Fed fights a losing battle on bonds

Oh, and don’t forget, treasuruies tend to run opposite of the stock market. When stocks go up treasuries go down which increases the yield (interest rate). Of course interest rates would go up in the face of the recent stock market rally.

Monetarizing the debt will result in inflation. That is just simple supply and demand. But if this move helps to bring down the price of the dollar realtive to other major currencies, it will be a good thing. Remember a strong dollar means our goods are expensive overseas and imports are cheap here. That moves good manufacturing jobs to other countries.

It will cause short term pain, but in the long run the US would be better if non economic factors did not artifically shore up the price of the dollar. When I say non eceomonc factors I mean things like using the dollar as the world’s reserve currency. According to supply and demand trade deficits are supposed to drive down the price of a currency. It has only been these ono-economic and artificial factors that have kept the dollar strong for so long.

Probably not. At some point, you have to decide if kapitalism can be resurrected. If it can, you have to start letting the markets set pricing on things again.

This is a big decision. While treasuries are probably priced correctly, this is not true for mortgages and real estate. Many of these loans will need to be repriced (in a downward direction) as the prices of the houses and buildings correct back down to their true values. There is still a lot of rubble out there in this area.

Just a few short years ago the Canadian Dollar was $0.50cents, for every US Dollar you could get 2 Canadian. Try that one today.
Now it looks like the Peso will soon be worth more than the US Dollar, as long as the FED keeps pumping Trillions in to the market.
It is time we audit the FED, then of course we will findo out that there is no magical wizzard sitting behind the curtain and that the entire world economy is based book entries, not real values.
At what level of debt do we all want to consider ‘enough is enough’? Time to start over. Read ‘web of debt’, fantastic book with real solutions. Maybe Bernanke should read it, but then again, he will find out that he was living in fantasy world half his life. Poor guy…

WOW, what an astute group of commenters. It is nice to read comments from such well informed folks. I do know this that at some point the Fed must go, they are ruining our country along with some others in congress. I read not to long ago about someone in the Atlanta area naming a street or road after Ben Bernanke, I wonder what they named it, Ben(dover) drive or perhaps Ben(dover)lane. This guy is trying his best to take the U.S. to the crapper to flush us down. I find it very ironic that his predecessor (Greenspam) also worked along these lines (remember the bailout of Long Term Capital Management) at taxpayer expense. Anyway there were so many good comments on this blog, if only we could implement just some of them…thanks for letting say my piece.

There is a good reason why Central Banks around the world don’t try to “monetize the debt” by just printing money and then using that “funny money” to buy Government Treasury Bonds.

It is this — it doesn’t work.

The Federal Reserve’s money charlatans and counterfeiters create a mirage and expect that mirage to fool the people.

You cannot reasonably expect a huge increase in the money supply in circulation (with nothing else happening) to have no effect on the “price” of money (i.e., the prevailing interest rate on debt).

Indeed by willy-nilly creating new money with nothing to back it — no extra economic growth for example — the FED runs the risk of creating “aversion to holding bonds”.

The price of money is the implicit interest rate that such Treasury bonds pay out. This is not the nominal rate or face value interest rate, but the current yield that those bonds sell at in the marketplace.

In other words the price of bonds drops when their supply goes up. And of course the implied interest rate (the yield) goes up as prices drop. This is just the law of supply and demand.

I don’t understand why the FED is so inconsistent. In Ben Bernanke’s own words “Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply.”

But then the FED goes ahead and issues more and more dollars. The FED says that dollars only retain their relative worth if the FED doesn’t issue too many of them.

This is the same thing as saying that interest rates will stay low (or that the price of debt & money will stay high) ONLY IF the FED does not print too many dollars.

So as soon as the FED prints all those extra dollars, should it NOT (from its own words) EXPECT that interest rates will go UP (that is, that the value of money, debt, and bonds, will drop)?

I repeat, how can the FED say two different things from 2 sides of the same mouth? This is inconsistent and just plain stupid.

http://www.federalreserve.gov/boardDocs/speeches/2002/20021121/default.htm

If I was from the speak-plain state of Missouri in the heartland of America, right about now I would say “Show Me!”
And maybe also quote the Missouri state motto: Salus populi suprema lex esto (Latin: “Let the welfare of the people be the supreme law”)

http://en.wikipedia.org/wiki/Missouri

The FED is out-of-control. It is acting AGAINST the best interests of the people. Can anyone actually trust a Central Bank with the following motto?

But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.

As the Federal Reserve increases money in circulation — by just printing more and more of it — and by then buying bonds that the Government itself just prints, the relative value of ALL the outstanding bonds in that same term class will DROP. The yield goes up.

This is because the bond market simply does not buy into Bernanke’s magical-mushroom “mirage”.

Ben Bernanke is deluded if he thinks that the magic wonderful new invention called the Magic Money Printing Press will solve his problems.

There is a corollary puzzle here also. That is, that why would we expect other financial instruments’ interest rates to go down even if the FED could somehow print a TRILLION dollars and thus keep Treasury rates low?

Sure the FED can keep some mortgage rates low so long as it prints all the money that Freddie and Fannie need to keep buying up all the mortgages that are out there.

But can the FED do this with all the other bond classes? As Paul’s article suggests, this is virtually impossible. That bond market is just too large. The FED is overwhelmed.

There was a fiasco back in 1998 that some people remember that was called LTCM (Long Term Capital Management). They had Nobel laureates in their organization. They thought that there were “historical relationships” between different bond classes that ALWAYS would be reverted back to — if you could wait that long. Their business model critically depended on those “historical relationships” returning to the norm.

Well guess what? Those “relationships” did not hold up.

http://en.wikipedia.org/wiki/Long-Term_Capital_Management

And so it is with the vain hope that by dropping Treasury rates, the FED can force other rates down as well. Bernanke thinks that there are “historical relationships” that will stay in place.

That is, force the government bond rates DOWN and others will DROP AS WELL. Well I gotta get me some of that smoke too! To cause THAT KIND of delusional thinking it must be potent stuff!

Let me repeat once more, hoping that it will sink in, “Dr. Bernanke, it just ain’t GONNA HAPPEN, no matter how much you hope it will!”

As more and more phony money is put into circulation those other bond classes will also have their rates go up — this is because no one in their right mind will buy 30-year bonds at 5% — the inflation rates over the 30-year time period will cause the intrinsic bond values to be so debased so as to cause the return from those investments to be NEGATIVE!

What else can you expect from misusing a “technology, called a printing press… that allows… as many U.S. dollars [to be produced]… at essentially no cost.

Some “no cost”!

It’s absurd for the Fed to think they can control interest rates by buying US Treasury debt. The bond market is too big and the US debt is growing exponentially. Monetizing the debt will only mean the US$ collapses. But the Fed will try. They are going to have to run a lot faster to keep up with the $2Trillion annual deficits, not to mention the foreign central banks selling their US$ denominated debt holdings to escape a collapsing US$.

NO.

Sure why not, pump some more dollars into the economy so that eventually our dollar will be worthless and the countries like China who own our debt all bail. You can give mortgages away and that will not effect the ability of an unemployed person to buy a house. The issue is not interest rates. It is jobs. These are disappearing at an alarming rate and pouring money into unemployment benefits and food stamps are not going to incentize anyone or any business to create jobs. A pro business economic policy will. The business investment segment of the first quarter GDP report declined by 37%! This clearly means that the people that create jobs in this country have no confidence in putting their money to work. Congress has it completely wrong and most of these idiots should be fired.

It would be great to see some of the people who created this mess and are now profiting from it to reinvest in these securities since they are much safer than the Ponzi scheme they (banks) created but they are getting their money and will take again. Mortgage rates must stay this low for a quick recovery or all of what’s been implemented will go for naught. Why would anyone buy a car for or anything else for 20% less and finance it for 25% MORE, there is no incentive. Looks like they better go back to the drawing board or this isn’t over for a long time.

Of course they should if they intend to continue the bubble in treasuries until its eventual collapse. The bubbled stock market, then real estate, then treasuries all have the common hallmark of not stopping in any logical way but require total bubble pop and collapse before people start calling it a bubble.

Dr. Bernanke – please continue to ruin our money and destroy our future.

Add my two cents to all comments about the fed. Personally Mr Chairman Bernake of the fed should be replaced and sent packing. In fact abolish the FED and return the responsibility back to congress. Let the market decide bond yields as his hair brained ideas are bankrupting us.

Debt is slavery. The Fed lends money to our government, we only pay the interest back through taxation under the threat of imprisonment, therefore we all are slaves.

We are now and will continue to be slaves until our monetary system is redesigned for the benefit of humanity, not private profit.

How great it could be to have a monetary system that no longer operates as a mechanism for profit & slavery, but for sustainable advances in the Standard of living & quality of life of future generations.

Support for Ron Paul’s bill (H.R. 1207) to audit the Fed is gaining more and more. People need to wake up and become aware that this shadowy huge organization is not part of our country or our government. We need to get control back of our own monetary policy and END THE FED !!!

Absolutely not. The Fed should let long term bonds reflect the price of money, given the risks of inflation and deflation over the period.

NO

The Fed buying treasurys is like using one credit card to pay off another. Sooner or later, the gig will be up. Hello INFLATION! here we come.

No! Rising interest rates are an indication of a healthy economy. Let’s face it, 3% on a 10 year bond is already ridiculously low, as are 30 year mortgage rates. If you think interest rates are high, then YOU’RE high! Am I the only person to think that it’s wierd for the Fed to be buying treasuries in the first place?

We have circus monkeys running the fed and the treasury. We’re buying our own debt because no one else will. Our public is so ignorant in financial matters. When our govenment spends money like there is no tomarrow. There is likely to be no tomarrow. Investors are not going to buy bonds that are certain to rapidly depreciate. When you buy bonds at 3% interest and inflation causes the risk free rate of return to go to 6% the value of your investment is cut in half! No sane person would buy those treasuries in light of the way we are devaluating our currency. Oh, I forgot our government would make that investment. They also purchased controlling interest in GM, CITI Bank, Chrysler, FNMA, and Freddie MAC, and several other bankrupt institutions, and bailed out all of the state governments that were run as poorly as the Federal Government is being run now.

As a mortgage professional I absolutely want the rates to stay low. However, if it rates rising means a more solid economic future then I’m all for it!

Of course, NOT, but they will. They have no choice. The FED is running on empty and the BOND market is shoving the QE right up Ben’s behind. The FED is now right between a ROCK and a ROCK, they have guided the US economy right into the iceberg and it’s just a metter of time before she goes down to the bottom. Wall Street is pumping the investing dupes for all they are worth, but mark my words, the bottom is going to fall out of the stock market and there will be absolutely NOTHING the government will be able to do to ultimately stop it, since they primarily have caused it. Dow 4000 here we come, but it could take another 4 to 6 months before all this financial nonsense finally hits the brick wall. God help those who got suckered. People don’t always get what they want, they usually always get what they deserve.