Friday, December 17, 2010

Armageddon on the Way, Nothing Normal about what is happening to Bond Markets

12/17/2010 Cochabamba, Bolivia Pop in your mints

We can’t shake the feeling that Armageddon is on the way for Bonds Markets in general and especially for any form of debt owed by a government of any size, no matter how powerful.  The Keynesians believe that government debt is simply a myth, just another data point in their mechanical view of the world.  Is private debt shrinking?  Public debt must expand.  In their fantasy world, as private debt is expanding, Public debt shrinks.

We do not know what planet Mr. Keynes lived on, but here on planet earth, government officials make promises to obtain votes.  These promises cost money.  Usually a lot more money than the government takes in.  Remember, the government, by definition, cannot do anything productive, economically speaking.  It can provide protection and justice, which has a price, but as for productive efforts, they are almost exclusively inept.  Ditto for “government investments.”  Investments worth making do not need government assistance.

Back to our point, public debt never shrinks as Keynes thought it would when the government in question runs a surplus.  Too many promises to keep, “investments” to make, wars to wage.  You see, Empires are built in the 21st century by incurring debt, not by paying it off.

But how much debt is too much?  Spain, as it conquered the new world, ran into a wall of debt.  More recently, Greece and Ireland ran into a wall.  The US government appears intent on running full speed into the very same wall.

The wall aside, we have actually seen commentators that believe that Bonds may be a “buy” now that yields have slipped more than 100 basis points since October.  At The Mint, October was but a minute ago.  If you look back over 50 years (see the chart below), 10 Year Treasury Bills, the benchmark, directly or indirectly, for nearly every debt issues in existence are still near 60 year lows.  We again ask the question, with and ever increasing supply of US Treasury debt, which has more than doubled with over $8 Trillion officially added in the last decade, much more if entitlement estimates are included, what reason would US Treasury debt have to go up in value? 

10 Year US Treasury Yields 1962 to Present
We can’t think of one.  QE2 appears helpless to stop this slide.  The House is wrangling over a bill that should add $858 Billion to this debt over the next two years.  The reason for the coming Armageddon in the Bond markets is simple supply and demand.  With the US just one of many sovereign debt issues that need to be refinanced or rolled over, supply is exploding.  What about demand?  Outside of the Federal Reserve system, it is nearly non-existent.

Down here in Bolivia the sun is shining.  The markets are packed to overflowing, along with the streets.  Even with a socialist government threatening to confiscate private property almost constantly, there is an economic movement here that seems unstoppable.  Years of instability in the government has made the citizens extremely self reliant.  With so much self reliance, the opportunity for further cooperation and division of labor abound.

Bolivia’s external debt?  Approximately $7 Billion, or 44% of GDP.  Compared with the US at $8 Trillion or 52% of GDP, whose Bonds would you buy?

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Key Indicators for Friday, December 17th, 2010


*See FED Perceived Economic Effect Rate Chart at bottom of blog.  This rate is the FED Target rate with a 39 month lag, representing the time it takes for the FED Target rate changes to affect the real economy.  This is a 39 months head start that the FED member banks have on the rest of us on using the new money that is created.