You Just Figured This Out Chris?

Frozen Hell

I mean, c’mon Chris.

I give you more intellectual chops than you’re displaying here, given how late you appear to be to this party.

The continued attrition of 45-54-year-olds in the workforce is cause for concern by itself, but with the other deflationary factors at work in the US economy, alarm bells ought to be ringing in Washington DC.

Ah, but you see, you can’t run trillion dollar deficits when the cost of borrowing the trillion dollars is 5% a year.  That would be $50 billion per trillion, no?  And we have how many outstanding right now?  $12 and change marketable, right?  Uh, yeah, we could shoulder $600 billion+ in interest payment annually, right, roughly double what it was five or so years ago — right?

Well, no.  At least not without massive cuts to other spending programs.  That $600 billion would have to come out of either spending or higher taxes (probably both.)

So if you want to point fingers, don’t point them at The Fed.  Point them at Congress, which has in fact said in plain language during Bernanke’s testimony that they’re children who are incapable of policing their own spending so long as rates remain at zero, basically telling him to cut that crap out or Congress will continue to have an orgy.

Well let’s see, who enables The Fed?  Who passed The Federal Reserve Act?  Who could modify — or revoke — it?  Why that would be Congress, right?


The trouble is, however, that “hot” policy like what the FOMC thinks it is pursuing is actually encouraging deflation in the US economy by robbing savers of badly needed income – this to the tune of about $100 billion per quarter just in terms of the return on US bank deposits. While low rates were helpful and entirely necessary early in the post-crisis response, today low rates are arguably a net negative for the US economy.

Well, yeah.  But exactly when did you change your mind Chris?

I mean, let’s be frank here — you seem to be a bit late to this party.

There’s a few of us, like myself, who rather-quickly changed our minds on the “inflationary” impact of Fed rate-cuts when the data didn’t support the thesis.  That would be around 2008 for me.  If you go back and read some of my work both earlier and through that time, you can easily see it.

Heh, when the facts change you can either change your opinion or evenutally the truth will smack you upside the head.  What I recognized very early on was that ZIRP and QE couldn’t work because they were nothing more than a cost-shift.

See, lending is a balance-sheet game.  What you save on your payment I don’t get in my interest coupon.  Therefore any gain is by definition nothing more than a transfer.

So why does it look good at the outset?

That’s simple — duration match.  The typical loan-maker (that is, the person who buys bonds or their products) doesn’t buy one loan.  He buys a lot of loans, in the form of bonds, and he intentionally layers those bonds so as to meet his duration needs.

So if you “QE” or “ZIRP” and Joe over here is one of those lenders, holding a 10 year maturity portfolio, in the first year he only sees 10% of the decrease in interest expense that you get immediately.

In other words your interest expense goes from $10 to $5, let’s say, or a 50% decrease.

Joe, because he has a 10 year maturity, sees his interest income go from $100 to $95, a 5% decrease.

This looks like a free lunch.

But it’s not, and I’m sure you know why.  Joe is stuck with the $5 less in interest income for the next 10 years, and each year that QE or ZIRP (or both) continue he sees an additional $5 decrease in his interest income as his portfolio rolls until his interest income is $50 instead of $100.

Worse, when you stop ZIRP or QE the impact continues on Joe for 9 more years as it rolls off exactly the same way it went on!  That is, the first year it’s $55, then $60 and so on.

So exactly how do you propose to “fix” that?

You can’t because if you sell the bond early you take a capital loss on the imputed value change.  That’s the point of a bond — X% interest to borrow $Y for duration Z.

You can only accept that you messed up advocating for it in the first place, along with everyone else.

Hell will freeze first, I’m sure.

The Market Ticker

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