« BACK  |  PRINT

RS

MEMBER DIARY

Treason and the Bond Markets

Congress might be able to fool the people on passing the stimulus, but you can’t fool bond traders.  You just can’t fool the market.  That is why we used to place such reliance on free markets.

Sir John Harrison: Treason doth never prosper: what’s the reason? Why if it prosper, none dare call it treason

Will the US proper from the stimulus?  Will the taxpayers prosper?  Trust me: savvy bond traders WILL prosper, even if the stimulus doesn’t.  That means Treas will not be able to sell bonds when traders have a choice of buying Chinese or British bonds (China and Britain are also issuing over a trillion in theior own treasury bonds).  Treas will need to pay a higher interest rate in order to sell its bonds.  

Bond traders also know that whatever the yield on Treas securities, they are going to be repaid with dollars that are rapidly diminishing in value, so they will want yet a higher yield.  With such a huge deficit, so much borrowing and fiscal policy managed to support mortgages (and the new ‘mortgage policy’ management) will place further downward pressure on interest rates.  So without huge interest rates, issues will go unsold.

Which means the only alternative is to print more money.  That will place downward pressure on the value of the dollar.  We see other currencies gaining value, and the price of gold going up.  We hear so many commercials on how the value of gold is expected to reach new heights.  Except the value of gold is pretty constant.  What is actually happening is that the value of a dollar is going down.   Way down.

There is an anecdote, probably urban folklore, that tells of an incident that purportedly happened during the hyper-inflation in the Weimar Republic of Germany in the 20s/30s.  A guy took a wheelbarrow full of cash to the store to buy some bread.  I left it unattended for a moment.  When he came back out, the whellbarrow was gone and the cash was on the ground.  The assumtion was that the whellbarrow was regarded as worth much more than the cash it contained.

We may be seeing the same here in the next few months.

Will this treason of our Congress prosper?

Get Alerts