- Will the FedRes let the bond market collapse? It is clear that foreigners are buying much less bonds, from the latest auction results. No amount of money is sufficient for the deficits the US government is generating. In the end, the FedRes will aggressively monetize debts (QE) by printing money out of thin air. It is a currency event and the precursor to the collapse of the USD. Whichever way you look at it, even if the bond market does not collapse, it will be paid with useless toilet paper USD. It amounts to the same thing: a collapse (albeit via the USD). Martin Weiss warns:
Trusting Washington and Wall Street is bankrupting millions of Americans … and now they’re at it again! In the 1990s, Wall Street urged you to buy Internet stocks at 500 and 1,000 times earnings — and even tried to railroad you into stocks with no earnings at all. Result: According to the Fed, nearly $6.6 trillion vanished into thin air when those stocks crashed and burned.
Then, in 2001, Washington got into the act — driving interest rates to their lowest levels since World War II … helping to create the greatest real estate bubble in history … and doing absolutely nothing when money-hungry bankers and brokers broke every rule in the book. Result: The Fed’s latest report reveals another $15.5 trillion in losses the great real estate bust, credit crisis and recession.
The bottom line: In less than one decade, investors who trusted Washington and Wall Street were fleeced to the tune of $22.1 TRILLION! Now, by bailing out bankers, brokers and CEOs, Washington has created the most dangerous bubble so far: The enormous and rapidly growing explosion of federal debt — U.S. treasuries — dumped on investors worldwide.
You don’t need a PhD in economics to know what’s next: Like the Tech Bubble and Real Estate Bubble that preceded it, this new bubble will also burst, wiping out trillions more dollars of invested wealth.
Three Compelling Reasons
Long-Term Bond Prices MUST Crash
Reason #1 — Exploding Federal Deficits: Washington’s current crop of drunken sailors is making some of their predecessors appear sober by comparison.
The 2009 budget deficit of $1.4 trillion was the worst in history — more than three times larger than the previous record. Recently, the Congressional Budget Office (CBO) projected that, rather than shrinking, the 2010 deficit will be $1.4 trillion. Worse, Washington will sink a total of $7.4 TRILLION deeper in debt over the next ten years.
The White House’s Office of Management and Budget (OMB) quickly disagreed, pegging the 2010 deficit at $1.6 trillion and promising an $8.5 trillion gusher of red ink over the next decade. The New York Times quickly chimed in, pointing out that about 80 percent of the government’s deficit forecasts over the past three decades were too optimistic.
In fact, just two years ago, the CBO said the 2010 deficit would be $241 billion. Now it’s likely to be at least $1.6 TRILLION — or over SIX TIMES MORE. Imagine if the government’s current ten-year debt estimates — already over $8 trillion — turn out to be equally far off-target! Of course, that would be impossible. Bond investors would simply stop lending Washington money long before that could happen.
Reason #2 — An explosion in the supply of U.S. Treasury bonds: It would be bad enough if Washington only had to borrow enough to equal each year’s budget deficits. That would mean $1.6 trillion-worth of treasuries hitting the auction block this year alone, many times more than in prior record years.
But Washington also has to borrow enough to replace Treasuries that are maturing — and that means an even greater avalanche of Treasuries need to find buyers each year. Already, total issuance of government debt already hit a stunning $922 billion in 2008. It then surged even higher to $2.1 trillion in 2009, and it’s on track to top $2.5 trillion this year. The size of just ONE WEEK’s debt auction has ballooned to almost $120 billion — more than the total supply hitting the market in a FULL year not long ago.
The laws of supply and demand dictate that when you get a massive increase in the supply of anything, its value plunges — and Treasury bonds are no exception.
Reason #3 — Global investors starting to rebel: So far, given the realities above, the U.S. treasury market has proven to be remarkably resilient because, in the global competition for investor funds, U.S. Treasuries are typically viewed as the “least ugly” alternative for many investors.
That’s why, so far, most foreign investors — now holding about 60 percent of all marketable U.S. Treasuries — have been willing to pay a relatively higher price for them and accept lower yields. But now even that is changing! As Mike Larson reported on Friday, China, the single largest holder of U.S. debt, dumped more Treasuries than in ANY month since the government started tracking the data in 2000.
This may help explain why the Treasury auctions last week turned out to be a monumental dud, with demand extremely weak. The 30-year auction was especially pathetic: Indirect bidders — mostly foreign governments and investors — took down just 28.5 percent of the bonds sold, compared to a ten-auction average of 43.2 percent percent.
Prices slumped. Yields surged. In effect, the U.S. Treasury had to bribe investors with higher yields to get them to buy. Immediately alarm bells began ringing at the Fed. On Thursday, just a few hours after we presented Nine Shocking New Predictions for 2010-2012, the U.S. Federal Reserve raised the discount rate on loans made directly to banks. The 25-basis-point increase was the FIRST hike in the discount rate since early 2006.
Secretly, the Fed is in a panic to ward off a bond market collapse! They know that, sooner or later, they MUST send the message that they’re serious about cutting back on their mad money printing.
The danger of course, is that foreign investors will get an entirely different message: That Washington’s efforts to fight the most severe recession since the Great Depression are waning.