Correlations

[Gumby]

Swapping one asset for another won't.

So basically it boils down to the fact that you consider T-Bonds and currency as the same thing, freely interchangeable, and I don't.  Is that a correct way to phrase the debate?

Well, we didn't say that T-Bonds were a "medium of exchange." We said that T-Bonds are our "savings" (they literally are).

A "Savings Account" is defined as:

Saving accounts are accounts maintained by retail financial institutions that pay interest but cannot be used directly as money in the narrow sense of a medium of exchange (for example, by writing a cheque).

Source: https://en.wikipedia.org/wiki/Savings_deposit

So, a "Savings Account" (or even Money Market Fund) can be composed of T-Bills, or commercial paper, or agency debt, or MBS or CDS. None of those things are "currency" in a grocery store, but they are part of broader money supply.

I mean, you don't really expect us to believe that Savings Accounts aren't "money" do you?

[Pointedstick]

Swapping one asset for another won't.

So basically it boils down to the fact that you consider T-Bonds and currency as the same thing, freely interchangeable, and I don't.  Is that a correct way to phrase the debate?

I see where you're going with this. How about this: if the fed initiated a purchase program to buy cars with newly-created money, then we'd have a problem, because the money is money, but the cars represent real goods and services that can be purchased with money. The net result would be an increase in the amount of money and a decrease in the amount of real goods and services available in the economy, which would be inflationary.

But I guess I don't see a government bond as a "real good or service". I see it as a financial instrument. And the purpose of financial instruments is the manipulation of money. They're never an end in and of themselves. You don't buy a bond or a bank CD because you really like bonds or bank CDs; you buy them because you want more money in the future. They're money-enhancers that are purely financial in nature; they don't result in the creation of any real goods or services until you swap them for cash and spend the cash.

Imagine if all the bank CDs suddenly turned into cash. Has the economy lost any real goods or services such as cars or computers or houses? No. Have people gained any money they didn't have before... well I guess that's the question. Savings accounts are money, right? If you see the CD as a more illiquid savings account, another vehicle for people to park their money for the purpose of making more in the future, then no. If anything, its deflationary since there's no longer an income stream or as big an income stream attached to the result of the swap.

[Gumby]

And while I hate to admit it, even Marx figured out that the bonds of a debt-based capitalist government was a public sector asset:

Karl Marx. Capital, Volume One
Chapter Thirty-One: Genesis of the Industrial Capitalist


The discovery of gold and silver in America, the extirpation, enslavement and entombment in mines of the aboriginal population, the beginning of the conquest and looting of the East Indies, the turning of Africa into a warren for the commercial hunting of black-skins, signalised the rosy dawn of the era of capitalist production. These idyllic proceedings are the chief momenta of primitive accumulation.

...

The system of public credit, i.e., of national debts, whose origin we discover in Genoa and Venice as early as the Middle Ages, took possession of Europe generally during the manufacturing period. The colonial system with its maritime trade and commercial wars served as a forcing-house for it. Thus it first took root in Holland. National debts, i.e., the alienation of the state – whether despotic, constitutional or republican – marked with its stamp the capitalistic era. The only part of the so-called national wealth that actually enters into the collective possessions of modern peoples is their national debt.[7] Hence, as a necessary consequence, the modern doctrine that a nation becomes the richer the more deeply it is in debt. Public credit becomes the credo of capital. And with the rise of national debt-making, want of faith in the national debt takes the place of the blasphemy against the Holy Ghost, which may not be forgiven.

The public debt becomes one of the most powerful levers of primitive accumulation. As with the stroke of an enchanter’s wand, it endows barren money with the power of breeding and thus turns it into capital, without the necessity of its exposing itself to the troubles and risks inseparable from its employment in industry or even in usury. The state creditors actually give nothing away, for the sum lent is transformed into public bonds, easily negotiable, which go on functioning in their hands just as so much hard cash would. But further, apart from the class of lazy annuitants thus created, and from the improvised wealth of the financiers, middlemen between the government and the nation – as also apart from the tax-farmers, merchants, private manufacturers, to whom a good part of every national loan renders the service of a capital fallen from heaven – the national debt has given rise to joint-stock companies, to dealings in negotiable effects of all kinds, and to agiotage, in a word to stock-exchange gambling and the modern bankocracy.

7. William Cobbett remarks that in England all public institutions are designated "royal"; as compensation for this, however, there is the "national" debt.

Source: Karl Marx. Capital Volume One. Chapter Thirty-One: Genesis of the Industrial Capitalist

[Mdraf]

I think this may be the root of our disagreement. You think that the Fed is severely depressing interest rates and that absent QE, they would be much higher.

If so, how do you explain that when QE2 ended, rates fell?

I like the Hoisington report explanation posted a few days ago:


When the Fed buys, it appears that the existing owners of
Treasuries (now amounting to $9.5 trillion) decide
that the Fed’s actions are inflationary and sell their
holdings, raising interest rates. When the Fed stops
this program, inflation expectations fall creating a
demand for Treasuries, bringing rates back down.

But this explanation seems out of synch with your belief that absent Fed buying, treasury rates would be much higher.

You're right to point that out. Had I not read that bit in Hoisington I wouldn't have an explanation. But he explains that to be a counter-intuitive short term reaction, not a long term one.

[MediumTex]

I like the Hoisington report explanation posted a few days ago:


When the Fed buys, it appears that the existing owners of
Treasuries (now amounting to $9.5 trillion) decide
that the Fed’s actions are inflationary and sell their
holdings, raising interest rates. When the Fed stops
this program, inflation expectations fall creating a
demand for Treasuries, bringing rates back down.

But this explanation seems out of synch with your belief that absent Fed buying, treasury rates would be much higher.

You're right to point that out. Had I not read that bit in Hoisington I wouldn't have an explanation. But he explains that to be a counter-intuitive short term reaction, not a long term one.

And yet, a similar long term pattern has been observed in Japan as well.

And really, we're now about five years into this Fed QE thing, and five years is really not what I would think of as a "short term reaction."

[Gumby]

I like the Hoisington report explanation posted a few days ago:


When the Fed buys, it appears that the existing owners of
Treasuries (now amounting to $9.5 trillion) decide
that the Fed’s actions are inflationary and sell their
holdings, raising interest rates. When the Fed stops
this program, inflation expectations fall creating a
demand for Treasuries, bringing rates back down.

But this explanation seems out of synch with your belief that absent Fed buying, treasury rates would be much higher.

You're right to point that out. Had I not read that bit in Hoisington I wouldn't have an explanation. But he explains that to be a counter-intuitive short term reaction, not a long term one.

Or you could have read the following link two years ago and figured it out in real time...

http://pragcap.com/evidence-qes-failures/

Far better than learning something from Hoisington years later.

Of course, those of us who were deeply invested in LTTs over the past few years remember that people tended to buy LTTs whenever the stock market went down and sold them whenever the stock market went up. Why? Because Treasuries are the safest place to put your dollars when you pull your money out of stocks. The two assets (stocks and LTTs) tend to mirror each other a good amount.

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So, from my viewpoint, at the time, LTTs were just reacting to money being pulled out of the stock market (which went down when QE ended). In other words, LTTs were just doing their job the whole time.

[Mdraf]

I noticed this negative correlation in my own HBPP which unfortunately leaves only gold to move the whole portfolio one way or another

[Gumby]

I noticed this negative correlation in my own HBPP which unfortunately leaves only gold to move the whole portfolio one way or another

I think it's probably a bit more complex than that. Yes, LTTs and Stocks seem to mirror each other on most days in recent memory — but not every day. Some days gold becomes the safe-haven of choice. Other days everything moves in tandem. It's a dance that changes from day to day. I think it really depends on the environment.