Michael Pento: The Coming Bond Bubble Collapse

In this week's podcast, Michael Pento, fund manager and author of The Coming Bond Bubble Collapse, explains how the United States is fast approaching the end stage of the biggest asset bubble in history. He describes how the bursting of this bubble will cause a massive interest rate shock that will send the US consumer economy and the US government—pumped up by massive Treasury debt—into bankruptcy, an event that will send shockwaves throughout the global economy:

These are the most dangerous markets I have ever witnessed in my entire life, and I’ve been investing for over 25 years. Let’s go over some numbers to let you know exactly how tenuous this bubble is. Its membrane has been stretched so wide and so tight that it’s about to burst, and any semblance of even maybe a little sharp object, something even a hemophiliac wouldn’t be afraid of, sends the market careening downward.

Global central bank balance sheets are up from $6 trillion in 2007 to $21 trillion today and they are still being expanded at the pace of $200 billion each and every month. What’s happening is that the robotraders, the algorithms, the frontrunners on Wall Street and around the world are just gaming the system, looking for the next increase in central bank credit to take their collateral to the ECB or to the Bank of Japan or to the Fed and buy more stocks and bonds.

That’s the game we’re playing. Even a hint that it might someday end sends the entire investment community scampering for the door; and that door is very, very narrow and can only fit a few people through it. So let’s go through a couple of more data points to emphasize just how big this bond bubble is and why it’s so important.

So the European Central Bank is buying corporate bonds. I hope everybody knows that. So much that there's now 30% of investment-grade debt in Europe trading with a negative yield. This is not sovereign debt (as asinine as it is to ever be able as a sovereign nation to issue debt and get paid to do so). Investment grade bonds in Europe now trade with a negative yield.

The Bank of Japan owns 50% of all Japanese government bonds, JGBs.

About 25 percent (and this number vacillates between days where the German tenure goes north or south of the flat line) of global sovereign debt trades with a negative yield.

So what happened on September 8th? Last Thursday, Mario Draghi came out and gave a press conference after leaving rates unchanged in the European Union. The audience was asking questions like: Did you discuss helicopter money? No, we really didn’t discuss it. Did you discuss extending the QE program beyond March of 2017? No, we didn’t discuss extending the 80 billion purchases of assets beyond March. There was a stirring in the audience, the reporters were beside themselves. They couldn’t believe that Mario Draghi, even though he didn’t even hint about stopping QE, he didn’t extend its duration or its quantity. That sent markets cratering. The Dow fell 400 points. The U.S. 10-year yield jumped from 1.52% to 1.68% in one day.

Now, the market had a bounce back the next day, then was down again more than 200 points on the Dow. So you can tell, anybody with any objective, critical, independent mind can tell this is an unsustainable, very ephemeral rally in stocks that has occurred since 2009. And when the bond market breaks, when that bubble bursts, it will wipe out every asset -- everything will collapse together -- because everything is geared off of that so-called 'risk free' rate of return.

If your risk free rate of return has been warped down to 0% for 96 months, then everything -- and I mean diamonds, sports cars, mutual funds, municipal bonds, fixed income, REITs, collateralized loan obligations, stocks, bonds, everything, even commodities -- will collapse in tandem along with the bond bubble burst.

Click the play button below to listen to Chris' interview with Michael Pento (27m:46s).

This is a companion discussion topic for the original entry at https://peakprosperity.com/michael-pento-the-coming-bond-bubble-collapse/

It seems that the only place to go is cash and gold which does not pay anything for years to come since it is hard to pin down when the end comes. At some point central banks will have to stop repeating the insanity of buying bonds and inflating assets for the top 1% of society like myself who live off interest and dividends while ignoring main street. Helicopter money would seem to make more sense since they could have given $50,000 to every US family instead of printing trillions of dollars, 95% of which went to the top 1%. A lot less could have stimulated the economy more than the low interest rates which do not incentivize banks to lend long term except to the most credit worthy who probably don't need it. A gradual normalizing of rates combined with some direct stimulus for lower income families might cushion the crash? A flexible payroll tax might do it with lower rates when the economy is slow and higher when recovery starts instead of pushing on a string with money printing. It would put cash into paychecks within the week for people that actually spend it instead of raising asset values for the few with little result for the economy. Of course it could be  cut it off quickly at the first sign of inflation. At least Janet Yellen has stopped the money printing making the USA seem more palatable for ones money. Next step, stop rolling over the bonds at the Fed to reduce the balance sheet at the fed slowly? Maybe sell some too while prices are high or would that crash the bond market? 

First, [econo-geek alert], Michael Pento just explained to us what the impact is of a central bank taking losses in excess of capital.  I've been wondering what the downside to this would be for quite a while, and he's now filled in that piece.  Yes, I really do sit around and wonder about things like this.
Basically, all those bonds on the balance sheet of the Fed represent base money that is in circulation.  If and when inflation ever strikes, the Fed-owned bonds allow the Fed to mop up the excess money by selling them on the open market and thus pulling the money out of circulation.

Now then, if the Fed takes losses, and they end up having a negative net worth, they will be unable to mop up the money out there to the extent they have losses.  ECB will take losses on all those negative-rate bonds they've purchased when they mature.  That should be interesting when these negative-rate bonds become a larger portion of their inventory.

Second - in 2008, when we had our most recent massive crash, all the money fled into bonds.  They were the safe haven, and all the sovereign debt shot higher.  But we are already at a high in bonds; if bonds are the thing that craters this time, and the banks aren't trustworthy either, where will the money go instead?  Armstrong thinks equities will get a moonshot, along with gold too.

Armstrong thinks very high grade corporates, equities, and gold are the places to be - once confidence cracks in the sovereigns.

PM is always welcome for food, friends and first aid at our farm. What else do you need? More precious metals!

PM is always welcome for food, friends and first aid at our farm. What else do you need? More precious metals!

PM is always welcome for food, friends and first aid at our farm. What else do you need? More precious metals!

Wow this podcast was very scary and confusing.  As I have said before I do not have a college degree and so never studied economics in college.  Perhaps that's a benefit.  I suspect I represent a large portion of our country, Mr. And Mrs. Middle America. Anyway it is very difficult to wrap my head around what is happening and what was discussed.  It seems easy to understand using cash, buying and selling and taking out a loan, you know basic activities of daily life transactions.  Here are a few items that boggle my simple mind and that don't make sense to me.

  • How can a bank balance sheet go from 6 trillion to 21 trillion, and what does that mean? Perhaps the banks are really, really carrying a lot of debt (from what) or we are taking out a lot of loans and they are expecting big payments from us or the banks  are playing some kind of digital games with numbers and saying those numbers represent money?
  • "Investment grade bonds in Europe now trade with a negative yield" -why would anyone buy a bond that does not pay a yield that makes no sense.  Are we at the point when the problems are so ludicrous that stupid becomes logical?
  • It's as if the whole financial system has become a casino with no common sense or rules.  Computer programs buy and sell stocks for the most astute manipulators and manipulating the system is the name of the game.  There seems to be no real representation of reality.  Numbers on a computer screen or printed on a piece of paper are creations of banks, governments and other entities and game playing, or perhaps its financial war, continues unabated as we poor saps are led to believe we are not spending enough, buying enough and don't pay enough for anything (like health care, food, or utilities).  
  • I suspect manipulating the financial system has become a game for some within the system and we poor saps, the middle class and the poor are just pawns to be moved around and fed propaganda.
  • How could a system like this not collapse?  
  • This system is all sooooo confusing my eyes are crossing and I have brain fog.  
Okay how did I do? Any insight for us novices?



[quote=AKGrannyWGrit]Are we at the point when the problems are so ludicrous that stupid becomes logical?[/quote]

There's an old story about the Saskatchewan farmer who was ecstatic when the maternity nurse told him his wife delivered a pre-mature, 1 lbs., baby girl and that her chances of surviving were slim. The nurse was puzzled as to why he was so happy, given the situation. His reply was, " Where I farm, we're lucky if we get our seed back at the end of the year". Ever increasing yields, whether agricultural or financial, have their limits (EROEI anyone).
Mr. Pento is only echoing what has been droning across the blog-o-sphere, webcasts and Fox-ownion airwaves for months and perhaps even the last couple of years. When you buy on margin and use those assets as collateral to buy more assets, balance sheets soar and CB's keep extending credit. Electronic, algorithmic traders continue to skim the cream and savers remain holding the bag. Mr, Pento  has read things correctly, but CBer's continue their prestidigitation in order for the very rich to continue their financial ploys. Getting local and increasing productivity are essential first steps in climbing out of this hole. PP's glimpses of the scarcity cards should grab the attention of all of us frequenting this site. Embrace resilient living and continue to share your ideas with all who will listen. Chris and gang, keep up the good work.

One at a time.

  • How can a bank balance sheet go from 6 trillion to 21 trillion, and what does that mean?
Pento was talking about the central bank balance sheets.  The central bank controls how much money is in circulation by increasing or decreasing its balance sheet.  For every dollar of "balance sheet" increase, the central banks have printed one dollar of new "base money".  They are trying to create inflation, in order to combat the deflationary pressure of the debt bubble pop, by creating more money supply.

You would think that "more money out there = more inflation" and thats true most of the time but not always.  Japan is a perfect case in point.  When people are scared, they save, they don't spend.  So all the new money created by the central bank just sits there, right alongside the old money.  No inflation (at least, no monetary inflation).

(Monetary) price inflation actually comes from money that is actually spent.  So if you borrow money and then stick it under your mattress, that's not inflationary.  If you borrow money and spend it on a vacation - that is inflationary.  Its what you do with the new money that counts.  Of course, paying it back is deflationary, and that's the state where society is now - in aggregate anyway.

Inflation can also come from people switching from saving to spending.  If people start to panic, thinking their money won't be any good - for whatever reason - then even if money supply doesn't change, inflation can pick up because people don't want to save anymore.  Whatever they decide to spend it on will go up in price.

So central banks can control the money supply, but they cannot control people's emotions.  People scared of debt & deflation won't spend.  That's why CB balance sheets have gone from 6 trillion to 21 trillion.  Its an attempt to create inflation.

  • "Investment grade bonds in Europe now trade with a negative yield" -why would anyone buy a bond that does not pay a yield that makes no sense.  Are we at the point when the problems are so ludicrous that stupid becomes logical?
People plead guilty and get prison terms all the time.  This seems stupid on its face - by doing this, you are guaranteed to go to prison.    But by pleading guilty they are trying to avoid a possibly much-longer prison sentence.  Everyone knows what this is: its a plea bargain.

Same thing with buying a negative-rate bond.  Big company has its payroll and working capital in the bank.  If the bank dies, in Europe, Big Company payroll will get "bailed-in", and they'll lose maybe 50-100% of their deposits.  If they buy a high grade short-term corporate, they'll lose a guaranteed -0.5%, but that's a much better fate than the potential 50% loss from the bail-in.  That's just one example.

Think of buying negative rate bonds as a plea bargain.  They're just trying to avoid a much worse fate.

  • How could a system like this not collapse?  
I'm not sure the system overall needs to collapse (i.e. a Mad Max dark age), but I think there does need to be a big reset before we can return to something approaching normality.  As Chris always says, the question is who will eat the losses during the reset.  Or as Nicole Foss would say, right now we have "excess claims to underlying real wealth," and some of those excess claims will need to be extinguished before we get back to something approaching normal.  Whose claims will be extinguished is another way of saying that same thing.

That's what happens in a debt bubble pop.  Excess claims are extinguished.  And nobody in that top 1% wants their particular claim to vanish…so the central banks are doing everything they can to try and avoid this fate for as long as possible.

"Please, everyone, borrow more money so we don't have to face the debt problem we're in.  I don't want my excess claims to be extinguished."

The last 8 years have been all about avoiding having the "excess claims extinguished" event from happening.  Its long-term impossible, of course - and the efforts to avoid this fate have warped the system beyond recognition.  In the meantime, everyone that has a claim is looking at which claims are more likely to be extinguished, and which are less likely.  Prices of the less-likely-to-be-extinguished group are bid up to silly levels.  And that's why we have negative rates, and the talk of banning cash.  (Cash, during the 1930s depression, was a claim that could not be extinguished; they're trying hard to "fix" that this time around).

My understanding is that we are seeing inflation up in the stratosphere of the economy the top 1% occupies; high art, luxury items, multi-million dollar estates, etc. The target strata of QE was the upper crust, but I expect helicopter money targeted at "middle 'murica" would have a more inflationary effect. This is why Chris advocates running, not walking, to buy everything you need at the moment you see helicopter rotors on the horizon, or hear them coming.


I'm just hoping Chris will alert us ahead of time, though I don't want to put it on his shoulders and ignore my own senses and agency.

And yet, all debt has to be paid back sooner or later, or at least there must be an expectation of that happening (why would you loan money if not to get paid back with interest??). So the conundrum, as I understand it, is that we have massive accumulated debt that must be paid back, hitting at a time when economic growth is low and not expected to get to pre-2007 levels for a long time - if ever - and thus the chances of present debt being paid off in a lower-growth future seems ludicrous at best, and downright insane if one considers demographics, resource limits, environmental impact, etc.  

Doesn't that mean that entities willing to buy bonds at negative rates are implicitly admitting the shit is already hitting the fan? Or are they just so certain of making good once the central banks buy those bonds off of them at a higher rate?


Again, as always, I don't see a reset happening in a system this interconnected and complex, especially if the elite are likely to lose influence, power, or money in any reset. One can always hope, though, for a reset and not a total collapse.

Which is why, in my opinion, you have politics moving towards the fringes in most of the industrialized nations. The bulk of peoples around the 'developed' world implicitly feel their share of the pie is getting smaller, their lives harder, and their children's futures' diminished, yet very few know exactly why or whom to blame. Plus it is far easier to scapegoat immigrants, Muslims, women, whoever than to analyze the inherent flaws in the system. You'd have better luck explaining water to fish.


Every time I imagine TPTB trying to take cash away from us, I get "Deforest Kelly face," because I feel like that's the robber robbing the car we are sitting in without us noticing. However, given what I know from history and from life, I also feel that betting against human stupidity or our penchant to see roses instead of thorns is a foolhardy bet, especially when the truth is hard or scary


By the way, great response Dave. Very clear and concise! 



I can't help thinking that any re-set will look a lot like WW3.


My understanding is that we are seeing inflation up in the stratosphere of the economy the top 1% occupies; high art, luxury items, multi-million dollar estates, etc.
Yes that's true.  Inflation is such a slippery term.  The CPI doesn't measure "asset price inflation" (maybe we should construct such a measure...boy would that one be interesting) and yet quite rightly you have pointed out we've seen top-1% prices increasing at some really impressive rates.

I guess a more precise way to say it is, we haven't seen "general consumer/middle class inflation" - which would first hit primary consumer goods prices, and then wages will theoretically follow.  That's what the CPI is structured to measure - price increases in middle class consumer items.  (Before all the "adjustments" of course).

Fed wants to see "middle class inflation" because when the wages rise, it makes the debts easier to pay.  Debts get effectively inflated away.  So at the core of it all, the Fed really wants to see wage inflation.  So far, not much joy on that front.

And yet, all debt has to be paid back sooner or later, or at least there must be an expectation of that happening (why would you loan money if not to get paid back with interest??).
This is where things get a little funny.   Turns out, debt does not need to be repaid.  It can be rolled over year after year.  That's called debt slavery!!

The gang owning the debt would (probably) like nothing better than to keep us all in a state of maximum debt, where we can just barely make that minimum payment every month - but without defaulting.  That way, the maximum possible portion of our income can be siphoned off to the debtholders.  Its just a new version of a "company store" type middle-class harvesting mechanism.

Another way to "pay down" debt is to default, of course.  This is what must occur after reaching the ponzi top in the debt bubble.  If we were all rational actors the ponzi would never happen, but people just get too excited, and the banks just can't resist lending money to anyone with a pulse.

Doesn't that mean that entities willing to buy bonds at negative rates are implicitly admitting the shit is already hitting the fan? Or are they just so certain of making good once the central banks buy those bonds off of them at a higher rate?
I think both observations are true.  The second gang (the ones front-running the ECB) will play for as long as they think the ECB will buy.  The first group is playing more for survival than as some money-making scheme.

Ultimately, negative rates are a danger sign.  But its not only about bail-ins.  In the Eurozone, there's an additional wrinkle; people are buying German bonds (pushing them into negative territory) expecting that if the EZ blows up, by owning German government bonds, they will end up being denominated in a future Deutsche Mark currency - which will immediately rocket higher after the EU goes away - at the same time, the buyers will avoid a massive currency plunge in their own soon-to-be Lira/Peseta/Drachma.  I'd guess the swing on that (DM +30%, Lira -50%) would vastly overwhelm the modest -0.5% penalty they are paying now for Bunds.

This is "capital flight in advance" - disguised as a bond purchase that pushes German rates negative.  Its a strong vote of No Confidence in the long term future of the Eurozone.

The EZ doesn't have currency differentials to absorb impact from confidence problems, so the bonds end up taking the heat - at least when existential issues become more front and center.  The ECB has intervened to try and neutralize this effect by "buying everything", but you can still see the impact if you look.

If I followed this podcast correctly, Mr. Pento points out that inflation is a tricky beast to control. Once it is unleashed, it isn't always easy to rein in.

This is also reminds me of why I sometimes object to the charge that current Fed policies are Keynesian; Keynes would have advocated for monies being funneled into the productive classes - ie. the working and middle classes - because those classes are inherently obligated to spend such money back out into the economy. This would have caused more inflation of both wages and prices…or at least more than QE did. So, from what I know of his theories, Keynes would have opposed QE as it eventually manifested. Wasn't QE modeled more on the neo-classical models that were merged with Keynesian macro theories, or…?

Admittedly, my knowledge of deep Keynesian theory is lacking, or more accurate to say "as deep as a historian needs to explain certain elements of history to his students,", so I'll put it out there that I could be wrong.

Funny, as in "The Joker" funny, rather than "John Belushi" funny.


The problem, it seems to me, is that there are far too many middle-class Americans on the verge of default than there are who are capable of taking on any more debt loads. Or, perhaps simultaneously, there are far too many middle-class Americans who are choosing not to take on any more debt loads because '07-'08 scared the bejeezus out of them. Hence the opening rounds in the "war on cash," right?


Dangerous game, that, since it has been pointed out even by mainstream economists that the exit is never big enough to accommodate the crowd in the room when they all try to get out at the same time. Are there signs emerging that there are big players who are positioning themselves near the exits? Like, in a number large enough to warrant serious alert status among us sheeples?

Add this to the list of red flashing lights on our dashboard. And here I was thinking we might avoid catastrophe.

And this is where I feel like a AAA player trying to hit a major-league fastball. I followed what you are saying, but good lord your ability to see the devil in the details of economics makes me feel totally in the dark; I'm ok with this, mind you, because I have my plate full with lots of other things to learn and know, so I'll rely on people like you to give people like me a SitRep when necessary.

Anyway, I knew all about the rates, but didn't realize how much was at play in the background, and what's at play seems to be some big players moving towards the exits. Fortunately I'm not a big enough investor to be in that room, so I can watch this all play out from the outside rather than worry if I will make it to the exit. If only I could find a way to shrink that door. That would make it all the more amusing to watch when the music stops! Which, by the sounds of this podcast, may be as early as this week? Joy.



None of this makes me feel any less unsettled about our current global economic situation.

CPI is highly controversial.  What it is "structured to measure" is highly debatable.  What organization is responsible for the CPI?  The same BLS that gives the bogus job numbers (& says we are currently at "full employment") month after month based off the hocus-pocus birth-death model produces the CPI.  The government has incentives to "manage" this number.  For example, a lower CPI will give a higher GDP.  Thus, a method to show fake "growth" and produce an artificially high GDP is to have an artificially low CPI.  Charles Hugh Smith had an article about his "Burrito Index" two months ago & how it outpaced the official CPI by 4.5x since 2001.


So, I think only the people who are high up in the BLS can explain what the CPI is structured to "measure".


In regards to the Fed, only the officials at the top of the Fed can say what they "want" or don't want in regards to "middle class inflation", etc.  What Fed officials say publicly does not mean that's what they are thinking privately.  The Fed answers to no one.  It's 100% privately owned & managed.  It's one of the most secretive organizations in the world.  The Fed started with virtually no assets & now is the largest real estate owner in the U.S.  Need I say more?

Your assumption that all debt has to be paid back is absolutely false.  Wall Street has made trillions based off the fact they know the current debt can never be paid back & this Ponzi scheme has passed the point of no return.  Thus, they have been banking (pardon the pun) on the fact that anything & everything will be done as far as money printing (eg conterfeitting) goes to keep the game going for as long as possible.  They will continue becoming extremely wealthy playing this paper game.  Where is all of this going?  The Ponzi grows & grows & grows until it is impossible to grow any further.  In this process the current concept of "money" (or currency as Mike Maloney says) is dying.  When things implode the paper assets will start approaching the value of paper & wealth will flow into real world hard assets.  The $64 quadrillion question is when the paper Ponzi implodes.

High inflation / hyperinflation is generally from a loss of faith in a currency or government.  Playing games with massive money printing is an extremely dangerous game.  Go a few dollars over the edge & when it gets going trying to reel it in can become impossible.

Not false at all. It's just that I'm approaching the issue from the perspective of a person who has been trained to pay back debt. TPTB don't care about such trivialities, which still butts up against my indoctrination. =/



Good points and thanks for qualifying the type of inflation as monetary.  Of course the big problem is, and why we will never get back to the old normal, is that there is structural inflation. By that I mean the fundamental change in EROEI.  The low hanging fruit in the current in the exploitation based model has been picked.  Soils are being exhausted, non-renewable energy consumed, fish stock depleted, forests clear cut, uranium depleted, water table dropped, ice storage in our highlands depleted, essentially every resource you can imagine, depleted, exhausted, poisoned. This creates structural inflation which no monetary policy can ever fix.
Talking about monetary policy in isolation, is a bit like chasing your tail, it leads nowhere. And even if your monetary heroes were suddenly and magically controlling all the financial levers of power, whether that means actively incentivizing different behavior, or letting the magic of the free markets do their thing - NOTHING CHANGES.  Just like in politics, no one ever questions (or even admits), that we are part of a global empire run under the threat of force, both monetary and military.  Everyone just talks about (in coded words of course) how to run the empire better…lets make America great again!!!

If we can not ditch the empire, exploitation, a competitive violent fear based system, which is part and parcel of our current monetary system, tweaking the edges with "policy" changes, is a total waste of time.  Relocalizing our economy where we can get back to a paradigm where we realize that our neighbors and the natural world are not our enemies is the way out of the madness, otherwise we will live in a world based on terror, whether it be political, ecological, financial, or mental.


Here's my latest Facebook post, in which I'm trying, yet again, to alert my friends and family to what the hell is going on. Please keep in mind that I'm a "big picture" kind of person, and that I have to keep it "broad-brush" for the audience I'm addressing. Let me know if I'm missing something big that I should add!.

"Economic- So, for all two of you who care about such stuff, this could be an interesting week in the financial world. The Japanese central bank and the Federal Reserve central bank are each holding meetings this Wednesday to assess current central bank policies in Japan and the United States, respectively.
See, the current high levels of the U.S. stock market, as well as historically low bond yields (the interest a bond issuer will pay to a bond purchaser), are all directly tied to the "easy money" policies of the world's largest central banks that have emerged over the last decade. In some nations, bond yields have even turned negative - a fascinating phenomenon because "issuing a bond" means "issuing an IOU and borrowing money," and "purchasing a bond" means "loaning money" - so purchasers of negative-yield bonds are PAYING for the honor of loaning money.
If that doesn't make your head swim, I don't know what else will, because the whole concept of "interest" since the inception of capitalism (and even before that) has been that YOU pay ME interest when I loan you money.
Now, there are only two reasons for any investor to buy a bond at a negative rate: 1) You have no other choice because there's nowhere else "safe" to park your large money (a scary indicator of how bad things have gotten in the global financial world), or 2) You are "front-running" the central banks by buying bonds at one rate directly from the government or corporation, then selling them to the central bank at a higher, more lucrative rate.
So this is where it gets interesting. IF the Bank of Japan and the Federal Reserve both signal that they may be wrapping up this whole "buy bonds willy-nilly" program, those bondholders who bought bonds at historically low rates stand to lose shit-tons of money. So, on any signal that this might happen, there could be massive bond selling going on late Wednesday into Thursday, which would cause bond rates to rise...and borrowing costs for governments and corporations to also rise...which would also cause further losses for anyone caught holding low-yield or negative-yield bonds. God forbid the Federal Reserve actually raise interest rates too, since that would have the effect of pushing things along even faster.
Many mainstream economists think that neither Central bank will do anything rash, and will continue the historically low interest rate and bond-buying policies, but if those predictions prove not to be true, THAT might explain any market chaos/bloodbath in the second half of this week.
This only matters to us little people because, oh, I don't know, most of us have 401k retirement plans that are heavily invested in both stocks and bonds.
We live in interesting times."


CPI is highly controversial.  What it is "structured to measure" is highly debatable...
I think you missed the part where I said "after the 'adjustments.'"

The original CPI, as constructed in 1913, was structured to measure middle class inflation, because of what was in the basket they measured.  They didn't include bottles of Chateau Lafite, or Picassos, or properties in the Hamptons.  It was cans of tuna, milk, eggs, bread, chicken.  Roughly speaking, that's middle class stuff.

If you want to get wrapped around an axle about what the CPI was supposed to measure, that's up to you.  Clearly the methodology has changed since 1913, we all know this - its Crash Course 101 - and I've said as much any number of times in the past.

Not even the Fed believes the CPI measures anything useful anymore.  I sometimes wonder what they actually use behind the curtain.  PPI, perhaps?  Check out how the CPI (roughly) stops tracking PPI after 1980.

In regards to the Fed, only the officials at the top of the Fed can say what they "want" or don't want in regards to "middle class inflation", etc.  What Fed officials say publicly does not mean that's what they are thinking privately.
Oh sure.  They could want all sorts of things.  The mind boggles.

But in terms of monetary outcomes, the Fed is pretty clear about wanting inflation (wage inflation, in this case) to order to make the debt easier to pay down, in tandem with financial repression.  That's the one relatively painless way out of a debt bubble.  There have been plenty of papers written on exactly this subject, Reinhart & Rogoff being one such paper.  Fed is big on papers.  Of course, once again, you can choose to get wrapped around an axle about what they do or don't want and the grand mystery as to what is truly in Janet Yellen's heart, but common sense would suggest that they actually do want a way out of this mess other than a deflationary collapse (or a hyperinflationary explosion), and this is what their favorite papers are saying so - Occam's Razor and all that.

Will they get this?  So far - there hasn't been much wage growth to speak of.  Globalization hosing wages, cartels ratcheting up costs, junk fees - it all seems to be structurally against their dream coming to pass.

And yet…look at the deflation in this recent chart of home mortgage debt/GDP ratio.  Overall mortgage debt has dropped, and GDP has risen - so this chart is the result.  Private mortgage debt as a percentage of GDP has dropped back down to 2003 levels.  That's better than a poke in the eye.