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Ambrose Evans-Pritchard: Why the Fed will again have to slash rates to zero and relaunch QE
By Ambrose Evans-Pritchard
The Telegraph, London
Friday, October 6, 2023
The U.S. economic expansion is being kept afloat only by extreme fiscal stimulus and war-time deficits, an astonishing state of affairs at the top of the cycle.
The federal government is unable to fund this scale of borrowing from U.S. domestic savings, and global creditors are no longer willing to fund it either at bearable cost.
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The violent spike in U.S. Treasury yields over the last two months has nothing to do with inflation, which has been falling faster than markets expected.
Real rates are rocketing, driven by a sudden jump in the "term premium." Think of it as a credit crunch being imposed upon a feckless political class in Washington by global bond vigilantes.
A very slow-burning fuse has finally, and suddenly, reached the powder keg, confirming the Dornbusch adage that financial crises always take longer than you think, but then unfold much faster than you expected.
Bernard Connolly, the world's foremost Wicksellian economist, says the U.S. fiscal bubble is the latest in a long string of bubbles required to keep Western economies above water. "If the fiscal deficit is reduced, the Federal Reserve will have to collapse interest rates," he said.
As the international capital markets pull the plug on U.S. fiscal incontinence, the Fed will again have to come to the rescue. It will have to restore negative real rates and blanket the debt markets with quantitative easing à outrance, or risk an economic depression. This in turn will launch the next QE bubble. ...
So where do you turn? Sooner or later the U.S. economy will snap, and the world economy will snap with it, and this will short-circuit the rise in bond yields.
You could do worse than buying 20-year or 30-year Treasuries, gilts, bunds, or French OATs, at a fraction of face value. You hold tight until central banks slash rates and abandon QT, realising how much they have over-tightened (too late, my friends), and then flip all the way to QE, this time by another name to fool us for a while.
For the brave, the contrarian bunt of the moment is Austria's 100-year bond, trading today at 4% of face value, the perfect QE play.
Or if you want a plain-vanilla defence against spiralling deficits and financial repression, just buy gold.
... For the remainder of the analysis:
https://www.telegraph.co.uk/business/2023/10/06/why-fed-will-again-slash-rates-zero-relaunch-qe/
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