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“The Biggest Bubble Of All . . . U.S. Government Debt”

Posted by commendatori on January 12, 2009

George Washington’s Blog

Thursday, Dec 18, 2008

PhD economist Marc Faber said in a recent interview that the last bubble to crash will be in long-term U.S. treasury bonds. Indeed, Faber has suggested shorting long-term treasuries at just the right moment. (He also is confident that – sooner or later – the U.S will go bankrupt).

Reuters correspondent and former Sempra economist John Kemp points out some irony regarding the fed’s policy regarding long-term treasuries:

The Fed’s decision to cut interest rates to between zero and 0.25 percent, coupled with a promise to keep them there for an extended period, and the threat to conduct even more unconventional operations in the longer-dated Treasury market risks the biggest bubble of all, this time in the U.S. government debt.***

The Fed is misleading investors into the biggest bubble of all time. Bernanke is making what learned economists call a “time-inconsistent” promise to hold interest rates at ultra low levels for an extended period.

The problem is that if the unconventional monetary policy works, and the economy picks up, the Fed will come under pressure to “normalize” rates and reduce excess liquidity to prevent a rise in inflation. The resulting rate rises will inflict massive losses on anyone who bought bonds at today 2.25 percent rate.

Bizarrely, Bernanke and Co are in fact inviting investors to bet the policy will fail, the economy will remain mired in slump for a long period, deflation will occur and interest rates will remain on the floor, as Japan’s have done since the 1990s . . . . Bernanke and Co are gambling memories will prove short and investors will prove just as eager to pay top prices for long-term government and private debt even though the downside is large [as previous times when they’ve bought at the top of the market].

[The fed is really saying] Let us have one last bubble, and when it collapses, we promise not to do any more in future…honest.

The must-create-big-bubble-to-fight-the-big-bust-we-created-with-the-last-bubble shenanigans of the Fed are leading us into disaster.

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2 Responses to ““The Biggest Bubble Of All . . . U.S. Government Debt””

  1. MC Shalom said

    Chairman Ben S. Bernanke, Quantitative Easing Can’t Work.

    In a Liquidity Trap although Saving (S) is abnormally high investment (I) is next to 0.

    Hence, the Keynesian paradigm I = S is not verified.

    The purpose of Quantitative Easing being to lower the yield on long-term savings and increase liquidity it doesn’t create $1 of investment.

    In a Liquidity Trap the last thing the Market needs is liquidity. This is why, Mr Chairman, we call it a Liquidity Trap,

    Force-feeding the Market won’t achieve anything useful.

    If short-term risk free interest rates are at 0.00% doesn’t that mean that credit is worthless?

    Quantitative Easing does diminish the yield on long-term US Treasury debt but lowers marginally, if at all, the asked yield on long-term savings.

    Those purchases maintain the demand for long-term asset in an unstable equilibrium.

    When this disequilibrium resolves the Market turns chaotic.

    This and other issues are explored in my tract:

    A Specific Application of Employment, Interest and Money
    Plea for a New World Economic Order

    Abstract:

    This tract makes a critical analysis of credit based, free market economy, Capitalism, and proves that its dysfunctions are the result of the existence of credit.

    It shows that income / wealth disparity, cause and consequence of credit and of the level of long-term interest-rates, is the first order hidden variable, possibly the only one, of economic development.

    It solves most of the puzzles of macro economy: among which Unemployment, Business Cycles, Under Development, Trade Deficits, International Division of Labor, Stagflation, Greenspan Conundrum, Deflation and Keynes’ Liquidity Trap…

    It shows that no fiscal or monetary policy, including the barbaric Quantitative Easing will get us out of depression.

    A Credit Free, Free Market Economy will correct all of those dysfunctions.

    The other option would be to wait till, on the long run, most of our productive assets get physically destroyed either by war or by rust.
    It will be either awfully deadly or dramatically long.

    In This Age of Turbulence People Want an Exit Strategy Out of Credit,
    An Adventure in a New World Economic Order.

    We Need, Hence, Abolish Interest Bearing Credit and Cancel All Interest Bearing Debt.

    Exit Strategy Out of Credit

    A Specific Application of Employment, Interest and Money
    [Intended for my Fellows Economists].

    Press release of my open letter to Chairman Ben S. Bernanke:

    Chairman Ben S. Bernanke, Quantitative Easing Can’t Work!

    Yours Sincerely,

    Shalom P. Hamou AKA ‘MC Shalom’
    Chief Economist – Master Conductor
    1776 – Annuit Cœptis.

  2. MC Shalom said

    Ben S. Bernanke Exposed

    “The debate about the ultimate causes of the prolonged Japanese slump has been heated. There are questions, for example, about whether the Japanese economic model, constrained as it is by the inherent conservatism of a society that places so much value on consensus, is well-equipped to deal with the increasing pace of technological, social, and economic change we see in the world today.

    The problems of the Japanese banking system, for example, can be interpreted as arising in part from the collision of a traditional, relationship-based financial system with the forces of globalization, deregulation, and technological innovation (Hoshi and Kashyap, forthcoming). Indeed, it seems fairly safe to say that, in the long run, Japan’s economic success will depend largely on whether the country can achieve a structural transformation that increases its economic flexibility and openness to change, without sacrificing its traditional strengths.

    In the short-to-medium run, however, macroeconomic policy has played, and will continue to play, a major role in Japan’s macroeconomic (mis) fortunes. My focus in this essay will be on monetary policy in particular. Although it is not essential to the arguments I want to make—-which concern what monetary policy should do now, not what it has done in the past—-I tend to agree with the conventional wisdom that attributes much of Japan’s current dilemma to exceptionally poor monetary policy-making over the past fifteen years (see Bernanke and Gertler, 1999, for a formal econometric analysis).

    Among the more important monetary-policy mistakes were 1) the failure to tighten policy during 1987-89, despite evidence of growing inflationary pressures, a failure that contributed to the development of the “bubble economy”; 2) the apparent attempt to “prick” the stock market bubble in 1989-91, which helped to induce an asset-price crash; and 3) the failure to ease adequately during the 1991-94 period, as asset prices, the banking system, and the economy declined precipitously

    Bernanke and Gertler (1999) argue that if the Japanese monetary policy after 1985 had focused on stabilizing aggregate demand and inflation, rather than being distracted by the exchange rate or asset prices, the results would have been much better. Bank of Japan officials would not necessarily deny that monetary policy has some culpability for the current situation. But they would also argue that now, at least, the Bank of Japan is doing all it can to promote economic recovery.

    For example, in his vigorous defense of current Bank of Japan (BOJ) policies, Okina (1999, p. 1) applauds the “BOJ’s historically unprecedented accommodative monetary policy”. He refers, of course, to the fact that the BOJ has for some time now pursued a policy of setting the call rate, its instrument rate, virtually at zero, its practical floor. Having pushed monetary ease to 2 Posen (1998) discusses the somewhat spotty record of Japanese fiscal policy; see especially his Chapter 2.its seeming limit, what more could the BOJ do? Isn’t Japan stuck in what Keynes called a “liquidity trap”?

    I will argue here that, to the contrary, there is much that the Bank of Japan, in cooperation with other government agencies, could do to help promote economic recovery in Japan. Most of my arguments will not be new to the policy board and staff of the BOJ, which of course has discussed these questions extensively. However, their responses, when not confused or inconsistent, have generally relied on various technical or legal objections—- objections which, I will argue, could be overcome if the will to do so existed.

    My objective here is not to score academic debating points. Rather it is to try in a straightforward way to make the case that, far from being powerless, the Bank of Japan could achieve a great deal if it were willing to abandon its excessive caution and its defensive response to criticism.”

    Prof. Benjamin Shalom Bernanke
    Japanese Monetary Policy: A Case of Self-Induced Paralysis?
    For presentation at the ASSA meetings, Boston MA, January 9, 2000.

    So Mister Chairman Ben S. Bernanke is not fit to deal with the present situation he does not even readily understand.
    Moreover, he advocates illegality.
    There is no pilot in this plane! We are going to crash!

    If short-term risk free interest rates are at 0.00% doesn’t that mean that credit is worthless?

    A Credit Free, Free Market Economy will correct all of those dysfunctions.

    The alternative would be to wait till, on the long run, most of our productive assets get physically destroyed either by war or by rust.
    It will be either awfully deadly or dramatically long.

    In This Age of Turbulence People Want an Exit Strategy Out of Credit,
    An Adventure in a New World Economic Order.

    We Need Hence Abolish Interest Bearing Credit and Cancel All Interest Bearing Debt.

    A Specific Application of Employment, Interest and Money
    [Intended to my Fellows Economists].

    Exit Strategy Out of Credit

    Press release of my open letter to Chairman Ben S. Bernanke:

    Chairman Ben S. Bernanke, Quantitative Easing Can’t Work!

    Yours Sincerely,

    Shalom P. Hamou AKA ‘MC Shalom’
    Chief Economist – Master Conductor
    1776 – Annuit Cœptis.

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