Fed forecasts down the bond bulls

The coiled spring of a massive bear market in US government bonds is slowly being released, the implications of which risk derailing the economic upswing that has gathered pace over the past year or so.

US 10-year government bond yields are 2.92 per cent this morning, just a few ticks from a multi-year high of 3.00 per cent. Last year, 10-year yields traded at 1.45 per cent as the US Federal Reserve stepped up its quantitative easing and bond purchasing program.

The interesting aspect of the current bear market is that the Fed is still buying bonds at a rate of $US85 billion a month. This implies that the more than doubling of yields has occurred at the mere prospect of QE being scaled back and of course, on increasing evidence that the economic expansion is gaining self-perpetuating momentum.

The market is still speculating, quite rightly, that the US Federal Reserve will possibly start scaling back QE next week when the Federal Open Markets Committee meets. 

The bond market matters, not just for the reason of funding the ongoing budget deficit which, according to the latest estimates from the US administration, will still be evident well into the 2020s, but also to cover the refinancing of maturing debt.

The government bond market is the risk-free financial market benchmark from which corporate bonds are priced. For many corporate borrowers, this means that higher government bond yields will mean rising borrowing costs. In the US, mortgage interest rates are also priced at a margin over government bond yields, usually the 30-year yield, so mortgage interest rates are also on the rise.

The increase in government bond yields in recent months equates to a tightening in monetary policy for the private sector and is therefore a dampening influence on the growth outlook. This is why some economists and the markets are antsy about the prospect of yet higher yields as the Fed steps away from its unprecedented intervention in the bond market.

In other words, the question is whether the economy can remain on track for 3 per cent GDP growth, with the unemployment rate heading below 6.5 per cent, if bond yields move much higher?

This is the critical issue for Fed policy and chairman Ben Bernanke and his fellow policy makers are fully aware of the risks from tightening policy too soon or by too much.

To square the circle, it is also why the Fed tapering or scaling back of the bond purchasing program will be modest, careful and adjusted according to market reaction. It will start small – perhaps reducing the bond purchasing program from $US85 billion a month to $US70 billion or so a month so the Fed can see how this change impacts sentiment. If markets recoil, the Fed will tread carefully; if they remain calm, the profile for tapering QE towards zero will remain. 

It is interesting that despite the sharp rise in bond yields, share prices remain robust. US stocks were again higher overnight and closed just a couple of points from fresh record highs. The US dollar is also trading in a very orderly fashion and in broad terms, it has been in a tight trading range for many months.

If financial market players were worried about the tapering of QE being too soon and fearing too much, both US stocks and the US dollar would be hit hard. They are not.

This all suggests that next week’s meeting of the FOMC could be the start of something big. Having set policy successfully to avoid a rerun of the horrors of the 1930 great depression – recall that the unemployment rate peaked at 10 per cent in the current cycle versus 25 per cent in the 1930s – the Fed is about to embark on what will be a very long journey to normalise policy settings.

The end game for the Fed will be to not only end all bond purchases, but to slowly wind down its massively inflated balance sheet, which includes trillions of bonds purchased over the last four or five years.

The first leg of this process could occur within a year – that is, the Fed will have stopped buying bonds in the market. The next part of scaling back the balance sheet could well take decades. As Bernanke has noted, it may well be optimal to have the Fed simply let its bonds mature rather than going to the market to sell them.

This seems sensible but that will be a question for late 2014 and beyond.

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Reckon they are locked in to buying bonds. Even without taking on new bonds...who's going to "buy" the trillions already floated by the Fed, that will come up for auction again...in say 1 month...right through to 30 years?
Sure...they can slow down the pace of buying "new" bonds ( the ones printed out of fresh air)...but surely this is the thin edge of the inflationary wedge...that was inevitable...when so much money gets printed.
The translation back to Aussie is lock in your home loan rate now, because in 2 years time, interest rates might be 10% on mortgages.

Good Morning Bruce - At last the political BS reality show appears to be all over and we can now get back to some serious discussion about what is really impacting the world of finance !

The Fed is so screwed, where this bond buying ends nobody knows, but you have hit the nail on the head, interest are only set to go higher regardless of what the Fed does in response to a worsening situation.

The Burning Platform has a series of articles going that paints a very perilous picture, but if we are prepared for a bit of reality then watch the overly indebted go to the wall as the cost of servicing their debt goes parabolic.

Quote: "Ben Bernanke has peddled the false paradigm of quantitative easing (code for printing money and airlifting it to Wall Street) as benefitting Main Street. Nothing could be further from the truth. He bought $1.3 trillion of toxic mortgage backed securities from his Wall Street owners. He has pumped a total of $2.8 trillion into the hands of Wall Street since September 2008, and is singlehandedly generating $5 billion of risk free profits for these deadbeats by paying them .25% on their reserves. Drug dealer Ben continues to pump $2.8 billion per day into the veins of Wall Street addicts and any hint of tapering the heroin causes the addicts to flail about. Ben should be so proud. He should hang a Mission Accomplished banner whenever he gives a speech. Bank profits reached an all-time record in the 2nd quarter, at $42.2 billion, with 80% of those profits going to the 2% Too Big To Trust Wall Street Mega-Goliath Banks. It’s enough to make a soon to retire, and take a Wall Street job, central banker smile"

Take a scroll down to the bearded one where I copied the text from - the bearded one sure has one heck of a poo eating grin on his face (quite similar to the one that use to grace GWB's face at times).

Full story here;

http://www.theburningplatform.com/2013/09/10/trying-to-stay-sane-in-an-i...

Cheers Bob ( I'll study your link in detail....just waiting for my loan guy to ring me back....think I'm screwed though...gotta fairly hefty exit fee...if I switch from variable to fixed).
Hey Bob...these are unchartered waters ( as you'd fully have covered)...and what's to say that once this flood of new money stops filling debt holes...and finds its way into markets...the previous inflationary breakouts...like Zimbabwe etc...might look like childs play!!

Every highly indebted nation or person prays for high inflation.

Governments pretend to keep inflation low, but desperately need it to be high.

A smaller example of what we are going through now, happened between 1973-1983... Please check RBA calculator to see that we had an average of 11.4% inflation per year for those 10 years,
so that a basket of goods bought for $100 in 1973 cost nearly $300 in 1983.

The turning of foreign central bank debt holdings occurred in November 2012 when central banks sold US$420Bn or 11% of their US Treasury Bonds.
The worry of course is that with all the money printing, the United States is debasing their currency, and central banks do not want to hold US bonds until maturity even though the US
Federal Reserve may have to because it will have little choice.

It will have little choice because at 6th September 2012 the US Federal Reserve has total credit of $3,607,114,000,000 but only $62,000,000,000 capital, and with the price of bonds going down the Fed would be insolvent by the time it's losses on selling assets hit that $62Bn.

So with interest rates going up (10-year has doubled in 12 months), the Fed can taper but it can't really sell.

Of course the Fed can't sell anyway because everybody else is selling, and it won't be able to taper much because as Bruce 55 says it has to buy the new Treasuries and Bonds as required by the US government fiscal deficit each year plus the old ones as they mature.

Steve 51~ that smells like GFC2...when the music stops and the Fed is still on the dance floor.

Yeah Bruce, smells like that dead skunk in the middle of the road...stinking to high heaven.

The United States Federal Reserve is trapped and it has lost control.

Stephen N. be careful. because if the USA does not keep currency value, then the world may actually end.

A world war could only last for 6 days, before there was no money left. Then uncle nuke may start to correct our thinking.

They thought the world would end when Rome collapsed
Then again with Portugal....Spain....Netherlands...France....Britain.
All having turns at the reserve currency.

But the sun will still come out tomorrow...bet your bottom yuan.

Big difference Stephen, the USA has the weapons to finish all life on earth and have no intentions of giving up their control of the world. Where as the countries you mentioned don't have enough weaponry, to protect their governments, if there was a coup.

Money and military are parallel states and no country had, or has, the military power of the US.

You are a military man, so tell a theater of war that US OPs have not planned for?

"Where as the countries you mentioned don't have enough weaponry, to protect their governments, if there was a coup."

---Ken

They did when they had the Reserve Currency....and that is the order in which they had it over the last 500 years..Portugal,Spain,Netherlands,France,Britain and now the US.

I said nothing of war Ken...that was you.

Sadly,.........the role of money in War, is more than an a mere ingredient,
it is likely to be the catalyst and cause.

Yes the money wasted on war certainly helped all these countries to go broke, but they went broke for other reasons too.
Probably the prime reason was the Triffin Dilemma : once you become the Reserve Currency you are set up for failure...if you are truly interested you should make a 30 minute study of this.

Stephen N. war is a parameter that must be considered, it is not conjecture on my part.

Benjamin Disraeli (P.M. of the U.K.) said, circa 1867, "One day the world will no longer be controlled by the military, but by bankers".

Well he was right, except that bankers fund the military and US debt is a product of war!

The reason why the USA controls the currencies of the world, is that they have the most powerful military on earth. Don't forget, that it was the western alliance, that voted to give the USA control of money.

European history shows that the map of Europe changed (on average) every 50 years. Why was it so? because increasing wealth came from takeovers. Not like the stockmarket takeovers, that we now have, but by military takeovers.

Stephen K. I'm on your side, but always remember that men are aggressive bastards.

Ken, war could hardly be conjecture when the United States has been constantly at war for the last 12 years, and often at war since Dec 1941.

Stephen N, it appears that you agree with what I have been saying - debt is a product of war.

Ken perhaps this is what is required to end the charade that is going on, something needs to occur to pull people in into line.

A couple of quick points are worth noting. Markets generally anticipate. Central Bank forward guidance assists in this regard. The sell off in bonds is in anticipation of tapering/tightening so it is not obvious that the execution of tapering will cuase additional selling off the bat. This may reflect the rallies in bond markets in anticipation of QE each time it was mooted by relevant authorities. Bond markets generally fell as those positioned into the QE sold into central bank buying.

It is also worth remembering that unemployment during the great depression was measured differently than it is today. U.S. unemployment as measured by the U6 definition peaked at 17.1% in October 2009 and remains at 13.7% as at August 2013.

Finally the option of the Fed holding bonds to maturing merely delays the reckoning (admittedly while preserving the intregrity of the balance sheet). As a bond matures Treasury would be required to repay the capital. Unless they are suddenly in a position where they are ruinning substantial surpluses, they would need to issue new bonds to meet these capital repayments. The question is, who will be the buyer at that point?

"The sell off in bonds is in anticipation of tapering/tightening so it is not obvious that the execution of tapering will cuase additional selling off the bat."

---David Graham

That one week in November 2012 when world central banks sold 11% (US$420Bn) of their bonds:
I don't think there was any talk of taper then.
And as far as we know it wasn't a coordinated effort.
Could have been the stench, no?

My point is where the information is telegraphed and markets have already started to react, the subsequent reaction is less than would have otherwise been anticipated. The example you cite was pretty much a random event that was unexpected. During every QE announcement, the major move preceeded the actual action by the central bank. By definiton the more an event is anticipated, the more likely there is to be an unanticipated outcome. Think BOE in 1992, Bank Negara in 1997 et.al. I am less concerned with tapering for the very reason that everyone is concerned about tapering.

"example you cite was pretty much a random event that was unexpected"

---David Graham

I doubt very much that the sale of US$420,000,000,000 of United States Bonds by world central banks over a period of one week (repeat 1 week ) in November 2012 was "pretty much a random event".
That's 11% of total Foreign Central Bank US Debt Holdings in one week.

I think Ken and Stephen N are both correct in some sense.

We are basically at this point in history testing the concept of money. With the abandonment of gold it has become a concept only.

While the US remains the world reserve currency it can print what it likes and repay debt in inflated trash.

If the world breaks ranks and attempts a new reserve currency there is little doubt the US will
do a divide and conquer and pick off the ring leader countries militarily. Iran is a prime example
because it not only has massive oil reserves but has sold oil in other currencies. Syria is an
opportunity because it has a defence alliance with Iran and any excuse helps to touch up the
cheeky countries like Iran to keep them in line.

The worry the US has is one of mass abandonment of the currency and some players are not
a push over militarily. The Chinese have been neutralised by their level of ownership of US
bonds. Any abandonment of the US dollar would be a major loss so they are slowly diversifying.

The russians are a different matter. They are no pushover and would love to sell everything in their
own currency.

My best guess is that will be a slow decay. Bit by bit, more and more oil deals and others will involve different currencies until the point where the US dollar is pretty much the same as other
currencies.

The US will fight this with small firefights all over the globe and any financial fright immediately
strengthens the US dollar.

It could take decades but while the US has 11 carrier battle groups and no other nation can
even operate one on their scale, they will print money to pay for their military and the world
will continue accepting it.

Empires like the US don't die militarily, they rot from within. Slowly the population changes
and internal corruption of the US will destroy it. But that is a ways off.

shoots

If you get a chance David, please check out the Triffin Dilemma...having the Reserve Currency sets you up for failure from the beginning.

Yes but the Triffin dilemma does not take account of the scale of US military dominance which the US will extend at any cost.

Consider that no other country has to capacity to operate a single aircraft carrier battle group on the scale of even a nimitz class carrier, No-oneelse can park a small airforce off anywhere in the world and attrit an air defence, then ground forces like the US. And they have 11 of these. It isn't just a case of money. The yanks never lost this skill/capacity since WWII. The indian, chinese,
russian and french comparisons are laughable.

The alleged threat to carriers posed by Chinese missiles on ballistic trajectories is dubious. Does anyone think ANY missile on a ballistic trajectory with a claimed HE warhead is going to be treated as anything other than a nuke?

In the longer run the threat will be eliminated by scramjet powered missiles launched vertically and travelling hypersonically to deliver a conventional warhead anywhere in the world within a few hours.
Kind of the ultimate cruise missile from space.

The X47B drone launched from a carrier a little while ago and the next gen of carriers will be smaller, faster with vertically stacked drones in the hangars.

The US will use this military edge to reinforce its monetary policy. Always has. As long as the
US has a reserve currency it never really has any debts since whatever it prints is money. If people object to that then they know the consequences. Markets might think they can bomb the US
bond market but the US will bomb someone in retaliation (usual false flag) and the money will
fly back to the US looking for safe haven.

The US has been doing this for at least a century. In the american mind, everyone must render
unto Caesar.

Also the bankers like someone to hide behind while they make money from the whole process.

shoots

The real threat to the system is not the US- which can print what it needs and bomb anyone who
objects- but the Japanese.

They are without a reserve currency and bond yields will kill them.

Then we have global collapse but the US will still be last man standing.

The US needs war to power its economy and while it has the capacity for war it can
defend its reserve status and run its war industries.

The US dollar I think will still stand above the rest when it's a case of last man standing.

shoots

Geeze Louise how did you go from talking about US insurmountable debt obligations to Battle Groups ?
Steve.

The US military has always been the arm of US investment. It's just Von Clausewitz. Google up a book called "I was a hitman for Wallstreet" written by a US marine corp general in the 1920s.

Same old game.

When has the ever NOT been at war with someone?

Why?

David, I just had a thought, relating to battle groups. Do you know why 3D printers were created? They were created (by MIT with an unlimited military research budget) to produce parts, for the navy.

Those battle groups are at sea for a long time and require a lot of spare parts.

Hey, hey thats probably part of the reason why the USA can't get unemployment down. Consider how many low skill jobs are required to make parts for the military. Not to mention how many jobs have been lost to China.

My worry is that Australia, will sit around while low skill (workforce) entry jobs disappear, developing into, a long term underclass.

It's going to take a lot of imagination, to create new streams of employment for our kids.

Yes Ken the underclass is here already. The loss of low skill jobs to asia has been decades in
process.

One threat to the US war machine is not only cyber attacks but the fact that many of their
technocrats and engineers are foreign born and educated since the US system has been dumbed
down so much.

Still they only need so many engineers and scientists.

Right hand signs cheque,.......gives to left hand.
Economics 101.

Could be the one-handed economist,no?

On the one hand........Yes, possibly...
But, on the other..........Oh, bugger!!

The critical issue in terms of a successful Fed exit (including rewinding the balance sheet), is the US government producing multiple years of surpluses. Simply holding the bonds to maturity is not enough, for if the Government can't repay them, we'd see a massive bond issuance in the future - and catastrophe if the buyers are not there.....

Of course that is true Rau...but at this stage it has to borrow the interest each year for their debt, let
alone tackle the actual debt.

And taxpayers are exhausted.

So the future you predict is already here.

If the Fed are locked into buying bonds, why has the English Central Bank stopped buying bonds for about 12 months and the economy is actually expanding faster - not trapped?

A lot of observers have been consistently making mistakes on exactly what QE3 means for the real economy. It is the interest rate margin between short and long term interest rates that provides the incentive for banks to lend, not the level of interest rates.

Because of the lack of interest rate margin, banks have moved most of their QE3 money back to the Fed's balance sheet. QE3 has actually been slowing the real US economy as the banks have less incentive to lend.

And now as an option the Fed is seriously considering increasing mandatory reserve requirements to prevent banks excessively lending the excess reserves back to the real economy. I cant predict if the Fed selects this option but if they do the "out of control" scenarios will be wrong - it could all come down to the experience of the new Fed chief?

I judge a theory by its results and so far the "lost control" theories would have you keep your cash in bank and suffer a real massive pay cut of 50% in the last few years.

At least if you had some money in the high yield shares you didnt suffer a pay cut and got a capital gain bonus.

However, there are risks even now appearing in shares for the first time in the form of:-
-heavy investmentd in high yield shares which may get seriously punished because they are mispricong high yield shares as if they were just risky bonds.
-takeover announcements
-new listings or rumours of listings (eg Dick Smith)

Your para 1: If this is not a rhetorical question, the short answer is that other central banks are still happy to buy BOE bonds but we all have to remember the main reason the Fed is buying its own bonds is to keep the long bond low so that it can afford to pay the interest over the next 30 years.If interest rates were normalised, interest on their debt would be impossible to pay.

Your para 2: same again...it is imperative that the US has very low interest rates on their long term debt.Even if average interest rate on debt was 5%, on $17Tn that's $850Bn interest out of tax revenue of only $2.469Tn...35% of income

Geoffrey, your last 3 paras.
I'm retired and more than happy to have that 50% cut in income for some years, living leaner.

The alternative is losing 50% of my capital...I didn't lose any in the 2008 crash, and I don't want to this time.

Stephen N, The only problem is you are still going to lose 50% of your capital value as the purchasing power of your cash decreases. It doesnt matter whether it is cash, shares, property, gold or any other investment, there is always a risk of losing capital in any investment.

For retirees, their biggest risks of losing capital are currently mainly - property promoters selling at inflated prices, high yield shares with no growth, people promoting gold savings accounts and companies dressed up as banks offering high "term deposits". The risk is everywhere..

Geoffrey Morris
70% of my super is in gold/silver bullion.

But no one can be smug; nothing guaranteed...it's all very ugly.

That's why they call it a depression.

Stephen N - 70% of your super in anything is a bit risky......but it is better than cash. Property rather than shares would be my nervous investment I couldnt make at the moment. Too much price increases caused by short term things like spruikers selling to SMSFs, Chinese investment and problems on increasing the supply side.

The purchasing power of cash increases in deflation.

Same same here SN

While I was waving my arms around like a madman in 2007 people used to treat me as entertainment value in order to get a bit of a laugh. Those same people had blank stares on their faces whenever I would raise the question of sub-prime mortgages, US Debt, the EU periphery, Real Estate bubbles etc, etc.

I still have a coupla years before retirement (Bob - 57) and my main aim is to preserve what we have without being forced into taking uneccesary risk - no easy job that is for sure.

I am well over the fear of missing out - all bubbles burst and currently that is all we get in response to the GFC - more freaking bubbles !

Yeah Bob, I didn't think it would take this long for capitulation.
And we still don't know how long it will take.
But we know it will end in tears...especially for those who have gone the way they are pushed by the Reserve Bank of Australia.

I agree with 'the vibe' most of what the contributors to the conversation have already posted, particularly Stephen Nordstrom, who seems to have a pretty deep understanding of historical and contemporary US Fed monetary policy.

The Fed has become the buyer of first, middle and last resort for US bonds.

There is no doubt it is caught in a trap of its own making.

QE was/is financing the US Federal deficit, which, due to automatic fiscal tightening and slightly higher tax receipts, other 'recoveries' in real estate and consumer spending, is lower than $85b per month... (winding back a couple of wars has also helped, but low and behold, they can't help themselves and are looking to start another).

All else being equal, matching QE with deficit spending requirements (which is really the US govt. demand for new debt assuming existing debt can be rolled)... should allow the Fed room to taper by ~$20b per month.

The thing is.. all else is not equal.

Enter the Bond market, which is cracking up.. slowly but surely.

I find this paragraph from S. Koukoulas' article particularly amusing: 'This implies that the more than doubling of yields has occurred at the mere prospect of QE being scaled back and of course, on increasing evidence that the economic expansion is gaining self-perpetuating momentum.'

With unsound money as the foundation plank of the economy, and ongoing debasement, and manipulation of the price and availability of said money, the economy has been infected with millions of decisions, based on false signals.

The basics of economic supply and demand cannot be established... all has been goosed, rigged,... and now the goose is cooked.

I challenge Mr. Koukoulas to provide evidence of the 'increasing evidence that the economic expansion is gaining self-perpetuating momentum'...

- Real estate? goosed..
- Consumer confidence? they are confident that the economy is in the toilet
- Unemployment? persistently high, even with the definitional and statistical changes which have led to massive underreporting since the great depression statistics oft. quoted.. (this apple is brilliant compared to this orange...)
- Business confidence? corporates are sitting on piles of cash, paid down debt (meaning that on average rising interest rates will affect them relatively less)... not hiring....
- Business investment?
- inflation? forget it...

The list goes on, but you get the picture... any economic statistic which the retail economist may quote, has, underlying it... unsound money.

Take away that drug, and, that which should have happened prior to interference, will happen.

The sum total of which is why, QE, to infinity and beyond, is here to stay, until Bond market blow up, triggers system destruction, and a new rigged system is devised, to replace the current rigged system.

KS

K.S "To infinity and beyond", that was from Captain Planet, wasn't?.

We have got to get this fiat money backed by energy :)

the animated movie 'Toy Story' actually... Buzz Lightyear can take the credit for that one (that's 'credit' figuratively speaking... there's already too much debt in the world....)

Energy backed currency Ken!.... forget supercooled electrons... let's have electron backed cash!

KS

Why not Keyser, thats what humans are made of, except for Goldfinger.

Good to have you back KS!!!!

Great. thanx KS for spoiling the happy illusion.

I'd prefer to keep on believing they are real and that Ben Bernanke is just the lead character in a movie 'Nightmare on Main Street'. It makes a whole lot more rational sense.

Ken, as per your request, below I re-post some of the links related to energy backed currency...

It is an interesting concept, with much merit, but, due to vested interest, I think the more likely 'replacement system', when it comes to it, will feature gold.

http://www.energybackedmoney.com/; http://www.theperfectcurrency.org/; http://www.energybc.ca/index.html; https://medium.com/armchair-economics/183c2ad47b50

KS

Thanks Keyser, I hope we can get some people reading this site.

The problem with gold (as the post states), is that digging it up and putting it in a vault, just does not make sense. Plus gold is becoming harder to find and more expensive to process (also stated in the site).

However electricity is becoming cheaper to produce, thus limiting the requirement for printing new money, so the effect will be mildly deflationary, with increased currency value.

According to that article KWH (electricity) is a far more efficient and relevant way to back fiat than gold.

Or did you send me something you don't agree with? Lets hear it K.S. are you a scientist or Au a gold bug?

Hi Ken,

I agree, the idea has merit, and may actually be superior to (a revised and improved) gold standard.

The best solution isn't always the one that gets implemented.

Witness the current system... Witness the Euro project... etc., etc.

When it comes time to remap the financial system, who is going to set the rules, in their own self interest? those with guns and gold...

KS

Ken,

Gold is the ONLY asset, which, in double entry accounting, does not have a corresponding entry in the liability column (physical gold that is).

The Chinese are not accumulating tonnes of physical gold to make bracelets and necklaces from...

Physical gold will get you a seat at the table, when the rules are re-written.

KS

I haven't seen any bugs made of gold Ken...but I'm sure it's out there.

Gold is money, and until 15 Aug 1971, the USD was redeemable in gold, and the Triffin Dilemma explains why the US had to go to fiat...but before that time the USD was as good as gold and actually had written on the note that it was so.
Paper currency in circulation represents money (gold).

The experiment of every currency in the world being fiat is now 42 years old, and is failing because the politicians around the world always make promises they cannot keep.
Every situation of fiat currencies in history have failed, as will the present one.

The authorities have had 5 years to try and fix things...but the debt just grows larger, despite the world's Depression Whisperer (Ben Bernanke ) doing his best.

Stephen what you has merit, however the fuedalistic societies in Europe, used to just confiscate gold and silver, when they wanted to have a war.

It was not until the French banks started to lend money (based on bond issue), that the middle class developed.

My problem is that I want to see the middle class retained. I don't want the world to move back to the days of Republics, where the rich have everything.

Gold for me, has always been a small asset class, that restricted the growth of the middle class. Fiat has problems, but might work, if it wasn't used frequently to fund wars.

Anyway, as we have moved into the realm of science, there is no turning back, energy has always been my choice for currency backing. Gold works but has limitation. Energy works and has no limitations.

The world is full of people and perhaps we will create, new living space on the moon. That's how we must think because too many people, means too many wars, too many wars means too much debt, too much debt means too much fiat.

War is the problem!

Ken you can fit US$108 dollars of oil in a barrel.
But you can fit US$50,000,000 of gold in a barrel.

That's one limitation of energy.Not sure how much oil you could fit in a safety deposit box either, if only you could stop its flow at room temperature.

KWH Stephen, kilo watt hours of energy. The AUD might be worth 4-5 KWH.

The two most traded markets, oil futures and foreign exchange, determine the value of the AUD but as you say oil is a substance. Where as electricity powers the world.

So, does it not make sense to tie your currency, to you electric production. That limits fiscal spending, to electricity production.

Suggest, that you read the site, that Keyser Soze, sent. Thomas Edison and Henry Ford campaigned for currency/electric to be used instead of gold/currency (100 years ago).

It's logical Stephen, read the article.

K.S. you make sense, however lets not forget that China has the largest electronics production output on earth, the USA, Japan, Taiwan and Korea also get a lot of their electrical components, produced there and what does the electrical industry require? copper, silver gold and rare earth materials. Similarly with India, lets also remember that China and India love their gold and silver jewelry.

The silk route was based on silk and jewelry, India produces the finest jewelry in the world and China loved it.

OK, back to currencies, gold or electricity, can be used to back currencies. However all businesses require electricity. Gold is limited in volume and increasingly expensive to produce, apart from the fact, that a lot of cyanide is used, in most gold production. The cost of producing gold, is a tax on the currency.

Electricity, is unlimited and technology will allow greater cost efficiency, relating to production. A lower energy cost produces a mildly deflationary effect.

"When the rules are re-written". Fiat currency has proven that the world can survive without gold backing. However no economy can survive without electricity and my view is that as we move further into the quantum age, that energy will dominate the entire world.

So, perhaps those minerals on the moon, might not be as expensive as you suggest - just a thought.

The Fed is unlikely to end QE over the next 6 weeks, because the US government's self imposed debt ceiling has to be raised from US$17 trillion to US$18 trillion within the next 3 to 4 weeks. The Fed is likely to wait for this to be approved and also wait for the market's reaction.

In addition, the Fed is likely to wait for the US government to make a final decision whether to attack Syria. An attack will heighten uncertainties, in which case, the Fed might keep QE infinity going, to ensure there is newly printed money to fund this new American war.

Ken,

To extend on our theme, preaching to the converted, would be a waste of energy ;)

Energy reserves on the moon (or anywhere else), are worth nothing, in the present tense, because they are latent. (they would have 'potential energy/value')

Energy which backs currency has to be immediately useable (either its calorific value or in watt hours).

If not immediately useable, conversion or transport costs must be netted off (kind of like the concept of 'net back pricing' in existing energy markets)...

Lots of the infrastructure (physical and financial) already exists to make energy backed currency a viable option...

I'm on board, but make the basic point that, global power/vested interest, would have to benefit for that solution to be implemented.

KS

KS, totally agree, thats why people around the world are reading my post right now, it's not because they like me, it's because my argument is rational, productive and a way to protect their interests. Did you ever imagine that (perhaps) thousands of Chinese read my posts on why electrons (energy fields), respond to temperature.

Shit I know how I respond to temperature and astrophysicists know how a modest amount of dark energy allows the universe to be the way it is. Atomic weapons are a way of releasing the power of electrons, electricity is a way of controlling electrons, quantum computers can use 1 electron to switch at a rate faster than the worlds largest super computer.

That's why they are listening, Keyser. I don't care about politics I care about people, the world is a pretty impressive place. We mere mortals have the ability to organise structure.

Remember Voyager 1, it left the earth circa 1978, took pictures of Saturn, Jupiter, Neptune but couldnt take pictures of pluto because it was way out of line with the "giants". It is now headed for Alfa Centaura and its still sending back a signal but it takes more than a day to reach the earth. Not bad for a 50 watt radio transmitter, that they thought would be dead, 10 years ago.

Einstein said: "Any intelligent fool can make things bigger and more complex but it takes a lot of courage to move in the opposite direction".

I just translate that to mean, even bright people can foolishly repeat their mistakes, until someone tells them to look at something different.

It's not about kudos, it's just doing what makes sense.

With so much debt floating around the world, the interest rates will not return to their historical level. In US, mortgage debt per household in $$$, not as a percentage of GDP, is much lower than AU. This is the result of real estate prices being half of those in AU. So, it makes sense to assume that mortgages in US being half of those in AU are less sensitive to interest change. An over-stretched person on half a million mortgage may not survive a one or two percent mortgage increase, whereas a person with half of that mortgage has a greater probability of 'survival'. Therefore, increase a couple of percentage points of interest rates will cause less damage in the US than in AU. AU 2-year bonds are already yielding more than RBA's cash rate. That means that the RBA lost control over the cash rate on the wholesale level. AU banks must borrow on overseas market at much higher interest rates than the cash rate and than the government bonds. We may be heading towards a major collapse of the weakest. NZ is worth watching as they have over-inflated real estate and their interest rates may go up soon, according to RBNZ.

Art, I think the point in the US is if you don't have a job you can't pay a mortgage.

The increase in interest rates in the US is more of a worry for humongous government debt.

In terse terms, the liars, deceivers and inflationary pilferers of the public purse are on the verge of being replaced by truth-telling and reality. The bond market, unlike the Fed and the share market, is a herald of truth and reality.

Clarity at last.
Thanks Bill.

No disrespect intended, with my comment of the gold bug, Stephen. Alan Parsons was one of my favourite bands and one of the tracks on an album of his (Turn of a friendly Card) was called the gold bug. Well worth listening to, if you like impressive music/lyrics.

None taken Ken...old friend.

Yeah I have a couple "Project " albums myself Ken...how the years fly....

"And when they ask me, if I knew you, I'll smile and say you were a friend of mine
As the final curtain falls before my eyes, when I'm old and wise" - Project.

Hi gang....I've been out of action today ( this very inconvenient thing...think its called "work")...but just as a very generic over view on this topic...I can't see how it can possibly end in anything other than PAIN.
Surely the only un-answered question is...is that pain tomorrow....or in 1 month...or in 6 months...or in 6 years?
I might be wrong...but this exercise in " money printing" would surely defy all the laws of economics...if it doesn't end in tears ( yes/no?)

Bruce, we've already been too long in the storm...but who knows when the final denouement
will occur.
We must remember that the Bear has some human characteristics...the Bear is pissed with Bernanke for interrupting his normal process of throwing out the trash, and organising gaol time for a lot of the bad guys.
Now, to borrow a phrase from Paul Keating, a mentor to this Bear, it wants to do Bernanke slowly and make him look foolish in front of the whole world.

This could take time Bruce.

Steve 51