It is frequently pointed out that bonds are not a good investment, because the yield on quality bonds, i.e. Treasuries, is insufficient to compensate for inflation.

The problem is, there are no good investments available. Where investment is defined as an income-producing asset with low risk of principal loss. Essentially all asset classes are overpriced. Equities have been overvalued continuously since 1991. Real estate, well don’t go there. Commodities and currencies aren’t investments, they don’t produce income.

So one does what everyone else is doing, one becomes a speculator, betting on future prices. Yuck. I hate it, but there is no alternative. This has meant, and continues to mean, markets where there is no tie to investment value, price action is the only thing. Manipulation is prevalent. But in the long run, I believe that value will govern. I’ve been in the speculation mode since 1997. I want to go back to being an investor. The overvaluation is driven by an excess of cheap credit. People borrow because they can, drive up the price of assets with the borrowed funds, and come to believe that they are investment geniuses. The great deleveraging, which will remove the supply of cheap credit, has started. The banking system is a collection of zombies, dead companies still trading, their capital an accounting fiction. I am just stunned that seemingly intelligent people think that the economy can resume growth with securitization of credit essentially shut down, and a banking system that is desperately short of capital already, and facing more losses in the future.

There is nothing that the Fed can do without a well-capitalized banking system, it is not a lender to end users of credit (except the brokers, I guess). It needs to look at the Japanese example and learn, not to wait as long as the BoJ did to restructure a broken system. It will not, and cannot, heal itself. Of course, the systemic failure is largely due to the actions of the Fed itself and recognizing this will be difficult. It is perhaps not something Mr Bernanke is capable of doing, given that he is so imbued with the nonsense of modern monetary “economics.” It is not what we don’t know that hurts us, it is what we know that isn’t so.