Notes From Underground: “And all My Words Come Back To Me In Shades of Mediocrity” (Paul Simon)

This reference is to Janet Yellen’s testimony in her Senate confirmation hearing as the chairman-to-be cited the benefits of the Fed’s policy of über low rates for the average household. While many Senators challenged the negative effects of the Fed’s policy for savers–financial repression in the words of Carmen Reinhart–Yellen noted that people were not just savers but also consumers. Thus, Fed policy may harm the return on savings, but households may receive the benefit of lower home and auto loans and the Fed’s QE policy may have had the ripple effects of getting their college graduate a job. So financial repression was a very difficult outcome to measure against the broad economic outcomes.

Well, Ms. Yellen, the same will also hold for the Federal Court that ruled Detroit’s bankruptcy is allowed to continue, which may enable a significant hit to the public sector pensions. However, pension restructurings are a form of financial repression that will have positive “ripple effects” for many participants in the Detroit economy and maybe even Illinois. Financial repression can come clothed in various forms and the restructuring of public liabilities may be an outcome that salvage states and cities for the greater good. Political payoffs resulting in State Constitutional protections do not hold sway over Federal bankruptcy law. Now, about those ripple effects.

***The Reserve Bank of Australia held its official interest rate steady at 2.5%, which was widely expected. The RBA is allowing its previous cuts to work before embarking on any further action. Again, the RBA cited the high value of the Aussie dollar as a concern but is reticent to cut rates to further weaken the currency, which is presently 12% lower on the year. Also, the Aussie dollar is making multi-year lows against its neighbor, the New Zealand kiwi, so there is no need to fear a competitive disadvantage. In a world of falling commodity prices, the biggest concern is the weakness of the Brazilian real, but with the Brazilian Central Bank raising the interest rate to 10 percent, the Aussies can be cautious as to how much lower the REAL will drop.

Tomorrow morning the Bank of Canada will announce its rate intentions and consensus is for no change from the present 1% level and a dovish outlook on the world economy. The LOONIE is down 7 percent on the year, which will allow the BOC to keep rates steady for there are no concerns about the Loonie being overvalued.

***For the YIELD CURVE MAVENS: The RBA has cut interest rates by 50 basis points. During the period of rate cuts, the 10-year Aussie note has moved about 100 basis points. If you had been buying the long-end of the curve in response to the rate cuts you would be a loser as the yield curve has steepened in response to the rate cuts. Again, it is difficult to time the outcome but it shows how you can be right on interest moves but where you are positioned on the curve will depend on profit or loss. Interest rates are dependent on much more than tapering and rate cuts, which is why yield curves are so significant in measuring the psychology of investors. Central banks can control the short-end but the long end of the curve is much more market influenced.

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10 Responses to “Notes From Underground: “And all My Words Come Back To Me In Shades of Mediocrity” (Paul Simon)”

  1. rob syp Says:

    Go Lions…

  2. Joe Says:

    “Well, Ms. Yellen, ….” Don’t bet she’s given that reality, which you accurately lay out, any thought on those long flights back and forth between Reagan National and SF Int’l?

  3. Shocked to Find Gambling Says:

    Concerning JY’s comments………low rates probably help the average household and economy, short term, because they have little savings, and would like to go buy a big screen TV on credit. However, if you want to think about this from a common sense standpoint, you are just loading up households with more debt, that has to be paid back eventually.

    Total Debt outstanding is at a near record 4.6 times Disposable Income, How does this get paid back?………maybe the FED is planning a TARP program for consumers (fat chance).

    The low rate policy is a massive transfer of funds from savers to borrowers. Does this promote long term economic stability?

    Conservative Savers who want any yield are being forced to go out on the yield curve, or accept credit risk, or the price volatility of stocks.

    The FED is effectively dumping huge risk (interest rate/credit/price) on conservative savers, most of whom are not aware of the risks they are taking.

    • Joe Says:


      Shocked wrote: Total Debt outstanding is at a near record 4.6 times Disposable Income, How does this get paid back?……

      Today the short off the record answer is “who the hell cares.” The solution has yet to be outlined in a Princeton dissertation.

      “The low rate policy is a massive transfer of funds from savers to borrowers. Does this promote long term economic stability?”

      That would have no bearing on the next election cycle, so, who the hell cares? Truth is, hell no. Manipulation of short term rates encourages larger percentage of debt spent on consumption. Savings would become investment capital in the long term, and that does not seem fashionable with policy makers of today. I’m sure there is a Princeton dissertation showing that consumption is a quantifiable way to grow commerce and disproves any notion that what borrowed funds are spent on matters.

  4. yra Says:

    Shocked—all solid points but the spirit of JY’s testimony is that the fed is exonerated from the negative aspects of “financial repression” because it is a net positive for all the reasons cited—you may have to take over writing this blog—Thanks for your input.—Yra

  5. Chicken Says:

    Why pay back debt when it’s obviously more lucrative to default and beg for forgiveness? Nobody was hurt, nobody goes to jail, all is good!

    Concentrate on teaching the yak farmer this valuable lesson!

  6. Dustin L. Says:

    Oh how the Fed Modellers love to have simple assumptions and to focus on the fact that since we can’t by definition quantify the known unknowns let alone the unknown unknowns they are thus less important to outcomes and thus to be discounted and the simplified modelled version of the world taken as reality. Fed officials sit in their ivory towers assuming that they know nearly everything and can control everything better than the aggregate of people (i.e. the market) can and are surprised every time something not explcitly in their model lurking in the error term becomes an unintended consequence. Well Mrs. Yellen I will let you live in your modelled world where the outcome of aggresive monetary stimulus ad infinitum in the present state must help consumers because on aggregate it drives up GDP (assumed) and this will inevitably feed through to everyone? And in a neo-keynesian delusion where wealth effects are real but substitution effects due to mean reversion are non-existent? This is all just “too much aggregation and not enough human action and motivation” for me. The aggregate intelligence of everyone, and hence the market, will always outsmart the combined intelligence of the relatively small group of central planners no matter how brilliant they are. So set your clocks and wait for the next unintended consequence as the central planners fiddle with their eloquent designs. But most importantly be there to profit from their lack of wisdom as defined by Socrates. (Note WISDOM not INTELLIGENCE) But oh wait, the Fed and Mrs. Yellen have it all under control 😉

  7. yra Says:

    Dustin L.—well said and 2+2=5 was of course Dostoyevsky’s response to the “modellers of the day.Models serve a genuine purpose in aggregating data but dependence on them for predicted outcomes has been nothing but a failure–remember that Bernanke thought the housing situation well contained based on the Fed models

    • Shocked to Find Gambling Says:

      It occurred to me this morning that QE Taper talk may be rallying stocks (I know this is blasphemy and the opposite of what I hear for 8 hours a day on CNBC).

      So the FED is about to end tapering, while keeping Fed Funds near zero. Under this scenario, what do you buy?

      Well you can’t buy bonds, bond prices may decline significantly as QE is rolled back.

      How about real estate? Not really. If 30 year fixed rate mortgage rates normalize (6% ?), residential real estate holds steady (at best).

      Money Market funds? Uh-Uh……Fed Funds likely near zero for quite a while

      That leaves stocks, as the winner by default. Most big companies have refied their long term debt, so less impact on profitability. And as the size of the fixed income market, dwarfs the size of the equity market………a small % into equities goes a long way.

      I haven’t researched this at all, and could be wrong.

  8. Shocked to Find Gambling Says:

    Low Fed Funds + QE have favored corporations, homeowners, and government, who have all been able to refi at ridiculously low levels for the past several years.

    Sounds good BUT investors (bond buyers) have taken the other side of the trade. Should 10 Year Treasuries go to, let’s say 5%, the world capital losses will be massive, and at 8% fuggedaboutit.

    Long term rates can go up on inflation, liquidity, or credit concerns(even for Treasuries).

    The FED policies have created an extremely dangerous disequilibria in fixed income, real estate, and equity markets………no one knows how this will turn out.

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