Yield Curve Control: How the Fed Will Quietly Confiscate Your Wealth
Doug Casey

Yield curve control, or YCC, may sound like an obscure technical policy.

It is not.

It is one of the most important tools of financial repression.

In plain English, yield curve control means the central bank decides what interest rate the government should pay on its debt—and then uses its money-printing power to enforce that rate.

If the free market demands 6% to lend to the government, but the central bank wants the government to borrow at 3%, the central bank steps in and buys enough bonds to force the yield down.

In other words, YCC is price fixing for government debt.

And like all forms of price fixing, it creates distortions, misallocations, and unintended consequences.

Of course, they may not call it “yield curve control.” They will probably invent some new euphemism or acronym. They may call it financial stability policy, emergency asset purchases, market functioning support, temporary intervention, or something else entirely.

But the label does not matter. The result is the same. The central bank buys government bonds with fake money it creates out of thin air to suppress yields and stop the system from breaking.

Remember, the Fed has only two tools in its toolkit: currency debasement and gaslighting.

That explains how YCC works mechanically. But the more important question is why politicians and central bankers would be able to get away with it.

It is not hard to imagine how YCC would also be politically popular.

Rising yields mean lower home prices. Home prices are especially important to Baby Boomers—about 22% of the population—and other politically active demographics because home equity is a major component of their wealth. So a policy that keeps yields from rising, and therefore helps keep home prices stable, could easily be sold to them. They would cheer YCC.

Likewise, YCC could be spun as a positive for younger voters because it would keep mortgage rates lower and make housing appear more affordable.

Of course, this is a Faustian bargain. There is no free lunch.

The benefits are illusory because Boomers and younger voters alike would end up paying for it through inflation. But perhaps not 1 in 100 would understand the dynamics. And that is why I think YCC would be politically popular.

That is the political sales pitch.

But beneath the slogans and euphemisms, YCC suffers from the same fatal flaw as every other central bank policy.

With any discussion about the Fed and central banks, it is essential to keep the basics in mind.

Start with the most fundamental point: central planning does not work.

That is the first principle.

Central planning of shoes does not work. Central planning of wheat does not work. And central planning of fake money does not work.

Central banks in general—and the Fed in particular—are on a mission impossible.

They do not know what the 10-year Treasury yield should be. Nobody does. That is an exclusive function of a voluntary market of savers and borrowers.

A politburo cannot centrally plan interest rates any more than it can centrally plan potatoes.

It will inevitably fail and cause enormous damage.

And once the monetary central planners start with YCC, there is no reason to believe they will stop there. YCC would likely be only the initial step in financial repression.

If YCC does not suffice, the US government will turn toward more aggressive measures.

Capital controls. Mandates forcing banks, pension funds, and insurance companies to buy government bonds. Regulations that make Treasuries appear “safe” or “risk-free” on institutional balance sheets. And countless other policies designed to trap capital inside the system and push it toward unwanted government debt.

Investment Implications

The investment implications of all this are straightforward.

• The US government’s debt problem is not going away.
• It is politically impossible to even slow the federal spending growth rate, let alone cut it.
• The debt will continue to rise.
• The interest expense on the debt will continue to rise.
• Yields will continue to rise until they force the Fed’s hand.
• And when that happens, I think the Fed will be forced to implement some form of yield curve control to cap long-term yields.
• That means the Fed will use currency debasement to buy long-term government debt and force yields lower. That is the key point.

Once you understand the logic, the investment implications become clear.

First, Treasuries—and likely most other bonds—will be terrible places to store wealth.

Supposedly “safe” fixed-income instruments are structurally designed to lose purchasing power so the government can service its debt without an explicit default. That is what financial repression really means.

It means forcing savers, retirees, pension funds, banks, insurance companies, and other institutions to hold government debt at yields below the real rate of inflation. It’s a guaranteed way to lose purchasing power.

That is why I want nothing to do with Treasuries or bonds.

The Fed needs inflation to make the debt math work. It needs negative real interest rates. It needs bondholders to earn less than inflation so the real value of the debt can be quietly liquidated over time.

Second, fiat currency inflation should benefit hard money alternatives resistant to debasement like gold.

If you stay trapped inside the fiat system and traditional fixed-income instruments, you will go down with the ship.

That’s the bad news. The good news is simple. You can exit (for now).

Much of the value stored in the colossal fixed-income market—roughly $300 trillion—will move elsewhere. Some of it will move voluntarily into superior store-of-value assets like gold. The rest will be transferred involuntarily to bankrupt governments and their cronies as they accelerate one of the largest wealth transfers in history.

That is the Big Picture reality that most people don’t understand… yet.

That is not surprising. Until recently, bonds had been in a bull market for more than 40 years. Complacency is deeply ingrained. Millions of investors still believe bonds are safe. They still believe Treasuries are “risk-free.” They still believe the central planners at the Fed can manage the system. They are wrong.

Financial repression will likely blindside most people with devastating effects. But for astute speculators, it is creating a ripe environment.

In essence, a speculator is someone who identifies market distortions and positions himself to profit from them. He does not create the waves in the ocean. He learns to surf them. And the coming wave of financial repression could be one of the biggest of our lifetimes.

Yield curve control is not merely a bond-market policy. It is a mechanism for quietly shifting wealth away from savers and into the hands of an overindebted government.

The next stage of this crisis could bring higher inflation, market volatility, and tighter controls over your money. That is why I prepared a free report revealing the risks ahead—and three practical strategies for protecting your wealth and personal freedom.

Get your free report now.

Doug Casey is a world-renowned investor and author of six books; his “Crisis Investing” was on the New York Times bestseller list for 29 weeks, including 11 weeks at #1. His third book, Strategic Investing, reached #7 on the NYT list. His most recent books are “Totally Incorrect” and “Right on the Money.” He’s currently completing a series of six novels; the first, “Speculator” is soon to be released.

He has been a featured guest on hundreds of radio and TV shows, including David Letterman, Merv Griffin, Charlie Rose, Phil Donahue, Regis Philbin, Maury Povich, NBC News and CNN, and has been the topic of numerous features in periodicals such as Time, Forbes, People and the Washington Post. He is also the founder of the Eris Society, a non-profit organization that for 30 years brought together hundreds of the world’s leading thinkers on a wide range of eclectic topics related to the arts, sciences, technology, finance and medicine. His firm, Casey Research, LLC, publishes a variety of publications and web sites with a combined weekly audience in excess of 300,000 individuals, largely high-net-worth investors with an interest in resource-development and international real estate. He can be reached at caseyresearch.com or internationalman.com.

Mr. Casey has visited over 145 countries, most of them several times, and has lived in ten. He has been active in polo, skydiving, martial arts, scuba, auto racing and competitive shooting. He lives mainly in Cafayate Argentina, Punta del Este Uruguay, and Aspen Colorado.

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