Stupid Wager Or Clever Prestidigitation?

[traelin0]

"Heads — you win; tails — I lose." Such is the message the Fed sends to bond speculators. But why would the Fed offer such a stupid wager? Read on.

The Fed is trying to bribe bond speculators with risk-free profits. That's how the Treasury/Fed check-kiting conspiracy makes sure that there will always be plenty of buyers for government debt, regardless of the size of offering.

Ten years ago I started writing about my theory that, wittingly or unwittingly, the Fed has become the quartermaster general of the coming deflation and depression. I offered a logical, closely argued reasoning for this thesis. My argument had to do with the contention that the open market operations of the Fed make bond speculation risk-free, which explains the perpetual bull market in bonds. Bond speculators, knowing that the Fed must needs buy bonds in order to keep the money supply growing, front-run (or, to use the old-fashioned term: pre-empt) the Fed's open market operations. They buy the bonds beforehand, and pocket risk-free profits when they sell them to the Fed. Speculators will allow the bond price to fall only so much. Then they show up as buyers for another ride of the escalator upstairs.

Incidentally, my theory also gives the coup-de-grâce to Keynesian and Friedmanite economics. Keynes, and later Friedman, advised governments to discard the gold standard thus destabilizing foreign exchange. That would give them free hand to pursue monetary policy — euphemism for the license to engineer unlimited depreciation of the currency. Scarcely did they consider that their scheme was to back-fire. They were shooting for inflation only to bag deflation. They wanted rising prices; instead, they got falling prices.

Read more here.