Why did QE cause treasuries price to drop and not increase?

Discussion in 'Economics' started by Newmoney24, Dec 13, 2012.

  1. plyka


    First of all, we need a sense of proportion. Interest rates are low, they are very low. In fact, they are historically low. And the reason they are so low is because the FED is doing all the buying. Even not counting all the buying the FED is doing, the money they create is slushing around the system, a lot of it going back into government debt. Theoretically, the FED could cause the price of bonds to go to infinity and interest rates to plunge into negative territory if they purchased enough. Bonds are like any other instrument, their price is based on supply and demand and if the FED prints enough money and buys enough bonds, they can take their prices where ever they want. Of course what is holding them back is the price of the $$ (value of). That's the limiter on the FEDs actions. They could do whatever they want with the price of government debt, but they do not have the same control on the value of the $$.

    So watching bonds is good, but the real tell is the value of the $$. Once that starts to fail, the FED will have to take action to stop the fall. The only action they can take is to decrease the supply of money by selling their bonds. At that point, interest rates will spike higher. But until then, the FED will have all interest rates extremely low.
    #21     Dec 14, 2012
  2. plyka


    What you're saying makes little to no sense. The FED does not have the power to "amortize catastrophe." That's not possible. There are real losses in the system, the FED does not have the ability to make those losses disappear. They have the power to socialize those losses by buying the worthless assets at full value, which is what they have been doing. This doesn't amortize the losses. This socializes the losses from the individuals/institutions which lost, to the holders of the currency.

    And they will not unwind their portfolio by holding to maturity. They literally have no power to do any of that because selling/buying assets is out of control once the FED funds target rate is set. They have no power to sell or buy anything, it is decided for them by the market after they have set their FED funds target rate. If the FED funds rate wants to rise, they will buy more government bonds to bring that rate back to their target rate. The decision to unwind their balance sheet is made by setting their target on the FED funds, not on anything else.
    #22     Dec 14, 2012
  3. Ed Breen

    Ed Breen

    Plyka, you didn't understand anything I wrote. I think I wrote it very clearly and simply. You read what I wrote and then started asserting that the Fed actions were keeping interest rates low and that the issue was all about supply and demand of treasuries. We are too far apart for me to try and explain again to your what is going on. I told you and you didn't get, so be it. I don't have time or patience to go through it again. If you have a specific rebutle on some point I asserted I will respond, otherwise good luck.
    #23     Dec 14, 2012