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Harry Potter and the Fed's Conundrum
Chapter One: The wizards and witches are flummoxed by the yield curve's odd behavior.
July 15, 2005: 10:25 AM EDT

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Illustro Yield Curveous!
Illustro Yield Curveous!
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"Confound this conundrum!" said the Chairman as he searched the pockets of his robe for his wand.

The doors to the conference room just closed and the muggles were outside. The wizards and witches in attendance were donning their robes. The Fed's Open Market Committee was now in session.

"Illustro yield curveous!" the Chairman incanted, pointing his wand at the center of the conference table. A golden graph appeared in the air.

"Still flattening," muttered the wizard from Dallas.

"And after all the hike hexes we've used," said the witch from Boston.

"Yes," said the Chairman. "We make the short term cost for money rise, yet the long term rate stays low. Sinks even. Most unnatural."

"Could it be what the muggles say?" asked another wizard. "Could it be that demand for bonds is just too great and no matter what we do, the price will be high?"

"And consequently, the yield low?" finished another.

The Chairman was quiet, contemplating the curve hanging in the air before them.

"It's the Ministry of Magic's insistence that the galleon be pegged to the yuan," hissed the Dallas wizard. "It distorts trade. China's products remain cheap for the muggles and us. They get money and in turn, buy bonds. It undermines our rate magic."

The chairman shook his head. "That cannot explain it all."

"A safety charm, then?" said a witch in the back. "Europe and Asia economies having trouble, so their money runs to our bonds, seeking safety and at least some return without the volatility of the goblin-infested equity markets."

"Money runs from market to market," the Chairman pointed out. "This money sticks to bonds for too long. It is powerful magic. No this must be the work of ..."

The room held its breath.

"Voldemort," the Chairman finished. Everyone gasped. "He must be hiding in one of the central banks overseas."

"What to do?" several wizards and witches cried.

"We could bewitch overseas banks to stop buying so many Treasuries," the Chairman mused. "But such magic won't work on You-Know-Who."

The committee shook their heads.

"Or we could stop with the hike hexes for a while. Tell the muggles we're done. Let things heat up in the economy a bit. That will draw money away from bonds to other enterprises."

"That risks releasing the Inflation Ogre," said the Dallas wizard. "Once out, it takes powerful spells to put him back. Spells that may well be beyond us. Better to keep him in check with little hike hexes now."

"But if that curve turns the wrong way," the Chairman pointed at the graph, "it opens the recession portal. The Dark Lord will come with his Debt Eaters."

A shudder ran through the room.

The Chairman sank back in his chair. "Confound this conundrum," he sighed.


Allen Wastler is Managing Editor of CNN/Money and appears on CNN's "In the Money." He can be emailed at  Top of page


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