Bond Expert: The Emperor Has No Clothes 42 comments
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Prices of Treasury coupon securities have posted mixed results today. The yield on the 2 year note has edged higher by 2 basis points to 0.92 percent. The yield on the 3 year note has increased one basis point to 1.31 percent. The yield on the 5 year note is dramatically unchanged in quiet professional trading at 1.75 percent.
There was more love in the longer maturities as the yield on the 10 year note declined 7 basis points to 2.75 percent and the yield on the 30 year bond fell 4 basis points to 3.45 percent.
The advance in the long end came in spite of the 10 year auction today and the prospect of a 30 year bond auction tomorrow.
The 10 year note auction resulted in a yield of 2.818 percent which was about a basis point cheap to where they were changing hands in the market at auction time. In light of the sharp rally of the last several days, I would pronounce that a successful and well received auction.
Foreign central banks via indirect bidding bought about 38 percent of the issue. So if there is to be a buyers' strike, it is once again deferred.
The long end of the market trades quite well the last several days and the price appreciation I just alluded to is clear evidence of that. I think that the market is sending a message.
The message is that the nearly 100 basis point back-up in the yield on the 10 year note adequately (for now) reflects the massive issuance upon which the Treasury has embarked. The global economy is still a wreck and the prospects for a quick macroeconomic fix are slim.
Additionally, I think that the Geithner speech yesterday was a seminal moment which revealed the limitations of the new Administration and government in general. There were no innovative proposals. There were no guarantees and there was no nationalization of banks or GSEs. Worst of all there were no details. The only plan was to have a plan.
In short the emperor had no clothes and potentially the financial system could undergo another wave of instability.
Maybe we are at the point at which the market should be allowed to do its own work. Maybe the overhang of government intrusion into the market is delaying the cathartic result. Maybe if the government stayed away, willing buyers and sellers would meet, in a punitive (for some) public purging which would lubricate the system.
Ultimately, it seems to me the only solution for the plethora of problems which plague us is a redistribution of positions, such that new players own them at prices which reflect market reality.
The market is not the problem nor was it the original problem. Greed was the problem. The ever-vigilant market was the mechanism which probed and searched and exposed the problem, and left to its own devices and unfettered by the demands of bureaucrats, it will solve the problem.
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Let us all start with a clean balance sheet and a clear concience.
New companies will be created and we start from ZERO!
Meanwhile, countries other than the United States are going to start NOT from zero.
Who is going to win the global marketplace of the future?
The remainder of your post is really quite revealing. I especially appreciate your examples of other "organized societies". Yes, the political/military classes in Rome, Egypt, and the Incas and Mayans "organized" their societies alright, and all of them brutally. Are these your shining examples of government? God help us. I'm catching a whiff of contempt for the private sector.
On Feb 12 12:48 AM Crocodilian wrote:
>
Greenspan abandoned his Randian beliefs, if he ever actually had them, a long time ago when he drank the Koolaid and embraced monetarism. In fact, Greenspan's tenure at the Fed is a shining example of why government cannot be trusted with something as important as an economy.
I'll take the market anyday over some system of central planning like the one we currently have. Socialist central planning died with the Soviet Union.
On Feb 12 01:51 AM Deumlaokeng wrote:
> It is amazing to see that otherwise intelligent people still believe
> in the concept of a mythical immaculate market that will always work
> in a rational manner despite the recent overwhelming evidence to
> the contrary. Even that ultimate guru of the myth of the free market
> Mr. Greenspan, a direct disciple of that ultimate libertarian Ayn
> Rand, has admitted that his most fundamental belief in rational actions
> as been proven wrong. Yet here we have yet another writer ascribing
> to the myth of the all good free market as well as to the myth of
> the all bad government as counterpoint. Mr. Jansen's religious beliefs
> prevent him from seeing that his concept of the "market" is nothing
> other than the realization of the greed in humankind and the two
> can never be separated. If the problem was greed then the problem
> is equally the market. Get use to it, your religious ideas failed
> everyone. Best to stick to bonds Mr. Jansen, and nothing but bonds.
The statement also lacked vision.
At some point the Treasuries must roll over or be extinguished. Can we not suspect this will occur at some future point at higher interest rates or higher tax rates, respectively?
Very good discussion. I will choose Rome from your comments below as the best example, having been to Italy.
>> The theatre in Pompei still bears the name of the private citizen who paid for the theatre and the cost of that building as required by Roman law. This was obviously done as a way to gain public favor and to get elected to office. The private sector is not new, proof is all over Italy, just not in English and you would have to get a good tour guide to know it.
>> Rome self destructed under its own size, corruption and most importantly......tax burden. Today irresponsible government forced Banks to lower their lending standards, and then banks tried to stick Fannie, Freddie and unsuspecting bondholders with the bad debt.
Governments forced risky lending practices into place and then congress voted against oversight of Fannie and Freddie in 2003. That is the reason for our collapse.
On Feb 12 12:48 AM Crocodilian wrote:
> In fact, notwithstanding your beliefs, Governments have been organizing societies for all of human history. Its the private sector that's the novelty. Civilizations like Rome and Egypt, Babylon and China were all built on incredibly strong and dominant political/military classes, with a minor role for the wealthy. You'd find the same thing in the New World -- Inca, the Maya, the Aztec civilizations are not about "the private sector"
" I offered plenty of facts which you chose to ignore."
Nope. You made a blanket claim:
"Government actions can certainly NEVER be described as "effectively organizing our society"
That's what you said. That proposition is false if a Government EVER effectively organizes a society. I've offered up many of the major world civilizations as evidence of Governments organizing societies. . . and you've got nothing to say in response.
Its your blanket claim, remember, supported with no facts.
@Hmm?!
On Feb 12 10:06 AM Hmm?! wrote:
> Crocodilian,
>
> Very good discussion. I will choose Rome from your comments below
> as the best example, having been to Italy.
You miss the point. I did not say that there was no commerce in Rome. There was. However, SW Richmond's proposition was:
"Government actions can certainly NEVER be described as "effectively organizing our society".
----------------------...
I don't think you'd find a Roman --either a Republican or an Imperialist-- who'd agree with that statement. Roman government organized Roman society, that's how Romans saw it.
The discover that there were wealthy citizens in Rome who undertook public works of various kinds doesn't diminish the argument in any way: SW Richmond's claim, which has no historical basis, is a blanket one
"Government actions can certainly NEVER be described as "effectively organizing our society".
Roman government clearly organized Roman society. Japanese Government organized Japanese society. Chinese Government organized Chinese society. Merchants and commerce existed in all these societies, and occasionally created institutions and structures of public utility. . . but the from the point of view of most citizens of these societies, the government (and associated state religion), not the private sector, was the dominant force organizing the social structure that they lived in.
Consider the life of a Roman soldier. His aim in life was to serve in the military, and then be granted land (conquered by the state), and given to him by the state, to farm as a veteran. That's how he saw the world. Merchants existed, and he'd occasionally have dealings with them, but they were far less important to his world than the State.
Similar observations could be made about France --either of Louis XIV or Napoleon. In both times, the State was the most important actor in society-- there were merchants, and they were active, but you certainly can't claim that they were more significant in society than the State.
The emperor has no clothes. It is only a matter of time before investors start questioning the wisdom of holding treasuries. Signs of this are occurring as China is asking for guarantees on the value of their holdings. Fed intervention would make matters worse as discussed elsewhere.
www.murdockglobalinsig.../
If you wish me to grant your point, that in the past murderous governments have in fact ruthlessly "organized" societies, then consider it granted. My original point, which I truly doubt was lost on you, was that governments' efforts at 'organizing society' are never optimal, and are always backed by beating, imprisoning, and hanging (or worse) as enforcement methods.
Is it your point that you advocate those as the solution?
On Feb 12 11:40 AM SW Richmond wrote:
> croc,
>
> If you wish me to grant your point, that in the past murderous governments
> have in fact ruthlessly "organized" societies, then consider it granted.
> My original point, which I truly doubt was lost on you, was that
> governments' efforts at 'organizing society' are never optimal, and
> are always backed by beating, imprisoning, and hanging (or worse)
> as enforcement methods.
>
> Is it your point that you advocate those as the solution?
I wasn't advocating anything. I was pointing out that your too-broad claim was historically incorrect. And nothing in human affairs is "optimal" -- too suggest that somehow because Governments are inefficient that that proves that there shouldn't be any makes no sense.
Do governments do bad things? Sure they do. Power to do good is power to do ill. One Roman Emperor built the Port of Ostia to facilitate grain for Rome . . . that's good. Other Roman Emperors did bad things.
The folks who wrote the US Constitution were abundantly aware of this-- the "checks and balances" is an explicit structure designed to get the benefits of the State, while limiting its power to do ill. Its not "optimal" -- but its pretty good . . . and "optimal" doesn't exist as a choice.
My beef is with your blanket statement denunciation of the public sector.
The public sector has a place, the private sector has a place.
Where the line is drawn varies-- Singapore draws it in one place, Canada in another, the United States in another. All three are valid choices, reflecting the political history of these societies. I would hardly call Canada a "ruthless" or "murderous" society-- and they've decided to provide health care to all their citizens.
The Canadian State organizes healthcare for Canadians. It might do a somewhat better job, but all Canadians get basic healthcare through the state. Without "murder" or "ruthlessness".
Moreover, we've seen in our recent meltdown that markets don't organize themselves. The ideologues who argued that OTC derivative should be traded offshore and be subject to no regulation now sing a very different tune. Among the many roles of the State, organizing transparent and fair markets is among the most important (and the most ancient).
What no one with any grounding in history suggests, as you did, is somehow society can get by without Government. Without Government, you have Sudan and Somalia.
If you're serious about this debate, I highly recommend a couple books (available free online) by Murray Rothbard. You ask for historical evidence of working anrcho-capitalist or "spontaneous order" societies and he provides them:
mises.org/rothbard/new...
Murray also exposes the farce that is central banking more eloquently than anyone else. This book in particular was a real "red pill" Matrix moment for me as it clarified just how money and banking really work and why any central control only serves to distort the market and exacerbate problems:
mises.org/Books/myster...
Let me know what you think.
On Feb 12 12:51 PM Mashuri wrote:
> Croc,
>
> If you're serious about this debate, I highly recommend a couple
> books (available free online) by Murray Rothbard. You ask for historical
> evidence of working anrcho-capitalist or "spontaneous order" societies
> and he provides them:
I did not ask for that.
I stated that your proposition: "Government actions can certainly NEVER be described as "effectively organizing our society".
Is wrong.
The fact that on occasion, small off-the-grid communities can organize themselves (which is effectively creating a Government) can do a good job hardly proves the anarchist case. All important states and societies in human history, above the hunter-gatherer level, have had a state setting policies . . . the advance of human history suggests that this works tolerably well.
<<" Murray also exposes the farce that is central banking more eloquently than anyone else. " >>
I said nothing about central banking. I would note only that central banking is not where banking started. Central banking exists as a response to the many financial crises that occurred before it. Without a lender of last resort, all banks are subject to bank runs . . .
"What no one with any grounding in history suggests, as you did, is somehow society can get by without Government. Without Government, you have Sudan and Somalia."
Now you're putting words in my mouth. Read my second post. I nowhere suggested that society can get by without government. In fact, I suggested exactly the opposite. Anyone can make an effective target out of a Strawman. If you wish to discredit my arguments, then you must restrict your activities to discrediting arguments I've actually made.
"The folks who wrote the US Constitution were abundantly aware of this-- the "checks and balances" is an explicit structure designed to get the benefits of the State, while limiting its power to do ill. Its not "optimal" -- but its pretty good . . . and "optimal" doesn't exist as a choice."
The fact that optimal doesn't exist as a choice is precisely the reason why government should be limited to bare minimum functions, among them the functions I mentioned above that it has proven it can't handle. If government would concentrate on those functions maybe it could adequately execute them. The fact remains when market forces cause harm, they are properly seen as private harm, and citizens have a possibility of nonviolent redress IF the government has a functioning court system, which we arguably do not. But when the harm is done by government it is harm that is enforced by men with guns and a legal monopoly on the use of force, against which there is no hope of redress.
"My beef is with your blanket statement denunciation of the public sector."
Well then you're gonna have to go ahead and have a beef, because the public sector should be expelled from about 80% of what it's now doing. Government, by its very nature, attracts corruption. Since it has a legal monopoly on the use of force, corrupt men will seek rent. My wish to minimize government is based on my desire to minimize the impact of corruption on my affairs.
"The Canadian State organizes healthcare for Canadians. It might do a somewhat better job, but all Canadians get basic healthcare through the state. Without "murder" or "ruthlessness"."
If you think the Canadian government's defense of its public system is not ruthless, please review Chaoulli v. Quebec, where a citizen had to sue the government, alleging deprivation of right to life. What if he had died in the meantime? The government's prohibition on private health care sounds pretty ruthless to me, and if it had resulted in death, not quite murderous.
"Moreover, we've seen in our recent meltdown that markets don't organize themselves. The ideologues who argued that OTC derivative should be traded offshore and be subject to no regulation now sing a very different tune. Among the many roles of the State, organizing transparent and fair markets is among the most important (and the most ancient)."
The banks in fact organized themselves based on their reasonable expectations of being bailed out by stealing from the taxpayer, via the government, which they own via campaign contributions. This is what I want to end, not the freedom of markets to allocate resources.
The difference being there is no monopoly on coercive power (the use of violence) to one central power. Call it competition among governance, where people can choose to reject one "organized community" for another that is more favorable to him/her. Your description can fit within anarcho-capitalist's views so long as contributions to said governing bodies are voluntary.
"I said nothing about central banking. I would note only that central banking is not where banking started. Central banking exists as a response to the many financial crises that occurred before it. Without a lender of last resort, all banks are subject to bank runs . . . "
A response that has been disastrous. Giving banks a lender of last resort creates a moral hazard and encourages risk-taking. As a result of fractional reserve banking, artificially low interest rates, FDIC insurance, etc, we have had huge bubbles and bank runs on the taxpayer as a result -- oh, and over 97% debasement of the dollar vs. less than 10% during our 80 years with no central bank in the 19th century.
I can think of one country today that has existed for over a century with no central bank: Panama. When they became independent in 1903, they included this little phrase in their Constitution that stated, "There will be no forced fiat paper currency in the Republic. Thus, any individual can reject any note that he may deem untrustworthy." Yes, they certainly have had their share of corrupt governments (imagine that) but they have never had a financial crisis and their inflation has averaged about 1% -- mostly because they accept U.S. dollars as legal tender. Their banks behave very conservatively because they don't have daddy to pay for their crashed car. The ones that do behave poorly get liquidated and any setbacks caused by it are corrected quickly be the free market.
I wanted to clarify that I believe the reason Panama has had any inflation at all is due to their acceptance of the US dollar which, as everyone knows, has inflated quite a lot.
Someone asked :"who in his right mind would buy the toxic mortgaged backed securities".
Let me tell you who would gladly buy the underlying morgage debt for cents on the dollar: the indebted home owners themselves!
If the panicky market valuation of "toxic" assets is at the heart of the need for bank bailouts and the issuing of more government debt, and the current market for these assets is not providing realistic pricing, then the US would do well to look at the Danish system of mortgage financing, where the home owners themselves have the option of buying back their debt.
If the CDO's could be untangled enough to yield lists of home owners that owe the debt, surely many of them would be highly interested to buy their debt off at more than 30 ct on the dollar!
(Online) auctions would quickly show the true market values, and this would help all banks in the process of "mark to market".
It might well be that a lot less bailout funding would be needed.
Adopting the Danish model of home financing would also go a long way to prevent such a mess in the future.
Unfortunately for our politicians and for us American people, the present US financial system is broken beyond a repair.
The other vary negative variable in the present world economic equation is that the present neocolonial world economy based on the Western reserve currencies is about to fall apart.
Consequently, it appears that we are heading for a major economic & political break down with civil unrest and wars. [Iraq is one of them]
On Feb 12 03:05 PM SW Richmond wrote:
>
> Now you're putting words in my mouth. Read my second post. I nowhere
> suggested that society can get by without government. In fact, I
> suggested exactly the opposite. Anyone can make an effective target
> out of a Strawman. If you wish to discredit my arguments, then you
> must restrict your activities to discrediting arguments I've actually
> made.
Your statement was "Government actions can certainly NEVER be described as "effectively organizing our society".
That's your statement. Its wrong. I'm not attacking a "strawman", I'm quoting your statement, and providing abundant historical evidence that its incorrect.
@Mashuri
"I can think of one country today that has existed for over a century with no central bank: Panama."
Um.. . do you know _why_ Panama has no central bank? Because they run their economy in US Dollars! Citing a tiny nation which is effectively the economic colony of a superpower, which runs their nation's economy in the currency of the nation which _does_ have a central bank hardly proves that we can dispense with central banks!
The US has a central bank. The UK has a central bank China has a central bank. Russia has a central bank. Europe now has a Central Bank. Nations ranging from hard right to hard left all have recognized that a central bank makes sense.
Do they all do a good job, all the time?
No
Does anyone serious believe that means they can be dispensed with?
No.
Rather than continuing to focus on the one very narrow semantic point which I granted long ago, why don't you try to respond to my growing list of criticisms of the remainder of your contentions? Can you?
I'm not going to crawl around in the mud with you if cannot engage in an ongoing and expanding discussion.
Do they all do a good job, all the time?
No
Does anyone serious believe that means they can be dispensed with?
No."
I fervently believe it. Central banks are the very instruments of expansive government policy. Central banks provide the means for theft-by-inflation, and make it possible for government to finance wars. VietNam is one historic example, which directly caused the death of Bretton Woods and Nixon's closing the gold window.
You should study history before you make such unsupportable blanket statements.