Wednesday, June 20, 2012

Another Head Fake on QE3

This morning, the talking heads were confident that after the Fed's Open Market Committee meeting, a new round of QE would be announced.  Instead, what they did was extend their "Operation Twist" program.  Operation Twist swaps short term bonds for long term bonds, which they say is intended to keep long term bond rates low.  Wanting to keep long term bond rates low is simply to try and keep the market from "getting away from them".  You probably know that a major item in our budget is the interest on the bonds that must be paid.  Many people have pointed out that current interest rates are at historic lows (they are really negative when inflation from QE is figured in) but that if rates were near where they should be based on inflation and not the Fed controlling the rates, say around 8 or 10%, the US would collapse in no time.  This move is to kick that can farther down the road.
This is today's intra-day chart of yield on the 30 year bond (the "long bond"), you can see the rate dive low right after the announcement and then pop back up nearly where it was.  Joe Weisenthal at Business Insider thinks their approach is not going to work.  
Now the incorrect thing you'll hear today is this: That because the Fed says it would buy more long-term Treasuries, and because in theory greater demand for Treasuries causes rates to fall, that the fall in rates is what the Fed was going for.

But actually it's the opposite. Fed easing causes rates to rise, because people expect more growth and inflation and growth and inflation causes people to dump Treasuries.

So the initial drop in rates reflects the market's view that the easing the Fed announced wasn't satisfactory and that the Fed wasn't going to do as much as expected.
More ominously, from my viewpoint, this says the Fed wants inflation.  They are doing all they can to create inflation and gets us out of this mess by creating money from thin air.  If you're retired and living on savings, or saving for retirement, they just put another one in your back.  Oh, yeah - I've been saying this for a couple of years.


3 comments:

RegT said...

The people running the Federal 401k program called Thrift Savings Plan, which my wife and I pounded as much as we could into while we were working at the VA, are running scared, I believe. They started playing games when my wife and I tried to close out our accounts, running a paperwork scam that was preventing us from getting our funds. I've turned it over to my bank to roll over into an IRA as I am hoping they will be able to get our money out where we couldn't.

I've heard from friends at the VA that employees who have recently retired will not be able to start collecting their retirement for TWO YEARS. Hope those people put as much as they could into their TSP accounts, because that is all they are going to get right now (unless they are old enough to collect SS). IF the Feds let them have access to their money in TSP.

I think Ann Barnhardt nailed it: get your money out now. I hope to purchase commodities, meds, and other items that won't be available if TSHTF any time soon, with our funds. Whatever is left over will go into physical precious metals.

Graybeard said...

The feedback from the VA friends is interesting. I wonder if that has anything to do with the way they kept the Fed.gov running by raiding Federal pension programs. I think that was during the last debt ceiling showdown, but I can't find it right now.

I have looked into my 401k plan and it appears locked up tighter than a drum. There is no way to get my funds out, except for a relatively small amount - around 25%, IIRC. I don't mind the tax penalty; if you think that you're going to give up 100% of it when TSHTF, the tax penalty on early withdrawal isn't that big.

RegT said...

I think that is indeed what is happening with the VA retirement system - they have actually spent the money, just as with Social Security, and so they are looking to kick the can down the road. My TSP account is being held hostage, too. I feel certain TSP has decided allowing us to pull our money would be the equivalent of a "bank run", and so they are doing all they can to prevent it.

If I am able to roll it over into an IRA at my bank, I plan on taking the penalty, then using it for real goods and possibly some real estate.