What does the collapse in US Treasury Bond interest rates really portend?

posted at 12:31 pm on June 2, 2012 by Jazz Shaw

It was the biggest story of the week… at least among the financial geeks. What’s that, you say? You missed it? Well, here’s the screaming headline for you. The interest rate on a ten year US treasury bond hit 1.53760 percent.

So what? Here’s what.

The current title on our CHART OF THE DAY today is simply 1.53760 percent, which represents the current yield on a U.S. 10-year Treasury.

For folks in the financial industry, that number is “mesmerizing,” but we also recognize that a huge swath of the population has no idea what this means or why it matters.

And?

The U.S. Treasury rate just represents the rate at which people are willing to lend money to the U.S. government. So when the 10-year U.S. Treasury is at 1.53670 percent, it means people are willing to lend to the government, and receive only 1.5370 percent interest each year for the next 10 years.

If you lent the government $100, each year you’d get a payment of about $1.53 (the principal is ony repaid at the end of the 10 years).

The important question is: Why are people willing to part with their money for so long and receive such a pittance in payback? The government’s debt-to-GDP is about 100 percent, and many mainstream pundits, politicians, and economists warn about an imminent U.S. debt crisis ala Greece.

Well, the fact of the matter is that the size of the U.S. debt or deficit just doesn’t matter that much. Actually, it’s never mattered at all.

(Emphasis mine above.) The idea that “the debt doesn’t matter” is pretty much anathema to conservatives, and for good reason. It’s a founding principle of political activism today and would seem to be supported by the impending collapse of European nations with liberal spending policies. But facts can be stubborn things. Here’s the money shot chart (if you’ll pardon the phrase) from Business Insider which charts the debt against the confidence of investors who place their cash in the hands of Uncle Sam.

Large Interest Rates GDP

You can read the long form explanation from the author, economics guru Joe Weisenthal, at the link above. But it just didn’t add up for me, so I thought it would be an opportune time to interview Mr. Money Game on the subject. The results follow.

Hot Air: Let’s start with chart #1 in your article where you say, “Well, the fact of the matter is that the size of the U.S. debt or deficit just doesn’t matter that much. Actually, it’s never mattered at all.” The numbers on the chart certainly seem to support it. But the conventional wisdom in conservative circles is that a vastly expanding debt is a huge threat to the future stability of the American economy and, in fact, its government. Do you interpret this data as meaning that there is no real threat from a spiraling debt, even if it completely swamps the nation’s GDP? Are the “smart people” still investing in US treasuries because they know this and we’re all fooling ourselves? Or could the “smart people” be wrong?

Joe Weisenthal: Out of control government spending could theoretically be a problem, but not in the way it’s typically thought of. The US is not going to “run out” of money, because the US prints its own currency. The real issue is: If the economy gets cranking again, and the government doesn’t slow its spending, inflation would be a problem. Also: Big deficits seem to be associated with a weak currency, so that could one day be a problem. So large scale government spending could be a problem, but not in the typical “interest rate surge sovereign debt
spiral” that’s usually imagined.

As for the “smart people” being wrong, I don’t think that’s the best way to think about this. In fact most smart people have been wrong about the Treasury bull market for the last decade. The fund flows.

HA: Sticking with the first chart, interest rates on treasuries seemed to respond to recessions (at least a little) in 70, 75 and the end of the Carter administration (to a large degree) but since then they seem to have completely ignored recessions, including the latest one. Does this mean that the “smart people” just ignore the state of the economy and assume that US treasuries will just always be the safest bet?

J.W.: That’s a good point that for the most part, interest rates have been grinding lower, though they still fluctuate with the economic cycles. One angle that I didn’t cover is demographics. As society ages, that prompts people to reallocate more of their investments from stocks to bonds, so that could explain a lot of the big multi-decade trend.

HA: Your third chart deals with growth in the economy (in GDP) and how that affects the confidence the “smart people” express in the future of America’s ability to pay back its debt a decade hence. Growth has been generally declining since the mid 80s, with some exceptions for the Clinton tech bubble in the 90s and the 2005 period, but interest rates continue to fall, expressing continued, increased confidence in the ability of the US to pay its debts over the long run. If we’re shrinking, how does this translate? Are we just the least crappy deal available in a generally crappy global investment market?

J.W: Again, this is why I think that “ability to pay” isn’t an issue at all. If it were, then yes, we’d be like Spain, where a recession would in fact threaten the tax revenues of the state and thus the ability to pay. As long as the US borrows in its own currency, which can be created at will, the market isn’t going to assign any kind of credit risk to US debt.

HA: I recently watched an analyst on CNBC talking about the “lost decade of private investors” since 2000. There has been a general sense of this for some time, but recent scandals seem to have brought it to the front, including Facebook most recently. Could some of what you are demonstrating in this column be attributed to a general sense in the public sector that the investment market is pretty much rigged, and “the rich get richer while Enron rips off the rest of us” and why should the little guy even bother investing if the fat cats will keep taking care of their rich friends and collecting their massive bonuses while they piss away our 401Ks? Not to put too fine a point on it, but is the jig up?

J.W.: There’s probably something to this. Since the burst of the tech bubble, there’s been a major decline in “retail” participation in the market.

Some of this could be due to individual scandals (Enron, etc.) but there are some other factors at play. One is, as noted above, the demographic shift. As people age, it just makes more sense for them to be more in fixed income, and less allocated in stocks. Also the emergence of stuff like index funds and ETF really have made it less appealing to trade individual stocks.

The FT recently had a “Death Of Equities” headline (alluding to some of these trends), which as market fans know, was the same headline that BusinessWeek once had in the late 70s, right before the biggest bull market of all time So all this talk about the jig being up, and nobody liking stocks could always represent some kind of bottom for equity participation.

There you have it. I’m still not sure if this is an argument for spending our way out of a problem or just an admission that the markets move in a different world of thought than the common guy on the street. I leave it to the reader to judge.


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LOOK AT THE CHART DUMMY,

it means the “crossover” WHERE DEBT MATTERS, happened around 1981ish and the Federal being a good investment will NOT happen until the debt level get back to 1981ish levels.

mathewsjw on June 2, 2012 at 6:51 PM

Every time the Social Security trust fund presents a bond for payment because Social Security has gone cash flow negative, the treasury cashes a bond paying 5.5% (the rate on social security trust fund bonds) with money borrowed at 1.5%.

Who pays the spread? Ah… it all becomes debt so magically nobody does – yet.

When SS cashes in an intergovernmental IUO, that money comes from the general fund, which because we operate at a deficit will all be added to that deficit.

If SS had no intergovernmental IOU’s in her “lock box” then the difference between what goes out and what comes in would still come out of the general fund and therefore still have to be borrowed.

There is NO SS lock box. Any difference between what goes out and what comes in is either paid into the general fund if surplus or paid out of the general fund if deficit. Every dollar paid out of the general fund to SS must then be borrowed because the general fund is perpetually in arrears.

The only use for the treasurys in the “lock box” would be for monetization – say by forming a bank and borrowing against those “assets” so SS can earn interest with which it can grow organically. But for SS to be organized as a bank and run $10 Trillion the liquidity provided to member banks to cover their disasterous deals would have to be returned to the Fed to fulfill its mandate to stabilize prices. That would kill, justifiably so, many of the Too Big To Fail institutions left insolvent, and they would not stand for that.

shuzilla on June 2, 2012 at 6:55 PM

I got the easy answer to this. What we have going on at the moment is the following. Old people must have a safe place to invest, that is US treasury bonds. On top of that, the government is printing money like mad. What they do is lend trillions of dollars to banks at .5% and have them lend it back to the government at 1.5%, allowing them to borrow nearly unlimited amounts based on some large multiplier set by the government. Free money for the banks, easy debt building for the government and it is all lain on the back of my 1 year old daughter’s back as well as all those who have children. The government sells the bonds to the lowest bidders that completes the total amount they want to borrow, thus the interest rate is guaranteed to keep going down so long as the government, the FED and the banks have this crony relationship.

astonerii on June 2, 2012 at 7:03 PM

mathewsjw on June 2, 2012 at 6:51 PM

Government bond rates are determined by popularity. The more popular the bond, the lower the rate. A “good” rate is an indication investors don’t have much confidence in that government’s economic future. But these low bond rates also are an indicator of weak economies in general. Investors are buying our bonds because few other investments look secure right now. If/when the economy improves federal bond rates will rise as investors more there dollars from government bonds into private securities. But we will likely still have the lowest bond rates compared to the rest of the world.

NotCoach on June 2, 2012 at 7:15 PM

I suggest everyone take a moment and review the series “Free to Choose”

http://commonsensecapitalism.blogspot.com/p/free-to-choose.html

You might also see what Milton has to say about monetary policy:

http://www.youtube.com/watch?v=MvBCDS-y8vc

Sackett on June 2, 2012 at 7:20 PM

Sackett, the idea that businesses aren’t investing because of regulations or taxes is nothing other than magical thinking. We have had higher taxes and far more regulations in the past, and economic growth was much higher. But we don’t even have to look there — we can actually look at survey research as to why businesses aren’t expanding.

We know why businesses aren’t expanding. They are not expanding because of low sales and low potential sales. They are not expanding because of low consumer demand. The other factors (collectively known as “convenient failure to enact Republican social policy”) are not more than a rounding error. Businesses are not investing because consumers aren’t buying. It is a collective action problem.

Please answer the following question for me, Mr. Economist. In your theory, what happens when the net desire to invest does not match (or come close to matching) net desire to save? What happens when everyone collectively would like to save more (net) than everyone collectively would like to (net) invest?

We know what happens when this occurs at 5% interest rates. Interest rates go down.

What happens when this occurs at 0% interest rates? What happens when current aggregate demand does not justify investing at 0% — but might justify investing at -5%?

What does your theory say we should do? What is your policy prescription? What do you think should happen when we have millions of unemployed workers and huge excess capacity? Do you believe the government should aim for a result of lower unemployed workers using that excess capacity, through policies that increase demand? (Whether through higher spending or lower taxes or monetary loosening?) Or do you believe as the Austrians do — that we should solve the problem of a burning building by throwing kerosene on the fire (and if that doesn’t work, lighting every other building on fire and hoping that solves the problem)?

If you are simply arguing that Obama’s spending should be better spent (or that demand should be induced in some other way than direct government spending), there is a much smaller divide between our positions.

But if you are instead joining in with the Republican chants of “Regulations! Size of government! Failure to elect Republicans! Failure to shovel more money at rich people!,” that is utterly magical thinking (at best). It is thinking that everyone will be laughing at in 5 years (and to be honest, thinking that even Romney’s economic advisers are likely laughing at right now).

jd3181 on June 2, 2012 at 7:35 PM

Sackett, the idea that businesses aren’t investing because of regulations or taxes is nothing other than magical thinking.

Open mouth, insert foot

Jason Speer is nervously watching Congress and possible tax changes as Bush-era income tax cuts near expiration at year’s end. He’s a vice president of Quality Float Works of Schaumberg, Ill., which makes devices to monitor fluid levels in tanks.

Speer says he’d feel a lot better about hiring later this year if it weren’t for the uncertainty about federal taxes. Unable to anticipate his company’s costs, Speer says he can’t make decisions about growth and hiring.

“We don’t know if there’s something around the corner that’s going to hurt our business,” Speer says.

Oh, and that was from those long-time right-wing </sarcasm> hacks at the Associated Press.

Steve Eggleston on June 2, 2012 at 7:40 PM

Steve Eggleston, do you really think you can get away with such blatant selective quoting, without being called out on it?

The economy seems so gripped by uncertainties that many employers have decided to manage with the staff they have. They aren’t convinced their customer demandwill keep growing. Or they worry that Europe’s festering debt crisis could infect the global economy. [How? Through a collapse in demand.] Or they aren’t sure what Congress will do, if anything, about taxes and spending in coming months. [What would gridlock produce? A collapse in demand.]

“For many companies that build highways, hiring plans are on hold while Congress debates long-term plans to pay for construction projects.

“I’ve got paving crews that are ready, willing to go to work next week, but I don’t have contracts that I can have them go to work on,” said Ed Dalyrimple, vice president of Chemung Contracting Corp., based in Elmira, NY.

The company, which operates gravel quarries and asphalt plants and does highway and airport runway paving, relies heavily on government work in New York, Pennsylvania and Virginia.

“There’s work that needs to be done, but none of the states have authorized it,” Dalyrimple said. “If you look at the transportation bill in Congress, it just sits there.”

Over and over again throughout the article. I never thought someone who claimed to take a position opposite mine would post an article that consisted primarily of anecdotal evidence to back up my position.

Of course, this is all sort of frosting on the cake, since I was basing my argument off of actual survey research (not a bunch of anecdotes). But thank you regardless.

jd3181 on June 2, 2012 at 7:55 PM

The last two paragraphs there were mine and should have been out of the blockquote.

jd3181 on June 2, 2012 at 7:55 PM

I am simply unaware of any investment professional that takes Joe Weisenthal seriously. He’s only marginally older than Zuckerberg and has never practiced, he’s only written (actually, he mostly cuts and pastes what others write). He is one of the true idiots on the web.

carl todd hand on June 2, 2012 at 8:09 PM

All that I will say is this:

I went Galt from my very lucrative law practise when Obama became POTUS. Personally, I know hundreds of people, who have either retired early, taken a sabbatical, gave up their paying jobs to volunteer, walk away from 7 figure jobs to go write their “epic novel” or “the best how-to-become-a-gazillionaire financial book ever written.” They are tired of being demonised.

I also know many people, who own their own businesses, firms, etc., who will NOT hire until Obama is gone. There are many reasons, but Obamacare is one. If you hire that 50th employee, you are Europeanised to death.

The Left used to have a saying in the 1960s: “Tune in, turn off, drop out.”

Today, there are many people, who are thinking about what Obama said and concluding, “You know what? Maybe, I really have made enough money…for now. Under the 13th amendment, the government can’t force me to work. Under the 16th amendment and Supreme Court precedent, it can only tax realised income. So, until Obama is on the last Social Justice train to Allinskyville, I’m just going to live off of principal and offset any profit by donating it to charity or taking a loss. I can outlast him and his crew. Fund your utopia without me.”

Like I said, I know a whole lot of people, who are doing this. I’m one.

If you want us to jump back in, start hiring people, and paying oodles of taxes, then quit the demonisation and tell the Lucky Duckies, OWStreets, etc., that, if they want to share the wealth, then they are going to have to share the work. Get out of the cart and start pulling and paying.

Resist We Much on June 2, 2012 at 8:11 PM

Resist We Much, where do you get the idea that they can only tax realised income? Sure, that is all they can tax under the 16th amendment. But they certainly have the Constitutional authority to tax the transactions of a rich person. This was true long before the 16th amendment.

jd3181 on June 2, 2012 at 8:18 PM

jd3181 on June 2, 2012 at 7:55 PM

You posted an absolute. I gave you an item that blew up said absolute.

Hope you’re not driving tonight because whatever you’re ingesting is quite potent.

Steve Eggleston on June 2, 2012 at 8:20 PM

Resist We Much, where do you get the idea that they can only tax realised income? Sure, that is all they can tax under the 16th amendment. But they certainly have the Constitutional authority to tax the transactions of a rich person. This was true long before the 16th amendment.

jd3181 on June 2, 2012 at 8:18 PM

Although the Eisner v. Macomber, 252 U.S. 189 (1920), Court acknowledged the power of the Federal Government to tax income under the Sixteenth Amendment, the Court essentially said this did not give Congress the power to tax — as income — anything other than income, i.e., that Congress did not have the power to re-define the term income as it appeared in the Constitution:

“Throughout the argument of the Government, in a variety of forms, runs the fundamental error already mentioned—a failure to appraise correctly the force of the term “income” as used in the Sixteenth Amendment, or at least to give practical effect to it. Thus, the Government contends that the tax “is levied on income derived from corporate earnings,” when in truth the stockholder has “derived” nothing except paper certificates which, so far as they have any effect, deny him [or "her" — in this case, Mrs. Macomber] present participation in such earnings. It [the government] contends that the tax may be laid when earnings “are received by the stockholder,” whereas [s]he has received none; that the profits are “distributed by means of a stock dividend,” although a stock dividend distributes no profits; that under the Act of 1916 “the tax is on the stockholder’s share in corporate earnings,” when in truth a stockholder has no such share, and receives none in a stock dividend; that “the profits are segregated from his [her] former capital, and [s]he has a separate certificate representing his [her] invested profits or gains,” whereas there has been no segregation of profits, nor has [s]he any separate certificate representing a personal gain, since the certificates, new and old, are alike in what they represent—a capital interest in the entire concerns of the corporation.”

Holding:

“A pro rata stock dividend where a shareholder received no actual cash or other property, and retained the same proportionate share of ownership of the corporation as was held prior to the dividend, was not taxable income to the shareholder within the meaning of the Sixteenth Amendment, and that an income tax imposed by the Revenue Act of 1916 on such dividend was unconstitutional, even where the dividend indirectly represented accrued earnings of the corporation.”

Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955), was an important income tax case before the United States Supreme Court. The Court held as follows:

“Congress, in enacting income taxation statutes that comprehend “gains or profits and income derived from any source whatever,” intended to tax all gain except that which was specifically exempted.

Income is not limited to “the gain derived from capital, from labor, or from both combined.”

Although the Court used this characterisation in Eisner v. Macomber, it “was not meant to provide a touchstone to all future gross income questions.”

Instead, income is realised whenever there are “instances of

1) undeniable accessions to wealth

2) clearly realised, and

3) over which the taxpayers have complete dominion.”

There must be a liquidity event; otherwise, you would have these problems:

Just imagine seniors. They bought their houses in the 1970s or 1980s. They paid off their mortgages. They have an enormous capital gain, which they would like to leave to their children…

…but you would have them pay a tax to the Federal government every year on that “unrealised income” even though they are retired and may be on a fixed or, at least, very reduced income.

You would do the same to the small businessman, who created a company, that has an asset called “goodwill.” It is an “unrealised gain.” The business’ value has grown tremendously because of his labour and good management. Yet, again, you would have the Feds send him a tax bill on income that he has yet (a may never because his business could be destroyed or go bankrupt in the future for some reason) to realise. I am sure that he will just run out in traffic begging for a few people to stop and come work for him.

Oh, and poor Mr Buffett’s secretaries! One year, they might have to pay taxes on increases in their 401(k)s due to a bull market. Would they get refunds in a bear market?

The Federal government cannot tax wealth because it would be a direct, unapportioned, capitation tax, which is expressly forbidden with the exception of taxes on income. So, if someone lives off of principal, they don’t have to pay a dime in Federal income taxes. After all, they call it Federal INCOME taxes for a reason and INCOME is a defined legal term.

Resist We Much on June 2, 2012 at 8:43 PM

Resist We Much, did you even read my post? I was saying the government had the power to tax transactions. That is different than taxing wealth. Wealth is not very useful to a rich “Galt” if they can’t do anything with it.

However, thank you for bringing up the point that in addition to taxing transactions, the government can actually tax wealth (as long as the tax is apportioned by state). That’s right there in the Constitution, since it was ratified.

jd3181 on June 2, 2012 at 9:12 PM

jd3181

I’m not sure that you fully understand how savings and investment work. Savings drive investment, not the other way around.

Assume people want to save. Pre-monetary societies had to store goods (usually grains). Money allows people to store their production in money. Naturally if they stick the money in a mattress, this pulls money out of the economy, and an increase in the money supply to compensate is perfectly understandable.

This is not the common case. Most people who save money do so by loaning it to others that want to spend. Whether through depositing it in a bank, or by buying stock.

When the investment opportunities in one country are not attractive enough people can exchange their dollars for francs or euros or whatever to invest in those areas. This then causes exchange rates to change. Furthermore those exchanged currencies come back to the country of origin as exports. (This is why America has such a poor export deficit- lots of foreigners want to invest in the United States, and so loan us money in their currencies which we then use to purchase goods from their countries. Meanwhile foreigners often stockpile dollars instead of using them to purchase goods from us. This is a strength for keeping our debt viable despite our large deficit, but could become a disaster if people ever lose confidence in the dollar).

Persistent low interest rates are evidence that savers find a Treasury Bond a better investment then anything else right now- not that there are no investment opportunities.

Why aren’t savers investing in businesses? There are two things.

First businesses (and people) have to pay off all the bad debts they accumulated during the bubble. Then they can start recapitalizing. This has consumed a lot of savings (particularly the housing market, and people who needed to recoup their losses after a devaluation of their home).

However, the federal government is producing large amounts of money from “nowhere” and using it to purchase things. Because the government is using it to fund consumption instead of investment, this drives production towards producing consumer goods instead of capital goods, resulting naturally in a slow and stagnant recovery. In a normal recovery, consumption is temporarily reduced to fund abnormally high levels of investment. The fault for this not happening this time is primarily the government.

To a Keynesian the fault is primarily that the federal and state governments have wasted their money on consumption goods or bad investments instead of good investments. Thus a Keynesian would say the current politicians are incompetent.

To an Austrian, the government is considered incompetent at best and evil at worst and so you’d expect the government to waste money no matter who is in office. In their opinion the fault was the government deciding to create a bunch of money and spend it in the first place. That money does not really come from nowhere. In reality what has happened is that every other dollar in existence is ever so slightly reduced in value by creation of new dollars. This decreases the wealth of those holding dollars, and so people have to save even more before starting to invest. It’s an invisible tax on savings. Naturally this discourages savings. An Austrian would argue that is that if the government had never created all that money, that individuals would have been able to save money (insignificant for each individual, but significant in the aggregate) and would have invested themselves.

Personally I tend to agree more with the Austrian perspective, but either philosophy can not be pleased with the actions of President Obama.

You asked for policy prescriptions: Here I would favor simply reducing government spending and pursuing a surplus. This will help reduce our capital account and provide some help for the export industries. It will also allow more savings to be directed towards private investment instead of government. (If the Government isn’t selling more Treasury bond the savers will have to go elsewhere). These private investments are more likely to be effective.

You mentioned regulations. Now some of the effects of regulation are simply a trade off between two different goods, and if the regulations tend to favor consumption goods (such as union benefits, or some environmental benefits) and disfavor capital goods (such as new oil and gas wells), others are trade offs between different capital goods (regulations that protect public health).

None of these trade offs are necessarily bad. They may be quite good trade offs to make, but rarely is a cost benefit analysis actually made. Are the benefits to public health really worth the loss of energy efficiency caused by the loss of several old coal plants? Asking these sorts of questions are surely legitimate, and not magical thinking. Thinking that a regulation that makes energy cost more will create more “green jobs” then the “dirty jobs” lost, that is magical thinking. All the evidence shows the opposite. If these regulations are justified, that justification must be made on the public health benefits, not “green jobs”.

I would likely delay the implementation of most new regulations until after recovery. I’m open to being convinced that there is a pressing need to implement them now, but currently it seems to me that economic recovery is more important.

I will talk more about regulations in the second section.

Another significant drain on the economy are our tax laws. Their complicated nature creates incentives to spend huge resources on avoiding taxation instead of producing goods. Tax lawyers do not create wealth, they just determine who gets to have the wealth, government or the producers. They are essentially deadweight loss. This cost of this tax compliance is estimated at $431 billion. That’s not chump change.

Eliminating deductions and exemptions and simplifying the tax code would remove a huge burden from American businesses. I know most Republicans want to insist on a reduction in rates to be revenue neutral, but frankly that is not a big priority to me at this point. Just get it simplified first, then we can talk about the correct tax rate.

Second people are afraid. Bad stuff keeps happening all over the place and no one is making them feel safe enough to invest. This is why gold and US Treasury bonds are so over valued. People are parking their money in safe places instead of investing in businesses.

Several things are making people afraid. Events in Europe are one. Not much can be done about that.

Fear of inflation is another. The huge purchases by the Federal Reserve have unnerved investors. How can you invest when you have no idea what the inflation rate will be? People have lost trust that the Federal Reserve will be able or willing to reduce the money supply if monetary velocity increases once again. Reducing the deficit and getting on a path to a surplus would go far in reassuring investors that the Federal Reserve will be free to pursue a monetary policy based on market needs instead of being forced to monetize the debt.

I feel that another major uncertainty that restrains investment is the regulatory uncertainty. This goes back far before Obama, so I’m not going to blame him to much for this.

It used to be that laws were made by Congress. It was hard for them to change, and so there was some stability in the regulatory regime.

Then Congress got lazy, and Presidents became aggressive. Instead of passing laws, Congress created regulatory bodies and empowered them to create regulations that had the force of law. Congress liked this because it allowed them to distance themselves from the regulations (“I didn’t make that law, some faceless bureaucrat did!”). Presidents liked it because it meant they could do something without having to go through Congress and Presidents have become increasingly assertive about the right of the Executive branch to make decisions. Decisions that often switch depending on who is President, and what his political needs are. (This applies to both Republicans and Democrats).

Imagine you are an investor having to decide if a 10 year investment is worth it. You might have 3 different Presidents during your investment period, can you depend on the regulatory regime not changing during that time period?

Additionally, in my experience, because the regulatory bodies are insulated from voters, they often write their regulations in a manner that is easiest for them to enforce, rather what is best for the citizens.

The regulatory bodies can also become captured by the industry, cutting corners, and favor industry leaders, trusting them to not do bad things (as was the case with the oil spill in the gulf).

All of these things are happening because legislative power has been transferred out of the legislative branch into the executive branch. The simplest solution would be to require that all regulations must be approved by Congress and signed by the President to become enforceable law. Regulatory bodies would still write the regulations, as they are the experts, and then Congress would vote on them.

This would also provide stability to the regulatory regime, as reversal of regulations would be much more difficult, and not as likely to change.

If the regulations are too complicated for Congress to vote on, then they are too complicated to expect people to obey.

I suspect you will not like the policy proposals I have given here, but I don’t see what else we can do.

Monetary stimulus has failed.

Fiscal stimulus has failed, and I don’t trust Congress or any President, Republican or Democrat to do it right.

The only thing left to try that I can see is to get the government off our back and let the American people fix the economy ourselves.

Sackett on June 2, 2012 at 10:23 PM

Hello? Is this thing on?

Is there anyone out there?

To: Hot Air Staff

From: The Membership

Subject: The Economy

It is time to WAKE UP and start learning about the economy. Government debt is not the economy. In a pure capitalistic system, it should never make an impact on the economy.

Jazz Shaw made the most pathetic excuse for a posting that I have seen on this site in 18 months.

Read the comments your members are making. Collectively, WE are supposed to be the economy.

WE are NOT functioning as an economy ANY MORE.

Hopefully, this scares the hell out of you.

Hopefully, you are strong minded enough to TUNE OUT the inside the Beltway BS and “insider” information you are being fed from your usual suspects.

Hello? Is anybody out there?

PolAgnostic on June 2, 2012 at 10:37 PM

jd3181

I’m not sure that you fully understand how savings and investment work. Savings drive investment, not the other way around.

*snip*

I suspect you will not like the policy proposals I have given here, but I don’t see what else we can do.

Monetary stimulus has failed.

Fiscal stimulus has failed, and I don’t trust Congress or any President, Republican or Democrat to do it right.

The only thing left to try that I can see is to get the government off our back and let the American people fix the economy ourselves.

Sackett on June 2, 2012 at 10:23 PM


Excellent post, Sackett.

You are trying to convert a moby. He is NOT listening. He is preaching the gospel he BELIEVES in which is based in his political ideology.

Don’t stop posting – I am suggesting you can accomplish far more by providing more clarity on the current situation for the lay persons on here. And inviting them to ASK you questions.

PolAgnostic on June 2, 2012 at 10:44 PM

You spend a lot of words talking about problems that are not really problems. Some are negligible compared to the actual problems that exist (so focusing on them is like focusing on paint chips as the house is burning down). Others are the opposite of problems. (Fear of inflation? Seriously? The 30 year bond rate is at 2.5%. FOR THIRTY YEARS.)

But in all of your words, you did not actually answer my question at all. And I am very curious to hear your answer — because no conservative has provided an answer to me that isn’t obviously incorrect.

The one statement that comes closest to answering my question (without answering it at all) is the following statement:

Most people who save money do so by loaning it to others that want to spend. Whether through depositing it in a bank, or by buying stock.

Of course that is the case. But it completely misses the point of my question. Obviously, someone who wants to save is going to try to loan it to others that want to spend (often through depositing it in a bank, let’s say).

But what if there are TOO MANY people who want to save TOO MANY dollars, relative to the demand for investment from creditworthy borrowers, at the current rate of interest?

This happens all the time, which is why the current rate of interest is reduced. But the current rate of interest is currently 0%, so it cannot be reduced.

So I ask again: what happens when the net desire to save exceeds the net desire to invest? What happens when saver A finds a good borrower, saver B finds a good borrower, and so on and so forth, but after all that, saver Z cannot find a good borrower (even at 0%)? Perhaps there are plenty of people that would love to borrow. But my question is ASSUMING that all of these borrowers have already borrowed up to their desire (and/or reasonable credit limit) from savers A, B, … and Y. I am asking about saver Z.

What is saver Z going to do? They are going to lend to the borrower of last resort, which happens to be the United States government. Saver Z is literally trying to shovel all his savings to the US, because he can’t find any other credit worthy borrowers.

(In practice, they would put their money in the bank. But again, under the premise of my question, there are no more credit worthy borrowers. So the problem is just shifted to the banks. The banking system has already loaned out all of Saver A’s money, Saver B’s money, and so on. When Saver Z deposits his money into the bank, and there are no more credit-worthy borrowers, what does the bank do? Well, they first try to find another bank that has too many potential loans and not enough money. But what if in the entire system, there are more dollars that savers want to save than dollars credit-worthy investors want to invest? The only option left is a US Treasury bond.)

If that money the government gets from issuing bonds is not directly spent, or invested, or given in the form of tax cuts to people who would definitely spend it, what happens to that money? Exactly what happens when you put money under your mattress.

When the net desired savings exceeds the net desired private investment, how is the difference any different than money under a mattress?

jd3181 on June 2, 2012 at 10:50 PM

PolAgnostic, if I wasn’t listening, I wouldn’t be continuing.

Every answer I have seen has assumed there are credit worthy borrowers that have the desire to invest. But the premise of my question is that there are NOT enough credit worthy borrowers for every desired saved dollar by all savers/banks/etc — even at 0%. (Again, this happens all the time when the interest rate is higher, and the response is to lower the interest rate. But I am asking about when the federal funds rate is at 0%, as it is today.)

So we can dispatch with red herrings, feel free to answer this question in a hypothetical world ASSUMING there are no regulations at all, and minimal taxes.

jd3181 on June 2, 2012 at 10:58 PM

Persistent low interest rates are evidence that savers find a Treasury Bond a better investment then anything else right now- not that there are no investment opportunities.

Sackett on June 2, 2012 at 10:23 PM

I thought Rick Santelli (on that otherwise complete vacuum of financial knowledge known as CNBC) made an excellent point on Friday.

He pointed out that someone with $ 100 billion USD in cash is seeking a safe, liquid position.

They are willing to accept virtually no return via interest because their other options like large financial institutions are not as solid as they might be and some are now penalizing the whales who park large amounts of cash in their accounts.

The beauty of the Treasury bonds is they are the only market able to absorb the unbelievable amounts of liquidity sitting out there and have proven to be easily convertible when another use for part or all of the $ 100 billion USD appears.

PolAgnostic on June 2, 2012 at 11:01 PM

The beauty of the Treasury bonds is they are the only market able to absorb the unbelievable amounts of liquidity sitting out there and have proven to be easily convertible when another use for part or all of the $ 100 billion USD appears.

And that is exactly my point. The US is the borrower of last resort, for the excess of desired savings over desired borrowing. There are no other options.

But if the United States government takes the cash that comes in from the bond sales, and then sits on it, how is that any different than you or Sackett taking money and putting it under your mattress? (The mattress situation is a situation that Sackett already said would call for printing more money.) I’m trying to understand why you believe it is any different.

jd3181 on June 2, 2012 at 11:14 PM

That’s not how it works jd3181.

There is nothing that says the government must sell you a bond if you want it.

A better question would be: If the US government stopped borrowing money (ie stopped selling US Treasury bonds), what would happen to all the savings currently being invested in Treasury bonds? Where would it go?

There is no “net desired savings.” There is simply savings. People save exactly as much money as they choose to save. That money is then invested. Period.

There is no lack of borrowers, there are always more people who want to borrow money. The saver simply chooses the best option available.

The saver is the constraint, not the borrower.

The government is not the borrower of last resort. Savers are choosing the government, why?

You dismiss all the reasons I gave. You really think people aren’t afraid of inflation? And cite interest rates as the reason? Where are you shopping? Have you seen the price of hot dogs lately?

You really think we have too many people saving money? Are you aware that the US has one of the lowest savings rates in history. We as a people do not save enough. We consume too much, and do not save. And then people wonder why we cannot create new businesses.

You must save to invest.

There is no other way to create capital, and capital is needed to allow growth.

We spent a lot of money buying stuff we didn’t need and cannot use anymore. We bought the wrong stuff. Mal-investment means that we need to reinvest, and that requires real savings, which requires reducing our consumption now.

Anything else is a fantasy.

This is why Economics is the Dismal Science. Our job as economists is to keep telling people things they do not wish to hear. There is no free lunch. There is no way to maintain our current lifestyles without massive growth, and that requires investment, which requires reducing our current consumption, which means we will have a lower standard of living for a while.

We have to stop spending and start saving more.

Right now our government won’t let us.

I’m off to bed. This was an enjoyable comment session, but I’m burnt out now.

Sackett on June 2, 2012 at 11:17 PM

So we can dispatch with red herrings, feel free to answer this question in a hypothetical world ASSUMING there are no regulations at all, and minimal taxes.

jd3181 on June 2, 2012 at 10:58 PM

Different thought …

Let’s leave all the econ course thought experiments behind and let’s jump into the hyperspace we find ourselves in today.

Latest estimate, there is a notional $ 1 quadrillion USD of derivatives exposure floating out here in hyperspace. In “normal space”, this total is not a real number. It exceeds the ability of the “markets makers” that have established this positions as hedges against all perceived risk to settle, clear or probably even keep track of all of them (i.e. as Jamie Dimon recently learned – again). I will refer to this as a lack of transparency.

Viewing the “hyper-reality” through the distorting lenses of history, Ben Bernanke and his ilk have flooded the global markets with unrealistic levels of liquidity. They have solved a problem that doesn’t exist (i.e. a lack of liquidity) by aggravating the problem that DOES exist – a lack of transparency in the derivatives market.

All the liquidity poured into the markets by the Central Banks has either been turned into new positions hedged with additional derivatives which have just made the transparency problem much worse …

.. or, with the active idiocy of QE2, were turned back into a government position of UST’s which, in conjunction with ZIRP and Operation Twist, have driven the UST curve to historic lows.

(With me so far?)

Meanwhile, here in hyperspace, the Bruno Iskil fiasco at JP Morgan has driven the risk appetite of the “market makers” into the sub-sub-basement. The money being unwound by these whales has only ONE safe haven – UST’s.

This is the underlying problem behind the collapse in the UST bond interest rates. The “market makers” are motivatd by FEAR – and there is only one cure – UST’s.

Your thoughts?

PolAgnostic on June 2, 2012 at 11:29 PM

There is no lack of borrowers, there are always more people who want to borrow money. The saver simply chooses the best option available.

The saver is the constraint, not the borrower.

That doesn’t make any sense. I’m asking you to assume, for the sake of argument, that there IS a lack of credit-worthy borrowers. I don’t care if you don’t believe that is exactly what is currently happening. For purposes of argument, I’m asking you to assume there is a lack of credit-worthy borrowers, and that the borrower is precisely the constraint.

There is no lack of borrowers, there are always more people who want to borrow money.

Why do you say that? I’m not talking about anyone who “wants to borrow money.” I’m talking about credit-worthy borrowers. If person A wants to borrow, but they have a bad credit history (or a business plan that would produce insufficient sales to pay back the loan, due to insufficient demand), they are not relevant to this conversation.

Surely, you must admit that this can happen if the interest rate is (say) 4000%. Right? I hope we can all agree that at a hypothetical 4000% interest rate, there might not be enough borrowers to borrow every dollar every saver wants to save.

If you agree with that, my question to you is exactly the same question, when the interest rate is at 0%. To put it another way, what happens when the credit-worthy borrowers have no desire to save, and those with a desire to save are not credit-worthy?

You really think people aren’t afraid of inflation? And cite interest rates as the reason?

Yeah, I cite interest rates as the reason. Apparently, people are lending to the government at an annual rate of return of 2.5%. If inflation exceeds that amount on average over the next 30 years, they are losing money. If it significantly exceeds that, they will significantly lose money. So of course the interest rate is quite relevant.

You really think we have too many people saving money? Are you aware that the US has one of the lowest savings rates in history. We as a people do not save enough.

This really gets to the heart of my question. Most people

can’t save

. They don’t have enough money to save. They are in debt.

There is a large set of people that want to borrow, and a large set of people that are credit-worthy enough to borrow. But what if the people that want to borrow are precisely the people that aren’t credit-worthy, AND the people that are credit-worthy enough to borrow are precisely the people who have no desire to borrow (and in fact have a desire to save)? Even if you don’t believe this is the case, I am curious to hear your response assuming it is the case.

jd3181 on June 2, 2012 at 11:30 PM

The US is the borrower of last resort, for the excess of desired savings over desired borrowing. There are no other options.

jd3181 on June 2, 2012 at 11:14 PM

You have misstated the situation.

The US is the borrower of FIRST resort.

This is obvious to the politicians in control in Washington, DC.

Bartender Ben Bernanke tells them they HAVE to stop drinking – while making sure he keeps serving them more drinks (more stimulus)and letting them have an unlimited bar tab (zero interest rates) and keep the keys to their car (unlimited financing of the defecits).

(For the HA’ers out there, please take note of my verb tenses in this latest paragraph)

This does not end well.

Anyone pretending otherwise is lying or non compos mentis.

PolAgnostic on June 2, 2012 at 11:41 PM

PolAgnostic, I’m not sure how the derivatives are relevant to this question. (They are certainly relevant overall, but I don’t see how to this question.) The 1 trillion figure is misleading, because it is the sum of all positions — including positions that cancel each other out.

For example, I could bet someone else 1 billion dollars that event X will not happen. I could also have another derivative with the same person that event X WILL happen.

What’s the total risk to either of us, no matter what? Nothing. If event X happens, I pay him 1 billion and he pays me a billion. If event X doesn’t happen, exactly the opposite.

This also happens with more than 2 people; with 4 people (for example), they can all have completely hedged bets with each other such that whether or not anything happens, all parties will have the same amount of money at the end of each day.

Of course, the derivatives also might not be hedged. That lack of transparency is a problem, as you say, since we really don’t know how much is hedged and how much isn’t. (For example, after Lehman collapsed, the netting out of derivatives on that event was minimal. On the other hand, AIG’s bets were almost all unhedged, which is why the collapse of AIG would have brought everyone down.)

But I don’t think that is related to the problem we are talking about. Bernanke is increasing the money supply, but that is simply in response to an increase in the demand for money. He is not increasing the money supply BEYOND the increased demand for money. Ramesh Ponnuru and David Beckworth have a good article on exactly this in the National Review:

http://www.nationalreview.com/nrd/articles/300951/monetary-regime-change

jd3181 on June 2, 2012 at 11:49 PM

jd3181: To put it another way, what happens when the credit-worthy borrowers have no desire to save, and those with a desire to save are not credit-worthy?

Wow. My question there was completely wrong. Sorry about that. Sackett, here is what I actually meant:

What happens when the credit-worthy borrowers have no desire to borrow (and would rather have a neutral position, or would rather actually save), while simultaneously those with a desire to borrow are not credit-worthy? (Otherwise known as a balance sheet recession.)

There is evidence that the gap is currently around 5.8% of GDP:

http://ftalphaville.ft.com/blog/2012/03/28/941241/the-balance-sheet-recession-charted/

Let us now look at the situation at US households with their damaged balance sheets. As Figure 4 shows, their behavior since 2008 has mirrored that of Japanese households and companies over the last decade and a half: they are both reducing financial liabilities (paying down debt) and increasing financial assets (savings) in spite of zero interest rates. Together, the household and corporate sectors are now net savers to the tune of 5.8% of GDP. That this surplus of private savings is occurring at a time when interest rates are at zero is a clear indication the US is in a balance sheet recession triggered by the first crash in house prices in seven decades.

But even if you completely disagree with that, I’m still curious what your response would be if we assumed so.

jd3181 on June 2, 2012 at 11:57 PM

PolAgnostic, I’m not sure how the derivatives are relevant to this question. (They are certainly relevant overall, but I don’t see how to this question.)

Since I went to pains to explain how they are relevant (scale of derivatives vs transparency vs risk appetite vs recent events) you are either a) a pure theoretician or b) a moby willfuly ignoring inconvenient facts.

The 1 trillion figure is misleading, because it is the sum of all positions — including positions that cancel each other out.

And that willful misstatement makes me tend towards b) a moby.

The number I quoted was $ 1 quadrillion USD – you know $ 1,000 trillion USD.

Calling it misleading – again b) a moby – because the SCALE of the derivatives exposure is completely relevant to the FEAR of the “market makers”.

Of course, the derivatives also might not be hedged. That lack of transparency is a problem, as you say, since we really don’t know how much is hedged and how much isn’t. (For example, after Lehman collapsed, the netting out of derivatives on that event was minimal. On the other hand, AIG’s bets were almost all unhedged, which is why the collapse of AIG would have brought everyone down.)

There is no way of knowing. That was the AIG lesson – which Washington conveniently ignored – and it was only $ 160 billion USD.

Oh, AIG would not “have brought everyone down” – it would have bankrupted them and broken them up into manageable – which is what is supposed to happen in free markets.

Still trending b) a moby – because I am seeing too much “conventional wisdom” – which ties into the existing status quo of corruption.

But I don’t think that is related to the problem we are talking about. Bernanke is increasing the money supply, but that is simply in response to an increase in the demand for money. He is not increasing the money supply BEYOND the increased demand for money. Ramesh Ponnuru and David Beckworth have a good article on exactly this in the National Review:

http://www.nationalreview.com/nrd/articles/300951/monetary-regime-change

jd3181 on June 2, 2012 at 11:49 PM

Again, I went to pains to tie everything together – partially out of disgust for the worthless crap originally posted – which was all about

What does the collapse in US Treasury Bond interest rates really portend?

So, final score b) a moby – because you don’t want to discuss the topic at hand or deal with the facts or do anything but pursue a theoretical discussion that fits your agenda.

PolAgnostic on June 3, 2012 at 12:28 AM

jd3181 on June 2, 2012 at 9:12 PM

No, the Federal government cannot tax wealth. It would be a direct tax and, thus, unconstitutional. Read the caselaw that I cited. Wealth is NOT income. They are two very different things under the law.

A transaction tax occurs only when an event happens. Again, in my original post, I said that many of us are living off of principal. There is no event to tax. For example, if I don’t sell anything, you have no transaction to tax.

Yes, the state can make me pay sales tax, but neither it nor the Federal government can require me to work for money. As long as I show $0 in income or offset any income with a loss or a charitable donation, I don’t have to fund the attempt to build utopia by a bunch of corrupt bassholes in DC and their teatsuckers elsewhere.

Maybe, you should better read what I write next time…

Resist We Much on June 3, 2012 at 2:46 AM

Oh, AIG would not “have brought everyone down” – it would have bankrupted them and broken them up into manageable – which is what is supposed to happen in free markets.

The reason AIG would have brought everyone down was not because AIG itself would have gone bankrupt. That would have been fine. The problem was that many of AIG’s counterparties would have gone bankrupt. This a large portion of the banking system, which would either go bankrupt (causing a cascading chain of bankruptcies throughout the whole banking system) or be massively undercapitalized (which can cause a run). These counterparties all turned toxic waste (on their balance sheets) into fully insured products, all through AIG. For people who thought the bank runs of the 30s (or previous banking panics) were good things, they would be pleased. But everyone else learned that there is little more damaging to the economy and society than mass bank runs/panics.

Again, I went to pains to tie everything together – partially out of disgust for the worthless crap originally posted – which was all about

What does the collapse in US Treasury Bond interest rates really portend?

If you think what was originally posted was “worthless crap,” I don’t think you understand what was originally posted. There isn’t a lot in the original post that can actually be “wrong” at all. What does interest rates being low objectively mean? It means that people are betting (at the very least) that inflation above the yield of their bond will not erode the value of their investment. When someone puts X dollars into a 30 year bond that yields 2.5%, they stand to lose a huge amount of money if the average inflation rate over 30 years goes about 2.5%.

If Bernanke was doing something that most investors would expect would raise future inflation (or if Congress was doing something that most investors would “bankrupt” the country, as if a country that prints its own currency can go “bankrupt”), yields would be RISING no matter what Bernanke did. But they aren’t.

Facts are stubborn things. They might conflict with the conservative worldview about the economy (which has been thrown to tatters every day their predictions of high interest rates and inflation “just around the corner” have been shown to be utter nonsense), but that doesn’t mean facts are not facts. Maybe everyone else is wrong, and you are right. But you know what? I doubt it. (Though if you want to put some money on your theory, you should short long-term treasury debt.)

jd3181 on June 3, 2012 at 5:51 AM

Yup, all of the liquidity that the central banks have been shoveling out (yeah it’s a mixed metaphor, deal with it) to the banking houses has to go somewhere.

It is a bit like a sinking ship. Everyone one runs to the highest point as the ship is going down. That doesn’t mean that the bow is suddenly a great place to be, it means that it is the last refuge before the water closes over you.

Investors are fleeing junk Euro Debt and lending to the prettiest horse at the glue factory.

RadClown on June 2, 2012 at 12:46 PM

Nathan_OH on June 3, 2012 at 10:23 AM

Resist We Much, I agree one of us needs to read better next time. Not sure it’s me though. I specifically said that a direct tax is Constitutional, provided that it is apportioned by state. The only type of direct tax that would be Unconstitutional is a direct tax that is apportioned.

Are you seriously disputing this? And assuming you are not disputing this, wouldn’t a direct tax that satisfied the Constitutional apportionment requirement be a “tax on wealth” by definition?

No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.

Furthermore, if they do tax consumption (in a hypothetical world), wouldn’t you be paying right into the pot to fund the “utopia?” I find it hard to imagine living off principal in some way other than spending it. What would you do — tape the dollar bills together and build yourself a hut?

It seems that in the end, you really don’t have much of a choice in the matter.

jd3181 on June 3, 2012 at 10:38 AM

The only type of direct tax that would be Unconstitutional is a direct tax that is “apportioned”

should read “unapportioned”

jd3181 on June 3, 2012 at 10:39 AM

The reason AIG would have brought everyone down was not because AIG itself would have gone bankrupt. That would have been fine. The problem was that many of AIG’s counterparties would have gone bankrupt. This a large portion of the banking system, which would either go bankrupt (causing a cascading chain of bankruptcies throughout the whole banking system) or be massively undercapitalized (which can cause a run). These counterparties all turned toxic waste (on their balance sheets) into fully insured products, all through AIG. For people who thought the bank runs of the 30s (or previous banking panics) were good things, they would be pleased. But everyone else learned that there is little more damaging to the economy and society than mass bank runs/panics.

jd3181 on June 3, 2012 at 5:51 AM

Your ignorance is breathtaking. You cannot take “toxic waste ” and turn into insurance products. That toxic waste you speak of, is still sitting on the books while FASB 168, 169 have been conveniently suspended for that purpose. However, the Second Law of Thermodynamics states that : “There ain’t no such thing as a free lunch”.

Finally, your argument that bonds and currencies are one in the same is like comparing apples and oranges. Frankly, the only thing fruity here is your logic.

What does interest rates being low objectively mean? It means that people are betting (at the very least) that inflation above the yield of their bond will not erode the value of their investment. When someone puts X dollars into a 30 year bond that yields 2.5%, they stand to lose a huge amount of money if the average inflation rate over 30 years goes about 2.5%.

jd3181 on June 3, 2012 at 5:51 AM

Of course I realize that you’re smarter than Bill Gross who runs the largest UST trading desk, PIMCO. Currently, his UST portfolio is at ZERO US Treasury bonds. Secondly, investors in this environment are NOT looking for YIELD, but relative liquidity AKA SAFETY. Not once have you mentioned the element of risk in ANY of your arguments which is ESSENTIAL to establishing a baseline of compensation.

I’ve commented because your near moronic notions need to be spoon fed back to you up your arse, whence they came. You neede to be told that you are out of your element. Please do EVERYONE a favor and not discuss this anymore until you have a clue about the subject. I suspect however, that you will once again be back at it offering your blatherings about nothing only to prove , once again, that you are truly unenlightened and definitely not evolved.

DevilsPrinciple on June 3, 2012 at 10:53 AM

What does the collapse in US Treasury Bond interest rates really portend?

So, final score b) a moby – because you don’t want to discuss the topic at hand or deal with the facts or do anything but pursue a theoretical discussion that fits your agenda.

PolAgnostic on June 3, 2012 at 12:28 AM

This is unfortunately a straw man question. UST interest rates have been moving down for over a decade. Currently, they are worth 57 % LESS than they were over a decade ago as measured against the Euro. This not “news”, but a trend. One that promises to continue as China and other Asian countries unwind their positions in UST’s because yields are better elsewhere in for example, rare or high demand commodities.

DevilsPrinciple on June 3, 2012 at 11:01 AM

Facts are stubborn things. They might conflict with the conservative worldview about the economy (which has been thrown to tatters every day their predictions of high interest rates and inflation “just around the corner” have been shown to be utter nonsense), but that doesn’t mean facts are not facts. Maybe everyone else is wrong, and you are right. But you know what? I doubt it. (Though if you want to put some money on your theory, you should short long-term treasury debt.)

jd3181 on June 3, 2012 at 5:51 AM

And the final piece of the puzzle – the Straw Man argument where the moby/liberal puts forward a statement the other party DID NOT MAKE so they can go back to THEIR talking points

WHERE did I make a statement/prediction on high interest rates and inflation being “just around the corner”?

Your tendency to lie about what people have said must make you unpopular in the Face To Face world, eh?

Oh, AIG would not “have brought everyone down” – it would have bankrupted them and broken them up into manageable pieces (word originally omitted added for clarity) – which is what is supposed to happen in free markets.

The reason AIG would have brought everyone down was not because AIG itself would have gone bankrupt. That would have been fine. The problem was that many of AIG’s counterparties would have gone bankrupt. This a large portion of the banking system, which would either go bankrupt (causing a cascading chain of bankruptcies throughout the whole banking system) or be massively undercapitalized (which can cause a run). These counterparties all turned toxic waste (on their balance sheets) into fully insured products, all through AIG. For people who thought the bank runs of the 30s (or previous banking panics) were good things, they would be pleased. But everyone else learned that there is little more damaging to the economy and society than mass bank runs/panics.

Of course, you had to go the the False To Fact Boogeyman to support your talking points.

When exactly was the last time we had a mass bank run/panic in this country?

By golly, the type YOU are referring to last happened in the 1930′s – before we had the FDIC set up to prevent the possibility of them occurring.

The FDIC has the ability to step in and seize the bank and all of its assets while simultaneously guaranteeing individual depositors accounts. They have done this for hundreds of banks over the last fours years. The bank executives, the bank’s shareholders and the bank’s bondholders are ALL guaranteed to take a significant or complete loss when the FDIC steps in.

They SHOULD have been allowed to step in and do their job with regard to the AIG mess.

Unfortunately, corrupt Washington politicians declared them Too Big Too Fail – when the truth was they were Too Powerful To Lose.

Facts are stubborn things. They conflict with the liberal agenda of spewing Fear, Uncertainty and Doubt (FUD) – but that doesn’t mean facts are not facts. They make it easy in a forum where what someone ACTUALLY said is right up above in the thread for others to see.

Liars and liberals (but I repeat myself) always have a blindspot in this regard on blogs.

PolAgnostic on June 3, 2012 at 11:06 AM

This is unfortunately a straw man question. UST interest rates have been moving down for over a decade. Currently, they are worth 57 % LESS than they were over a decade ago as measured against the Euro. This not “news”, but a trend. One that promises to continue as China and other Asian countries unwind their positions in UST’s because yields are better elsewhere in for example, rare or high demand commodities.

DevilsPrinciple on June 3, 2012 at 11:01 AM

In the long run, China may still be OK but for the short term their commodity positions have got to be a source of some significant internal stress within the political structure.

And the recent effort to “clamp down” on the party elite attempting to move their wealth and themselves out of China should add to the internal strains.

They have floated back up a bit of late in UST’s but I view that as a political hedge that gained them the ‘primary dealer’ access they wanted to the system.

PolAgnostic on June 3, 2012 at 12:17 PM

It certainly matters to Greece, Spain, et al.

This seems to be enough counter to logic that it’s screaming to me, “BUBBLE!”

{^_^}

herself on June 3, 2012 at 1:28 PM

They have floated back up a bit of late in UST’s but I view that as a political hedge that gained them the ‘primary dealer’ access they wanted to the system.

PolAgnostic on June 3, 2012 at 12:17 PM

Hear, hear..

DevilsPrinciple on June 3, 2012 at 2:59 PM

This seems to be enough counter to logic that it’s screaming to me, “BUBBLE!”

{^_^}

herself on June 3, 2012 at 1:28 PM

Are you sure you screamed “BUBBLE?”… : – >

DevilsPrinciple on June 3, 2012 at 3:07 PM

The interest rate for 10 year treasury notes is NOT driven by free market forces!

The Federal Reserve has already purchased TRILLIONS of dollars worth of these bonds. They simply do not care what the interest rate on those bonds is as they do not buy these bonds to make money.

Reporting an a false market indicator, like manipulated US Treasury note interest rates, is a meaningless exercise.

This entire episode by Bernanke will not end well.

Freddy on June 3, 2012 at 4:50 PM

Interest rates are a lagging indicator of inflation, not a leading indicator.

By the time you have high interest rates and high inflation you’re already in to the worst of it.

Sackett on June 3, 2012 at 7:43 PM

Your ignorance is breathtaking. You cannot take “toxic waste ” and turn into insurance products. That toxic waste you speak of, is still sitting on the books while FASB 168, 169 have been conveniently suspended for that purpose. However, the Second Law of Thermodynamics states that : “There ain’t no such thing as a free lunch”.

I am describing what actually happened. Banks took toxic assets and insured their performance with AIG. Of course it isn’t a “free lunch” (since if AIG failed, they would fail). But that is exactly my point; they thought that insurance through AIG would prevent their failure, to the point where if AIG actually did fail, large parts of the banking system would be in huge trouble.

Finally, your argument that bonds and currencies are one in the same is like comparing apples and oranges. Frankly, the only thing fruity here is your logic.

Of course, you say that, but you don’t actually dispute anything I said in that paragraph. You don’t dispute that when someone buys a 30 year bond at 2.5% interest, they lose principal if inflation is above that amount. You just hope that your namecalling will cause people to overlook the fact that there really isn’t anything disputed by anyone serious in that paragraph.

Of course I realize that you’re smarter than Bill Gross who runs the largest UST trading desk, PIMCO. Currently, his UST portfolio is at ZERO US Treasury bonds.

Thank you for bringing up Bill Gross. Do you know how much money he lost, by taking EXACTLY your position?

http://blogs.wsj.com/marketbeat/2011/10/13/bill-gross-suddenly-finding-it-hard-to-attract-new-money/

This is stacking up to be one of the worst years for high-profile money manager Bill Gross.

His ill-timed bets on Treasury bonds have set his $242.2 billion Total Return Fund, the world’s largest bond fund, up for one of its poorest annual returns in a decade. And that has generated another blow: New money flowing into the fund has dramatically slowed in 2011, a stark contrast to the strong inflows seen in the previous few years.

This year through the end of the third quarter, the fund attracted $183.5 million in new contributions, according to data compiled by fund tracker Lipper under the request of Dow Jones Newswires. The fund lured $17.6 billion in new money last year, $57.7 billion in 2009, and $20.4 billion in 2008.

“For a fund with over $240 billion in it, an inflow of $180 million is close to zero,” said Jeff Tjornehoj, senior research analyst for Lipper. “Being on the wrong side of the Treasury bond market rally injured performance and reputation. When someone so visible makes a mistake it has large consequences.”

Oopsies.

What did Bill Gross have to say about our current policy, after he discovered his bet against Treasuries was so monumentally wrong?

http://www.pimco.com/EN/Insights/Pages/School-Daze-School-Daze-Good-Old-Golden-Rule-Days.aspx

In the end, I hearken back to revered economist Hyman Minsky – a modern-day economic godfather who predicted the subprime crisis. “Big Government,” he wrote, should become the “employer of last resort” in a crisis, offering a job to anyone who wants one – for health care, street cleaning, or slum renovation. FDR had a program for it – the CCC, Civilian Conservation Corps, and Barack Obama can do the same. Economist David Rosenberg of Gluskin Sheff sums up my feelings rather well. “I’d have a shovel in the hands of the long-term unemployed from 8am to noon, and from 1pm to 5pm I’d have them studying algebra, physics, and geometry.” Deficits are important, but their immediate reduction can wait for a stronger economy and lower unemployment. Jobs are today’s and tomorrow’s immediate problem.

Again, thank you very much for bringing up Bill Gross. Since you seem to put a lot of faith in him, I assume that you think “you’re smarter than Bill Gross who runs the largest UST trading desk, PIMCO.” He just made the Keynesian case more explicitly than even most Democrats.

Secondly, investors in this environment are NOT looking for YIELD, but relative liquidity AKA SAFETY. Not once have you mentioned the element of risk in ANY of your arguments which is ESSENTIAL to establishing a baseline of compensation.

Of course this is true, and I have mentioned it several times. SO WHAT? How does this contradict my point at all? If investors thought that the US would experience either high inflation or were at risk of defaulting, they would NOT BE BETTING OTHERWISE (to the tune of 2.5% yields over 30 years). Why? Because if they are wrong, they stand to lose unbelievable amounts of money. They are putting their money where their mouth is.

I’ve commented because your near moronic notions need to be spoon fed back to you up your arse, whence they came. You neede to be told that you are out of your element.

Oh, please continue. Your responses show that the entire conservative economic argument consists of

1. Ad Hominem attacks.
2. Citing sources that actually argue the position opposite from what you are arguing.

If you believe that this is the stuff effective arguments you are made of, I wholeheartedly encourage you to continue.

jd3181 on June 3, 2012 at 8:17 PM

Oh, please continue. Your responses show that the entire conservative economic argument consists of

1. Ad Hominem attacks.
2. Citing sources that actually argue the position opposite from what you are arguing.

If you believe that this is the stuff effective arguments you are made of, I wholeheartedly encourage you to continue.

jd3181 on June 3, 2012 at 8:17 PM


Hmmmmmmm ….

So quoting and citing items that are from 9 – 11 months AGO are relevant to TODAY exactly HOW?

Maybe the average reader is not aware your citations are the equivalent of fossils from a different geologic epoch as far as financial markets are concerned …

Oops, well , now they know.

PolAgnostic on June 3, 2012 at 10:24 PM

So quoting and citing items that are from 9 – 11 months AGO are relevant to TODAY exactly HOW?

Maybe the average reader is not aware your citations are the equivalent of fossils from a different geologic epoch as far as financial markets are concerned …

The fact that a commenter’s source actually favors Keynesian government job creation is apparently my problem now? Because they announced they favored my position last year?

Got it.

jd3181 on June 3, 2012 at 11:16 PM

(Emphasis mine above.)

Well Jazz, you just blew your cover. Where WOULD you like people to put their money (ie. the hard earned income they were allowed to keep)? Greece? Spain? Beannie Babies???

WryTrvllr on June 4, 2012 at 12:50 AM

The fact that a commenter’s source actually favors Keynesian government job creation is apparently my problem now? Because they announced they favored my position last year?

Got it.

jd3181 on June 3, 2012 at 11:16 PM


No, pathological liar
– you were castigating Bill Gross’s current performance this year by citing references critical of his actions from 9 – 11 months ago.

Do liberals ONLY hang around with people stupid enough to fall for this childish crap?

FYI, before I retired, someone engaged in your behaviors with regard to willful misstatement of facts and refusal to answer direct questions were the type of people it was easy to feel good about firing because their continued presence in the firm was huge downward drag on morale. Getting the garbage out the door was always good for morale of the people who were sick and tired of putting up with them.

PolAgnostic on June 4, 2012 at 4:02 AM

Doesn’t Japan answer all these questions for us? A quarter century of low interest rates, sky-high debt, no growth and a stock market at a 23-year low. Having low interest rates does not mean things are peachy.

Also, what she said:
http://www.nationalreview.com/corner/300915/public-sector-austerity-vs-private-sector-austerity-veronique-de-rugy

Randall Hoven on June 4, 2012 at 10:15 AM

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