Are Treasury Investors Dense

Government figures have recently shown that inflation is benign and economic growth is slow. One would think that with these type of headlines treasuries would be rallying. Instead, they are selling off. Are treasury investors dense? I would highly recommend reading Jeff Mathews' latest post.


PJ said...

The Fed is looking at the larger, demographic- and debt-driven long-scale cycle.

But the whole world embarked on extreme stimulus 2.5 years ago, setting us off on a shorter-term Austrian style boom-bust cycle.

Now that we're in the inflation and rising rates phase of the Austrian cycle, its bust will occur within a year.

Then we'll be in both busts at the same time.

What's befuddling is why the Fed has relentlessly pursued a pro-cyclical policy. They promote the bubbles and thereby deepen the busts. They've added tremendous debt during the global recovery when they should have saved their powder for real times of trouble and accepted a private deleveraging which would have moderated the coming bust.

It seems they have a very simple model in which the best thing is to grow debt at all times, and not worry about the future because they'll be dead and it'll be somebody else's problem.

revelo said...

PJ: The Fed is a bureaucracy and bureaucrats don't like to deviate from consensus thinking. Consensus thinking continues to be that asset bubbles don't matter. Just headline inflation. It will take another bust, worse than the last one, to finally convince change this consensus, so that central banks are given the mandate to fight asset bubbles in the future.

Fighting the housing bubble without a consensus and mandate to do so would have been politically impossible. Just look at the difficulty the Bush administration faced trying to rein in Fannie and Freddie (not that the administration tried very hard). Voters really, really like asset bubbles, just like they really, really liked wage inflation back in the 1960's, until that wage inflation turned to price inflation. Now the voters have to learn, the hard way, that asset bubbles are also poisonous.

PJ said...

Hi Revelo,

I don't think I'm willing to put most of the blame on the voters. I think the Tea Party movement shows that many voters understand that debt bubbles jeopardize their retirement.

Rather it's politicians and bankers and influential elites who love bubbles. Not coincidentally, debt bubbles tend to redistribute wealth from the middle class to elites.

I don't doubt that the real estate bubble was politically untouchable. But I don't think a stock and commodities bubble is politically untouchable. Just the opposite! It is unpopular, yet the Fed is pursuing it anyway.