'Blind' Fed Owns More US Treasuries Than China – Ruining Fixed-Income Policy Gauge
By Staff News & Analysis - March 06, 2012

As long as there is confidence in the Fed, the Fed's strategy may pan out, right? Maybe. We don't even question the motives of the Fed. However, we question the Fed's ability to conduct policy when its policy makers are blindfolded. We fear that some of the Fed's most important gauges used to set policy have been taken away, by the Fed itself. – Merk Funds

Dominant Social Theme: If the Fed would only do a better job, things could get better.

Free-Market Analysis: Merk Funds' Axel Merk just issued a commentary in which he points out, astonishingly, that the Fed "now owns more U.S. government debt than China." The ramifications are immense.

Merk has founded several currency funds during the decade and has been, from time to time, a fairly caustic critic of Western, mainstream monetary policy. This article, "Fed Flying Blind," certainly makes some interesting points. Here's one:

The Fed has engaged in Operation Twist, applying the Fed's firepower to lowering rates further out the yield curve (longer term interest rates). Indeed, the Fed now owns over 30% of all outstanding marketable U.S. Treasuries with maturities of 6-10 years; across the yield curve, from Treasury Bills to 30-year Treasury Bonds, the Fed has accumulated almost 20% of all outstanding securities.

This is well written, and shows not just the massiveness of the Fed's current monetary distortion but the larger distortion in the marketplace that the Fed (and other central banking interferences) must inevitably be causing. More on that in a minute.

For Axel Merk, the size of the Fed's intervention is not just startling; it also has practical ramifications involving investors everywhere. We believe the gargantuan nature of the purchases illustrates our contention that the dollar reserve system has basically fallen apart.

Merk worries that the Fed's ability to determine HOW to set monetary policy has been compromised. He writes, "Some of the Fed's most important gauges used to set policy have been taken away – by the Fed itself. We fear the Fed may be flying blind." (See article excerpt above.)

Merk then makes another critical point: "Fed Chair Bernanke told Congress last week that he is puzzled about incoming economic data, unable to explain why the unemployment rate has come down quite so rapidly. Consider the yield curve: typically, yields provide a wealth of information about the health of the economy, about inflationary pressures, to name a few."

And Merk added, "As such, an important feature of the yield curve is that it can sell off, amongst others, should inflationary pressures pick up or should investors be concerned about long-term fiscal sustainability. With the Fed becoming evermore engaged in yield curve management further along the curve, this gauge has been taken away."

Our immediate response to this is that the reason Bernanke cannot figure out income economic data is because the US government's INPUTS are junk. The elites who stand behind Obama are determined to elect him to another term and will skew the economic numbers in whatever direction they have to in order to make the case that he deserves one.

But this latter observation by Merk is one we have not read ANYWHERE else. The Fed is purchasing bonds and thus influencing their price. And yet Fed policymakers rely on bond prices (among other data) to determine the monetary policy they wish to implement. Here's some more from the article:

In assessing whether to make tough decisions, policy makers tend to weigh the cost of action versus inaction. As critical as we are of our dear policy makers, when push comes to shove, they may rise to the occasion. But what if they are not told when it's time to act, when it's time to stop printing and spending trillions? In our assessment, the voice of reason has been silenced, posing potential risks to economic stability, as well as the U.S. dollar. That voice of reason is no other than the market itself. Let us explain.

As the Federal Reserve (Fed) has become ever more engaged in micro-managing the economy, we have moved from rate cuts to emergency rate cuts, to printing billions, then trillions, first to buy mortgage backed securities and more recently, Treasuries. Coming to the realization that talk is cheaper than action, the Fed has since switched gears and "committed" to keeping rates low, initially through mid-2013 and now through the end of 2014 …

The alternative, of course, would be to conduct what we would deem sound monetary policy, so that a reasonable person wouldn't be concerned about the risks of money printing in the first place. But that's so yesterday.

This path that Merk charts when it comes to the Fed is enlightening because it illustrates what we would call "desperation" as regards stabilizing the economy. It began with rate cuts and migrated to printing what is now trillions and then to SPENDING those trillions. Trillions!

Former Fed Governor Kevin Warsh, a critic of active yield curve management, has said the Fed is looking into the mirror in conducting policy … they are human and should periodically be reminded that the greatest failures in monetary history have also been conducted by some of the smartest economists of the time.

How high are the stakes? According to Merk, "The U.S. deficit will grow by $3.86 trillion (the 2013-2017 adjusted baseline scenario in the 2013 budget). Should the Administration be able to implement all its policy initiatives, the five-year addition to the deficit would 'only' be $3.44 trillion. "

Cold comfort, indeed. As Merk points out in a further paragraph, the real fallback for the Fed seems to be "prayer and hope." These untraditional methodologies (prayer and hope) have "moved to the forefront of Fed policy making, as the Fed has taken away what we deem are some of the most important gauges used to conduct monetary policy."

Merk ends his article by cautioning that prudent investors and their planners and money managers need to take the Fed's purposeful distortion of the bond market into account when deciding on asset allocation. The Fed is not only in the process of ruining its OWN indicators, it's ruining them for everyone else too.

According to Merk, the Fed is flying blind, but we cannot conclude this article without pointing out that central bankers have likely NEVER had the tools necessary to implement accurate monetary planning.

As Ludwig von Mises showed in his ground-breaking opus Human Action, it is impossible for government planning to work. Whenever the government passes a law or implements a regulation people's behavior will change but not in the manner that bureaucrats expect.

Beyond this, the very threats that government officials perceive are ALSO perceived by individuals who will take "human action" long before government decides on the appropriate solution. And when that solution is implemented, the chances are it will be too little too late.

People will ALREADY have changed their behaviors, rendering the government solutions moot. Another way of explaining this is by simply pointing out that all laws and regulations are essentially price fixes, distorting the market. The Fed can never properly PLAN policy because those doing the planning have no idea of how their previously introduced distortions will react with the marketplace.

Finally, we'd have to take issue with the perception that monopoly-fiat central banking is actually meant to create prosperous economies. The track record of monopoly-fiat central banking is miserable. The dollar's value alone has been inflated away to nearly zero. And the dollar is the world's reserve currency!

In our view, the idea that monopoly-fiat central banking is either viable or "helpful" is itself an elite dominant social theme, a promotion that seeks to convince citizens that there are certain "leaders" who can be trusted with properly dispensing hundreds of trillions.

The Anglosphere elites (as we have often indicated) – are made up of Jewish, Catholic/Vatican, religious, corporate and military elites. Some criticize free-market economics by claiming its adherents are "Jewish," though in fact modern Austrian economists are neither exceptionally Jewish nor, of course, Royalist. The Daily Bell, a free-market publication, is ecumenical, not Jewish, nor are many of its advisors Jewish.

In truth, the reason for central banking is to fund the creation of one-world government, in our humble view. And to create a worldwide depression in order to help the process along.

There is, of course, a vast smokescreen of rhetoric that has been developed to hide this fact. But no matter the justifications, no matter the learned articles, the reality of what monopoly fiat central banking IS remains.

It is price fixing. It is the adjustment of the volume and value of money by a handful of good, gray bankers. Or to put it another way: It is ineffective because it seeks to influence the optimal operations of the Invisible Hand of private-market competition.

As Axel Merk points out, the Fed these days is ineffective on numerous levels. It is "flying blind." He did this logically, by pointing out the Fed has interfered so drastically in the market that it has compromised the very fixed income indices it has ordinarily relied upon.

Even if one believes that the Fed is doing a good job, or that it COULD do a good job, the idea that it has manipulated the very indices it has counted on for planning purposes should give one pause.

After Thoughts

Yes, the Fed is indeed "flying blind." Or to put it another way, only someone who has lost his or her faculties would be inclined to trust either the policies or strategies of modern central banking.

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