Setting Up The Next Financial Crisis

Meltzer exposing the 800 pound naked emperor in the room

Don't be fooled by the bond market. Banks are holding prices down because they can buy Treasurys with free money from the Fed.

Many market participants reassure themselves that inflation won't come by noting the decline in yields on longer-term Treasury bonds and the spread between nominal Treasury yields and index-linked TIPS that protect against inflation. They measure expectations of higher inflation by the difference between these two rates, and imply long-term investors aren't demanding higher interest rates to protect themselves against it. But those traditional inflation-warning indicators are distorted because the Fed lends money at about a zero rate and the banks buy Treasury securities, reducing their yield and thus the size of the inflation premium.

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