When the Bond Buying Stops, the Game Is Over
(Editor’s Note: The Bond Market is the facility through which the Federal Reserve is able to “monetize the debt”. Your editor predicted the Bond market would collapse in an essay I wrote in January, 2005 entitled Paradise Lost. Admittedly, I was seven years too early in my prediction (as has been true in the majority of my predictions, right on but several years early. You’ve got to hand it to them. The criminal minions running the FED and the government have a lot more staying power than I originally gave them credit for. – JSB)
I would not touch bonds with a barge pole, especially government bonds. After 40 years of unending fiat money expansion, the world suffers from excess levels of debt. A lot of this debt will never be repaid. My expectation is that the market will increasingly question the ability and the willingness of most states – and that, crucially, includes the big states – to control their spending and to shed their addiction to debt financing.
What happens to high-spending credit-dependent states when the market loses confidence in them has been evident in cases such as Ireland, Portugal and Greece? Among the big financial calamities of 2011 were notably government bond markets. Perversely, some of the big winners of 2011 were also government bond markets.
Market participants have so successfully been conditioned to believe in state bonds as safe assets that when some sovereigns go into fiscal meltdown it only serves as reason to buy even more bonds of the sovereigns that are still standing, even though their fiscal outlook isn’t much better. While the fate of Greek and Italian bonds should have cast serious doubt over the long-term prospect for Bunds, Gilts and Treasuries, it only propelled them to new all-time highs. Strange world.