Of Greenspan Conundrums, Literacy, and Helpless FED

It is hard to imagine the Chairman has not read John Maynard Keynes’ “The General Theory”. Is being a faithful Keynesian not his job description? In chapter 13 Keynes, almost 60 years ago, described the “conundrum” in which Mr. Greenspan finds himself (and American economy) today. Keynes’ insight is so remarkable I will take a liberty of rather lengthily quoting him here:

• “… circumstances can develop in which even a large increase in the quantity of money may exert a comparatively small influence on the rate of interest. […] It is interesting that the stability of the system and its sensitiveness to the quantity of money should be so dependent on the existence of a variety of opinion about what is uncertain. …if we are to control the activity of the economic system by changing the quantity of money, it is important that opinions should differ.”

This brings us back to the beginning of the current tightening cycle. By “communicating with the markets” and removing any uncertainty regarding the future FED actions the venerable Chairman has rendered himself less then useless. Remember his (in)famous "Rising interest rates have been advertised for so long and in so many places that anyone who has not appropriately hedged this position by now obviously is desirous of losing money."? At that time, apart from very few and far-in-between clear thinkers such as Dr. Faber, the prevailing opinion was that the Bond Bull was dead. The results were typical of Mr. Market – he sometimes gives what they expect to some people, but never what everybody expects to everybody.
It will be interesting to see if things are going to be different in a near future. There have been quite a few new bond-bullish voices heard recently, including that of the same Mr. Gross who had proclaimed the “bull run” to be over for bonds some two years ago. Perhaps we will see higher rates sometime soon, after all.