Bill Bonner

“Monetary policy cannot fulfill each and every market expectation.”

So said the head of the Bundesbank, Jens Weidmann.

Why not, investors want to know.

Mr. Weidmann was talking to The Wall Street Journal. He was explaining why Germany was sticking to its guns. They don’t use that expression in Germany. But you know what he meant.

“The crisis can be solved only by embarking on often-painful structural reforms,” he insisted. “If policy makers think they can avoid this they will try to.”

Mr. Weidmann is talking about the present. He is also describing the future. In the old world there is a backlash growing against the Germans and their financial guns. Austerity doesn’t seem to work. Countries try it. They cut spending. They fire people. They get nothing from it. Their budgets are still far out of balance, with deficits way above the 3% limit demanded by the European Union. Unemployment goes up. GDP goes down. Unhappy mobs start breaking windows. Why bother?

Look what is happening in Britain, for example. The Telegraph reports:

The unexpected 0.2pc contraction in UK growth followed a 0.3pc fall in gross domestic product (GDP) in the fourth quarter of 2011, signalling a technical recession and Britain’s first double-dip since 1975.

Economists had expected the Office for National Statistics data to show the economy grew by 0.1pc between January and March.

The Prime Minister said the figure was “very, very disappointing” but added that that it would be “absolute folly” to change course and jeopardise Britain’s low borrowing rates. He told Parliament:

“We inherited from [Labour] a budget deficit of 11pc. That is bigger than Greece, bigger than Spain, bigger than Portugal [...] The one thing we mustn’t do is abandon spending and deficit reduction plans, because the solution to a debt crisis cannot be more debt.”

Of course, you might look at these facts and conclude that they are not trying hard enough. Instead of making smallish cuts…why not make big ones? Why not actually balance government budgets so that they can tell German central bankers to drop dead?

Everyone agrees that that would be too radical. It would invite “social upheaval.” Apparently, actually living within your means is no longer politically or socially acceptable. You have to live beyond your means… The only question is ‘who will pay for it?’ The answers to that question are not easy. When debt levels were low, the answer was probably ‘future generations of taxpayers.’ At today’s debt levels it is unlikely that the debt will ever reach future generations. And with so much of the debt now being taken up by the central bank the burden shifts, from lenders to borrowers, taxpayers and consumers. Good debts may fall on debtors…even those who are not even born yet. But bad debt and inflation float down like leaves…blown by the winds…and eventually dropping down on innocent passers-by.

With perhaps the exception of the German central bank, all the others — or most of them — are trying to “fulfill each and every market expectation.” They are trying to drive asset prices higher…reach full employment…and cure diabetes.

The Fed is at the helm. And The New York Times reports that this week’s policy meeting produced an assurance. The Fed will stay on course…guided by its own star:

WASHINGTON — In a statement following a two-day meeting of its policy-making committee, the Fed said that it would continue its existing efforts to stimulate the economy, but it decided again not to expand those efforts, even though its projections show unemployment will remain a massive and persistent problem for years to come.

The statement also said that the Fed plans to maintain those existing efforts, including holding short-term interest rates near zero, “at least through late 2014.”

But a separate summary of the views of senior Fed officials showed that a majority of the committee now expects to raise interest rates by the end of 2014.

“The Committee expects economic growth to remain moderate over coming quarters and then to pick up gradually,” the statement said. It said unemployment would “decline gradually” and that inflation remained under control despite the impact of the recent rise in oil prices, which it regards as temporary.

The Fed’s chairman, Ben S. Bernanke, strongly defended the calibration of the central bank’s policies at a press conference following the release of the statements. He said that the Fed already was engaged in a massive effort to bolster the economy.

“The question is, does it make sense to actively seek a higher inflation rate in order to achieve a slightly increased pace of reduction in the unemployment rate,” he said. “The view of the committee is that that would be very reckless.”

He added that the Fed’s ability to reduce the unemployment rate more quickly was somewhat “doubtful” and that any success likely would be small.

Low rates are a kind of hustle. They take money from savers and redistribute it to debtors. Borrowers — such as the big banks — get money at a preferentially, artificially low rate. But savers pay the price.

Recently, thanks to the shale oil story, scammy rig operators are promising returns as high as 14% PER MONTH. Retired people, supplementing their Social Security payments with interest income, are tempted. At today’s rate, the pensioner gets less than $2,000 on his $100,000 of savings. He is desperate for more. Even to the point of listening to shysters and investing with fraudsters.

But in a system pumped up by counterfeiting…hoist on the gassy petard of economic BS…and kept from blowing away by the short memories of the investing public…

…what is not a scam?

A partnership that promises a 14% per month rate of return is surely a flimflam. But what about an IOU from the world’s biggest debtor…promising almost nothing?

Investors must have had the same faith in bonds back in 1946. Then, bonds had been going up for a whole generation. Stocks crashed in ’29…and again in ’37…and in ’42…and bonds went up. Real estate sank and stagnated for two decades…and bonds went up. A Great Depression lasted, on and off, for 12 years…and still bonds went up. Even throughout the biggest war in human history…the full faith and credit of US Treasury bonds was as solid as Ft. Knox. Now, in 1946, with the war over…Europe demolished, and the Soviets ready to invade…millions of returning soldiers who might find no work…

…what better to buy than US bonds?

But monetary policy held more or less steady. Despite double digit inflation and despite a series of post-war recessions…monetary policy was relatively calm. It let the money supply fall…and prices rise…

And the bond market gave way.

Bonds went down for the next 36 years. An investor who bought US Treasuries during the Truman administration years lost 83% his money before Ronald Reagan moved into the White House.

Meanwhile, prices rose to more than 4 times what they had been in the post-war period. The poor investor. Hammered by inflation…smashed by the bond market. He was black and blue all over. And by the end of the ’70s he considered government bonds nothing more than “certificates of guaranteed confiscation.”

But those were the good ol’ days. Now, nearly every central bank — especially the Fed — aims to fulfill all market expectations. Stock market buyers expect higher prices; if they don’t get them, it won’t be the fault of the Fed.

Bond market buyers also expect higher prices…or at least stable prices for their US Treasury bond. The Fed is on their side too…buying up bonds in staggering quantities in order to keep yields low and prices high.

This time, an activist Fed is on the case. And bonds are doomed…even more than in ’46.


Bill Bonner
for The Daily Reckoning

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily ReckoningDice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill's daily reckonings from more than a decade: 1999-2010. 

  • Larry Bernard

    You don’t buy bonds from major countries to make money: you buy them because you believe you will have the US government keep paying you

  • Burney

    What’s amazing to me is that (far as I’m aware) no country of significant size is/nor has short-to-medium term plans … of not running a deficit.

    Worse, many countries borrow just to pay the debt interest coming due, never mind that they also borrow to roll the debt principal coming due.

    Actually making inroads in paying off the principal isn’t on any ones radar.

    It’s incredible.

  • ken

    @ Larry Bernard

    And that’s the same reason most ‘voters’ vote the way they do…

  • http://bigpond pedro mohr

    Bill Bonner is terrific writer but when he mentions full employment and diabetes cures,I get upset cause to get full employment one may need a war,but not diabetes because yes there is a cure and it involves cinnamon a herb from tree grown in South Pacific.Also involves better diet and certain type vitamins as benfontaine.

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