In his latest monthly outlook Bill Gross calls June 30th the equivalent of the market’s D-Day.  Of course, that is when the Fed’s QE2 program ends.  And Mr. Gross might be right.  After all, the Fed has injected our blind school child with the belief that he is going to become the world’s greatest archer.  No, the Fed hasn’t changed anything fundamentally about the US economy via its purchase of long-term bonds.  In fact, given the drop in housing prices, surge in commodity prices, billions reallocated due to gasoline prices, surging mortgage costs, continued lack of borrowing, etc you could actually make the argument that this program has been counterproductive.  The one thing it has done is boost risk assets and give market speculators an almost Superman-like feel.  Our poor little archer is convinced that Papa Fed has given him superhuman powers.  I guess the end of QE2 can be seen as their Kryptonite and our blind school child is still…blind.

But that is not what Bill Gross is worried about.  No, he is concerned that the US government might not be able to fund itself when QE2 ends.  That is to say that QE2 filled some void that wasn’t going to be there.  Naturally, he doesn’t explain how the lack of QE2 would have resulted in its own D-Day (because it wouldn’t have – the Federal government would have continued spending with or without QE2), but the truth doesn’t make for nearly as interesting story telling.  He says:

“What an unbiased observer must admit is that most of the publically issued $9 trillion of Treasury notes and bonds are now in the hands of foreign sovereigns and the Fed (60%) while private market investors such as bond funds, insurance companies and banks are in the (40%) minority. More striking, however, is the evidence in Chart 2 which points out that nearly 70% of the annualized issuance since the beginning of QE II has been purchased by the Fed, with the balance absorbed by those old standbys – the Chinese, Japanese and other reserve surplus sovereigns. Basically, the recent game plan is as simple as the Ohio State Buckeyes’ “three yards and a cloud of dust” in the 1960s. When applied to the Treasury market it translates to this: The Treasury issues bonds and the Fed buys them. What could be simpler, and who’s to worry? This Sammy Scheme as I’ve described it in recent Outlooks is as foolproof as Ponzi and Madoff until… until… well, until it isn’t. Because like at the end of a typical chain letter, the legitimate corollary question is – Who will buy Treasuries when the Fed doesn’t?”

“I don’t know. Reserve surplus sovereigns are likely good for their standard $500 billion annually but the banks are now making loans instead of buying Treasuries, and bond funds are not receiving generous inflows like they were as late as November of 2010. Who’s left? Well, let me not go too far. Temporary voids in demand are not exactly a buyers’ strike. Someone will buy them, and we at PIMCO may even be among them.”

Yes, you will buy them.  And so will the rest of America because no matter what the Fed does they cannot eliminate the public’s desire to net save.  They can make other assets less attractive on a relative basis, but they cannot eliminate a savers desire to net save.  And during a balance sheet recession that desire to save is quite high so wise savers naturally choose risk-free interest bearing bonds over cash.  Luckily, the Federal government is running a 10% budget deficit so the private sector is able to save in excess of 7% of GDP (we are running a -3% Current Account (CA) deficit so the math can be no other way).  Naturally, some of this savings is flowing into government bonds.

If one were to actually review the bond auction data you can see this for yourself.  Where will the buyers come from?  They will come from the same place they always come from.  Although he acknowledges that some of these buyers are foreign governments he appears oblivious to the simple reality of the current account (CA) deficit.  Those dollars may leave our shores, but they come back in the form of UST purchases.  The alternative is for these foreign nations to purchase other dollar denominated goods.  If you recall, most foreign governments have a pretty poor record of buying our resources, ports or oil companies.  So what do they do?  They buy the safest yielding paper on the planet – UST’s.  This is expect so long as inflation remains under control.  

Most importantly, it’s likely that QE has not had a substantive impact on the US economy to begin with.  That is, interest rates likely would have fallen with or without QE because the US economy has remained weak leading to low inflation.  So the demand for US T-bonds was never in doubt.  It would have been strong regardless of QE because US government bonds remain the safe haven in an environment where the only safe low interest bearing assets are all slowly being driven to lower interest rates.  Without a hike in the Fed Funds rate due to high inflation fears there is a very low probability that interest rates will surge at the end of QE.

But most importantly, the buyers can always be in the form of the Primary Dealers as they execute their required role as bond bidders.  The Dealers are required to make a market in government bonds.  If you study the bond auction results you can actually see this for yourself.  The PDs can always take down the entire bond auction.  That’s not a coincidence.  It is designed that way.  So, who will be the buyers?  Assuming we continue running a current account deficit (check), US consumers continue their desire to save (check)m zero interest rate policy remains in place (check) and inflation remains in check (check) there will no concern about yields surging or bond auctions failing after June 30th.


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • MMTer

    It’s not even remotely surprising that Bill Gross would be in bankruptcy court today if not for the government bailouts. This just shows that it doesn’t take much aside from good luck and timing to become a billionaire.

  • casanova

    Nothing will happen on June 30th. Fed will anounce another program to continue to monetise the debt even before that date. This is so obvious.

  • http://www.pragcap.com Cullen Roche

    You can’t monetize what you don’t fund…. http://pragcap.com/pomo-flip-matter

  • Derfem

    TPC, I think you miss the best part:

    Someone will buy them, and we at PIMCO may even be among them. The question really is at what yield and what are the price repercussions if the adjustments are significant. (…) What I would point out is that Treasury yields are perhaps 150 basis points or 1½% too low when viewed on a historical context and when compared with expected nominal GDP growth of 5%. This conclusion can be validated with numerous examples: (1) 10-year Treasury yields, while volatile, typically mimic nominal GDP growth and by that standard are 150 basis points too low, (2) real 5-year Treasury interest rates over a century’s time have averaged 1½% and now rest at a negative 0.15%! (3) Fed funds policy rates for the past 40 years have averaged 75 basis points less than nominal GDP and now rest at 475 basis points under that historical waterline.

  • http://www.pragcap.com Cullen Roche

    He seems to be ignoring the fact that we are in a particularly odd sort of recession. The FFR is not at 0% because everything is perfectly normal. The low yields reflect this unusual environment. Could yields rise if the recovery continues, the Fed starts hinting at rate increases, etc? Absolutely. But it’s not going to result in a lack of buyers or some sort of collapse in the govt bond market….In other words, I think Mr Gross is whipping out his history books and the problem is that there aren’t many historical cases of recessions like this one….So, all those past results are inapplicable….

  • Silalus

    Showcasing my own ignorance… What happpens if the PD’s are contractually obligated to purchase an amount of bonds that greatly exceeds private demand for them? Is it possible for the PD’s to end up in a situation where they have to decide between taking a loss on the resale of their bonds or just holding on to them without selling them?

    If that did happen it could end up as a weird little back door way of invisibly removing toxic assets from those institutions, couldn’t it? If they were “forced” to borrow from the PDCF at a low discount rate while providing mortgage-backed securities as collateral, and in turn required to use those loaned funds to purchase additional bonds… Then that would be be equivalent to a free swap of a potentially high-risk asset to a zero risk asset, would it not?

  • MMTer

    Why is there demand for government bonds? Because there is a desire to save. The only reason that demand for government bonds would collapse is in a hyperinflation. That means users of the currency don’t desire to save in US dollars.

  • MMTer

    He’s a marketing genius. He has created this “new normal” and then he comes out and writes garbage like this. How can we be in a new normal and at the same time apply past history to the current environment? According to his own “new normal” theory it is different this time. So, wouldn’t it make sense then that the government bond market respond differently?

  • AK

    OK you tell me how many times did you actually paid for stock with actual cash dollars? ZERO! Correct? All you see is credit and debit on your computer accounts. Did your dollars go up when Bernanke was “printing money”? No.

    Same thing with banks. There was no actual transfer of money. In fact no money was ever moved into the real economy. Banks could have speculated before or after Bernanke allowed them to switch so called account ‘t-bills’ into account ‘reserves’ on their computer screens. That is all Bernanke has done. This just changes their capital-ratios. Changing capital-ratios allowed them Banks to say “we are solvent” or “we can serve our debts” or “interest-coverage is good”. That is all. On top of that banks even though their reserves went up they never lend loans but their financial status improved. This gave markets an excuse to say everything is fine now so let us begin are new speculation cycle.

  • John

    Does the venerable Mr. Gross really not know how the monetary system works? Or is he just pretending in order to manipulate the markets?

  • roger erickson

    Wrong question.

    Right one would be: “What would happen if the US Treasury simply stopped offering Treasury Bonds?”

    Answer: Absolutely nothing.

    The FED would simply have to set overnight inter-bank rates by decree, instead of such convoluted & indirect methods invented during the brief & disastrous gold-std days.

    On a fiat currency std, currency supply is generated by gov spending, and regulated to stay within inflation/deflation tolerance limits by taxation. Aggregate demand is tempered by money supply quantity, not price.

  • http://www.pragcap.com Cullen Roche

    Right, but the days of no govt bond market are not in our near future….

  • http://blogfirstrider.blogspot.com/ first

    The low yields reflect the BB environment.


    Too much fuss about the obvious. If demand goes down due to the fed exiting the game bonds will clear at a lower price (i.e., higher rates) everything else being equal. However there are many other things going on in the economy which also influence rates. For example, if the economy starts to stall for one of the many reasons you read here like higher oil, china’s hardlanding, Europe’s mess, us consumers once again chocking on debt, the housing dd, etc; then rates may even go lower despite the end of QE2.

  • Anonymous

    sounds right octavia

  • http://blogfirstrider.blogspot.com/ first

    The venerable Mr. Gross“Gross in January sold is managed holdings of U.S. government and related debt by $239 billion” That 48% of the venerable BB’s QE. You can rest assure hat he was not the only one getting out of Gov debt. That is why the Bond market was going down despite of BB the bider of last resort.

  • Anonymous

    someone please tell who is not dying for higher rates so they can capure some yield on US treasuries. folks in the US are clamoring for higher yields which will keeep them capped. the 5 year yield on bank cd’s are pathetic and a scam run by banks trying to borrow short lend long.

  • Chris

    I saw this on BI and desperately hoped you would do a piece on it. THANK YOU. I would suggest trying to get Henry/Joe W to post your response.

  • http://www.pragcap.com Cullen Roche

    Who cares? That audience just flames me anyway….They don’t care to take the time to think through reality and facts….

  • Rob Jones

    What irks me about this site is that it takes someone’s comments, misstates them, and then proceeds to attack the guy for things that he was never actually saying. I don’t see anywhere where Mr. Gross is predicting that the government will have trouble funding itself when QE ends.

    It appears to me that Bill Gross is simply suggesting that interest rates may rise, perhaps as much as 1.5% on the 10 year, when QE ends. This seems plausible enough to me. Of course, you can fairly argue that a 1.5% rise is unlikely due to the weak state of the economy. But it seems reasonable to expect some increase in rates. Of course, the US Government is a huge borrower and a even a small rise in interest rates could cost it tens of billions per year, increasing the deficit. But no one seems worried about the deficit at the moment.

    What effect this would have on the overall economy is difficult to predict. Higher interest rates probably won’t help housing. Mr. Gross also implys that he believes QE has been pumping up the stock market, although he doesn’t give arguments to support this. But the stock market has been on a tear recently, so he may well be right. In any case, the QE party may be ending. Let’s hope the hangover is not too bad.

  • jt26

    I still love these articles! A great addition to your MMT tutorial would be a discussion of the relevance of issuing various tenors of Bills/Bonds (0-30 years). Also, what’s the relevance of the Fed repo’ing 1-3 yr Bills/Bonds vs. 30years, MBS, HYield (! they probably aren’t allowed to, but its a hypothetical question about whether any asset can be used to manage the Fed Funds rate or not). Cheers!

    The other issue about MMT is how to manage the money supply for “maximum productive use”. Whether it’s Taylor’s rule (employment/inflation) or asset prices or … this is a real political problem in addition to none of the politicians understanding how the system works.

  • http://www.pragcap.com Cullen Roche

    You might want to read his piece again. He calls the govt’s actions a “ponzi scheme” and directly says that he doesn’t know who will buy govt bonds when QE2 ends:

    “This Sammy Scheme as I’ve described it in recent Outlooks is as foolproof as Ponzi and Madoff until… until… well, until it isn’t. Because like at the end of a typical chain letter, the legitimate corollary question is – Who will buy Treasuries when the Fed doesn’t?”

    I don’t know what you’re reading (perhaps you don’t know what a ponzi scheme is, but it implies that the music stops when the money stops coming in, ie, no more buyers), but the message from that sentence is pretty crystal clear. His commentary is vague enough not to actually make a poignant message, but cute enough that people like you eat it up. Well, news flash. It’s flat out wrong.

    He is not just saying that yields might rise a little tiny bit, there will be some adorable little sell-off in govt bonds and then we all go along our merry way. He is calling their actions a ponzi scheme and comparing it to what Bernie Madoff did. Yes, HE IS DIRECTLY SAYING THAT THERE MIGHT NOT BE BUYERS OF GOVT BONDS JUST AS THERE IS AN END TO EVERY PONZI SCHEME WHEN THE BUYERS STOP. That is beyond absurd and the fact that anyone could defend such commentary is insane. I am far from being the person who defends the Fed and their actions, but come on – a ponzi scheme? Bernie Madoff? That’s absurd. It’s beyond absurd. If I worked in the govt I would issue a press release calling him an idiot.

    Accusing me of taking his commentary out of context is utterly ridiculous.

  • Hammertime

    Are not treasuries extremely important to sterilize the massive money creation from deficit spending by our incompetent government? You act like the treasury market is useless and should be eliminated as a relic of the gold standard days. I think this is where your MMT arguement falls apart.

  • Rob Jones


    But Gross clearly says in his article: “Someone will buy them, and we at PIMCO may even be among them.”. He is not saying that QE is a Ponzi scheme. He is only suggesting that, like a Ponzi scheme, QE may have had the effect of enticing people into paying too much for an asset (in this case Treasuries) that will ultimately be worth a lot less when the scheme finally comes to an end. If interest rates rise at the end of QE, someone is going to be stuck with those low-yielding Treasuries issued during QE. Of course, it appears that in the case of QE, the victims will mainly be foreign governments and the Fed itself. This could be important if the Fed ever finds it necessary to mop up the liquidity it added to the system during QE. If it added $1B to the system by purchasing $1B worth of Treasuries during QE and then is only able to sell those same Treasuries for $900M because interest rates have risen after the end of QE, then $100M of worth of liquidity would have “escaped” into the system.

    And yes, I do understand what a Ponzi scheme is. But thanks very much for the insult! I have usually found that when someone gets angry and starts insulting people, it usually means that they have run out of good arguments.

  • JWG

    MMT makes perfect operational sense. As a matter of law, however, we are stuck with the government bond market and the legal remnants of the gold standard. Both MMT and the government bond market are reality based.

    Commentators on this site sometimes deride very wealthy and experienced investors and officials as naive or uninformed about the realities of the bond market and MMT. Do we truly believe that Bill Gross is naive or uninformed? He is a powerful and extremely wealthy insider who made his fortune in fixed income, and who has over the last few months suddenly been attacking the Federal Reserve with great intensity. He may know something about the coming bond market reality that MMT-ers, with their focus on elegant operational realities and sectoral balances, may be ignoring, and that pure academics like Ben Bernanke will never grasp.

    Neither overweight nor underweight the alternative narrative in an arena such as finance and investing that is governed by by human emotion rather than predictable outcomes. I just finished reading Benoit Mandelbrot’s book about fallacies in investment analysis; my thought is that Bill Gross might perceive another fat tail event on the horizon. Maybe he is wrong, but I’ll take his free advice under advisement, and with gratitude. I would be a fool not to.

  • http://www.pragcap.com Cullen Roche

    Considering you’re not that familiar with Gross’s work it’s not surprising to see you make these sorts of comments. From his October letter (which nullifies everything you’ve wasted your time writing):

    the Fed has joined the party itself. Rather than orchestrating the game from on high, it has jumped into the pond with the other swimmers. One and one-half trillion in checks were written in 2009, and trillions more lie ahead. The Fed, in effect, is telling the markets not to worry about our fiscal deficits, it will be the buyer of first and perhaps last resort. There is no need – as with Charles Ponzi – to find an increasing amount of future gullibles, they will just write the check themselves. I ask you: Has there ever been a Ponzi scheme so brazen? There has not.

    So yes, he clearly has been saying (for 6 months now) that QE is a ponzi scheme….

    I know you don’t like my arguments because they don’t mesh with your hyperinflation/USA default argument, but please don’t come here and accuse me of something that is blatantly wrong. If you want to argue the actual article then fine, but don’t try to say he’s not saying something when he clearly has been for 6 months.

  • Uncle Tupelo

    So Cullen, I’m I’m honestly trying to understand your points here, but as Gross and others say, if the the true market-based interest rates without the Fed’s buying is, let’s say, 2% higher across the curve, then doesn’t that suddenly make the debt issuance un-servicable given the rise in interest payments? That seems to be the fundamental point here, with the implication being that the Fed either needs to buy forever or the government needs to spend dramatically less (or some sudden true organic growth in the real economy nees to occur, which seems very unlikely given the degree to which false economies still remain)…

  • http://www.pragcap.com Cullen Roche

    The same logic would have applied following QE1, right? But what happened to rates? They FELL after QE1….

  • Rob Jones


    Bill Gross: “Someone will buy them, and we at PIMCO may even be among them.”

    Readers can form their own opinions as to whether you are twisting Gross’s words.

    I also think that Bill Gross is very fond of hyperbole. When he asks: “Has there ever been a Ponzi scheme so brazen? There has not.”, I think he is being humorous. Clearly QE is not a Ponzi scheme, and certainly Gross is aware of this and certainly he is aware that his readers are also aware of this. This is vintage Bill Gross and I interpret it as his way of saying that QE is a massive crock. At least I find it very funny.

    And by the way, I am not predicting hyperinflation or outright default for the US. It is true that I am rather fearing that a nasty round of ordinary inflation similar to what the US experienced in the 1970’s might hit sometime in the next 10-15 years as the boomers retire.

    Naturally I expect you to dig up some of my old posts where I described hyperinflation in Germany and other places and claim that I have been predicting hyperinflation in the US when in fact I am not and never have expected or predicted that. And I have always tried to make that clear in my posts. But of course, you will leave out the parts where I said that. I only brought up those examples to show that governments can easily create large amounts of inflation whenever they want when they are using paper money. That is not the same as predicting that it will happen in the US. Actually, there isn’t any real need for hyperinflation, because ordinary inflation will wipe out debts well enough.

    The problem with this website is that you have no humor and don’t recognize humor when it occurs in a post. So jokes are very likely to be misinterpreted. And you take people’s statements out of context in order to support your arguments. So if someone uses the Weimar Republic so support a minor point, he automatically becomes a hyperinflationist/default lunatic fringe fanatic who must be attacked, even if that person repeatedly states the opposite.

  • studentee

    “The problem with this website is that you have no humor and don’t recognize humor when it occurs in a post. So jokes are very likely to be misinterpreted. And you take people’s statements out of context in order to support your arguments. So if someone uses the Weimar Republic so support a minor point, he automatically becomes a hyperinflationist/default lunatic fringe fanatic who must be attacked, even if that person repeatedly states the opposite.”

    i follow this site regularly and this isn’t even close to being true.

  • Mediocritas

    I think Gross is asking the wrong question here.

    At the risk of oversimplifying, I think the primary issue that the Fed is trying to deal with here is the rate of defaults (particularly mortgage default and the threat of state-level defaults), the theory being that keeping long yields low translates into reduced defaults. So Gross’s question might be better reworded as: “what is the default environment like?” as this predicts whether or not the Fed will cease OMO operations (and what will happen if it does).

    I won’t go into any further detail because I have work to do, but I’ll just finish with one important point which, if omitted, Cullen will catch me on ;-)

    Which is that forcing yields lower may indeed relieve interest service stress in the short term (hence reducing defaults), but will ultimately *fail* in the longer term if there is no parallel improvement in legislation that forces lenders to engage higher standards of prudence. Excessive regulatory lag will result in risk returning as bad loans are extended further on lower rates to entities that were previously priced out, thereby putting us in an even *worse* situation (same risk with no room to move down on yields).

    I know we tend to focus on monetary factors here, but it’s important to remember that long-term solutions require a multi-faceted effort. The Fed can provide suggestions here (and has), as has the BIS, but it’s ultimately up to Washington.

  • Uncle Tupelo

    So here’s my question…Is there a realistic scenario where rates can rise again anytime in the foreseeable future, let’s say 10 years? For those who don’t understand or agree with MMT the answer would appear to be ‘no’ and as best i can understand it from reading your background articles, the answer from MMT would also appear to be “no” (ignoring the government debt service question, since as i understand it, the government/treasury/congress can always just create money to service the debt, as long as there is no acknowledged inflation in the US) since higher rates would in fact encourae greater saving, if I understand correctly…If all that is correct, it says a lot about how to invest or not invest…

  • Mediocritas


    Don’t forget that the Treasury (effectively) pays zero interest on bonds bought by the Fed. It doesn’t matter if the yield is 2% or 2000%, the government only pays the face value at maturity plus a small amount to cover Fed operational expenses along the way.

    Interest service on debt held by other parties (eg China) *does* have to be serviced but this will never actually be a burden unless the US Govt wants it to be. Said another way, the Fed can conduct OMO to finance US debt service to foreign holders, helping to reduce yields in the process and increasing the proportion of US debt held on the Fed’s books both as a direct consequence of OMO and an indirect consequence of making US debt less attractive to external participants, thereby negating risk from hostile remote holders.

    The problem here is that foreign holders of US Treasurys may lose confidence in the ability of the US private sector to recover (therefore in the US govt to raise tax revenue and shrink money supply hence failing to control inflation). Although this is not a real threat, it may encourage bond dumping, leading to higher yields and forcing the Fed to engage in more aggressive OMO. Consequently, Eurodollar holdings would increase leading to inflation of all things traded in US dollars, for example, commodities and US stocks, as those dollars were offloaded like the hot potatoes they were perceived to be.

    This is one (of many) contributive factors to the current commodity rally (although I do not believe it is the primary one). Such a scenario is very unwise for foreign debt holders as to dump US Treasurys in exchange for commodities, equities, etc, in an environment of high deflation threat (the economy is still weak, toxic derivatives are still toxic) increases the risk of a *major* loss. The Fed will end up eating them for breakfast (pulling a tidy profit in the process). If anyone is actually doing this, I don’t believe it would be a foreign sovereign. Last time I checked, China had actually *increased* net US debt holdings, so this is likely not a major source of current commodity inflation.

  • Uncle Tupelo

    Thanks…until recently i would have agreed with your high-deflation risk statement, expecially since for the things that are high-dollar items here in the US (houses and other debt financed items) the money supply for those things appears to still be contracting, however with enough “stimulus” those can be propped up and it certainly seems like true inflation will arise either directly or recycled, well before interest rates can rise under MMT…I have been betting that their is a ceiling on rates for a long time to come, but i have been wrong before so always on the lookout for alternative views…

  • Mediocritas

    Another thing to consider with interest rates (which a lot of people forget about) is the elephant in the room: interest rate contracts (the largest class of derivatives). Almost 452 TRILLION notional in June 2010. (See http://www.bis.org/statistics/otcder/dt1920a.pdf )

    So any large, unexpected moves in US interest rates will cause absolute havoc in the financial sector. In essence, the Fed is being held hostage by the gambling antics of the banking sector.

    I don’t expect to see significant motion in interest rates any time soon…unless the Fed loses its mind.

  • http://blogfirstrider.blogspot.com/ first

    Gross probably knows a few things about what is down the road that BB also knows but for now BB seams to have a different agenda.

  • http://www.pragcap.com Cullen Roche

    Look Rob, if you want to criticize me then please do it in a constructive manner. If you want to debate something then please do so in an intelligent manner. If you don’t like the content then just don’t read it. It’s free. And you are free to leave any time you want.

    If you want to insult me then don’t waste your time. I don’t have time for the type of people who spend their days arguing with anonymous people on the internet. I welcome your presence, but I just hope you’ll respect me and my work and the people around here. There are tons of readers here who don’t agree with everything I write. But you know what? By discussing our disagreements in an intelligent and peaceful manner with one another we actually create a better learning environment.

    We’re not here to twist people’s words or make anyone look bad. I am attempting to enlighten some people about the way things work and hopefully start some conversations that make people think and move things in the right direction. I don’t pretend to know everything so I wholeheartedly welcome intelligent debate. But your kind of comments detract from the site.

    And if you think I have a short fuse…well, try running a website for a month and see how you feel after the first 50 jerks stop by to pee on your doormat. It gets old pretty fast and if you let it keep happening they become emboldened. Personally, I can’t have people peeing on my doormat. It stinks enough as it is.


  • http://www.pragcap.com Cullen Roche

    I’ve touched on how this has to be a bank bailout….I don’t see who else it really helps. Who knows….

  • http://www.pragcap.com Cullen Roche

    I haven’t been calling for deflation. All last year I said we would have disinflation. This year I am calling for modest, but below trend inflation. I still think there is no risk of hyperinflation and that the more likely of the two is deflation….

  • Anonymous

    I see it the same way.


  • Anonymous

    Well Cullen,

    You must admit that the US deficits / QE are on the back end of a slippery slope. I do not know if the rate of money issuance (be it Fed or govt) is high enough to get to hyperinflation, but I do know that the problem is not linear. Currently the high rates of deficit / QE may be counterbalanced by the consumers’ debt deleveraging, but I also know that government gets entrenched and never cuts back (and special interests also demand that the free goodies continue to flow, as they will be too accustomed to them) even if times are good again.

    So a question for you: At what level of deficit (or QE), the US will experience say 10-15% inflation

    a) if private debt was not a problem?
    b) at current deflationary pressures from private debt?


  • Anonymous

    P.S.: I mean experience this level of money issuance for a number of years, say 5-10 and then experience high inflation, not within a year.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    Claiming that person X is an insider, or has a Ph.D., or is very smart, or whatever, so they can’t be wrong, is equivalent to admitting that you have no idea yourself, so you’re just going to trust them.

    Everyone can be wrong, no matter how smart they are. The point isn’t intelligence, the point is whether or not the paradigm used to understand the monetary system is applicable. Throughout history, very intelligent people have had the wrong paradigms–almost all the smart people thought the sun went around the earth, for instance, at one time. The fact of the matter is VERY few people have expertise on the monetary system. Even among economists, probably less than 1% of them have such expertise–the operational details of the monetary system haven’t even made their way into any of the graduate textbooks even in the specialized fields, let alone more general macro texts, even as economists from all schools of thought actually researching it have come to very similar conclusions. So, no, it’s absolutely no surprise if highly intelligent people, insiders, etc., don’t have training on the monetary system’s operations.

  • boatman

    no QE3 in an election year in this environment?…that n bailed out zombie banks are the only thing really fueling anything.

    do you really think there is anyone who would judiciously apply ‘ACTIVE’ MMT to our govmint?

    jefferson is dead……too many political pressures….who’s going to be that ‘king?’ (god)?

    i just don’t see it.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    Of course, you didn’t say he couldn’t be wrong, but did suggest it is wrong to believe he could possibly be “naive or uninformed.”

  • AWF

    The question: “Who will buy the bonds”

    Would the illuminati at Kansas City care to comment in a historical context with reference to the 1981-1985 period.

    How could the 30yrTrBond get to 15.2% in Sept 1981

    How could the 30yr TRBond stay at double digit for 4 yrs.

    Clearly “the market” was not buying the cooking the FRB was dishing out.

    I’m not talking about the why of Hyper/Runaway-Inflation

    I’m talking about the gizmo of investor preference/confidence

    It seems today and going forward Bond managers will not have the luxury of investing with the 30yr at 15%

    BTW–I think Randall’s approach/writing on high unemployment is on the spot–2 bad nobody is listening?

  • Chris


  • http://www.pragcap.com Cullen Roche
  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    “How could the 30yrTrBond get to 15.2% in Sept 1981″

    Fed funds rate was at about 16% for the month on average. Pretty simple.

    “How could the 30yr TRBond stay at double digit for 4 yrs.”

    AGain, simple. Fed funds rate through 1984 never got below 8.5% average for any month. Got barely below 8% in 1985.

    There’s obviously more than the funds rate driving the bonds, but it’s still very important.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    Lots of examples where that didn’t happen–Japan.

    See this, for instance:

    Doubling Your Monetary Base and Surviving: Some International Experience pp. 481-50. St. Louis Fed Review, NOVEMBER/DECEMBER 2010 Vol. 92, No. 6
    by Richard G. Anderson, Charles S. Gascon, and Yang Liu


  • AWF

    “There’s obviously more than the funds rate driving the bonds.”

    This is the area I hoped you might comment.

    Given over 8% guaranteed return you would expect investors to gobble/gobble up bonds–it was the fire sale of the century.

    But even Double Digit rates for 4+yrs gives evidence of reluctant buyers

    So the question: ” Who will buy the Bonds” might need your insight.

  • Chris

    The commenters are all trolls. Never pay attention to them.

    But don’t consider BI a total loss in terms of extending your reach (its how I found prag cap).

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    Actually, the spread was pretty small compared to the past 30 years, particularly as the economy was in recession and moved out, which are times of steeper yield curves. Also, starting around this time, spreads widened more than they had pre-1979 (pre 1979, spread b/n 10y and 3m on average was 1%, rising to about 1.7% long run average thereafter), in my view likely because of the Fed’s new (at that time) credible strategy of raising rates whenever it anticipated inflation, regardless of what unemployment was doing at the time.

  • http://neweconomicperspectives.blogspot.com Scott Fullwiler

    Should also mention that the Fed’s tactics during 1979-1988 allowed a lot more intraday and day-to-day variability in the funds rate–especially 1979-1982. And they didn’t announce targets till 1992. Researchers have suggested there is evidence this uncertainty affects spreads.

  • Chris

    And your “90%” is hyperbole on the low side.

    I go to BI for entertainment, not data or info. It is (literally) the HuffPo of what it covers.