The Treasury Bubble Blows On

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The Treasury Bubble Blows On“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.” — Alan Greenspan

Before he sold his soul and renounced free market economics, Alan Greenspan was one of my heroes, and the above quote exemplifies why. I’m still in shock; the man spent his entire life championing economic freedom, only to throw it all away near the end. I don’t see how he sleeps at night, knowing history will see him as a sycophantic coward and a political lackey. But, as Mr. Greenspan so eloquently noted above, “the financial policy of the welfare state requires there be no way for the owners of wealth to protect themselves.” The treasury bubble blows on…

This process has gone on far longer than I really believed it could, but I maintain that being short Treasuries is a no-lose trade; no matter what happens, rates are going higher.

I’ve heard any number of analysts suggest that the current Treasury bubble is “different” from other bubbles, because it is driven by fear rather than greed. I respectfully disagree; there are any number of traders out there who will be happy to go on the record to say that Treasury prices are going higher — mainly because they believe the Fed probably is going to continue hammering the long end of the yield curve. The U.S. central bank can announce any policy it likes, but the clear truth is that it is still buying bonds, and savvy traders know this. I assure you, these traders’ motives have absolutely nothing to do with safety and fear; they’re buying Treasuries for capital appreciation. And that smacks conspicuously of greed to me.

This is a bubble — of the old-fashioned persuasion — and its longevity owes almost exclusively to the financial magnitude behind the full faith and credit of the United States government. Nonetheless, every mighty empire in history has collapsed. Interestingly, their declines were — in every case — hastened by economic folly.

This bond craze isn’t as tame as some people would have you believe, and when it ends, it’s going to end quickly — and painfully for anyone holding longer-dated maturities. The printing presses are groaning under the strain of their toil, heralding the imminent onset of unadulterated inflation.

I’m going to ask the same question I have been asking for some time: when this borrowing spree finally reaches its zenith, who is going to keep lending the United States money? Will it be the Chinese? The Japanese? The Saudis? And if so, why? Why would anyone continue to lend to the most indebted nation in the history of humanity — especially at such meager rates?

To make something valuable, one must decrease the available quantity — and/or increase demand. The U.S. government is clearly not decreasing the number of dollars available. And I am hard-pressed to think of any factor that will perpetuate anything like the demand that will be required to sustain this ride; I can envision no force in the universe that will create demand at a rate that outpaces the trillions of dollars now circulating in our economy.

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