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The last few days have seen significant shifts in the term structure of US Treasury bonds; auctions have not gone well and despite the world’s expectations for ‘taper’ to lead to a surge in rates, the long-end of the bond-market has rallied. While Goldman might believe the ‘bond bubble’ is starting to pop, the following 223 years of Treasury yields (through free-markets and centrally-planned) sheds some light on what the ‘new normal’ level of rates really represents because, as we noted previously, the world is so levered now that any ‘reversion’ in rates is simply unthinkable.
Notice any difference pre- and post-Fed?
Chart: Goldman Sachs
Each quarter the Fed releases their assessment of the economy along with their forward looking projections for three years into the future. (See Fed Projections Myth Vs. Reality for the September analysis) I started tracking these projections beginning in early 2011 and comparing the Fed’s forecasts with what eventually became reality. The problem has, and continues to be, is that their track record for forecasting has been left wanting. The reality is, however, is that the Federal Reserve simply cannot verbally state what they really see during each highly publicized meeting as it would roil the markets. Instead, they use their communications to guide the markets expectations toward reality in the hopes of reducing the risks of market dislocations.
The most recent release of the Fed’s economic projections on the economy, inflation and unemployment continue to follow the same previous trends of weaker growth, lower inflation and a complete misunderstanding of the real labor market.
When it comes to the economy, the Fed has consistently overstated economic strength. Take a look at the chart and table. In January of 2011, the Fed was predicting GDP growth for 2013 at 4.0%. Actual real GDP (inflation adjusted) is currently estimated at 2.0% for the year or a negative 50% difference. The estimates at that time for long run economic growth was 2.7% which has now fallen to 2.15% and was guided down from 2.3% in September and 2.5% in June.
We have been stating repeatedly over the last 2 years that we are in for a low growth economy due to the debt deleveraging, deficits and continued fiscal and monetary policies that are retardants for economic prosperity. The simple fact is that when an economy requires more than $5 of debt to provide $1 of economic growth – the engine of growth is broken.
As of the latest Fed meeting the forecast for 2014 and 2015 economic growth has been revised down to just 2.9% and 2.8% respectively as the realization of a slow-growth economy is recognized. However, the current annualized trend of GDP suggests growth rates in the next two years could likely be lower than that.
With more than 48 months of economic expansion behind us; this current expansion is longer than the historical average. Economic data continues to show signs of weakness, despite intermittent pops of activity, and the global economy remains drag on domestic exports. With higher taxes, government spending cuts and the debt ceiling debate looming the fiscal drag on the economy could be larger than expected.
What is very important is the long run outlook of 2.15% economic growth. That rate of growth is not strong enough to achieve the “escape velocity” required to substantially improve the level of incomes and employment that were enjoyed in previous decades.
The Fed’s new goal of targeting a specific unemployment level to monetary policy could potentially put the Fed into a box. Currently, the Fed sees 2014 unemployment falling to 6.45% and ultimately returning to a 5.6% “full employment” rate in the long run. That long run rate was adjusted higher from the June meeting. The issue with this “full employment”prediction really becomes what the definition of “reality” is.
Today, average Americans have begun to question the credibility of the BLS employment reports. Even Congress has made an inquiry into the data collection and analysis methods used to determine employment reports. Since the end of the last recession employment has improved modestly. However, that improvement, as shown in full-time employment to population ratio chart below, has primarily due to increases in temporary and lower wage paying positions. More importantly, where the Fed is concerned, the drop in the unemployment rate has been due to a shrinkage of the labor pool rather than an increase in employment.
While the unemployment “rate” is declining, it is a very poor measure from which to benchmark the health of the economy. The drop in unemployment is primarily due totemporary hires, labor hoarding and falling labor participation rates. Real full-time employment as a percentage of the working population shows that employment has only marginally increased since the financial crisis. The drop in jobless claims does not necessarily represent an increasing employment picture but rather labor hoarding by companies after deep levels of employment reductions over the past 4 years.
InflationWhen it comes to inflation, and the Fed’s outlook, the debate comes down to what type of inflation you are actually talking about. The table and chart below show the actual versus projected levels of inflation.
The Fed significantly underestimated official rates of inflation in 2011. However, in 2012 and 2013 their projections and reality became much more aligned. Unfortunately, inflation has fallen well below target levels of 2% which is weighing on economic growth. The Fed’s greatest economic fear is deflation and the current drop in annual rates of inflation will keep pressure on the Fed to continue to accommodative policy active for longer than most expect.
However, for the average American the inflation story is entirely different. Reported inflation has little meaning to the consumer as the real cost of living has risen sharply in recent years. Whether it has been the cost of health insurance, school tuition, food, gas or energy – these everyday costs have continued to rise substantially faster than their incomes. This is why personal savings rates continue to fall, and consumer credit has risen, as incomes remain stagnant or weaken. It is the rising “cost of living” that is weighing on the American psyche, and ultimately, on economic growth.
While the FOMC is vastly hopeful that the current economic improvement will be sustained; rising deflationary pressures, weak global growth rates and stagnant wages pose major headwinds. The problem is that the current proposed policy is an exercise in wishful thinking. While the Fed blames fiscal policy out of Washington; the reality is that monetary policy does not work in reducing real unemployment or interest rates. However, what monetary policy does do is promote asset bubbles that are dangerous; particularly when they are concentrated in the riskiest of assets from stocks to junk bonds.
The problem that the Fed will eventually face, with respect to their monetary policy decisions, is that effectively the economy could be running at “full rates” of employment but with a very large pool of individuals excluded from the labor force. Of course, this also explains the continued rise in the number of individuals claiming disability and participating in the nutritional assistance programs. While the Fed could very well achieve its goal of fostering a “full employment” rate of 6.5%, it certainly does not mean that 93.5% of working age Americans will be gainfully employed. It could well just be a victory in name only
With the Fed committed to continuing its Large Scale Asset Purchase program (Quantitative Easing or Q.E.), and deploying specific performance targets, the question of effectiveness looms large. Bernanke has been quite vocal in his testimonies over the last year that monetary stimulus is not a panacea. In his most recently statement, Bernanke specifically stated that “fiscal policy is restraining economic growth.”
However, the recent improvements in employment and economic activity allowed the FOMC to begin “tapering” their current rate of asset purchases from $85 to $75 billion per month.
“…the Committee sees the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to modestly reduce the pace of its asset purchases.”
The problem for the Federal Reserve currently is that there are very few policy tools left, and the economic effectiveness of continued artificial stimulation is clearly waning. Lower mortgages rates, interest rates and excess liquidity served well in priming the pumps of the real estate and financial markets when valuations were extremely depressed. However, four years later, stock valuations are no longer low, earnings are no longer depressed and the majority of real estate related activity has likely been completed. More importantly, the recent surge in leverage and asset prices smacks of an asset bubble in the making.
Reminiscent of the choices of Goldilocks – the reality is that the Fed’s estimates for economic growth in 2013 was too hot, employment was too cold and inflation estimates were just about right. The real unspoken concern should be the continued threat of deflation and what actions will be available when the next recession eventually comes.
Canadians’ debt ratio increased last quarter, but so did the value of their assets, so the national net worth increased. (The Associated Press)
The amount that Canadians owe compared to their disposable income rose to an all-time record last quarter, although their net worth also increased.
Statistics Canada reported Friday that the level of household credit market debt to disposable income increased to 163.7 per cent in the third quarter from 163.1 per cent in the second quarter.
That means Canadians owe nearly $1.64 for every $1 in disposable income they earn in a year.
‘The seasonal bounce in mortgage borrowing in the previous quarter picked up into the fall’– Royal Bank economist Laura Cooper
Policymakers are fixated on the debt ratio in part because it was at above 160 per cent that households in the United States and Britain ran into trouble about five years ago, contributing to defaults and the financial crisis that triggered the 2008-09 recession.
Debt loads can be influenced by seasonal factors, and although the headline figure is higher, the rate of growth in that ratio was the smallest in 12 years.
“Those figures should be encouraging for policymakers and suggest that the Bank of Canada’s belief that imbalances are evolving constructively is right on the mark,” said Benjamin Reitzes, a senior economist with BMO Capital Markets.
Indeed, while they are borrowing more, Canadians are also worth more as their assets increase by a similar amount. The national net worth increased to $7.5 trillion in the third quarter, up 2.1 per cent from the previous quarter.
On a per capita basis, that works out to $212,700 for every Canadian. The previous quarter, that figure was $208,300.
Canadians saw their financial assets go up in value, as well as their non-financial assets (such as houses) do the same. The value of shares and other equities gained 3.7 per cent in the quarter, while the value of household real estate gained 1.5 per cent.
“The pace of debt accumulation picked up slightly in the third quarter as the seasonal bounce in mortgage borrowing in the previous quarter picked up into the fall,” Royal Bank economist Laura Cooper said.
With files from The Canadian Press
The Fed is busy doing everything in its considerable power to get credit (that is, debt) growing again so that we can get back to what it considers to be “normal.”
But the problem is that the recent past was notnormal. You may have already seen this next chart. It shows total debt in the U.S. as a percent of GDP:
Somewhere right around 1980, things really changed, and debt began climbing far faster than GDP. And that, right there, is the long and the short of why any attempt to continue the behavior that got us to this point is certain to fail.
It is simply not possible to grow your debts faster than your income forever. However, that’s been the practice since 1980, and current politicians and Federal Reserve officials developed their opinions about “how the world works” during the 33-year period between 1980 and 2013.
Put bluntly, they want to get us back on that same track, and as soon as possible. The reason? Because every major power center, be that in D.C. or on Wall Street, tuned their thinking, systems, and sense of entitlement, during that period. And, frankly, a huge number of financial firms and political careers will melt away if and when that credit expansion finally stops. And stop it will; that’s just a mathematical certainty.
Total Credit Market Debt (TCMD) is a measure of all the various forms of debt in the U.S. That includes corporate, state, federal, and household borrowing. So student loans are in there, as are auto loans, mortgages, and municipal and federal debt. It’s pretty much everything debt-related. What it does not include, though, are any unfunded obligations, entitlements, or other types of liabilities. So the Social Security shortfalls are not in there, nor are the underfunded pensions at the state or corporate levels. TCMD is just debt, plain and simple.
As you can see in this next chart, since 1970, TCMD has been growing almost exponentially.
That tiny little wiggle happened in 2008-2009, and it apparently nearly brought down the entire global financial system. That little deviation was practically too much all on its own for the markets to handle.
Now debts are climbing again at a quite nice pace. That’s mainly due to the Fed monetizing U.S. federal debt just to keep things patched together. As an aside, based on this chart, we’d expect the Fed to not end their QE efforts until and unless households and corporations once more engage in robust borrowing. The system apparently needs borrowing to keep growing exponentially, or it risks collapse.
One could ask why credit can’t just keep growing. But there are many reasons to believe that the future will not resemble the past. Let’s start in 1980, when credit growth really took off. This period also happens to be the happy time that the Fed is trying (desperately) to recreate. Between 1980 and 2013, total credit grew by an astonishing 8 percent per year, compounded. I say “astonishing” because anything growing by 8 percent per year will fully double every 9 years. So let’s run the math experiment and ask what will happen if the Fed is successful and total credit grows for the next 30 years at exactly the same rate it did over the prior 30. That’s all. This is nothing fancy, and it is simply the same rate of growth that everybody got accustomed to while they were figuring out “how the world works.”
What happens to the current $57 trillion in TCMD as it advances by 8 percent per year for 30 years? It mushrooms into a silly number: $573 trillion. That is, an 8 percent growth paradigm gives us a 10-fold increase in total credit in just 30 years:
For perspective, the GDP of the entire globe was just $85 trillion in 2012. Even if we advance global GDP by some hefty number, like 4 percent per year for the next 30 years, under an 8 percent growth regime, U.S. credit would be twice as large as global GDP in 2043.
If that comparison didn’t do it for you, then just ask yourself: Why, exactly, would U.S. corporations, households, and government borrow more than $500 trillion over the next 30 years?
The total mortgage market is currently $10 trillion, so might the plan include developing an additional 50 more U.S. residential real estate markets?
So perhaps the situation moderates a bit, and instead of growing at 8 percent, credit market debt grows at just half that rate. So what happens if credit just grows by 4 percent per year? That gets us to $185 trillion, or another $128 trillion higher than today — a more than 3x increase. Again: for what will we borrow (only) $128 trillion for, over the next 30 years?
When I run these numbers, I am entirely confident that the rate of growth in debt between 1980 and 2013 will not be recreated between 2013 and 2043. But, I’ve been assuming that dollars remain valuable. If dollars were to lose 90 percent or more of their value (say, perhaps due to our central bank creating too many of them), then it’s entirely possible to achieve any sorts of fantastical numbers one wishes to see.
For the Fed to achieve anything even close to the historical rate of credit growth, the dollar will have to lose a lot of value. This may in fact be the Fed’s grand plan, and it’s entirely about keeping the financial system primed with sufficient new credit to prevent it from imploding.
Note: The views expressed in Daily Articles on Mises.org are not necessarily those of the Mises Institute.
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Chris Martenson is a former biochemical scientist. Currently he is a writer and trend forecaster interested in macro trends regarding the economy, energy composition and environment. He is the founder of PeakProsperity.com. See Chris Martenson’s article archives.
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Medieval thinkers were tempted to believe that if you throw a rock it flies straight until it runs out of force, and then it falls straight down. Economists are tempted to think of prices as a linear function of the “money supply”, and interest rates to be based on “inflation expectations”, which is to say expectations of rising prices.
The medieval thinkers, and the economists are “not even wrong”, to borrow a phrase often attributed to physicist Wolfgang Pauli. Science has to begin by going out to reality and observing what happens. Anyone can see that in reality, these tempting assumptions do not fit what occurs.
In my series of essays on interest rates and prices, I argued that the system has positive feedback and resonance, and cannot be understood in terms of a linear model. When I began this series of papers, the rate of interest was still falling to hit a new all-time low. Then on May 5,2013, it began to shoot up. It rose 83% over a period of exactly four months. That may or may not have been the peak (it has subsided a little since then).
Several readers asked me if I thought this was the beginning of a new rising cycle, or if I thought this was the End (of the dollar). As I expressed in Part VI, the End will be driven by the withdrawal of the gold bid on the dollar. Since early August, gold has become more and more abundant in the market. I think it is safe to say that this is not the end of the dollar, just yet. The hyperinflationists’ stopped clock will have to remain wrong a while longer. I said that the rising rate was a correction.
I am quite confident of this prediction, for all the reasons I presented in the discussion of the falling cycle in Part V. But let’s look at the question from a different perspective, to see if we end up with the same conclusion.
In the gold standard, the rate of interest is the spread between the gold coin and the gold bond. If the rate is higher, that is equivalent to saying that the spread is wider. If the rate is lower, then this spread is narrower.
A wider spread offers more incentive for people to straddle it, an act that I define as arbitrage. Another way of saying this is that a higher rate offers more incentive for people to dishoard gold and lend it. If the rate falls, which is the same as saying if the spread narrows, then there is less incentive and people will revert to hoarding to avoid the risks and capital lock-up of lending. Savers who take the bid on the interest rate (which is equivalent to taking the ask on the bond) press the rate lower, which compresses the spread.
It goes almost without saying, that the spread could never be compressed to zero (by the way, this is true for all arbitrage in all free markets). There are forces tending to compress the spread, such as the desire to earn interest by savers. But the lower the rate of interest, the stronger the forces tending to widen the spread become. These include entrepreneurial demand for credit, and most importantly the time preference of the saver—his reluctance to delay gratification. There is no lending at zero interest and nearly zero lending at near-zero interest.
I emphasize that interest is a spread to put the focus on a universal principle of free markets. As I stated in my dissertation:
“All actions of all men in the markets are various forms of arbitrage.”
Arbitrage compresses the spread that is being straddled. It lifts up the price of the long leg, and pushes down the price of the short leg. If one buys eggs in the farm town, then the price of eggs there will rise. If one sells eggs in the city center, then the price there will fall.
In the gold standard, hoarding tends to lift the value of the gold coin and depress the value of the bond. Lending tends to depress the value of the coin and lift the value of the bond. The value of gold itself is the closest thing to constant in the market, so in effect these two arbitrages move the value of the bond. How is the value of the bond measured—against what is it compared? Gold is the unit of account, the numeraire.
The value of the bond can move much farther than the value of gold. But in this context it is important to be aware that gold is not fixed, like some kind of intrinsic value. An analogy would be that if you jump up, you push the Earth in the opposite direction. Its mass is so heavy that in most contexts you can safely ignore the fact that the Earth experiences an equal but opposite force. But this is not the same thing as saying the Earth is fixed in position in its orbit.
The regime of irredeemable money behaves quite differently than the gold standard (notwithstanding frivolous assertions by some economists that the euro “works like” the gold standard). The interest rate is still a spread. But what is it a spread between? Does arbitrage act on this spread? Is there an essential difference between this and the arbitrage in gold?
Analogous to gold, the rate of interest in paper currency is the spread between the dollar and the bond. There are a number of differences from gold. Most notably, there is little reason to hold the dollar in preference to the government bond. Think about that.
In the gold standard, if you don’t like the risk or interest of a bond, you can happily hold gold coins. But in irredeemable paper currency, the dollar is itself a credit instrument backed by said government bond. The dollar is the liability side of the Fed’s balance sheet, with the bond being the asset. Why would anyone hold a zero-yield paper credit instrument in preference to a non-zero-yield paper credit instrument (except as speculation—see below)? And that leads to the key identification.
The Fed is the arbitrager of this spread!
The Fed is buying bonds, which lifts up the value of the bond and pushes down the interest rate. Against these new assets, the Fed is issuing more dollars. This tends to depress the value of the dollar. The dollar has a lot of inertia, like gold. It has extremely high stocks to flows, like gold. But unlike gold, the dollar’s value does fall with its quantity (if not in the way that the quantity theory of money predicts). Whatever one might say about the marginal utility of gold, the dollar’s marginal utility certainly falls.
The Fed is involved in another arbitrage with the bond and the dollar. The Fed lends dollars to banks, so that they can buy the government bond (and other bonds). This lifts the value of the bond, just like the Fed’s own bond purchases.
Astute readers will note that when the Fed lends to banks to buy bonds, this is equivalent to stating that banks borrow from the Fed to buy bonds. The banks are borrowing short to lend long, also called duration mismatch.
This is not precisely an arbitrage between the dollar and the bond. It is an arbitrage between the short-term lending and long-term bond market. It is the spread between short- and long-term interest rates that is compressed in this trade.
One difference between gold and paper is that, in paper, there is a central planner who sets the short-term rate by diktat. Since 2008, Fed policy has pegged it to practically zero.
This makes for a lopsided “arbitrage”, which is not really an arbitrage. One side is not free to move, even the slight amount of a massive object. It is fixed by law, which is to say, force. The economy ought to allow free movement of all prices, and now one point is bolted down. All sorts of distortions will occur around it as tension builds.
I put “arbitrage” in scare quotes because it is not really arbitrage. The Fed uses force to hand money to those cronies who have access to this privilege. It is not arbitrage in the same way that a fence who sells stolen goods is not a trader.
In any case, the rate on the short end of the yield curve is fixed near zero today, while there is a pull on the long bond closer to it. Is there any wonder that the rate on the long bond has a propensity to fall?
Under the gold standard, borrowing short to lend long is certainly not necessary  However, in our paper system, it is an integral part of the system, by its very design.
The government offers antiseptic terms for egregious acts. For example, they use the pseudo-academic term “quantitative easing” to refer to the dishonest practice of monetizing the debt. Similarly, they use the dry euphemism “maturity transformation” to refer to borrowing short to lend long, i.e. duration mismatch. Perhaps the term “transmogrification” would be more appropriate, as this is nothing short of magic.
The saver is the owner of the money being lent out. It is his preference that the bank must respect, and it is for his benefit that the bank lends. When the saver says he may want his money back on demand, and the bank presumes to lend it for 30 years, the bank is not “transforming” anything except its fiduciary duty, its integrity, and its own soundness. Depositors would not entrust their savings to such reckless banks, without the soporific of deposit insurance to protect them from the consequences.
Under the gold standard, this irrational practice would exist on the fringe on the line between what is legal and what is not (except for the yield curve specialist, a topic I will treat in another paper), a get-rich-quick scheme—if it existed at all (our jobs as monetary economists are to bellow from the rooftops that this practice is destructive).
Today, duration mismatch is part of the official means of executing the Fed’s monetary policy.
I have already covered how duration mismatch misallocates the savers’ capital and when savers eventually pull it back, the result is that the bank fails. I want to focus here on another facet. Pseudo-arbitrage between short and long bonds destabilizes the yield curve.
By its very nature, borrowing short to lend long is a brittle business model. One is committed to a long-term investment, but this is at the mercy of the short-term funding market. If short-term rates rise, or if borrowing is temporarily not possible, then the practitioner of this financial voodoo may be forced to sell the long bond.
The original act of borrowing short to lend long causes the interest rate on the long bond to fall. If the Fed wants to tighten (not their policy post-2008!) and forces the short-term rate higher, then players of the duration mismatch game may get caught off guard. They may be reluctant to sell their long bonds at a loss, and hold on for a while. Or for any number of other proximate causes, the yield curve can become inverted.
Side note: an inverted yield curve is widely considered a harbinger of recession. The simple explanation is that the marginal source of credit in the economy is suddenly more expensive. This causes investment in everything to slow.
At times there is selling of the short bond, at times aggressive buying. Sometimes there is a steady buying ramp of the long bond. Sometimes there is a slow selling slide that turns into an avalanche. The yield curve moves and changes shape. As with the rate of interest, the economy does best when the curve is stable. Sudden balance sheet stress, selloffs, and volatility may benefit the speculators of the world, but of course, it can only hurt productive businesses that are financing factories, farms, mines, and hotels with credit.
Earlier, I referred to the only reason why someone would choose to own the Fed’s liability—the dollar—in preference to its asset. Unlike with gold, hoarding paper dollar bills serves no real purpose and incurs needless risk of loss by theft. The holder of dollars is no safer. He avoids no credit risk; he is exposed to the same risk as is the bondholder is exposed. The sole reason to prefer the dollar is speculation.
As I described in Theory of Interest and Prices in Paper Currency, the Fed destabilizes the rate of interest by its very existence, its very nature, and its purpose. Per the above discussion, the Fed and the speculators induce volatility in the yield curve, which can easily feed back into volatility in the underlying rate of interest.
The reason to sell the bond is to avoid losses if interest rates will rise. Speculators seek to front-run the Fed, duration mismatchers, and other speculators. If the Fed will “taper” its purchase of bonds, then that might lead to higher interest rates. Or at least, it might make other speculators sell. Every speculator wants to sell first.
Consider the case of large banks borrowing short to lend long. Let’s say that you have some information that their short-term funding is either going to become much harder to obtain, or at least significantly more expensive. What do you do?
You sell the bond. You, and many other speculators. Everyone sells the bond.
Or, what if you have information that you think will cause other speculators to sell bonds? It may not even be a legitimate factor, either because the rumor is untrue (e.g. “the world is selling Treasury bonds”) or because there is no valid economic reason to sell bonds based on it.
You sell the bond before they do, or you all try to sell first.
I have been documenting numerous cases in the gold market where traders use leverage to buy gold futures based on an announcement or non-announcement by the Fed. These moves reverse themselves quickly. But no one, especially if they are using leverage, wants to be on the wrong side of a $50 move in gold. You sell ahead of the crowd, and you buy ahead of the crowd. And they try to do it to you.
I think it is likely that one of these phenomena, or something similar, has driven the rate on the 10-year Treasury up by 80%.
I would like to leave you with one take-away from this paper and one from my series on the theory of interest and prices. In this paper, I want everyone to think about the difference between the following two statements:
- The dollar is falling in value
- The rate of interest in dollars must rise
It is tempting to assume that they are equivalent, but the rate of interest is purely internal to the “closed loop” dollar system. Unlike a free market, it does not operate under the forces of arbitrage. It operates by government diktats, and hordes of speculators feed on the spoils that fall like rotten food to the floor.
From my entire series, I would like the reader to check and challenge the sacred-cow premises of macroeconomics, the aggregates, the assumptions, the equations, and above all else, the linear thinking. I encourage you to think about what incentives are offered under each scenario to the market participants. No one even knows the true value of the monetary aggregate and there is endless debate even among economists. The shopkeeper, miner, farmer, warehouseman, manufacturer, or banker is not impelled to act based on such abstractions.
They react to the incentives of profit and loss. Even the consumer reacts to prices being lower in one particular store, or apples being cheaper than pears. If you can think through how a particular market event or change in government policy will remove old incentives and offer new incentives, then you can understand the likely first-order effects in the market. Of course each of these effects changes still other incentives.
It is not easy, but this is the approach that makes economics a proper science.
P.S. As I do my final edits on this paper (October 4, 2013), there is a selloff in short US T-Bills, leading to an inversion at the short end of the yield curve. This is due, of course, to the possible effect of the partial government shutdown. The government is not going to default. If this danger were real, then there would be much greater turmoil in every market (and much more buying of gold as the only way to avoid catastrophic losses). The selloff has two drivers. First, some holders of T-Bills need the cash on the maturity date. They would prefer to liquidate now and hold “cash” rather than incur the risk that they will not be paid on the maturity date. Second, of course speculators want to front-run this trade. I put “cash” in scare quotes because dollars in a bank account are the bank’s liability. The bank will not be able to honor this liability if its asset—the US Treasury bond—defaults. The “cash” will be worthless in the very scenario that bond sellers are hoping to avoid by their very sales. When the scare and the shutdown end, then the 30-day T-Bill will snap back to its typical rate near zero. Some clever speculators will make a killing on this move.
 See the Monetary Metals Supply and Demand Report
 I argue that it always fails in the end in Duration Mismatch Always Fails
- Theory of Interest and Prices in Paper Currency Part VI (The End) (keithweinereconomics.com)
- How We Can Predict The Next Financial Crisis (popalx.wordpress.com)
- Financial Crisis and War (project-syndicate.org)
- Goldman’s Blankfein: The Worst Case Scenario ‘Absolutely Will Happen’ (businessinsider.com)
- HSH Nordbank’s Dr. No CEO Faces Trial Over Financial Crisis – Bloomberg (bloomberg.com)
- Rogoff: Innovation Crisis or Financial Crisis? (economistsview.typepad.com)
- Washington & Wall Street: What Does Japan Meltdown Say About US Markets? (breitbart.com)
- Serious Meltdown In Global Equities (mayzusmena.wordpress.com)
- Japan’s PM Abe defends policies as markets settle (miamiherald.com)
- America’s Bubble Economy Is Going To Become An Economic Black Hole (silverdoctors.com)
- Japan’s QE is Exporting Deflation (wallstreetpit.com)
- Japan and the Gold Price (goldinvestingnews.com)
- Breakout in Japanese 10-Year Bond Yield (globaleconomicanalysis.blogspot.com)
- World’s Biggest Volatility Jump Spurs Fund Outflow (bloomberg.com)
- Nikkei Up Another 3% as Yen Breaks .99; Japanese Bonds Halted; Be Careful of What You Ask (financialsurvivalnetwork.com)
- How Can We Tell If “Abenomics” Is Working? – Bloomberg (bloomberg.com)
- Japan to ‘support’ Southeast Asian bond markets (forexlive.com)
- Is Abenomics Going to Put Japan Back on the Map? (theburningplatform.com)