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Tokyo, Not Buenos Aires

T-bonds fell on debt-ceiling deal & new Fed chair Yellen. But it's deflation now, inflation later...
LONG-DATED Treasury bonds sold off this week, says Bill Bonner in his Diary of a Rogue Economist. Because the bond market is worried its biggest buyer – the Janet Yellen Fed – will bow out.
The proximate cause was the news from Washington. First, Congress voted to raise the debt ceiling, without quibbles or conditions, until next year.
Second, Janet Yellen made her debut on Capitol Hill as Fed chairwoman with this question from Republican Congressman Jeb Hensarling, from the sovereign state of Texas:
"Are you a sensible central banker, and if not, when will you become one?"
It was a coded challenge, based on Yellen's 1995 statement that a sensible central bank follows formulae...and transparent rules...rather than making ad hoc decisions.
Yellen replied that, yes, she was sensible and that, yes, a central bank should follow transparent rules...
...but that she would continue making it up as she goes along. Christian Science Monitor reports:
"For more than a year, the Fed's policy committee has said it wouldn't consider a hike in the short-term interest rate until unemployment dipped to 6.5%, as long as inflation didn't exceed 2%. Today, with the jobless rate already down to 6.6%, Fed officials including Yellen are saying the 6.5% rate is not a 'trigger' for raising rates.
"In practice, Yellen told lawmakers on Tuesday that she would be looking at a range of labor-market and inflation data to assess when to raise rates. It's likely the Fed will maintain ultra-low interest rates "well past the time that the unemployment rate declines below 6-6.5%," she said in the written testimony prepared for Tuesday's hearing."
So, QE could go on...and it looks as though financial author Richard Duncan was right.
He told us that the Fed fuels "excess funding" of America's credit needs...and that this excess funding drives the stock market.
There should be enough to keep the stock market up during the first half of 2014, he said. But if the Fed keeps to its tapering promises, watch out.
This source of funding is like manna from heaven. No calloused hands earned it. No drop of sweat stains it. No furrowed brow figured out how to make it.
Five years ago, we were certain the Fed could not expand its balance sheet to $4 trillion without grave and ghastly consequences. But month after month goes by with no such consequences...nor even the top of their masts visible on the horizon...what are we to think?
When the global financial crisis arrived in 2008, our prediction sounded like a tour itinerary: first Tokyo, then Buenos Aires.
We meant that the US economy was entering a period of deleveraging, much like that of Japan at the start of the 1990s. Paying down, defaulting on, writing down and writing off debt would be long and hard, we reckoned. When that was over, we would find ourselves in a period of inflation, maybe even hyperinflation. This could come about in one of two ways.
When the deleveraging was complete, people would begin to borrow and spend again. This would increase the money supply – possibly virulently, given the Fed's ultra-low interest rates – and drive up consumer prices.
Or desperate and impatient to revive the go-go days before the crisis began, the Fed might resort to direct monetary stimulus (some sort of helicopter drop).
The Fed surely has a contingency plan. A sensible central banker wouldn't think of doing it. But despite what Yellen told lawmakers yesterday, we are in an age of "improv" monetary experimentation. We shouldn't rule anything out.
US consumer prices – by the official measure – rose 1.5% over the last 12 months. Economists aren't worried about too much inflation, but about the lack of it.
We are still in Tokyo, not Buenos Aires.

New York Times best-selling finance author Bill Bonner founded The Agora, a worldwide community for private researchers and publishers, in 1979. Financial analysts within the group exposed and predicted some of the world's biggest shifts since, starting with the fall of the Soviet Union back in the late 1980s, to the collapse of the Dot Com (2000) and then mortgage finance (2008) bubbles, and the election of President Trump (2016). Sharing his personal thoughts and opinions each day from 1999 in the globally successful Daily Reckoning and then his Diary of a Rogue Economist, Bonner now makes his views and ideas available alongside analysis from a small hand-picked team of specialists through Bonner Private Research.

See full archive of Bill Bonner articles

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