How The Fed's Next Trick Will Hurt Bonds

MSN Money ^ | 10 December 2012 | Jim Jubak

[zeestephen]

Another bond-buying program seems likely as the Federal Reserve tries to boost the economy. But long term, it will lead to higher interest rates, inflation and bond market turmoil.

[zeestephen]

The new bond buying program Jim Jubak expects would require the further expansion of the Federal Reserve's already massive balance sheet, which stood at $2.85 trillion as of November 21.

Jubak believes the Fed's balance sheet will grow to more than $3 trillion sometime in 2013.

The Fed's balance sheet was at just about $1 trillion before the start of the current downturn.

[palmer]

the new program will be an out-and-out plan to buy five- to seven-year Treasurys

The author is still pretending that the previous QE was to "help the economy". Now the emperor's jock strap has fallen off and the Fed is revealed as simply the enabler for Congress and Obama to spend money we don't and never will have. In fact low rates have destroyed much of the economy by taking away capital from long term uses growing businesses and turning worldwide stock markets into a casino. Low rates here and Japan have devastated economies elsewhere by creating booms and busts through carry trade. It is one of the reasons that the marginal economies in Europe are going under.

The only way this ends is default or inflation. There is no more chance of growing and paying the money back through tax revenue (with no tax increases). The bubble that has been created and maintained in Treasuries and will be extended with this blatant nonsense will crash and burn very badly with the potential for hyperinflation starting with a currency swap where bonds and entitlements get paid out in funny money. Ultimately the Chinese and others who make things we want will want their payment in PMs and there will be middlemen to take your PMs without much the government can do about it.

[pepsionice]

You would have to admit that the bond rating for the US...will be lowered again by spring of 2013, and I’m betting on a second lowering by the end of 2013.

[tired&retired]

As a CPA who spent many years auditing balance sheets, I can honestly say that the Fed balance sheet is not worth the paper it is written on. When an entity has the authority to fabricate assets (monetary supply) at will with no tangible backup support, it is a facade.

What puzzles me is that they are now creating the illusion of long term interest rate stability by turning their fabricated cash into long term low interest rate debt investments.

And, every time I see the morning DOW futures skyrocket after a bad previous day, or watch the DOW go up while the NASDAQ is off considerably, I know they are playing games!

[tired&retired]

“the new program will be an out-and-out plan to buy five- to seven-year Treasurys”

This is like playing Monopoly with the bank. They don’t care what they spend their $$ on when they are fabricating them to begin with.

[tired&retired]

“You would have to admit that the bond rating for the US...will be lowered again by spring of 2013, and I’m betting on a second lowering by the end of 2013.”

One would assume, in an open market, that a lowering of rating would cause an increase in interest rates. But this is not an open market. It is a Fed manipulated market and has been since 1992.

[gotribe]

From the article, here's the flaw in the mainstream thinking: "The big problem comes when the economy starts to pick up speed. Then, all that created money that was intended to speed up growth becomes the source of inflation and threatens to push up not just prices (consumer inflation) but also the prices of financial assets (asset-price inflation). Neither is good." What these pundits haven't figured out yet is that with a $3 trillion balance sheet of garbage assets, the Fed no longer has any incentive to allow the economy to grow. So the economy will not be allowed to grow.

[palmer]

But this is not an open market.

No, and even worse there's a number of non-market mechanisms to force other countries to debase or buy our treasuries. China goes along to some extent as long as we continue to fund their expansion by our consumption. That's why morons like Krugman claim that our economic problem is a lack of demand and it needs stimulating. It's not. It's a lack of savings and investment to grow our economy. The real goal of Krugman and his ilk is the demise of America.

[Axenolith]

3 trillion “in 2013”? One more month of 45 billion in crappy mortgage repurchases sticks the fork in that number, should be more like “might pass 4 trillion”...

[zeestephen]

Re: $4 Trillion

Yes, I noticed the same thing, but Jubak said the Fed asset sheet has been right below $3 trillion since June 2011.

I don't understand why.

I believe “Operation Twist” is sterilized - that is, short term debt is sold, then the exact same amount of longer term is bought.

But the mortgage purchases are just old fashioned money printing, correct?

Speaking of crappy assets...

Twice in three days I read or heard that the Fed is now purchasing 70% of new Treasury issues.

Once again, is that not pure money printing?

And, as I recall, 90% of US mortgages are now guaranteed by Fannie, Freddie, FHA, or the VA.

I also heard an economist on C-SPAN say if US interest rates move up to their post-1945 average, our debt costs will go up $500 billion.

I mean, who is buying ANY of our debt?

You have to go out more than 5 years on the curve just to earn one percent!

[tdscpa]

“Who is buying our debt?”

Only the US government would buy it without requiring Jimmy Carter type interest rates.

Owe-bama can't pay 16-18% interest on 16-20 trillion in debt.

[Axenolith]

Yea, and out 5+ years is the part of the curve they are trying to depress. Note that they don’t mention that this is depressing the returns on the SSI “trust fund” debt. It’s accounted as averaging in the 4-5% range and IIRC, every percent below the assumed average puts it something like 200 billion in the red further, I think it was annually...