Inflation and You: Partners In Freedom

Tim Cavanaugh | June 29, 2009

If federal debt is so scary, why do people keep buying it? The panic I tried to spread over U.S. Treasury bonds earlier this month has gone nowhere. After breaking 4%, the yield on the 10-year Treasury has dropped to 3.49%, and with the Department of the Treasury not planning to borrow any new money this week, that puts at least a temporary kibosh on the claim that the market is losing its appetite for U.S. government debt.

Why is demand for Treasury bonds high, when the supply is so vast and the Federal Reserve has to keep buying inventory, supposedly to keep up the price? The Market Oracle reads the entrails:

The demand from both domestic and foreign market participants has been ridiculously high in all three tranches auctioned last week.  Even the 7 Year Note - which is considered to be a bit of an odd duck - was oversubscribed to a record level and foreign Central Banks took the highest percentage ever for this particular maturity.  World capital markets are highly interconnected.  If the yields on Treasury bonds increase, that will cause funding costs to rise for the Russians, Chinese, Japanese, etc. - all those parties that are highly critical of the way the US continues to  ramp up its borrowing needs.  Officials in those countries are fully aware of that, so they continue to show up in size at all the Treasury auctions - which is really what matters at the end of the day.

If anybody can disambiguate me on why a rise in Oceania's bond yields would cause funding problems for central bankers in Eurasia and Eastasia (because it would lower the price of the bonds they have in their portfolios?), I'm all ears. It's also interesting that you can ease your worries about another party's excessive leverage by lending that party more money.

In any event, the U.S. Government is not having trouble selling its debt. If you traded all your greenbacks for gold, escudos or Mervyn's gift cards on the promise of mega- or giga-inflation, I apologize.

On the other hand, if you're a believer in bold, persistent experimentation with your great-grandchildren's tax revenues, this is good news. At the moment the Treasury is in the catbird seat. With gasoline the only thing going up in price, the government can continue to set new records in debt issuance (a new auction of 3-, 10- and 30-year notes will be held next week [pdf]), but not have to worry that it's unleashing inflation.

Things get more complicated, of course, when you want to unleash your inflation tiger but just can't get it up. The bridezilla above and the lazy slob to the left -- who's apparently getting a COLA adjustment even though he can't be bothered to look at the nail he's hammering -- come from The Story of Inflation, one of several fairly instructive comic books available from the New York Federal Reserve. You can order free copies here, and you'd better do it soon before the Obama Administration realizes they can realize $100 billion in deficit cutting by calling them "graphic novels" and selling them for $24.95. The Story of Inflation tries to be even-handed; you may prefer your pro-inflation propaganda in the more raw forms that were popular in a less thought-tormented age.

Comments

BeesInTheBrain|6.29.09 @ 7:19PM|#

Could it be as simple as ensuring that the US is dependent upon you for funding gives you a leg up in negotiations?

|6.29.09 @ 7:42PM|#

This is the hottest video yet from the Free State Project. It is good to see there are quite a few hot libertarian chicks.

http://www.youtube.com/watch?v=zuOAbarqRaM

|6.29.09 @ 7:53PM|#

Another libertarian hot chick.

http://www.youtube.com/watch?v=XBh_AaZ_BjM

Interesting trend. This type of thing was not as common in 2007.

BakedPenguin|6.29.09 @ 8:15PM|#

There may be a lot of people out there who expect an extended recession. With no/negative growth, the increase in money supply won't be inflationary, and the government will be one of the few entities out there with good prospects to actually have income.

OTOH, maybe they're just idiots. These might be the same people who were planning to flip houses in early 2006.

jasno|6.29.09 @ 8:36PM|#

I've got your libertarian babe right here.

That first video looks like the saddest party I've ever seen. Two girls dancing around a bunch of disinterested guys... No wonder we can't get elected.

Alan Vanneman|6.29.09 @ 9:04PM|#

"The demand from both domestic and foreign market participants has been ridiculously high in all three tranches auctioned last week."

If you believe that markets are efficient, as I presume "The Market Oracle" does, then demand is "high," not "ridiculously high." If you believe that markets are efficient, it is ridiculous to call the market "ridiculous."

Both Tim and the Oracle seem offended by the fact that markets are behaving in a manner that they feel is "wrong." But if you believe in markets and you feel that they're behaving in a way that you feel is "wrong", doesn't that prove that you're wrong, not the markets?

BakedPenguin|6.29.09 @ 9:35PM|#

Hey Alan, I have a house to sell you. In 2006.

Naga Sadow|6.29.09 @ 9:43PM|#

Give it time, Tim. Give it time. Rome wasn't bankrupted in a day.

|6.29.09 @ 9:54PM|#

Alan is cranky because he just watched and reviewed The Money Pit. Frankly, I can't blame him.

BakedPenguin|6.29.09 @ 10:02PM|#

Epi, at Best Buy I saw a "three-fer" Tom Hanks movie pack. Bachelor Party, The Money Pit, and Nothing in Common.

Despite it's low, low price of $6.99, there was a surprising abundance still remaining.

|6.29.09 @ 10:35PM|#

alan-

But if you believe in markets and you feel that they're behaving in a way that you feel is "wrong", doesn't that prove that you're wrong, not the markets?

Of course not, you insufferable fuckwit. I started shorting bank stocks in 2007. I was "wrong" for about 9 months...

Naga Sadow|6.29.09 @ 10:39PM|#

Epi,

I must comment my friend. You seem to be posting later and later into the night. What gives?

|6.29.09 @ 10:51PM|#

Naga, I'm a West Coaster now. I'm 2-3 hours behind you. 9:54 Pm on reason's server is 6:54 PM for me.

Epi, at Best Buy I saw a "three-fer" Tom Hanks movie pack. Bachelor Party, The Money Pit, and Nothing in Common.

Nothing in Common is actually not a bad movie; I know, because I saw it about 800 times during its HBO run. Now, a truly inspiring triple play of Hanks movies would replace Nothing in Common with The Man With One Red Shoe.

(shudders)

Tim Cavanaugh|6.29.09 @ 11:05PM|#

Nothing In Common still owns the Most Banal Tagline category for its poster phrase: "It's a comedy and a drama...just like life." That was a catchphrase for many years among my droogs.

Bachelor Party is unironically great, but it's more of an Adrian Zmed vehicle than a Hanks vehicle.

|6.29.09 @ 11:44PM|#

Bachelor Party is unironically great, but it's more of an Adrian Zmed vehicle than a Hanks vehicle.

Sort of like T.J. Hooker?

(This ties in with the Shatner discussion in your Bernake thread)

|6.29.09 @ 11:52PM|#

Re: Funding Costs

All those countries share a feature, as does Korea. The Central bank makes some loans to member banks in dollars. They have to absorb the liquidity coming out of the US otherwise they will have exchange rate problems. Along the same lines, they are all export dependent and so they are in essence not letting the US devalue vis-a-vis their home currencies. That is the best I could come up with reading other financial reportage on the topic.

Ebeneezer Scrooge|6.30.09 @ 12:23AM|#

I suspect that's about right. But I'm just an engineer that can barely write a coherent sentence and not a brilliant economist.

Ebeneezer Scrooge|6.30.09 @ 12:34AM|#

If you've ever heard the expression "God's ways are not man's ways", which always comes with the innuendo "and you, poor fool, should not expect to understand" -- well just wait until you dive into the pool of international finance. Where nothing is what it seems anymore.

So while we're at it,

With gasoline the only thing going up in price, the government can continue to set new records in debt issuance ... but not have to worry that it's unleashing inflation.

tell me how this is really panning out.

We've got a massive deflationary force at work. It's called "real estate values" and they're falling like a rock. Or at least a well weighted feather.

Seems like in this environment Uncle Sam can get away with printing dollars, and not have it show up (too badly, or even at all?), as long as they print at about the same rate the market value of housing is going down.

So what is it when this happens? The Invisible Inflationary Man? The Inflated Revenge of the Deflated Ghost?

Ebeneezer Scrooge|6.30.09 @ 12:38AM|#

Seriously, with the single biggest collateral item in the US market taking a nose dive, why haven't we had deflation? Unless the printing presses are in fact running.

Ebeneezer Scrooge|6.30.09 @ 12:41AM|#

And while we're tossing wild questions around, how come western Europe had a housing bubble at exactly the same time the US did? Is Europe so stupid that they were just following the Feds policy on everything?

Invisible Finger|6.30.09 @ 11:17AM|#

It's simple. Buy our debt and we won't slap a tariff on the shit you export to us.

|6.30.09 @ 12:29PM|#

In any event, the U.S. Government is not having trouble selling its debt.

Color me surprised.

I still think we're in for a very serious bout of monetary-driven inflation starting later this year/early next year. People seem to have forgotten that inflation isn't necessarily a demand-push or supply-pull event that can't happen in a recession.

Historically, the worst inflation has happened in economies that are contracting. Contracting economy + expanding money supply = hyperinflation. Which part of that equation do we not have?

mark|6.30.09 @ 3:25PM|#

Sounds like 7-year bonds were the sweet spot for foreign banks. When those bonds come due and the economic picture is different, they may not repurchase in order to invest in their economies.

|6.30.09 @ 3:52PM|#

Waauugh!

Don't read comics from the NY Fed to learn about economics. Read mine.

I'll make you a good price on them!

New World Dan|6.30.09 @ 4:27PM|#

As a new mortgage holder on a large house, I'm personally cheering for a round of heavy inflation. All of my debt is in dollars and all of my assets are in things that are mostly immune to inflation. Once things settle, and my wages adjust to the new value of a dollar, I'll come out massively ahead.

Ebeneezer Scrooge|6.30.09 @ 4:58PM|#

Once things settle

Like, say, 2020?

and my wages adjust to the new value of a dollar

It's just the interim that's going to suck the big one.