Gyroscopic Investing

Todays Fed announcement is that low treasury rates don't look to be anything tempory. I guess this is fodder for gold and LTT price increases or at least might mean that the unusually good run of results for the PP might persist longer than the historical norm

http://jessescrossroadscafe.blogspot.com/

"The Committee also anticipates that over coming quarters, inflation will run at levels at or below those consistent with the Committee's dual mandate.
To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014."

No QE3 either, which was expected by some.

Wasn't operation twist QEIII?

didn't take long for metal to react..

Canary in a coalmine, murph.  Right. On. Schedule.

Thanks, stone.

The end of the month is coming up, so I'm taking this promise of perma-ZIRP as a signal to go ahead and grab this year's batch of I-bonds.

What does this mean for the PP?

if you need a laugh, see twitter.com/jamesgrickards

murphy,

It was a laugh alright.  :D.

Rickards has some legitimate, interesting things to say... as far as inflationistas go he's on the better half of them... but QE just trades fiat confetti (dollars) for fiat confetti (treasury bonds).

Hard to debase the dollar if you're sucking up confetti as fast as you're spitting it out.

The dollar is backed by nothing but the IRS' tax-collection authority, not a promise to trade gold for cash, or gold availability for a bond held to maturity.  This means that treasury bonds represent the same fiat purchasing power as cash does, and at near-zero interest rates they are even MORE like cash than ever before.

This means deficit-spending (Creation of $1 in cash and $1 in treasury bond ($2 of fiat savings total) for the cost of $1 cash destroyed), not QE (1:1 fiat asset swap), is what drives the fiat purchasing power held on US citizen balance sheets, and, therefore, drives inflation.  Of course, deficit spending only drives inflation to the degree China & others aren't immediately sucking it off of our shores... Maybe someday they'll ask for products back and send our savings back to us, but that sounds like a full-employment scenario if I've ever heard of one.

Of course, this is long-term quantity-theory type stuff.  In the short-term, other factors will play a larger role than the total amount of $$'s and treasury bonds in existence.

Basically, I see it as this...

QE is almost irrelevent to inflation/recovery (pick your poison) today, and doesn't do THAT much when rates are higher either, as it's desired affect (expanding bank loans), simply creates a liability for every asset, which is always a drag on the will to purchase by Americans, though it can have some nice short-term affects.  

Budget deficit is relevent (even if caused by tax-cuts... not stimulus spending), but only after subtracting the trade deficit (money flows out of the country)... this ate up almost half of our budget deficit in 2010.  This represents what would have been savings in our accounts, as well as more GDP.

In the short-to-medium term, expansion or contraction of credit-money affects demand & inflation, and in the longer term, enough fiat base money and debt (sum of cash & treasury bonds) need to be in existence to adequately service the credit-based debt.  Otherwise you strain balance sheets, as well as impose restraints on the real economy for no good reason.

Over time, expansions in productive capacity call for more "base purchasing power" (my definition of M0 plus treasury bonds), as well as a reasonable amount of private leverage on top of that.... think of financial assets as the "oil" that runs the economic engine.  A V8 needs more oil than a 4-banger.

If we ever lose a war and have foreign denominated debt, an untrusted government and lose a ton of our productive capacity, the hyperinflation that could ensue is simply a manifestation of all of our REAL problems (just mentioned), not that we enacted QE or changed the fed funds rate.  I never seem to see these types of events mentioned in Rickards-esque calls for future currency disaster.

stone wrote: "The Committee also anticipates that over coming quarters, inflation will run at levels at or below those consistent with the Committee's dual mandate.
To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014."

Good time to buy more gold.  It looks like it finally broke the downtrend from last years peak on the news.  But its hard to see how it will continue to go up in face of a global recession.

MG

MG, I'd have thought in ZIRP world we might drift towards an inadvertent gold standard despite governments not wanting it. The gold bull market could tick along further and further until the gold price was so elevated that it corresponded in value to the amount of money in circulation. I guess the volatility of everything would be pretty loopy by then. My impression is that the PP seems a robust vehicle to try and navigate through a ZIRP future.