Follow her down to a bridge by a fountain
Where rocking horse people eat marshmallow pies
Everyone smiles as you drift past the flowers
That grow so incredibly high
– The Beatles, ‘Lucy in the Sky with Diamonds’
BALTIMORE – We’re drifting in fog. Have been for years. And what’s this? A vague silhouette… the outline of something… coming into focus. Yes… it’s the strange Isle of Peculiarities and Impossibilities.
When it rains on this island, the water comes up from the ground. When the sun shines, you have to put on your galoshes. The plants growl… and the rocks weep.
We threatened to explore the Fed’s fabulous monetary policy today. So, let’s cast off… and row to the shore and see what we can find. When the Fed announced its QE program almost eight years ago, we didn’t know quite what to make of it. Animal? Vegetable? Mineral?
‘Money printing,’ we called it. ‘No, it’s not money printing at all,’ said a number of voices, including some on the Bonner & Partners research team. It was an entirely new species, they said. They were right. It wasn’t ‘money.’ And central banks weren’t ‘printing’ it.
Instead, the Fed was simply replacing long-term debt (Treasurys and government-backed mortgage bonds) with short-term debt (‘cash’ reserve balances). The idea was that the extra demand would push up bond prices and push down yields. (Bond yields and prices move in opposite directions.)
This post was published at Acting-Man on March 26, 2016.