MIA: Bond Vigilantes

Following up on a previous matter, Karl Denninger  posted what is supposed to pass for a rebuttal to my recent post on government spending. To my eyes, as Jay Bookman so aptly put it, it looks like “the octopus trick, squirting black ink to cloud your retreat.” True enough. Anyway, done with that discussion.

Paul Krugman presents a chart in his new book, End This Depression Now, that just screamed at me for replication and a bit of enhancement, so here it is. Professor Krugman wrote about the ongoing cries of the bond vigilantes, who have been warning for about three years running that we were on the cusp of runaway inflation and skyrocketing interest rates any day now. I have documented this a bit myself over the past three years (in response to Bowyer and Laffer  here in July 2009, and again here last year), but Professor Krugman’s chart inspired me to revisit this topic.

Below is a chart of the US 10-year Treasury, including clearly marked points in time at which we heard from various vigilantes (including, regrettably, President Obama). The 10-year yield at the time of the comment is indicated.

Source: St. Louis Fed, Series DGS10. Markers placed on a best efforts basis.

In chronological order:

May 2009, The Wall Street Journal, The Bond Vigilantes. 3.67 10-year. Money shot:

It’s not going too far to say we are watching a showdown between Fed Chairman Ben Bernanke and bond investors, otherwise known as the financial markets. When in doubt, bet on the markets. [Ed. note: Assuming the Journal still believes an investor’s best bet is “on the markets,” what would be its advice now with a ~1.84 (May 8 close) 10-year?]

June 2009, Arthur Laffer in The Wall Street Journal, Get Ready for Inflation & Higher Interest Rates. 3.81 10-year. Money shot:

Reduced demand for money combined with rapid growth in money is a surefire recipe for inflation and higher interest rates. The higher interest rates themselves will also further reduce the demand for money, thereby exacerbating inflationary pressures. It’s a catch-22. It’s difficult to estimate the magnitude of the inflationary and interest-rate consequences of the Fed’s actions because, frankly, we haven’t ever seen anything like this in the U.S.

July 2009, Jerry Bowyer, in National Review Online, We’re All Inflation Hawks Now. 3.63 10-year. Money shot:

But what happens when the [monetary] floodgates open? At some point the banks will have to release a river of liquidity. Consumers are demanding it, Congress is demanding it, and even President Obama is demanding it. (That last one may well be the clincher.)

November 2009, President Obama, Interview with Fox News. 3.33 10-year. Money shot:

“I think it is important, though, to recognize if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the U.S. economy in a way that could actually lead to a double-dip recession.”

December 2009, Morgan Stanley Sees 5.5% Note as U.S. Faces Deficits. 3.69 10-year. Money shot:

The surge will push interest rates on 30-year fixed mortgages to 7.5 percent to 8 percent, almost the highest in a decade, Greenlaw said.

March 2010, Wall Street Journal (as a news story, not an editorial), Debt Fears Send Rates Up. 3.84 10-year. Money shot:

And some argue that the bond market has been too confident about these longer-term rates remaining low, at a time when the economy is slowly improving and the government is running huge budget deficits.

April 2011, Bond King Bill Gross, LA Times, Gross Boosts Bet That Treasury Bond Yields Will Surge. Even the best and brightest make mistakes. 3.52 10-year. Money shot:

As the U.S. Treasury gets set to issue another $66 billion in notes and bonds this week, Pimco bond guru Bill Gross has a message for potential buyers: Stay away.

August 2011, Standard & Poor’s downgrades the credit rating of the United States. ~2.50 10-year.

Now, there’s getting it wrong because you modeled it wrong, and getting it wrong because you’re a political operative first and economist or market pundit second. Both are on display above. The political operatives, who to this day are still making noise about Weimar in the United States tomorrow, simply refuse to acknowledge the mechanics of a liquidity trap. I know Gross, to his great credit,  has done some very public navel-gazing on this matter. Too bad the same can’t be said for the likes of Bowyer, Laffer, or the Journal.

@TBPInvictus