Wenzel On Bob Murphy’s Gloating, And My Two Cents

Just for the record, I agree almost completely with Bob Wenzel’s post, where he takes Bob Murphy to task for gloating to his ‘foes’ about the fact that US Treasury yields rose following Ben Bernanke’s statement that he might taper QE.

Bob Murphy is beating his chest because Paul Krugman and Scott Sumner have for a while been saying that the Fed does not impact long-term interest rates. Bob Murphy disagreed and said the Fed does impact long-term interest rates. After the Fed said it will stop buying Treasury bonds last week, the market has taken these long-term yields to the highest level they’ve been in a while, to which Murphy is saying to Krugman and Sumner, “see I told you so.”

Wenzel writes regarding the problem with what Murphy is doing:

As Mises, Hayek and Rothbard taught, the science of economics is a deductive science, not an empirical science. Let’s consider this possible scenario.What happens if Bernanke retracts his statement in the next few days, as he well might do through leaks to favored journalists, and interest rates continue to climb? This could happen.

Would it not be fair for Krugman and Summers to then argue that Murphy doesn’t know what the hell he is talking about, since he argued that Bernanke’s statement caused the run-up in interest rates but now that  Bernanke is hinting that there will not be any “tapering” soon and interest rates are still climbing that Murphy must have the causal factor wrong?

It is also important to note (as Wenzel kind of does) that US Treasury yields were already in a strong uptrend ahead of the Bernanke speech, suggesting something else was already driving the move (or leaked info from the Fed, but I don’t think so, seeing as the market started the move a month and a half before the statement).

Also, to add another scenario to Wenzel’s, I can foresee a situation where the Fed keeps its ‘taper’ talk going, i.e. continues to commit to scaling back QE, but that US Treasury yields start to decline despite that, as growth slows and the stock market corrects, triggering a rotation out of other assets (equities, commodities, junk bonds, EM assets, etc) into the perceived safety of US Treasuries. An economic crisis in Europe, Japan, or China could also trigger a decline of US Treasury yields, despite Bernanke maintaining the ‘taper’ stance. A combination of the two could possibly drive US Treasury yields back to levels where they were a year ago.

Then Sumner and Krugman could also say “see, the Austrians have the causal factor completely wrong!”

Readers who read this post on clb last week, and followed the link to the client report ETM published in March 2013, will note I clearly state I anticipate a rise of US long-term rates in coming months, but that I didn’t mention what the Fed would be doing in coming months as part of this analysis.

In my opinion, the fundamentals moving US Treasury markets today are due to Fed interventions and monetary distortions from months ago. The line of least resistance was already established, and because the market was already bearish, the bearish news out of the FOMC was exaggerated (and bullish news ignored).