Fact or Fantasy?

Yahoo! Finance reported in “The $1 trillion reason why Bernanke’s critics were wrong,” that:

[courtesy Google Images]
[courtesy Google Images]

 “Last week, NYT columnist Paul Krugman penned an ode to his former Princeton colleague. ‘And there but for the grace of Bernanke go we,’ Krugman wrote, reflecting on Europe’s economic morass.

“On Monday, Bloomberg wrote that Bernanke’s critics missed out on $1 trillion in potential gains in Treasuries since 2008. ‘The resilience of Treasuries represents a rebuke to the chorus of skeptics . . . who predicted the Fed’s unprecedented stimulus would lead to runaway inflation and spell doom for the bond market’.”

But how “resilient” are US Treasuries if nearly 90% of those sold since A.D. 2012 have been purchased at full face value by the Federal Reserve?

What would the price of US Treasuries be if those Treasuries were only sold on the free market and not on a market dominated and manipulated by the Fed?

The reason the Fed bought those bonds is because the free market would only agree to pay a fraction of the bonds’ face value. Rather than let the free market “discover” the true value of US bonds, the Fed intervened to overpay and thereby support the illusion of US Treasury value.

“Of course, it’s impossible to know if Bernanke’s critics have been actively shorting Treasuries or ever capitulated to the rally in bonds, but it’s pretty clear to say they were dead wrong about the outlook for Treasuries, the dollar and inflationor at least so far ahead of the curve as to risk falling off.”

The Yahoo! Finance article appears to be correct to this extent: Despite Quantitative Easing, the dollar hasn’t died; inflation (although closer to 9% than the “official” rate of less than 2%) has not yet soared—and all dire warnings to the contrary have been, so far, mistaken or at least premature.

But why might those warnings premature?

A: Because most prognosticators didn’t anticipate that the markets would be “rigged” rather than “free”.

Those who offered dire warnings about the economy and/or about the rising price of gold were like statisticians who offered mathematical predictions of how often the marble would land on the “00” in a roulette wheel. Their predications were mathematically sound, but the statisticians didn’t take into account the fact that the particular roulette wheel was “fixed” in a way to defy mathematical probability and allow “00” to come up 50 consecutive times.

“The inflation hawks and bond bears were wrong for a number of reasons; most notably, they failed to understand the deflationary forces already at work in the global economy, which the “Great Recession” only exacerbated. Furthermore, those forecasting doom for the dollar and Treasuries failed to adequately consider that finance is global and that U.S. Treasuries looked good relative to the competition—and still do.”

Although a hyper-inflationary depression is possible, deflation is usually one of the hallmarks of an economic depression. Yahoo! Finance implies that, after A.D. 2008, the forces of “natural deflation” in the US and global economies (and our “natural” tendency to economic depression) were so great that the artificial stimulus of injecting trillions of inflationary dollars into the economy did little more than counter-balance and negate the existing deflationary pressures.

And that’s probably true.

In a sense, the Great Recession economy was dominated by 100 “units” of “natural” deflation and the Federal Reserve countered by adding 100 “units” of artificial inflation. The result was roughly zero and the economy did not soar into prosperity, but also didn’t sink into a full-blown depression.

The questions that remains is whether the 100 “units” of artificial inflation can permanently subdue 100 “units” of natural deflation—or whether the forces behind that “natural” deflation are still lurking in the shadows and waiting for an opportunity to break loose in the form of a global depression.   In other words, did the QE creation of trillions of fiat dollars really control the economy on a permanent basis? Or did those trillions of fiat dollars only provide a temporary refuge from the inevitable?

If it turns out that fiat currency creation can actually control an economy permanently, Lord Maynard Keynes and Ben Bernanke will have finally created a viable “money tree” that can make us all rich forever.

If, on the other hand, it turns out that all those trillions of illusory, fiat dollars used to “stimulate” our economy did so only on a temporary basis, then a national and/or global depression is still waiting to strike.

Written by: ALFRED ADASK – continue reading at ADASK’S LAW

 

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