E Greenspan On Yields, Slow Growth And Hyperinflation

Alan Greenspan occasionally rolls out his dog and pony show, presumably to move the markets. He has, on more than one occasion, said that investors want better yields on their government bonds, and most recently, that government bond yields are so low that they stifle economic growth. But he says more. That is what is explored in this article.

I showed in a recent article, entitled  Hoarding the New Gold: Early History About Structured Finance, that the march towards diminished yields, in both good and bad times, corresponded to his tenure as head of the Fed. Alan Greenspan succeeded in his goal of stabilizing banking, pushing risk off the balance sheet of banks. But he created an environment where bonds are hoarded, where bond yields relentlessly decline. He now looks at the system and sees the threat of hyperinflation. I think he is confused or perhaps conundrummed. I made up that word, but it could mean: being prisoner to your own plan, leading to massive confusion. More on that and hyperinflation later.

We cannot blame the former Fed chief directly for the more recent creation of clearinghouses that have pushed demand for bonds up even more than thought possible. But clearly, they are an extension of the usage of treasury bonds as collateral in the derivatives markets that he fostered. If you want to make sure people have good collateral, you don't want to be dealing with an AIG, you want clearinghouses that verify the counterparty financial soundness.

While I believe that Greenspan is sincere in his desire to see bond yields rise and the economy prosper, there is always that doubt created in my mind because he presided over most of the structured finance we see today. When the asset based structured finance (MBSs) failed in the housing crash of 2008, it became apparent that treasury bonds were the safest of all collateral. One could say that Greenspan's efforts to undermine that bond collateral by seeking higher yields is a conundrum in itself. It seems out of character for one so concerned about bank risk. Why would he want to destroy the collateral for the derivatives market he fostered? It makes no sense that he would want to saddle the big banks with even more risk and threat of margin calls. 

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Disclosure: I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice.

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