often points out US dollars can't be spent in China or Japan. They have to be converted into local currency units. The FX has to remain outside the country and opportunities must be found for exchange in the international market. The opportunities for outbound foreign direct investment (FDI) are extremely limited compared to the volume of funds available for investment.

Sure there is a great deal of need but that's not how FDI operates. The bulk of the FDI flows from developing countries to the developed countries - not the other way around. Capital flows from the poor countries to the rich countries because of the broader range of investment opportunities, return, perceived safety, illicit funds and so on.

Long story short, I'm arguing that the interest rates on USG debt tended to fall over the past 30 years because demand exceeded supply and the Fed/Treasury were managing, or riding, a trend rather than manipulating the market. The Fed's monetization of USG debt through QE breaks a lot of economic "rules" but they got away with it. As per my earlier comment the Fed and Treasury have created an artificial shortage of USG debt in the market and as a result the game can continue.

GM Jenkins said...

Costata - the evidence suggests you're right re: artificial shortage. Definitely seems to dovetail with this (speculative) blog post I read last week...

costata said...
This comment has been removed by the author.
costata said...

Hi GM,

I read the post that you linked. Some interesting theories.

I'm wondering if the banksters have the cojones to pull off an unauthorised pump and dump in US sovereign paper and private sector prime paper. I use the word "unauthorised" because I can't think of any reason why the Fed/Treasury would not want rock bottom interest rates on this "risk-free" debt to continue.

If the banksters really can act with impunity in the US bond market then I suspect a pump and dump would be very tempting. I note some MSM pundits are starting to beat the shortage and safe haven drums recently. Pension funds are being herded toward bonds again by new regulations and some other possible reason may be emerging according to the analysts quoted in that ZH piece I linked previously.

Thinking out loud about this issue of whether a play like this would be "unauthorised". If the US Treasury wanted to back up the truck to take advantage of ultra-low IR then the dump would only affect the secondary market. Treasury's gains would be locked in beforehand. So maybe, it might not be a play that runs contrary to policy. Simply a window of opportunity.


Son of Brock Landers said...

Thanks for the link. Im working on a book about Rubin. Basically, they captured the Dems in the 90s, made regulatory changes using the "peopl's party" as a cloak, and have enjoyed immunity ever since. Sadly, the pols wil do anything for gdp growth as well as job gains, and the FIRE economy was the only painless way to get both.

GM Jenkins said...

Looking forward to the book, SoBL!

I'd love to review it here if you send me a copy.

Anonymous said...

I enjoyed your article and was interested in your chart showing the least squares fit to the treasury bill. I wrote this piece exploring the history and future of the ten year:

My question is, What is the lower limit to the 10 year? I see that Japanese yield are at 0.58 percent today. I think that the US Govt. is at east as credit worthy as the Japanese. Can yields drop below 1% and stay there without causing a crisis?