One of the things I said back in late 2010 was that government bonds would be the next bubble, and the one that, when it burst, would be the big one. At the time, it seemed unlikely to me that the bubble could be sustained for more than a few more months.
Via the Circle Bastiat on Mises.org, Hunter Lewis talks about The Hidden Motive Behind Quantitative Easing:
The Fed said that quantitative easing was meant to create U.S. jobs, but this never made much sense. Even a hard core proponent of QE, Fed official William Dudley ( formerly of Goldman Sachs), admitted that the Fed’s own economic models could not explain how creating money out of thin air and using it to buy U.S. bonds would increase employment. Some link to rising stock prices could be demonstrated, if only through the cheap financing of corporate stock buy-backs, but then rising stock prices could not be shown to create jobs either.
One inference from this was that chairman Ben Bernanke, and now new chairman Janet Yellen, were just taking wild stabs in the dark. A more reasonable inference is that they had another reason for QE, one which they did not want to acknowledge.
Viewed in this way, the 2008 bail-out should be viewed not as a bail-out of Wall Street, but rather as a bail-out of Washington. The Federal Reserve feared that the market for government bonds was about to collapse, which would lead to soaring interest rates, and a complete collapse of our bubble financed government.
The Fed did not have the option of creating money and buying debt directly from the Treasury. That would be illegal. The Treasury must first sell its bonds to Wall Street, after which the Fed can then use its newly created money to buy them back. Hence, in order to rescue the Treasury, the Fed felt it had to rescue Wall Street.
(Emphasis added by me)Lewis explains, also, that former Treasury Secretary Hank Paulson has told us that Russia tried to get China to join them in dumping U.S. bonds back in 2008 in order to completely collapse our economy. At that time, the Chinese were not willing to go along. I think it might be more realistic to say that China was not yet ready to go along with a bond dump. Their economic "miracle" has been very dependent on the extravagance of the U.S. consumer and the easy-money policy here. They needed time to prepare their own situation. They have had that time.
After Crimea, Russia withdrew its U.S. bonds from the custody of the Federal Reserve. It would not surprise me at all that Putin is selling or is about to sell off those bonds and that China might be more willing and able to go along with it this time.
I would not put much faith in the promises of "tapering" from the Federal Reserve. QE was done to benefit the federal government. We are now much further in the hole that Obama promised to "dig us out of". We have talked before about what will happen if bond rates rise dramatically. We know that inflation is once again putting pressure on people, and more QE will only worsen the consumer's position.
On one end of the spectrum, there are food riots and "tanks in the streets"; on the other end is hyperinflation, Zimbabwe and the Wiemar Republic. In the middle, there is Japanese-style stagnation and "lost decades". The right road is, as Galadriel told Frodo, the edge of a knife. At best, if we can discipline ourselves, it is painful and slow. Politically, the only real solution is simply unacceptable. Those living within the Beltway Bubble will never willing give up their power.
The Fed has, with the other central banks, held it together far longer than I expected. Can they keep it going and somehow right the ship? I don't see how, but I've been wrong betting against them so far. Though, even being wrong, I don't lay awake at night worrying about what is going to happen.
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