Could bond yields be in a doom loop, where the Fed’s yield suppression policies and emergency bank funding to keep liquidity flowing to insolvent banks be a short-term fix that could also compound a long-term credit crisis? 

The eye of the storm of a banking liquidity crisis triggered by the 2023 historic treasury bond crash claimed five banks in 2023 could yet pass over. 

The 2-year treasury rate yield, a gauge for forecasting Fed fund rates, could be suppressed at 4.68%. 

Debt Doom Loop
Central banks - 21st century

“The eye of the storm of a banking liquidity crisis triggered by the 2023 historic treasury bond crash claimed five banks in 2023 could yet pass over”

WIN INVESTING

Here is the reason why bonds could be in a doom loop

The Fed has waved the white flag over its mandatory inflation target of 2% and has resigned itself to being okay with inflation at around 3% for the near future. 

A 50% increase in the mandatory inflation target would stir up a storm in the treasury market, given all things equal. 

But price discovery is dead. The Fed sits in the cockpit, navigating prices by creating currency to purchase assets.

This mechanism has been given many names ranging from quantitative easing, QE1, QE2, QE3, Operation Twist, yield targeting, yield suppression and most recently, emergency bank funding, the Fed’s “discount window.”

The Fed has many names for it, but its actions are the same, creating currency to buy distressed assets and suppressing yields and interest rates.

Given no change in interest rates and yields, interest payments on the 34 trillion dollar public deficit will hit 1.6 trillion dollars by year-end, making it the most significant government outlay. 

Global Inflation

“A 50% increase in the mandatory inflation target would stir up a storm in the treasury market, given all things equal”

WIN INVESTING

Reflecting on this point; in the previous 2008 credit crisis, the Great Recession central banks created currency to buy toxic assets and finance a fiscal infrastructure project to get the economy going and create jobs. 

In the 2023-2024 Great Depression, for many with collapsing living standards, central banks are doing stealth QE to keep the banks from insolvency, preventing bank runs and a catastrophic bond collapse, triggering a currency collapse government default. 

“Nearly half of Americans, 44%, can’t afford 1,000 US dollars in emergency expenses” – Win Investing

Debt doom loop currency debasement hyperinflation and civil discontent

Headlines are full of public workers striking and signs of real hardship. Police officers use food banks to feed their families, parents missing meals to feed their children and nurses turning to prostitution to survive. 

Nearly half of Americans, 44%, can’t afford 1,000 US dollars in emergency expenses. But Americans have it good with the dollar remaining relatively strong in a basket of junk currencies. It is worse elsewhere. 

MMT and the debt doom loop 

Modern Monetary Theory fantasy creating currency has no impact on inflation. MMT’s school of thought is to give everyone free currency.

The value of a currency reflects the economic productivity, innovation and creativity of a nation, its natural resources, the fiscal management of its policymakers and whether it is a good store of value. 

Universal Income diminishes the currency and accelerates the debt doom loop as the central banks create even more currency to suppress yields and prevent a government default. 

A policy doom loop where the crash is in currencies?  

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