Tuesday, February 3, 2009

Will the Obama stimulus plan blow up the economy?

I'm going to hammer on the point that the Fed's printing of more money and Obama's stimulus plan is going to wreck the market for Treasuries and implode the economy even more as interest rates will shoot up as prices plummet. The Wall Street Journal published a story by Peter Evans today about the reaction of the bond markets to what our government is doing:
The mother of all market battles is just getting started.
In one camp is the federal government, which needs to finance large fiscal deficits as the economy slows. In the other, bond investors who are expected to purchase the flood of Treasury debt.
In recent weeks, investors have staged a small revolt, pushing down the price of 10-year Treasurys to get higher yields. While the 10-year rallied Monday, its 2.72% yield remains far above December's low of 2.07%.

The long-term Treasury yield plays a central role in the economy, heavily influencing lending rates to private borrowers. Right now, the Federal Reserve is keen to keep rates low to stoke a recovery.
But the strategy could backfire. High government spending -- the Congressional Budget Office expects the federal deficit to hit 8.3% of GDP this year -- and a fear of longer-term inflation engendered by the Fed's ultraloose monetary policy could spook Treasury investors.
Granted, for a while, the government can count on some level of market acquiescence.
First, headline consumer prices are likely to fall, with Merrill Lynch predicting 3.2% annual deflation by July. This pushes up "real" yields.
Second, even as Treasury issuance ramps up, it could be soaked up by segments of the market, such as households, wanting to increase their Treasury holdings from low levels. Drew Matus, U.S. economist at Merrill, says that, in 1990, $300 billion of households' $14 trillion in financial assets were in Treasurys. Of the $45 trillion they hold today, less than $100 billion are in Treasurys, leaving plenty of room for growth as nervous individuals get thrifty.
Perhaps the strongest near-term reason why Treasury yields might stay under control is that the Fed might step in and buy the bonds.
Last week, it said it would do so if it felt that would be "particularly effective in improving conditions in private credit markets."
But it is exactly that sort of policy that could freak bond investors over time.
If the Fed buys Treasurys with freshly printed money and starts to rekindle economic growth, it raises the risk of inflation -- the No. 1 enemy for fixed-income investors.
In essence, then, the bond market has to trust that the Fed can, and will, apply the brakes at just the right time -- a skill the central bank hasn't mastered in recent years.
"The market should be pricing in the risk that current fiscal and monetary policies will cause inflation down the road," says Michael Pond, strategist at Barclays Capital, which expects a 4.1% yield on the 10-year at the end of the year.
If the Treasury isn't careful, the current skirmish with investors could yet turn into a rout
."

See the dilemma the Fed is in? One one side it is trying to keep interest rates low so as to stimulate private borrowing. On the other side it is printing more money because of poorly-thought out stimulus plans (keep in mind the Fed created over two TRILLION dollars in new money last year). It will be difficult if not almost impossible for the Fed to do both as investors will demand higher yields for Treasuries as they become worth less due to more spending (thank you Bush, Paulson, Bernanke, and Obama). If something doesn't change, a train wreck is coming.

1 comment:

Anonymous said...

News out this morning how the commercial real estate market is cratering though I'm confident the Electric Building wankers will mislead that it is still green grass and blue skies forever. But when you live in the echo chamber of downtown where less than .002% of Jacksonians reside then the cold hard facts of what is happening in Jackson's neighborhoods -- where the tax receipt rubber meets the road -- will surely escape you.



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Trollfest '07 was such a success that Jackson Jambalaya will once again host Trollfest '09. Catch this great event which will leave NE Jackson & Fondren in flames. Othor Cain and his band, The Black Power Structure headline the night while Sonjay Poontang returns for an encore performance. Former Frank Melton bodyguard Marcus Wright makes his premier appearance at Trollfest singing "I'm a Sweet Transvestite" from "The Rocky Horror Picture Show." Kamikaze will sing his new hit, “How I sold out to da Man.” Robbie Bell again performs: “Mamas, don't let your babies grow up to be Bells” and “Any friend of Ed Peters is a friend of mine”. After the show, Ms. Bell will autograph copies of her mug shot photos. In a salute to “Dancing with the Stars”, Ms. Bell and Hinds County District Attorney Robert Smith will dance the Wango Tango.

Wrestling returns, except this time it will be a Battle Royal with Othor Cain, Ben Allen, Kim Wade, Haley Fisackerly, Alan Lange, and “Big Cat” Donna Ladd all in the ring at the same time. The Battle Royal will be in a steel cage, no time limit, no referee, and the losers must leave town. Marshand Crisler will be the honorary referee (as it gives him a title without actually having to do anything).


Meet KIM Waaaaaade at the Entergy Tent. For five pesos, Kim will sell you a chance to win a deed to a crack house on Ridgeway Street stuffed in the Howard Industries pinata. Don't worry if the pinata is beaten to shreds, as Mr. Wade has Jose, Emmanuel, and Carlos, all illegal immigrants, available as replacements for the it. Upon leaving the Entergy tent, fig leaves will be available in case Entergy literally takes everything you have as part of its Trollfest ticket price adjustment charge.

Donna Ladd of The Jackson Free Press will give several classes on learning how to write. Smearing, writing without factchecking, and reporting only one side of a story will be covered. A donation to pay their taxes will be accepted and she will be signing copies of their former federal tax liens. Ms. Ladd will give a dramatic reading of her two award-winning essays (They received The Jackson Free Press "Best Of" awards.) "Why everything is always about me" and "Why I cover murders better than anyone else in Jackson".

In the spirit of helping those who are less fortunate, Trollfest '09 adopts a cause for which a portion of the proceeds and donations will be donated: Keeping Frank Melton in his home. The “Keep Frank Melton From Being Homeless” booth will sell chances for five dollars to pin the tail on the jackass. John Reeves has graciously volunteered to be the jackass for this honorable excursion into saving Frank's ass. What's an ass between two friends after all? If Mr. Reeves is unable to um, perform, Speaker Billy McCoy has also volunteered as when the word “jackass” was mentioned he immediately ran as fast as he could to sign up.


In order to help clean up the legal profession, Adam Kilgore of the Mississippi Bar will be giving away free, round-trip plane tickets to the North Pole where they keep their bar complaint forms (which are NOT available online). If you don't want to go to the North Pole, you can enjoy Brant Brantley's (of the Mississippi Commission on Judicial Performance) free guided tours of the quicksand field over by High Street where all complaints against judges disappear. If for some reason you are unable to control yourself, never fear; Judge Houston Patton will operate his jail where no lawyers are needed or allowed as you just sit there for minutes... hours.... months...years until he decides he is tired of you sitting in his jail. Do not think Judge Patton is a bad judge however as he plans to serve free Mad Dog 20/20 to all inmates.

Trollfest '09 is a pet-friendly event as well. Feel free to bring your dog with you and do not worry if your pet gets hungry, as employees of the Jackson Zoo will be on hand to provide some of their animals as food when it gets to be feeding time for your little loved one.

Relax at the Fox News Tent. Since there are only three blonde reporters in Jackson (being blonde is a requirement for working at Fox News), Megan and Kathryn from WAPT and Wendy from WLBT will be on loan to Fox. To gain admittance to the VIP section, bring either your Republican Party ID card or a Rebel Flag. Bringing both and a torn-up Obama yard sign will entitle you to free drinks served by Megan, Wendy, and Kathryn. Get your tickets now. Since this is an event for trolls, no ID is required. Just bring the hate. Bring the family, Trollfest '09 is for EVERYONE!!!

This is definitely a Beaver production.


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Trollfest '07

Jackson Jambalaya is the home of Trollfest '07. Catch this great event which promises to leave NE Jackson & Fondren in flames. Sonjay Poontang and his band headline the night with a special steel cage, no time limit "loser must leave town" bout between Alan Lange and "Big Cat"Donna Ladd following afterwards. Kamikaze will perform his new song F*** Bush, he's still a _____. Did I mention there was no referee? Dr. Heddy Matthias and Lori Gregory will face off in the undercard dueling with dangling participles and other um, devices. Robbie Bell will perform Her two latest songs: My Best Friends are in the Media and Mama's, Don't Let Your Babies Grow up to be George Bell. Sid Salter of The Clarion-Ledger will host "Pin the Tail on the Trial Lawyer", sponsored by State Farm.

There will be a hugging booth where in exchange for your young son, Frank Melton will give you a loooong hug. Trollfest will have a dunking booth where Muhammed the terrorist will curse you to Allah as you try to hit a target that will drop him into a vat of pig grease. However, in the true spirit of Separate But Equal, Don Imus and someone from NE Jackson will also sit in the dunking booth for an equal amount of time. Tom Head will give a reading for two hours on why he can't figure out who the hell he is. Cliff Cargill will give lessons with his .80 caliber desert eagle, using Frank Melton photos as targets. Tackleberry will be on hand for an autograph session. KIM Waaaaaade will be passing out free titles and deeds to crackhouses formerly owned by The Wood Street Players.

If you get tired come relax at the Fox News Tent. To gain admittance to the VIP section, bring either your Republican Party ID card or a Rebel Flag. Bringing both will entitle you to free drinks.Get your tickets now. Since this is an event for trolls, no ID is required, just bring the hate. Bring the family, Trollfest '07 is for EVERYONE!!!

This is definitely a Beaver production.

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