Image above: The movie moment when Dorothy confronts the Wizard of Oz. From (http://blog.mrm.org/2007/09/excommunicated-for-apostasy)
By Ilargi on 10 April 2010 in The Automatic Earth -
(http://theautomaticearth.blogspot.com/2010/04/april-10-2010-dorothy-theory-bonds-run.html)
Say what you will about finance policy decisions coming from Washington since Barack Obama took over as president, they have at least been consistent. No financial institution has been allowed to fail, no executive but Bernard Madoff has been persecuted, and no accounting rule that could potentially be harmful to Wall Street has been left untouched. These policies have put at risk so many trillions of dollars in taxpayer funds that it wouldn’t be terribly surprising if by now literally nobody has been able to keep count.
The main result of it all is a mirage resembling an economic recovery, an image best exemplified by the US stock exchange, the perhaps easiest-to-manipulate segment of the economy. Not that there's no manipulation of data concerning unemployment, foreclosures, home sales or overall productivity; it's just that despite the manipulation, these segments still look awful. And there is exactly zero chance that this will improve in any significant way anytime soon.
If and when the idea takes hold that home prices would seem to stabilize, large numbers of thus far unaccounted-for homes from the 10 million+ shadow inventory will come on the market, quickly overwhelming both demand and price recovery. A similar development will take place if employment numbers appear to pick up: millions will start looking for jobs that have fallen off the radar in the past 2-3 years simply because they had given up all hope. Latent demand is a known economic term; latent supply is just as real. Not counting large numbers of unemployed and large numbers of empty homes is also a type of bad accounting.
The main reason why there is no recovery, despite what anyone might claim, is that there is no way the economy could possibly keep its bearings, let alone recover, without gigantic additional injections of taxpayer money, to the tune of many more trillions of dollars. The present fake recovery does nothing to enhance the real underlying values of the toxic paper and toxic loans that linger inside the vaults of the real economy, many of which can best be typified as zombie vaults.
Since there is no sign whatsoever that the Obama administration has any intentions at all to change its tack, the task of financial truth-finding has now shifted to those markets the government can no longer ignore, and must now turn to in order to finance its rapidly growing debts and deficits: the bond markets. And what a spectacle it promises to be.
The US is set to issue record amounts of Treasuries. But so is about every single other country, And state, and municipality, and many if not most corporations. Will there be enough demand in the international markets for such a supply overdose? Well, yes, sure, as long as the rewards are good enough. The Greek debt that yielded 8% this week is but a perhaps slightly premature messenger of what's to come. US issuance didn't exactly go without a glitch either. Yields reached 4%. And it's only April.
To keep the charade going, Washington has one more trick up it sleeve that may well be known to future historians as the single biggest transfer of public to private capital. Morgan Stanley's analysts foresee a Treasury yield approaching 5.5% by the end of 2010, but there doesn't seem to be any particular reason why it would halt there. It's just about infinitely more important to sell the debt today than to worry about tomorrow's interest payments.
That, combined with the Federal Reserve's resolve to keep base rates at record lows, provides the White House with a neat little scheme that could both make sure its debt is sold, and boost bank capital at the same time. It's not something new, either, but it could be made to grow considerably. Wall Street banks can borrow from the Fed at 0.25%-0.5% right now, then walk a few -virtual- blocks down the street to the Treasury Department, buy Treasuries that yield 4% today and likely much more in the months and years to come, and basically sit on their hands while the money flows in.
This could in theory go on until cracks appear in the walls of the vaults. There is of course the obvious risk that it will steer large amounts of capital away from muni bonds and, especially dangerous for Washington's coveted recovery mirage, the stock markets. However, manipulation of the latter has been going on long enough that the fat cats must feel they have this one down, while municipalities can simply be made to pay a premium over sovereign debt, and too bad boo-hoo-hoo if that starts running into double digits.
Once the inner workings of the scheme become public knowledge, and it may take a while, the defense will be that the end justifies the means, and glorious graphs and stats will be presented, intended to prove beyond a doubt that the recovery works, that Bernanke is a genius worth of an Economics Fauxbel, and that growth is the only way out of the mess the decision makers themselves created.
The only people worse off on account of it all, we the people, won't be able to figure out what on earth has happened until it's about a lightyear too late . And some bespectacled age-old wrinkled wizard will be drawn from behind the curtain to solemnly declare that nobody did foresee, nor even could have foreseen, this terribly unfortunate outcome. And that the theory they based themselves on is still solid as a rock. It’s just that pesky real world that keeps interfering. And now, if he may be excused, he's got a late plane to catch to Paraguay.
There is of course also another outcome possible, what we might call the Dorothy Theory: that someone stands up and insists vigorously to see the wizard at work before he's done manipulating. Experiences of the past few years don't leave all that much hope, however. We find the mirage recovery easier, more appealing and instantly fulfilling than an arduous quest for what the world looks like when it’s not manipulated. And if we keep that up, we won’t find a heart, or courage, let alone a brain. We’ll instead find ourselves broke and broken.
Say what you will about finance policy decisions coming from Washington since Barack Obama took over as president, they have at least been consistent. No financial institution has been allowed to fail, no executive but Bernard Madoff has been persecuted, and no accounting rule that could potentially be harmful to Wall Street has been left untouched. These policies have put at risk so many trillions of dollars in taxpayer funds that it wouldn’t be terribly surprising if by now literally nobody has been able to keep count.
The main result of it all is a mirage resembling an economic recovery, an image best exemplified by the US stock exchange, the perhaps easiest-to-manipulate segment of the economy. Not that there's no manipulation of data concerning unemployment, foreclosures, home sales or overall productivity; it's just that despite the manipulation, these segments still look awful. And there is exactly zero chance that this will improve in any significant way anytime soon.
If and when the idea takes hold that home prices would seem to stabilize, large numbers of thus far unaccounted-for homes from the 10 million+ shadow inventory will come on the market, quickly overwhelming both demand and price recovery. A similar development will take place if employment numbers appear to pick up: millions will start looking for jobs that have fallen off the radar in the past 2-3 years simply because they had given up all hope. Latent demand is a known economic term; latent supply is just as real. Not counting large numbers of unemployed and large numbers of empty homes is also a type of bad accounting.
The main reason why there is no recovery, despite what anyone might claim, is that there is no way the economy could possibly keep its bearings, let alone recover, without gigantic additional injections of taxpayer money, to the tune of many more trillions of dollars. The present fake recovery does nothing to enhance the real underlying values of the toxic paper and toxic loans that linger inside the vaults of the real economy, many of which can best be typified as zombie vaults.
Since there is no sign whatsoever that the Obama administration has any intentions at all to change its tack, the task of financial truth-finding has now shifted to those markets the government can no longer ignore, and must now turn to in order to finance its rapidly growing debts and deficits: the bond markets. And what a spectacle it promises to be.
The US is set to issue record amounts of Treasuries. But so is about every single other country, And state, and municipality, and many if not most corporations. Will there be enough demand in the international markets for such a supply overdose? Well, yes, sure, as long as the rewards are good enough. The Greek debt that yielded 8% this week is but a perhaps slightly premature messenger of what's to come. US issuance didn't exactly go without a glitch either. Yields reached 4%. And it's only April.
To keep the charade going, Washington has one more trick up it sleeve that may well be known to future historians as the single biggest transfer of public to private capital. Morgan Stanley's analysts foresee a Treasury yield approaching 5.5% by the end of 2010, but there doesn't seem to be any particular reason why it would halt there. It's just about infinitely more important to sell the debt today than to worry about tomorrow's interest payments.
That, combined with the Federal Reserve's resolve to keep base rates at record lows, provides the White House with a neat little scheme that could both make sure its debt is sold, and boost bank capital at the same time. It's not something new, either, but it could be made to grow considerably. Wall Street banks can borrow from the Fed at 0.25%-0.5% right now, then walk a few -virtual- blocks down the street to the Treasury Department, buy Treasuries that yield 4% today and likely much more in the months and years to come, and basically sit on their hands while the money flows in.
This could in theory go on until cracks appear in the walls of the vaults. There is of course the obvious risk that it will steer large amounts of capital away from muni bonds and, especially dangerous for Washington's coveted recovery mirage, the stock markets. However, manipulation of the latter has been going on long enough that the fat cats must feel they have this one down, while municipalities can simply be made to pay a premium over sovereign debt, and too bad boo-hoo-hoo if that starts running into double digits.
Once the inner workings of the scheme become public knowledge, and it may take a while, the defense will be that the end justifies the means, and glorious graphs and stats will be presented, intended to prove beyond a doubt that the recovery works, that Bernanke is a genius worth of an Economics Fauxbel, and that growth is the only way out of the mess the decision makers themselves created.
The only people worse off on account of it all, we the people, won't be able to figure out what on earth has happened until it's about a lightyear too late . And some bespectacled age-old wrinkled wizard will be drawn from behind the curtain to solemnly declare that nobody did foresee, nor even could have foreseen, this terribly unfortunate outcome. And that the theory they based themselves on is still solid as a rock. It’s just that pesky real world that keeps interfering. And now, if he may be excused, he's got a late plane to catch to Paraguay.
There is of course also another outcome possible, what we might call the Dorothy Theory: that someone stands up and insists vigorously to see the wizard at work before he's done manipulating. Experiences of the past few years don't leave all that much hope, however. We find the mirage recovery easier, more appealing and instantly fulfilling than an arduous quest for what the world looks like when it’s not manipulated. And if we keep that up, we won’t find a heart, or courage, let alone a brain. We’ll instead find ourselves broke and broken.
.
Dorothy Theory Financial Ruin
SUBHEAD: That's what happens when someone insists to see the wizard's work manipulating the economy before he's done.
Image above: The movie moment when Dorothy confronts the Wizard of Oz. From (http://blog.mrm.org/2007/09/excommunicated-for-apostasy)
By Ilargi on 10 April 2010 in The Automatic Earth -
(http://theautomaticearth.blogspot.com/2010/04/april-10-2010-dorothy-theory-bonds-run.html)
Say what you will about finance policy decisions coming from Washington since Barack Obama took over as president, they have at least been consistent. No financial institution has been allowed to fail, no executive but Bernard Madoff has been persecuted, and no accounting rule that could potentially be harmful to Wall Street has been left untouched. These policies have put at risk so many trillions of dollars in taxpayer funds that it wouldn’t be terribly surprising if by now literally nobody has been able to keep count.
The main result of it all is a mirage resembling an economic recovery, an image best exemplified by the US stock exchange, the perhaps easiest-to-manipulate segment of the economy. Not that there's no manipulation of data concerning unemployment, foreclosures, home sales or overall productivity; it's just that despite the manipulation, these segments still look awful. And there is exactly zero chance that this will improve in any significant way anytime soon.
If and when the idea takes hold that home prices would seem to stabilize, large numbers of thus far unaccounted-for homes from the 10 million+ shadow inventory will come on the market, quickly overwhelming both demand and price recovery. A similar development will take place if employment numbers appear to pick up: millions will start looking for jobs that have fallen off the radar in the past 2-3 years simply because they had given up all hope. Latent demand is a known economic term; latent supply is just as real. Not counting large numbers of unemployed and large numbers of empty homes is also a type of bad accounting.
The main reason why there is no recovery, despite what anyone might claim, is that there is no way the economy could possibly keep its bearings, let alone recover, without gigantic additional injections of taxpayer money, to the tune of many more trillions of dollars. The present fake recovery does nothing to enhance the real underlying values of the toxic paper and toxic loans that linger inside the vaults of the real economy, many of which can best be typified as zombie vaults.
Since there is no sign whatsoever that the Obama administration has any intentions at all to change its tack, the task of financial truth-finding has now shifted to those markets the government can no longer ignore, and must now turn to in order to finance its rapidly growing debts and deficits: the bond markets. And what a spectacle it promises to be.
The US is set to issue record amounts of Treasuries. But so is about every single other country, And state, and municipality, and many if not most corporations. Will there be enough demand in the international markets for such a supply overdose? Well, yes, sure, as long as the rewards are good enough. The Greek debt that yielded 8% this week is but a perhaps slightly premature messenger of what's to come. US issuance didn't exactly go without a glitch either. Yields reached 4%. And it's only April.
To keep the charade going, Washington has one more trick up it sleeve that may well be known to future historians as the single biggest transfer of public to private capital. Morgan Stanley's analysts foresee a Treasury yield approaching 5.5% by the end of 2010, but there doesn't seem to be any particular reason why it would halt there. It's just about infinitely more important to sell the debt today than to worry about tomorrow's interest payments.
That, combined with the Federal Reserve's resolve to keep base rates at record lows, provides the White House with a neat little scheme that could both make sure its debt is sold, and boost bank capital at the same time. It's not something new, either, but it could be made to grow considerably. Wall Street banks can borrow from the Fed at 0.25%-0.5% right now, then walk a few -virtual- blocks down the street to the Treasury Department, buy Treasuries that yield 4% today and likely much more in the months and years to come, and basically sit on their hands while the money flows in.
This could in theory go on until cracks appear in the walls of the vaults. There is of course the obvious risk that it will steer large amounts of capital away from muni bonds and, especially dangerous for Washington's coveted recovery mirage, the stock markets. However, manipulation of the latter has been going on long enough that the fat cats must feel they have this one down, while municipalities can simply be made to pay a premium over sovereign debt, and too bad boo-hoo-hoo if that starts running into double digits.
Once the inner workings of the scheme become public knowledge, and it may take a while, the defense will be that the end justifies the means, and glorious graphs and stats will be presented, intended to prove beyond a doubt that the recovery works, that Bernanke is a genius worth of an Economics Fauxbel, and that growth is the only way out of the mess the decision makers themselves created.
The only people worse off on account of it all, we the people, won't be able to figure out what on earth has happened until it's about a lightyear too late . And some bespectacled age-old wrinkled wizard will be drawn from behind the curtain to solemnly declare that nobody did foresee, nor even could have foreseen, this terribly unfortunate outcome. And that the theory they based themselves on is still solid as a rock. It’s just that pesky real world that keeps interfering. And now, if he may be excused, he's got a late plane to catch to Paraguay.
There is of course also another outcome possible, what we might call the Dorothy Theory: that someone stands up and insists vigorously to see the wizard at work before he's done manipulating. Experiences of the past few years don't leave all that much hope, however. We find the mirage recovery easier, more appealing and instantly fulfilling than an arduous quest for what the world looks like when it’s not manipulated. And if we keep that up, we won’t find a heart, or courage, let alone a brain. We’ll instead find ourselves broke and broken.
Say what you will about finance policy decisions coming from Washington since Barack Obama took over as president, they have at least been consistent. No financial institution has been allowed to fail, no executive but Bernard Madoff has been persecuted, and no accounting rule that could potentially be harmful to Wall Street has been left untouched. These policies have put at risk so many trillions of dollars in taxpayer funds that it wouldn’t be terribly surprising if by now literally nobody has been able to keep count.
The main result of it all is a mirage resembling an economic recovery, an image best exemplified by the US stock exchange, the perhaps easiest-to-manipulate segment of the economy. Not that there's no manipulation of data concerning unemployment, foreclosures, home sales or overall productivity; it's just that despite the manipulation, these segments still look awful. And there is exactly zero chance that this will improve in any significant way anytime soon.
If and when the idea takes hold that home prices would seem to stabilize, large numbers of thus far unaccounted-for homes from the 10 million+ shadow inventory will come on the market, quickly overwhelming both demand and price recovery. A similar development will take place if employment numbers appear to pick up: millions will start looking for jobs that have fallen off the radar in the past 2-3 years simply because they had given up all hope. Latent demand is a known economic term; latent supply is just as real. Not counting large numbers of unemployed and large numbers of empty homes is also a type of bad accounting.
The main reason why there is no recovery, despite what anyone might claim, is that there is no way the economy could possibly keep its bearings, let alone recover, without gigantic additional injections of taxpayer money, to the tune of many more trillions of dollars. The present fake recovery does nothing to enhance the real underlying values of the toxic paper and toxic loans that linger inside the vaults of the real economy, many of which can best be typified as zombie vaults.
Since there is no sign whatsoever that the Obama administration has any intentions at all to change its tack, the task of financial truth-finding has now shifted to those markets the government can no longer ignore, and must now turn to in order to finance its rapidly growing debts and deficits: the bond markets. And what a spectacle it promises to be.
The US is set to issue record amounts of Treasuries. But so is about every single other country, And state, and municipality, and many if not most corporations. Will there be enough demand in the international markets for such a supply overdose? Well, yes, sure, as long as the rewards are good enough. The Greek debt that yielded 8% this week is but a perhaps slightly premature messenger of what's to come. US issuance didn't exactly go without a glitch either. Yields reached 4%. And it's only April.
To keep the charade going, Washington has one more trick up it sleeve that may well be known to future historians as the single biggest transfer of public to private capital. Morgan Stanley's analysts foresee a Treasury yield approaching 5.5% by the end of 2010, but there doesn't seem to be any particular reason why it would halt there. It's just about infinitely more important to sell the debt today than to worry about tomorrow's interest payments.
That, combined with the Federal Reserve's resolve to keep base rates at record lows, provides the White House with a neat little scheme that could both make sure its debt is sold, and boost bank capital at the same time. It's not something new, either, but it could be made to grow considerably. Wall Street banks can borrow from the Fed at 0.25%-0.5% right now, then walk a few -virtual- blocks down the street to the Treasury Department, buy Treasuries that yield 4% today and likely much more in the months and years to come, and basically sit on their hands while the money flows in.
This could in theory go on until cracks appear in the walls of the vaults. There is of course the obvious risk that it will steer large amounts of capital away from muni bonds and, especially dangerous for Washington's coveted recovery mirage, the stock markets. However, manipulation of the latter has been going on long enough that the fat cats must feel they have this one down, while municipalities can simply be made to pay a premium over sovereign debt, and too bad boo-hoo-hoo if that starts running into double digits.
Once the inner workings of the scheme become public knowledge, and it may take a while, the defense will be that the end justifies the means, and glorious graphs and stats will be presented, intended to prove beyond a doubt that the recovery works, that Bernanke is a genius worth of an Economics Fauxbel, and that growth is the only way out of the mess the decision makers themselves created.
The only people worse off on account of it all, we the people, won't be able to figure out what on earth has happened until it's about a lightyear too late . And some bespectacled age-old wrinkled wizard will be drawn from behind the curtain to solemnly declare that nobody did foresee, nor even could have foreseen, this terribly unfortunate outcome. And that the theory they based themselves on is still solid as a rock. It’s just that pesky real world that keeps interfering. And now, if he may be excused, he's got a late plane to catch to Paraguay.
There is of course also another outcome possible, what we might call the Dorothy Theory: that someone stands up and insists vigorously to see the wizard at work before he's done manipulating. Experiences of the past few years don't leave all that much hope, however. We find the mirage recovery easier, more appealing and instantly fulfilling than an arduous quest for what the world looks like when it’s not manipulated. And if we keep that up, we won’t find a heart, or courage, let alone a brain. We’ll instead find ourselves broke and broken.
.
Image above: The movie moment when Dorothy confronts the Wizard of Oz. From (http://blog.mrm.org/2007/09/excommunicated-for-apostasy)
By Ilargi on 10 April 2010 in The Automatic Earth -
(http://theautomaticearth.blogspot.com/2010/04/april-10-2010-dorothy-theory-bonds-run.html)
Say what you will about finance policy decisions coming from Washington since Barack Obama took over as president, they have at least been consistent. No financial institution has been allowed to fail, no executive but Bernard Madoff has been persecuted, and no accounting rule that could potentially be harmful to Wall Street has been left untouched. These policies have put at risk so many trillions of dollars in taxpayer funds that it wouldn’t be terribly surprising if by now literally nobody has been able to keep count.
The main result of it all is a mirage resembling an economic recovery, an image best exemplified by the US stock exchange, the perhaps easiest-to-manipulate segment of the economy. Not that there's no manipulation of data concerning unemployment, foreclosures, home sales or overall productivity; it's just that despite the manipulation, these segments still look awful. And there is exactly zero chance that this will improve in any significant way anytime soon.
If and when the idea takes hold that home prices would seem to stabilize, large numbers of thus far unaccounted-for homes from the 10 million+ shadow inventory will come on the market, quickly overwhelming both demand and price recovery. A similar development will take place if employment numbers appear to pick up: millions will start looking for jobs that have fallen off the radar in the past 2-3 years simply because they had given up all hope. Latent demand is a known economic term; latent supply is just as real. Not counting large numbers of unemployed and large numbers of empty homes is also a type of bad accounting.
The main reason why there is no recovery, despite what anyone might claim, is that there is no way the economy could possibly keep its bearings, let alone recover, without gigantic additional injections of taxpayer money, to the tune of many more trillions of dollars. The present fake recovery does nothing to enhance the real underlying values of the toxic paper and toxic loans that linger inside the vaults of the real economy, many of which can best be typified as zombie vaults.
Since there is no sign whatsoever that the Obama administration has any intentions at all to change its tack, the task of financial truth-finding has now shifted to those markets the government can no longer ignore, and must now turn to in order to finance its rapidly growing debts and deficits: the bond markets. And what a spectacle it promises to be.
The US is set to issue record amounts of Treasuries. But so is about every single other country, And state, and municipality, and many if not most corporations. Will there be enough demand in the international markets for such a supply overdose? Well, yes, sure, as long as the rewards are good enough. The Greek debt that yielded 8% this week is but a perhaps slightly premature messenger of what's to come. US issuance didn't exactly go without a glitch either. Yields reached 4%. And it's only April.
To keep the charade going, Washington has one more trick up it sleeve that may well be known to future historians as the single biggest transfer of public to private capital. Morgan Stanley's analysts foresee a Treasury yield approaching 5.5% by the end of 2010, but there doesn't seem to be any particular reason why it would halt there. It's just about infinitely more important to sell the debt today than to worry about tomorrow's interest payments.
That, combined with the Federal Reserve's resolve to keep base rates at record lows, provides the White House with a neat little scheme that could both make sure its debt is sold, and boost bank capital at the same time. It's not something new, either, but it could be made to grow considerably. Wall Street banks can borrow from the Fed at 0.25%-0.5% right now, then walk a few -virtual- blocks down the street to the Treasury Department, buy Treasuries that yield 4% today and likely much more in the months and years to come, and basically sit on their hands while the money flows in.
This could in theory go on until cracks appear in the walls of the vaults. There is of course the obvious risk that it will steer large amounts of capital away from muni bonds and, especially dangerous for Washington's coveted recovery mirage, the stock markets. However, manipulation of the latter has been going on long enough that the fat cats must feel they have this one down, while municipalities can simply be made to pay a premium over sovereign debt, and too bad boo-hoo-hoo if that starts running into double digits.
Once the inner workings of the scheme become public knowledge, and it may take a while, the defense will be that the end justifies the means, and glorious graphs and stats will be presented, intended to prove beyond a doubt that the recovery works, that Bernanke is a genius worth of an Economics Fauxbel, and that growth is the only way out of the mess the decision makers themselves created.
The only people worse off on account of it all, we the people, won't be able to figure out what on earth has happened until it's about a lightyear too late . And some bespectacled age-old wrinkled wizard will be drawn from behind the curtain to solemnly declare that nobody did foresee, nor even could have foreseen, this terribly unfortunate outcome. And that the theory they based themselves on is still solid as a rock. It’s just that pesky real world that keeps interfering. And now, if he may be excused, he's got a late plane to catch to Paraguay.
There is of course also another outcome possible, what we might call the Dorothy Theory: that someone stands up and insists vigorously to see the wizard at work before he's done manipulating. Experiences of the past few years don't leave all that much hope, however. We find the mirage recovery easier, more appealing and instantly fulfilling than an arduous quest for what the world looks like when it’s not manipulated. And if we keep that up, we won’t find a heart, or courage, let alone a brain. We’ll instead find ourselves broke and broken.
Say what you will about finance policy decisions coming from Washington since Barack Obama took over as president, they have at least been consistent. No financial institution has been allowed to fail, no executive but Bernard Madoff has been persecuted, and no accounting rule that could potentially be harmful to Wall Street has been left untouched. These policies have put at risk so many trillions of dollars in taxpayer funds that it wouldn’t be terribly surprising if by now literally nobody has been able to keep count.
The main result of it all is a mirage resembling an economic recovery, an image best exemplified by the US stock exchange, the perhaps easiest-to-manipulate segment of the economy. Not that there's no manipulation of data concerning unemployment, foreclosures, home sales or overall productivity; it's just that despite the manipulation, these segments still look awful. And there is exactly zero chance that this will improve in any significant way anytime soon.
If and when the idea takes hold that home prices would seem to stabilize, large numbers of thus far unaccounted-for homes from the 10 million+ shadow inventory will come on the market, quickly overwhelming both demand and price recovery. A similar development will take place if employment numbers appear to pick up: millions will start looking for jobs that have fallen off the radar in the past 2-3 years simply because they had given up all hope. Latent demand is a known economic term; latent supply is just as real. Not counting large numbers of unemployed and large numbers of empty homes is also a type of bad accounting.
The main reason why there is no recovery, despite what anyone might claim, is that there is no way the economy could possibly keep its bearings, let alone recover, without gigantic additional injections of taxpayer money, to the tune of many more trillions of dollars. The present fake recovery does nothing to enhance the real underlying values of the toxic paper and toxic loans that linger inside the vaults of the real economy, many of which can best be typified as zombie vaults.
Since there is no sign whatsoever that the Obama administration has any intentions at all to change its tack, the task of financial truth-finding has now shifted to those markets the government can no longer ignore, and must now turn to in order to finance its rapidly growing debts and deficits: the bond markets. And what a spectacle it promises to be.
The US is set to issue record amounts of Treasuries. But so is about every single other country, And state, and municipality, and many if not most corporations. Will there be enough demand in the international markets for such a supply overdose? Well, yes, sure, as long as the rewards are good enough. The Greek debt that yielded 8% this week is but a perhaps slightly premature messenger of what's to come. US issuance didn't exactly go without a glitch either. Yields reached 4%. And it's only April.
To keep the charade going, Washington has one more trick up it sleeve that may well be known to future historians as the single biggest transfer of public to private capital. Morgan Stanley's analysts foresee a Treasury yield approaching 5.5% by the end of 2010, but there doesn't seem to be any particular reason why it would halt there. It's just about infinitely more important to sell the debt today than to worry about tomorrow's interest payments.
That, combined with the Federal Reserve's resolve to keep base rates at record lows, provides the White House with a neat little scheme that could both make sure its debt is sold, and boost bank capital at the same time. It's not something new, either, but it could be made to grow considerably. Wall Street banks can borrow from the Fed at 0.25%-0.5% right now, then walk a few -virtual- blocks down the street to the Treasury Department, buy Treasuries that yield 4% today and likely much more in the months and years to come, and basically sit on their hands while the money flows in.
This could in theory go on until cracks appear in the walls of the vaults. There is of course the obvious risk that it will steer large amounts of capital away from muni bonds and, especially dangerous for Washington's coveted recovery mirage, the stock markets. However, manipulation of the latter has been going on long enough that the fat cats must feel they have this one down, while municipalities can simply be made to pay a premium over sovereign debt, and too bad boo-hoo-hoo if that starts running into double digits.
Once the inner workings of the scheme become public knowledge, and it may take a while, the defense will be that the end justifies the means, and glorious graphs and stats will be presented, intended to prove beyond a doubt that the recovery works, that Bernanke is a genius worth of an Economics Fauxbel, and that growth is the only way out of the mess the decision makers themselves created.
The only people worse off on account of it all, we the people, won't be able to figure out what on earth has happened until it's about a lightyear too late . And some bespectacled age-old wrinkled wizard will be drawn from behind the curtain to solemnly declare that nobody did foresee, nor even could have foreseen, this terribly unfortunate outcome. And that the theory they based themselves on is still solid as a rock. It’s just that pesky real world that keeps interfering. And now, if he may be excused, he's got a late plane to catch to Paraguay.
There is of course also another outcome possible, what we might call the Dorothy Theory: that someone stands up and insists vigorously to see the wizard at work before he's done manipulating. Experiences of the past few years don't leave all that much hope, however. We find the mirage recovery easier, more appealing and instantly fulfilling than an arduous quest for what the world looks like when it’s not manipulated. And if we keep that up, we won’t find a heart, or courage, let alone a brain. We’ll instead find ourselves broke and broken.
.
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