Tuesday, December 25, 2012

Klugman Cult

Here's a cult to fear, the Krugman cult and its faith in government control of interest rates. Let's have some clarity about these low interest rates. Short-term interest rates are controlled by our central bank, the Federal Reserve, a quasi-government entity. But not only does the Fed control interest rates, it's also a significant customer since it owns about $1.7T of bills/bonds in varying maturities.
The Fed has less control over long-term rates. So the Treasury seems to be purchasing more short-term bills at lower interest rates when they should be locking in those 30 year 3% long-term rates but that would cost them (us) more now.  Short-term thinking leads to long-term problems.  Want proof; Despite a recent auction in which $32B in 30 Bonds were tendered only $13B were accepted.
So, have no fear, the Federal Reserve is helping out by buying bonds with created money which increases the money supply dollar for dollar. There's nothing to worry about....Have a great Holiday....all is well. The government has everything under control, even the interest rates.

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