Written by Jeff NielsonFriday, 06 May 2011 10:57
What qualifications do you need to be “head of interest rate strategy” at Morgan Stanley? It requires that you must know absolutely nothing about interest rates or economics.
Observe incompetence in action. We are being told by this esteemed “expert” (and echoed by the “experts” at Goldman Sachs) that a “slower-than-forecast pace of inflation” and slower economic growth will translate into higher prices for U.S. Treasuries.
Let’s take these parameters and apply them to the real world. First of all, in the real world inflation is rapidly accelerating, so we can begin with the fact that this is (at least in part) another exercise in fantasy. However, for sake of argument let’s assume that this nonsense is actually valid.
With banker money-printing and government borrowing running at (by far) their highest rates in history, this is supposed to provide enormous stimulus for all of these economies. In other words, if there was even the tiniest semblance of health in these economies, then after three years of insane money-printing, near-zero interest rates, and record-deficits all of these economies should be ‘over-heating’.
The fact that with even the most extreme stimulus in history (by a factor of ten), all of these Western economies are reporting either very anemic growth or even sporadic contractions (as occurred in Canada’s economy in February) shows that these economies are ‘sicker’ than they have ever been at any time in modern history (including the Great Depression).
This confirms what I’ve been saying in my own analysis all along: that this extreme money-printing and extreme borrowing must continue to destroy our economies, since it was excessive money-printing and borrowing which created all of these economic problems. To repeat an analogy, just like an alcoholic, our debt-junkie governments continue to pretend that they can “cure” the economic hang-overs caused by too much debt and money-printing with more debt and money-printing.
Now we have the “experts” at Morgan Stanley and Goldman Sachs openly confessing that this stimulus is failing (in order to pump the U.S. bond market). What does this mean in economic terms? On the one hand, with the developing economies which are still relatively healthy, “sick” Western (consumer) economies will buy much less of their goods – meaning that the trade surpluses of these nations will shrink or disappear entirely. Indeed, China just reported its first trade deficit a month earlier, and (not coincidentally) has been selling U.S. Treasuries for the last four months.
This dynamic is very simple, and very obvious. The only nations with any “surpluses” to buy Western debt will have much smaller surpluses, or no surpluses at all. This means falling demand for U.S. Treasuries and all Western debt.
Conversely, with our debt-bloated Western economies already reporting “record deficits” every year, what does the “slowing growth” which Morgan Stanley and Goldman Sachs warn us about mean for Western budgets? Obviously it means even higher deficits, and even more borrowing; translating into rising supply for U.S. Treasuries and all Western debt.
Now here is an economics “test” for anyone who has spent even a week in an Economics 101 class: what does it mean when you have either “falling demand” or “rising supply”? It meansfalling bond prices. Now the “bonus question”: what does it mean when you simultaneouslyhave falling demand and rising supply? It means rapidly falling bond prices.
Note that this analysis still excludes two huge fundamentals. First of all, many/most Western economies are hopelessly insolvent. In fact the “risk premium” which any sane investor must attach to Western debt should result in an even larger drop in prices than that caused by falling demand/rising supply.
Secondly, the most rapid money-printing in history also obviously translates into the most rapid currency dilution in history. Thus any sane investor will demand another risk premiumbefore they could be tempted into holding any of the currencies in which this worthless paperis denominated.
It is therefore a matter of the most elementary economic analysis that if we plug-in the parameters supplied to us by the “experts” at Morgan Stanley and Goldman Sachs, we arrive at the unequivocal conclusion that bond prices must plummet lower (rather than going “higher” as these charlatans claim). However, this is still only half of the required analysis.
Western economies have now become so saturated with debt that they have begun aterminal “vicious circle”. As interest rates creep higher due to falling demand, rising supply, and greater risk-premiums (as evidenced in credit-default swap markets); the rise in interest rates alone makes these economies much less-solvent. This increases the deficits still further, which increases the borrowing still further, which increases the bond-supply and the risk-premium still further, which pushes up interest rates still further – and then we begin the feedback cycle again.
This is most easily illustrated with the U.S. economy – the most insolvent of all Western economies. If we completely ignore the $100 trillion (or so) in “unfunded liabilities”(something not done in any other Western economy), that still leaves the bankrupt U.S. economy with $60 trillion in total public/private debt. Raising interest rates even 1% would drain an additional $600 billion from this economy (every year) in interest payments alone. That massive capital-drain would amount to a nearly 5% plunge in U.S. GDP before factoring in the multiplier effect. In other words, even that tiny increase in interest rates would immediately send the U.S. economy spiraling toward bankruptcy.
This brings us to the real purpose of this piece of propaganda from Bloomberg. There are obviously no chumps still willing to pay the highest prices in history for U.S. Treasuries, when fundamentals clearly dictate that bond prices must plummet much, much lower.
Conversely, as we heard from Ben Bernake in his 2011 April Fool’s Day joke, he’s planning another “exit strategy”. The problem: how can the Federal Reserve “exit” from all of its bond-buying when there is no one else on the planet who could possibly buy-up all those $100’s of billions (per month) in Treasuries?
The answer of course is that in the real world the Fed cannot possibly make an exit. However, if it is going to even pretend to make an “exit” then the propaganda-machine must attempt to create a plausible myth that there are still chumps willing to pay the highest prices in history to finance the debts of a hopelessly insolvent economy.
After this pathetic attempt by Bloomberg, Morgan Stanley, and Goldman Sachs to try to provide some “cover” for Bernanke’s “exit” from the U.S. Treasuries market, all I can say is “you better try again.
http://www.bullionbullscanada.com/index.php?option=com_content&view=article&id=18749:morgan-stanleygoldman-sachs-bond-propaganda&catid=47:us-commentary&Itemid=132
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