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We’ve been fooled into believing there is no longer a monetary Pole Star by which to accurately triangulate our current financial position. Speaking in terms of money, finance, and economy, in the olden days of a fixed currency getting your bearings could be more easily accomplished by watching gold – what Andrew Carnegie once characterized as the North Star.

Whether money was too dear, too loose, or anything in between, one would quickly discern the truth via fixing one’s position in relation to the price at the world’s monetary center. No central bank, no political policies, just action…and consequences.

What have we been given today for guidance in the star’s absence? Jay Powell, Christine Lagarde, Haruhiko Peter Pan Kuroda. They’ve all been accused at varying times of wrecking each currency allegedly under their individual authorities. Inflation the inevitable result, a cry of wolf we’ve heard from the very first rumble of “quantitative easing.”

From 2009 in the US, back to 2001 in Japan, there would be no escaping the tidal wave of currency destruction. Yet, year after year there was none.

Suddenly, 2021, it all changed. But QE hadn’t.Without any heavenly direction, plotting a future course under so many weighty assumptions at first appears impossible; we can’t even tell one thing from another, lost upon the vast oceans of systemic confusion.

For one, the consumer price bulge last year has been routinely, regularly characterized as if the CPI (in any country) represented the economy itself rather than a consequence of imbalances within it. You heard it all the time, the higher any consumer price measure reached the more “red hot” the economy underlying must have been.

The Phillips Curve was thrown around to give the narrative a gloss of Ptolemaic objectivity. Not just overheated economy, practically nuclear labor market (again, not just US) befouled only by a purported labor shortage.

Just a few weeks back, with another American CPI (for May 2022) stretching to 40-year highs, the research team for Bank of America declared Phillips the new economic sky god: “Inflation is also being driven by strong consumer demand because of a red hot labor market and strong wage inflation.”

Like those working away at the Federal Reserve, BofA’s analysts judged consumer prices as having outgrown their “transitory” supply shock factors, becoming “embedded” in all things around and in the consumer bucket.

They are, however, increasingly alone in this view. Whereas it had been universally fashionable last year to look upon the combination of QE “money printing” and the prices of consumer goods and see only the fires of grossly heated demand, this year another word has been made increasingly common and commonly accepted as almost a matter of fate.


While not yet within the viewing range of BofA’s relevant sextant, it absolutely is for maybe the majority of the public and much of the financial space anyway. Inflation was supposed to be an economy only too good, but now serious prospects of recession, even a nastier one?

It doesn’t seem to make much sense, which is why the term “stagflation” has returned to the mainstream discourse. Those who predicted only inflation can claim there’s still inflation, only now, allegedly, still going strong even with a contraction becoming so likely, a recession whose prospects have become too large to keep ignoring any longer (hard as everyone will try, and not just BofA).

As with all these things, stagflation has been inappropriately dusted off and applied to incoming circumstances because of major mistakes about monetary history, and reality, particularly the Great Inflation (might want to ask Paul Volcker about the money of the seventies; second thought, don’t because he was still as confused when he passed away in 2019 as he had been forty-some years before then).  

The massive Gauromydas fly in the superheated ointment, the monster of a hitch in the otherwise smooth string, is currency. The Fed dealt the world a flood of digital dollars, and everyone says so including the “central bank’s” Chairman Jay Powell who in May 2020 sat down for a 60 Minutes interview where he explicitly stated this as fact.

It wasn’t – and he knew it.

For a time, this might have seemed plausible. In the second half of that year, the dollar was in the tank against every other currency. The ancient (2009 seems an awfully long time ago) screams of “I told you the Fed would wreck the dollar!” rained down far and wide across cyberspace, and maybe even real space, too.

Then consumer prices came in 2021, and it all clicked for (too) many.

What didn’t, however, was the dollar’s demise. Not only did it stop going down, it then went up at the same time CPIs had. In fact, the further they rose, the more the dollar would, too. While rates of consumer price increases have reached four-decade highs, the dollar’s exchange value has hit two-decade highs.

The only conclusion can be, must be, something is missing from all this astrology. That answer can be found through basic scientific observation, but even if you need the veneer of orthodox academia there’s no more a duo in such pedigreed standing than Valentina Bruno and Hyun-Song Shin (2013):

“The focus on the US dollar as the currency underpinning global banking lends support to studies that have emphasized the US dollar as a bellwether for global financial conditions.” [emphasis added]

Bellwether is good, but can we do better?

It’s funny how you might find what you’re looking for in the strangest places somedays. Just a few months ago, as the confluence of inflation confusion was mixing with uh-oh-there’s-serious-recession, the National Bureau of Economic Research (NBER) published a paper (Working Paper 30089) attesting to what to any honest monetary observer has been a long-since established fact: the biggest “investors” around the rest of the world don’t buy US Treasuries for their returns.

Examining data going back to 1980, “foreign investors” have fared exceedingly poorly compared to simple buy and hold strategies.

“The picture that emerges from the quantities and prices is that foreign investors hold a large quantity of safe dollar debt claims, accepting a low return on these holdings.”

This price inelasticity with regard to return is puzzling to most efficient market hypotheses, which is one key reason why Economists struggle so much to understand the inner workings and motivations of the Treasury market therefore real money.

The situation only grows stranger from there. Not only are the returns comparatively mediocre, by singling out timing patterns this paper identifies how these foreign investors continuously do the opposite of how any rational investor should behave.

“In other words, foreign investors buy U.S. Treasurys [SIC] when they are expensive and offer low future returns, and they exit their positions when Treasury bonds are cheap and offer high future returns…We show that the stand-in foreign investor times their purchases and sales of U.S. Treasurys [SIC] to yield a return that is lower than the buy-and-hold strategy over the same investment period.”

They sell low and buy high. But why?

Because US Treasuries are not investments. They might be to you or me, but you and I aren’t really sizable buyers nor owners of these instruments. To these “foreign investors” and their domestic counterparts (and counterparties), Treasuries are a balance sheet tool which can often cost the financial intermediary or foreign reserve manager dearly for the privilege of liquidity.

This is not something that just showed up with Basel 3 and its annoying distraction of HQLA (high quality liquid assets). Financial participants have been using USTs as such since before the study’s beginning, before Volcker. I’ve recounted numerous times the 1963 episode when the Bank of Japan was forced to sell T-bills if only to help local Japanese banks satisfy eurodollar borrowings they could no longer roll over.

Investment has nothing to do with it. Money does.

Treasuries are the central currency of the global interbank money system, which, eurodollar, just so happens to be the global reserve currency.

And like the historic importance once attached to gold, though more indirectly in this case, the importance attached to Treasuries (as both liquid assets as well as usable even necessary collateral) is as equally useful.

Foreigners (and domestic banks) buy them as they rise in price because of why they rise in price. Collateral scarcity drives that liquidity premium; therefore, the system requires participants (all classes) obtain them at almost any price when there isn’t enough eurodollar “currency” in the system.

They get sold as they fall in price because of why they fall in price, merely the opposite of above.

It is the unnecessarily hidden aspects of modern monetary workings they don’t teach you in school, or tell you about in the media – and all due to the gaslighting about Volcker.

Being as close to a modern North Star as we might have available, Treasuries have been unequivocal about the monetary shape of global economic affairs ever since Jay Powell’s 60 Minutes shame. No money had been printed, at least not in the way he implied or the public thinks (actual dollar bills).

The closest the monetary system ever came to “money printing” was via the US Treasury’s unrelated issuance of securities to finance the utterly absurd borrowing following the CARES Act (further piled onto in later “stimulus” rounds). But even then, it was never a sufficient supply to have moved the global monetary needle from “too little” over toward “way too much” as the inflation story had proposed.

From that modest reflation followed instead renewed restriction. Treasury issuance (particular bills) calmed down, and global banks failed to offset the growing collateral shortfall (for liquidity reasons of their own).

None of this, including the growing Treasury market-financed fed footprint (some would rightly claim it a boot print) on the economy, is or has been inflationary – going all the way back to 2007. That did not change in ’21.

The recession of ‘22, should there be one as Treasuries are and have been indicating, is not the reintroduction of dormant stagflation, rather the process of reversion to our unfortunate post-2007 deflationary mean. We know this because we are able to triangulate our monetary, financial, and economic position from the closest thing we have to a rediscovered Cynosūra.

It may not be the pure brightness of the ancient golden Lodestar, the Treasury market – and its curve – will still safely guide you toward useful truth. If only our top policymakers and politicians would see the light.

Jeff Snider is Chief Strategist for Atlas Financial and co-host of the popular Eurodollar University podcast. 

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