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May 2024 Newsletter: The Bond Market is the "Dumb Money" Now
(www.lynalden.com)
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this post was submitted on 21 May 2024
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Collapse
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We know this is true because the curve remains inverted, with short-term debt remaining around the FFR, but long-term is below it, when really it should be a bit above and on a slope upward toward the 30 year. Maybe it will eventually sink in. The FOMC started even talking about hiking rates again recently, since inflation failed to cool in recent months.
People fail to understand we are in fiscal dominance rather than monetary dominance now and interest rate increases wont throttle inflation. Interest rate increases can actually create inflation now because that money is printed and paid to bondholders who then use it in the actual economy therefore creating more money chasing the same amount of goods , therefore inflationary. this is like the 40s not the 70s.
Yep, plus they are talking about INCREASING short term debt issuance versus going back to QE. They have to because of the deficits. But this can create feedback and we'll have the situation of both government spending and bondholder cash contributing to the inflationary dynamic. So for some time to come, the trend will be inflationary, even as the Fed balance sheet winds down. Though, if you look at their balance sheet, it can only go down so far, since Treasury's bank account is at the Fed and I don't see that decreasing soon either.