Friday, March 12, 2021

Sure, Throw More Oil To The Fire

 The ECB's Mrs. Lagarde is concerned and determined.  Concerned about the ongoing increase in bond interest rates and determined to stop it.  How? By buying even more bonds, of course!  

Right... let's follow the logic here: interest rates are going up because sane and rational bond investors see the flood of new money being printed by the Fed and ECB creating significant monetary-driven inflation.  Commodity prices are already spiking alarmingly, there are massive shortages of memory chips and sea transport rates are climbing very fast.  In our highly interconnected, just-in-time manufacturing and delivery economic system it is only a matter of time - a very short time - until consumer prices start spiking, too.  For example, crude oil prices are now the highest in three years - you can't really expect the Saudis to sit idly by and sell their oil for depreciating dollars.  

Back to Mrs. Lagarde: buying even more  government bonds, even if only pre-existing ones from the secondary market, is not going to make Bond Vigilantes any happier.  Oh sure, they will be very happy to hit ECB's bids and unload as much of their portfolios as the ECB will buy - but they're not going to buy any more new ones at auction. At least nothing longer than 3-5 years MAXIMUM.  

So, two things: 

  • Mrs. Lagarde is losing her cool.  Talk is cheap: if you want to bring bond rates down ADJUST YOUR MONETARY POLICY, or be prepared to buy trillions in long bonds. And then, watch them depreciate fast.
  • ECB buying more new bonds at auction will just add to the money stock, ie create even more monetary inflation - exactly what the bond market is currently worried about.

In short, Mrs. Lagarde is NOT calming the market and, in fact, she's making things worse.  

That's the problem with political wonks... never having worked in a real life dealing room they think their title and words alone will make markets do their bidding.  Well, it just ain't so...


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