Bloomberg is out today loudly proclaiming Yellen’s victory at stimulating the economy without awakening the demons of inflation.
While the Fed scales back the unprecedented stimulus that has inundated the world’s largest economy with more than $3 trillion of cheap cash, the differences between short- and long-term yields of U.S. government bonds indicate that investors are confident Fed Chair Janet Yellen can keep inflation in check as growth rebounds without having to ratchet up interest rates.
What’s that expression about horses and barn doors again?
Once again, there’s little explanation of where this magic confidence comes from — instead we are fed the standard logic of, “if the rates say that’s the way it is, then that’s the way it is”. The five and thirty don’t lie. Stop asking. Just believe.
And who more objective to comment on such things than Priya Misra at (cough, primary dealer) Bank of America:
“The bond vigilantes have all been quieted,” Misra said by telephone on June 19. “The idea that just the act of printing money gets you inflation has been debunked.”
Got that? Well… it’s true that pissing into the winds of credit destruction will probably get one drenched in one’s own effluence, one must point out the soaring prices of …well, everything… which just so happen to coincide with a half-decade of unprecedented “stimulus”.
But who are we to question the obvious.
Never minding the fundamental reality that it’s not actually possible to push employment with low-rates in a carry-trading, yield-seeking globalized world anyway. And never minding that inflation is already running at a rate closer to 10% if we were to measure it the way we used to. One has to ask the Chairwoman if she has noticed the 90 MILLION that have dropped out of the workforce and stopped looking? Because we’re having a hard time reconciling terms like “growth” with swelling numbers of Americans on foodstamps, soaring wealth disparity, a financial sector out of control and a national debt at all time highs.
But all that matters one supposes is that the “Market” believes in magic. Hence: There is no inflation. Because if there was, the yields on the 5 and 30 wouldn’t be so darn cozy. And it’s a free market economy… right? Of course it is.
But the larger question that looms, isn’t whether or not inflation is running helter skelter (of course it is — to debate it is silly), but whether the Fed actually has a handle on rates at the end of the day. Because if history is any guide, they’re going higher whether the Fed wants them to or not. And that’s the kind of thing that puts a dent in portfolios. The Fed’s included.