By Peter Chezwick, FutureMoneyTrends.com Contributor
What do you do when you have a massive problem with no possibility of a good outcome and that must be dealt with at some point in the near future? If you were to listen to our leaders and the people that pull the economic levers at the Federal Reserve: You deny its existence and ignore it, of course. I am referring to the US Treasury Bond market that has gone parabolic over the last five years in case you were not aware of it.
If you listen to most of the “experts” you might think that debt really doesn’t matter when it comes to the government or it’s something that will be dealt with in the future at some point. I contend however, that this exponential monster lurking in the shadows has the power to do great harm to people that even think they are not exposed to it.
In my estimation, either we are led by the most ignorant, moronic bunch of buffoons that could be mustered, or we are being outright lied to. The media simply can’t tell you the risk involved in the Treasury bond market, this would cause a panic. Government hopefuls that talk of financial hardship are never elected as we see with Ron Paul and all other fiscally responsible politicians. Tell the people what sounds good, what they want to hear, like “very low inflation” and “tepid but solid recovery” while food and energy are strapping the middle class with invisible taxes.
We all know what happens to a country’s currency when they default on their debt; it’s called hyperinflation, Mr. Bernanke. He must know that we have been living on borrowed time ever since the first round of Fed bank bailouts and the infamous Quantitative Easing (electronic money printing) scheme. When nobody has the currency to finance your country’s future obligations, make your own money, right? None of this is terribly surprising to me and I think the average aware American knows there IS a big event coming when, not IF, but WHEN the treasury bubble pops. It’s always easier to make these issues someone else’s problem when in charge though as people have the “not on my watch” mentality so their reputation is not stained.
What I still don’t comprehend is why the financial sector seems to pretend that there is no problem. Anyone who says that this issue must be addressed right away, like 2008-2009 right away, is called some sort of crackpot. Maybe this is because if everyone saw the urgency of the monster we face, it would precipitate the great exit from the “most stable liquid asset class there is?” I really would love to get inside the heads of whoever oversees the asset reserves of countries like China, Japan, oh yeah and most domestic insurance companies and pension funds. Do they not understand the risk of an “asset” that has been diluted by more than 100% over the last 7 years? An obligation that has no logical, mathematical way of being made good on with real dollars in terms of purchasing power, and you’re betting the future on it?
One thing that we know about bubbles is that the denial of them is shoutest the loudest right before they pop. Even Bernanke himself denied the, “premise” of a housing contraction right before the bottom fell out of the market that almost took the world economy with it. The housing bubble was a fraction of the amount of promised dollars to be delivered from treasury debt, and get this; some are 30 years out at an annual rate of 2.81%! Another thing we know is the speed at which bubbles deflate once they are recognized. Here is where things get tricky if you hold or depend on this paper via a pension plan or retirement fund. The first ones to get out do very well and the last to the exit go to the financial slaughterhouse.
Is it possible that the only reason anyone is holding 10 year treasury debt at 1.616% is because the market is so liquid and they think the exit is a few keystrokes away? Seems a little short sided to me, what happens if they simply close the markets during a panic selling rout? The government has shown very little restraint when acting in their own interests, but I digress. The only other explanations for “investing” in US T-Bonds are blind faith or financial illiteracy if you acknowledge the fundamentals.
How liquid is a $16.3 trillion dollar treasury market though, when a fast liquidation is required? It really dwarfs anything in terms of magnitude the world has ever seen and a rapid exit scenario would take the global economy down with it as it backs almost everything from government reserves, most large financial institutions to granny’s retirement plan as an asset when really it is a liability in terms of inflation. Inflation is the only way to pay this money out. Sure you might get your dollars in the end if the Fed decides to go with the nuclear option and buy all the outstanding debt, but they just won’t have any purchasing power.
In the meantime, kick back and drink your Starbucks, nothing to see here if you listen to the leaders and pundits…until there is something to see here. By then though, millions, even billions of lives will be affected in a very negative way as far as all of this supposed future wealth, (false promises) evaporates and the people in charge claim they never saw this coming while scurrying around looking for a scapegoat like China. (If you’re scared of hard assets, this is the fear mongering part.)
Most things tangible should hold their value when this happens, food, property, energy etc. But for portable wealth in a dense form that has never been a liability, precious metals are the way to go. I’m not a precious metals bull by the way, I’m a dollar bear. Sure, there might be some deflationary head fakes before the bond market capitulates and capsizes, but the ultimate outcome is certain when looked at logically.
