For My Next Trick…

When policy makers ran into the zero bound the long slog into quantitative easing public relations began.  Now, several years later, the great Ray Dalio calls this process a "beautiful de-leveraging." The key characteristic of which is a nominal growth rate greater than the nominal interest rate on the debts. We have less eloquently described this as a government pulling of a deceit. If that trick is done well enough, buyers of the debt will clamor for it under the belief they will be smart enough, quick enough and gosh darn it just cool enough  to dump out before the key relationship tips against them.

Thursday, the Fed will address the idea of a bigger monetary program while implicitly admitting it was wrong about the 'stock" theory of QE and is hopping on the much sexier "flow" angle. The Chairman should refer to this as Portfolio Channel Theory for a classic misdirection move. The low rates and tight spreads that QE have already compressed appear to the Fed to need further pressure. We do not agree with them.

Finally, the ASR Biannual survey showed debt balances for the public have shifted down markedly. Those with 0, zip, nada in the debt category jumped to 29 vs 19 2 years prior. Those with debt other than a mortgage? 54 vs 67.  And those that have a mortgage vs 2010? 50% vs 54%.  So where did all the beautifully de-leveraged debts go?  Some were extinguished, most swapped to your Ol' Uncle Sam. That's the purpose of the trick. High pitched and sweaty rants on the "moral" hazard are silly. Monetary pornography is by definition "to sell a journey."  We are heading in the right direction. The FOMC's next trick is to say how far along we are without blowing the illusion on what's already been done.

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