1940s Yield Curve Control Review

Yield curve control was operational during and post World War 2 for a 9 year period.

The US stacked up a huge national war debt. With war comes higher inflation, this time higher inflation could not be allowed to be followed by higher interest rates as the national income could not pay the interest bill and a sovereign debt default would follow. The response by the Federal reserve was to cap interest rates near 2.5% to contain the interest expense.

The chart below shows this period.

In the chart below while inflation (CPI) is above the 10-year interest rate this is known as 'negative yield' and purchasing power destruction of the currency (USD), hence why funds will flow into anti-US dollar trades like gold, silver, bitcoin, and oil.

The bondholders become the investors holding the short stick as inflation destroyers their capital, stocks do well, commodities do well. The problem for the Fed is the bondholders are massive in number and for the Fed to contain their selling they would have to buy all which is sold or convince this class of investor that it is best for national interest that they 'do not sell' and take the loss for the good of the nation. During World War 2 the bond investors made this patriotic choice, today maybe not so much, hence the Fed buying could be exponential.   

Currently, the Fed is jawboning the idea of yield curve control for a period of 2 years. Get the feeling the DEM's are targeting mid-term elections with the Fed's help, hmmm.

POINT: The Fed's choice is to trash the dollar to save the economy, or trash the economy to save the dollar. 

Reminder...

..."I learned early that there is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again. I’ve never forgotten that.".

Jesse Livermore

DOW

 

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