To the extent that the central bank is driven to accumulate government securities at artificially inflated prices(and repressed yields), either such purchases must be i) held to maturity (implies that the central bank will not have the freedom to contract its balance sheet in a timely manner in order to tighten quantitative monetary policy) or ii) the government must be prepared to underwrite the capital losses realized from the sales of such securities in a normalized yield environment.

from "The Complete Chartpack Of The Top Global Themes For The Next Five Years"

One wonders when the U.S. has had a "normalized yield environment" and if that phrase means "one without the Treasury/Fed's collective thumbs on the scale". Sometimes they push down and sometimes they push up; but that unicorn of economic theory - the natural rate of interest - has not been seen in America's natural history. since Hamilton told everyone how wonderful it was that the Feds were going to redeem the states and Confederation's crap paper at par.

I love the author's gloomy conclusion - "A central bank that is beholden to government in this way has lost its independence. Its objective has been subtly realigned to the preservation to the creditworthiness of the sovereign". Duh!@# The illusion of the creditworthiness of the sovereign (governments remain the only serial defaulters in hisotyr) has alwasy been and always will be the objective of a central bank. That is why they were created in the first place.

We have already seen the Federal Reserve choose door (i). They also did so between 1938 and the end of the Korean War. For that entire period interest rates remained "moderate" even as the Federal debt increased parabolically. The question that even Jeffrey Gundlach seems to shy away from answering is how far along we all are in the process of climbing to the new much higher plateau of sovereign IOUs.


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