Price Fix is In
A Wall Street Journal editorial note the Jerome Powell Price-Fix Is In.
The latest idea whose time has come and gone and come again is yield-curve control, which is shaping up to be one of the Federal Reserve’s next party tricks. This tool would involve the Fed setting interest rates by diktat for the first time in 70 years, and Governors are warming to the idea.
Backers say the policy allows central banks to manipulate rates without expanding their balance sheets ad infinitum. This argument appealed in Japan, the Frankenstein’s lab of monetary policy, where two decades of quantitative easing left the central bank with relatively few outstanding government bonds to buy.
The Fed last experimented with this policy in the 1940s as Washington struggled to finance World War II.
If Mr. Powell thinks President Trump’s Twitter feed is bad for Fed independence, wait until the chairman starts manipulating rates outright. The danger will grow more acute the more indebted the federal government becomes from pandemic response and Baby Boomer entitlements.
The world needs a market price for the 10-year Treasury yield, and Mr. Powell is threatening to take that away.
News Flash
I have news for the Wall Street Journal:
There is no market price for treasuries right now.
Forcing down interest rates by QE where the Fed wants is not a market price.
Credibility Boost
Straight from the Twilight Zone: “Governor Lael Brainard argues that forcing medium-term rates downward would bolster the Fed’s credibility.”
Yes, about as much as mandating the price of orange juice or steel.
The Wall Journal gets back on track with its conclusion.
We don’t know what price the global economy would pay for such a policy in economic distortions or financial instability. The Fed doesn’t know either. No one should be eager to find out.
Mish
The FED knows the currency solution lies with Congress. But for reasons of moral compromise no solution exists. So the FED’s left holding the bag. But the FED has never has been an innocent bystander. It’s just that now, as Congress ignores economic plight and looks the other way, the FED is given the job of driving an increasingly heavy dump truck down a narrowing road at increasing speed.
And in the backs of people’s minds is an odd sense that something seems increasingly wrong. Invest in ammo.
You can’t sue your economist for malfeasance because no state has given them a license to practice their profession. Let that sink in for awhile.
These “markets” are all manipulated by the Fed the same way BoJ has been manipulating Japanese markets for decades. It is another way of extending and pretending.
But the U.S. is the beacon of Free Market Economy!
The Fed alone? Hard. With BLK’s help sure.
Is it at all possible that the Fed might throw up his hands one fine day?
The Federal Reserve limited it what it can do (buy).
Either Congress has to revise Federal Reserve Act to enlarge their powers … or, like now, work in conjunction with US Treasury.
My impression is the Fed is enlarging their powers all by themselves. Am I wrong?
I don’t see Powell crossing any lines (yet).
However, I DID see Bernanke (in 2008) cross the line not once, not twice, but three times.
Maiden Lane
Opening Discount Window to every Tom Dick and Harry
Putting an “explicit” guarantee on GSE mbs (till then it had been “implied”, but iirc, China owned about $500 billion worth at the time. We weren’t going to make them mad)
Having said that there was barely a murmur from Congress re: Bernanke’s actions … which led me to believe Bernanke met with leaders of Capitol Hill behind closed doors … and they gave him the OK to do WHATEVER IT TOOK to make market carnage stop.
There is growing backlash against the Fed in the country now, as it is correctly being perceived that the Fed’s manipulation is directly responsible for the large disparity between rich and poor. The inequality of the classes and the inability of the working class to survive is directly attributable to the Fed and its actions to support Wall St. while punishing main street. It is time to abolish the Fed….
How the eviction crisis across the U.S. will look
“White House economic adviser Larry Kudlow said on Sunday that he would extend that moratorium, but these tenants are now unprotected from eviction.”
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Can Kudlow even play CHECKERS??
He – of all people – should realize second order effects. Allowing rent not to be paid will crush many landlords who need to make mortgage / insurance / property tax / maintenance payments.
“Allowing rent not to be paid will crush many landlords who need to make mortgage / insurance / property tax / maintenance payments.”
As it needs to.
At least unless there exists a readily available, less stressful, to bring those costs down to the rather small fraction of current which is economically sustainable and compatible with a free market.
Which there isn’t, or it would have superseded bankruptcy about 2000 years ago.
Bankruptcy, foreclosure, and subsequent resale at 10 to 50 percent of current price while clearing out the excessive debt, was the only sustainable way forward for America even before Covid. And it’s not as if Covid has made that process any less critical.
You are correct.
Probably should have asked why Kudlow favoring “the poor” over “the rich”.
If I understand correctly, instead of The Fed setting the rates by buying Treasuries as they do at the moment, they’ll do it by Diktat. So who will buy the Treasuries to finance the deficit? How does it work in Japan?
Um I think that is the point, it DOESN’T work in Japan.
Ah I see, someone buys their government bonds though don’t they?
“We don’t know what price the global economy would pay for such a policy in economic distortions or financial instability. The Fed doesn’t know either. No one should be eager to find out.”
No one is eager to find out what is is on the other side of the coin, either. That is why we continue to get more of the same.
Collective memory fades with time. Who personally remembers a time when the FED did not exist? Who personally remembers a time when the government did not interfere in the economy during a recession?
Republican Senators Collins and Romney will oppose Judy Shelton.
Collins? She will talk all tough and say she is not going to approve this nominee just as she said she would vote not to confirm O’Kavanaugh. But when the vote rolls around she will be smooching DT’s prostate as usual.
Really?
She is in the fight for her life this November. At best, toss up now.
She’ll roll the dice with DJT??
Looking more and more like the old Soviet Union every day.
“Backers say the policy allows central banks to manipulate rates without expanding their balance sheets ad infinitum.”
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Well, that is sort of happening now. “Investors” are front running the Federal Reserve at every turn. The SPV created in the Spring (with US Treasury and due to end by October) could purchase UP TO $750 billion in corporate bonds.
I checked the most recent FR balance sheet. The Total purchases to date of bonds / bond etfs / commercial paper / munis only about $100 billion.
I’ve been making the point that the Federal Reserve’s bark a lot worse than its bite. When Federal Reserve makes an announcement, they KNOW “investors” will front run them leaving them without much to do.
Now when the Losses start to show, in earnest???
Will prove to be an “uh oh” moment for many.
edit: Federal Reserve just extended emergency lending till end of year.
Read at CNBC this morning that it is predicted the Fed will blow up the balance sheet to over 20 trillion. Here is the thing, the US government alone is now standing at $26,536,793,171,015.79 and another more than a trillion in stimulus for covid before the end of the 2020 FY, and that is on top of regular budgeted spending which adds about 800 billion to the deficit every month. ALL that debt has to be rolled over because in a period of deficits you cannot honestly say you are paying down debt, as long as you are creating more debt you are paying nothing off, just getting in deeper.
In order to pay this debt down we would have to run a surplus and apply that surplus to the amount owed just like when you deal with your credit cards. That will never be allowed because it would “shrink the economy.” Yet even if the debt stabilized at say 30 trillion with new taxes to end the deficit spending we would still have to carry that 30 trillion at interest, meaning if interest rates ever even hit 1% again it will bankrupt the nation, with debt service all going to the top 10% richest Americans who own that debt. It actually already is goin to them. Just that for the moment we can “afford” that burden because rates are so low as to be negative in real terms.
The Fed will be the only market for this debt if they swich from a market based interest rate discovery. And on top of that because they will be holding the interest on that debt so far below what the market would set it means all other rates like auto loans, mortgages, credit cards, etc. will be disconnected from that and will have to make up the difference. Again it already does in a way, my credit card is 13.75% which I thought was a good rate for a credit card when I got it, but when you think of how profitable that is for the banks you just want to take scissors to it. I also have an old emergency card I never closed at 29.9% which till this week had a zero balance. Mortgages and other loans will become more and more disconnected from economic reality as well, as the so called market price discovery becomes a feeding frenzy on a population now utterly dependent upon credit because the alternative to credit is a near impossible cash society, there are many places that do not take cash. How do you pay your utility bill when there no longer are offices or a desk you can go to for payment of bills? Cash = poverty now. If you want to do something as simple as rent a car or buy anything over $5,000 you must use a card so your buying and spending can be tracked most notably by government. How are they going to file a SAR regarding your spending if you ise cash?
So all that rolling over of federal debt will have no other place to land but the Fed balance sheet where it will mean nothing at all.
“Read at CNBC this morning that it is predicted the Fed will blow up the balance sheet to over 20 trillion. ”
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Opinions vary.
Anyways, even if true that still leaves a lot in public hands as fedgov debt soon > $30 trillion.
The worry for many (everyone?) now is return ON investment.
Soon enough it will turn to return OF investment.
At that point, the lightbulb will go off for many that maybe, just maybe, treasuries not so bad.
Correct me if wrong, when rates go neg it’ll be because big entities who have too many dollars to put in a bank account will have no better “investment” option than T’s. But at no point does a little guy exchange his little pile of dollars for neg interest T’s — except to speculate and try to front-run the big entities.
You are correct.
Any individual can always hide his money under the mattress. But there is < $US 2 trillion in currency circulation globally. Quite a few multi nationals routinely sitting on tens of $billions in cash and not option.
I’ll be quite honest. As long as they hold home values up for 25 years, that’s about all that matters. It will likely be 0.5% loans to do it, but as long as I can retire and also pass down the home to my kids, that’s the best I can do. Beyond that it’s too far out to predict, and the kids that will have to grow up past that won’t even be born for 25+ more years. If they are born at all.
“As long as they hold home values up for 25 years, that’s about all that matters.”
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Federal Reserve only controls the first I in PITI.
The other 3 letters are on a tear upwards … at SOME point the gimmicks will run their course … housing will crash. None to soon.
Home of the Brave indeed. Let’s f*** the next generation as long as “I” am good. tt’s a good thing it won’t happen.
Just imagine how fantastic it would be, if they hold milk values up for 25 years, as the milk sits there and curdles! Now wouldn’t that make America Great Again!
Just some basics:
A home, like all else, sitting there and decaying, does patently not get more valuable over time. It is no different, except for the rate of decay, from milk in that regard.
Also, The Fed only puts Washington’s head on paper pieces. That’s all. It doesn’t make anything, build anything, invent anything…. Hence, it creates no new value.
Yet, your home “holding up” for 25 years, means new value has to be added to it. And since The Fed doesn’t create any value, and you home doesn’t create any by sitting there decaying, the only possible way The Fed could help it “hold up”, is to take the value required to do so, from from somewhere, and redistribute it to you. And somewhere else, means “someone else.”
So what you are cheering for America to become (more like remain…), is a straight up, crass kleptocracy. Where the ruling Junta runs around robbing poor people into destitution. While you are cheering for them to do so, one hollow eyed starving kid dying at a time. Just as long as the Junta promises to cut precious little useless you in on the looting, so that you don’t have to do anything useful, but can instead just sit there and cheer for a junta as it gleefully steals the last remaining breadcrumb from the lips of a million starving kids.
awesome response!
Also, The Fed only puts Washington’s head on paper pieces. That’s all. It doesn’t make anything, build anything, invent anything…. Hence, it creates no new value.
Yeah, I read that a lot and especially from libertarians, yet people regularly kill each other and have extreme messy divorces and screw each other blind for just a few of those pieces of paper. Because those pieces of paper are money, legal tender, claims on assets. The Fed may not MAKE anything tangible, but they do direct who gets what in a macro sense in our economy.
“The Fed may not MAKE anything tangible, but they do direct who gets what in a macro sense in our economy.”
Yup.
What they are engaged in, is pure, 100% redistribution. Not in any way at all different from direct taxation of some, in order to hand the funds to others.
It’s just that while most tax-some-to-support-others schemes, are at least nominally aimed at taxing the rich to aid the poor; the Fed version, is the exact opposite: Tax the, if not poor then then at least those working; in order to hand the money to the idle rich.
That’s why wealth distribution has gotten more unequal since 1971. And also why most Americans are poorer now, than they were back then, which is quite an accomplishment, considering how much more efficient many processes have gotten.
But the theft from those working, by the Fed, for the benefit of those receiving and living off of Fed welfare, is by now more than making up for the “lift all boats” technological progress. Such that people really are getting poorer and poorer year in year out.
This theft, is also the entire reason, why working people have gotten poorer. Mexicans, Chinese and Muslims have exactly zero to do with it. The Fed stole working people’s money, and handed it to nothings who either idly sit there “owning assets”, or do pure, negative-value-add makework in FIRE rackets. That’s where all the stolen money went. Not to Mexicans, not to Chinese, not to Black Lives Matter. Just to the guy with a big house in San Francisco, and the one with a big stock portfolio. It isn’t hrder than that, no matter how much resources the Fed welfare beneficiaries try to obfuscate that obvious-to-anyone-literate fact.
Bingo Stuki, the top 10% has taken more than 100% of all new wealth in the nation every year since 2000, and this year will be seen to be the very biggest take of them all. What I wish I knew from a forensics point of view is how the Fed hides this gifting to the rich at the expense of all else so that it is not showing up on their balance sheets. The bboks are cooked that cannot be otherwise. Because we know in the GFC the Fed actually pumped out more than 10 trillion yet their balance sheet did not show that. I was thinking they are only showing the balance, be it +/- and what they were doing was buying those disgusting outright fraudulent SIVs and other instruments issued or bought by their banking system in exchange for cash at face value and then vaporized at least till the maturity dates, but by now many of the failed bonds and instruments not worth their weight in recycled paper would have matured. Because FASB changed the mark to market rule (at least for big banks and corporations) to mark to make believe they can list them on their balance sheet at any rate they like.
Or, not put all that on their balance sheet at all because they can post the entry at any price they like, all they have to say is this is the market value and that happens to equal the amounts they paid out to the banks for all of it, so the net difference is zero, it did not affect their balance sheets at all. According to them. That gave them till maturity to repump the housing bubble so that the banks also show no losses, take no losses on any of the remaining housing stock that was not already impaired. Essentially all losses related to the GFC were monetized and that cash creation was hidden off the balance sheet because they were able to mark the trash to any price they liked.
I don’t even think the Fed is trying to hide it.
It’s just that if you do not create any new wealth yourself, the only possible way you can fund policies aimed at making those with assets wealthier, is by making those without assets poorer. The additions to the wealth which those with assets enjoy as a result of your policy, has to come from somewhere. That’s just basic arithmetic. And it ain’t coming from neither the mold in their house walls, nor the dustmites in their bond stacks.
The whole thing is another example of Bastiat’s Seen and Unseen: When The Fed bails out Citibank, it obviously makes an awful lot of (mostly) wealthy banksters, bondholders, lawyers, executives etc.; as well as those leasing and selling them condos, yachts and Jimmy Choos in New York; wealthier than if they had not been bailed out. That’s seen by all. But exactly who ends up playing for it, is much harder to pin down and observe directly. But, anyone with even the most rudimentary understanding of; not even necessarily economics, but even just basic arithmetic; knows it has to come from somewhere. Hence come from someone. Who will hence be made poorer as a result of the bailout act/policy.
It’s the same story when interest rates are lowered to “support” the “housing market.” Home owners obviously benefits from being “supported.” Which, again by simple arithmetic necessity, means someone else has to pay for that support. And again, exactly whom, is a bit diffuse and hard to pin down. But anyone sentient knows someone has to.
Which is why Bastiat points out:
“
In the department of economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause — it is seen. The others unfold in succession — they are not seen: it is well for us if they are foreseen. Between a good and a bad economist this constitutes the whole difference — the one takes account of the visible effect; the other takes account both of the effects which are seen and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favorable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, at the risk of a small present evil.
“
And that should tell anyone all they need to know, about the level of quality of “economists” in the employ of The Fed…..
I want to reply to that, but also to Tony Bennett. I cannot agree, at least directly, they could very well bust this system and actually already have since there is now no way out of this debt spiral except more debt, and that has a very limited shelf life at this point because of the geometric expansion compounding debt requires. So all the actions required to kill the current system have already been done, it is just waiting for the roof to cave in now.
Just before that happens though they will do something radical like a jubilee and then the Fed will not be in control of just the I in your PITI. They will have effectively granted you all the P as well. At some point there has to be a reset, there just is no way around that, if not there will be tens of billions of trillions of quadrillions of dollars (assets and claims on assets) and they will all be owned by one person, with the rest of us dead of starvation.
I say that we are going to see this before the next 12 months is out no matter what happens in the election. I say the only alternative is that aliens land and free energy as well as unlimited resources and technology are fact. When everyone has everything they could ever possibly want the concept of wealth loses all meaning. No scarcity means no money for it would simply not be needed. Either that or man may have ended civilization within the next 12 months so there would be nobody to care or notice. Not worth dwelling on, it would be like dwelling on your own death, why? It is coming and you can’t stop it, it is going to be bad and there is no way to make it better, so enjoy now while you can.
“Just before that happens though they will do something radical like a jubilee and then the Fed will not be in control of just the I in your PITI. They will have effectively granted you all the P as well.”
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Well, if they do that they’ll make a lot of people poor. Though the GSEs guarantee the debt, most of the mbs held privately (pensions, institutional, etc).
There is NO magic bullet.
You have forgotten the 70’s, when old people living off fixed income were dumped on the street because they couldn’t afford the property taxes that were higher than their mortgage payments ever were. It wouldn’t even necessarily require high inflation. They’re strapped for funds, rates could go up, and wages could go down. So could still be hard to hold onto the property, let alone the value.
I’d like to know the prognosis for GBP in the medium term. If any currency is ripe for trashing it’s Sterling
Another debt ridden, socially and economically sick nation, what do you expect ? I d say RUBLE, buy Ruble ! Healthy, almost debtless economy with limited social liabilities, military strong on top of that ! I started buying amidst the CIA orchestrated coup in Ukraine , at one point I managed to rake in 25% interest rates on sovereign bonds, bought some stock too, still making profits up till now ….
Great, but don’t know any platform for buying Russian bonds or stocks. Any ideas?
I bought Ruble at my local bank in 2014 and began looking for undervalued russian state bonds , I use the german ONVISTA aktien , anleihen(shares and bonds ) and check ‘Russische Foederation rl bonds’, then told my bank what to buy ….I am afraid it is a bit too late now, everything has become too pricey, 5% for Ruble, though state guaranteed, is not great….. It just occurred to me that in the US and among its *licking friends you probably can t buy russian bonds because of ‘sanctions’…..
As a Brit, I think the GBP is probably positioned marginally better than the euro (and possibly even the USD?).
Once Brexit is settled and it is hopefully seen that the UK not only is surviving, but beginning to flourish, my instinct is that the GBP will rise against the flawed from the outset euro.
Just my twopence worth.