Grant on bond yields .
What conceivable circumstances could provide the undergirding for a new, generational bear bond market ahead? One possibility is the long-prophesied train wreck of federal finances, notably of Medicare. The so-called entitlement gap was what Senator Joseph Lieberman (D-Conn.) was thinking about when, a few weeks ago, he asserted in the Financial Times that the “entire U.S. government is going broke.” The point survives the exaggeration.
Then there’s the U.S. dollar, the world’s favorite monetary brand. “We in the United States have been incurring ever larger trade deficits,” Greenspan recently intoned, “with the broader current account measure having reached 5% of GDP. Yet the dollar’s real exchange value, despite its recent decline, remains close to its average of the past two decades.”
So it does. However–other things being the same–if the dollar exchange rate were to plunge, dollar-denominated yields would soar. Posterity will supply the reasons for the looming rise in interest rates. History says that it is coming.
{ 9 comments }
We know money is not neutral.
Weak fiat currencies are inevitable in the future because of the deeds of the Federal Reserve and Foreign Central Banks in the past.
As a result, the market will demand higher interest rates to compensate for the loss in purchasing power of the various monetary units. It seems Gold and Silver will be our only refuge. It is clear that Central Banks and National Treasuries will not protect us from the inflation they create. TIPS, are joke. Buying a TIP is like buying theft insurance from a thief.
Jeff Fisher
Mises wrote:
The course of a progressing inflation is this: At the beginning the inflow of additional money makes the prices of some commodities and services rise; other prices rise later. The price rise affects the various commodities and services, as has been shown, at different dates and to a different extent.
This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to the altered money relation. There are still people in the [p. 428] country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services. These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings. As long as such ideas are still held by public opinion, it is not yet too late for the government to abandon its inflationary policy.
But then finally the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against “real” goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.
It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796, and with the German Mark in 1923. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last.
National Review on inflation here. Comments?
Granted this is one possible outcome. Another, more probable near term possibility is the sound of bursting bubbles. Stocks, housing, credit… which one could argue together with large global deflationary forces (despite central bankers’ best efforts) which one could argue would lend a large bid to US Treasuries as, ironically, a safe haven.
Mises above ‘If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last.’
Why? Even the least educated are cogniscent that prices rise over time, be it their pick up truck, housing, wages, beer etc. yet we still have inflationary policy.
Kudlow National Review Article.
My View:
He throws out a mix of conflicting ideas in order to confuse the discussion. His conclusion, as always, be bullish. Kudlow has been calling the bottom since April 2000.
Jonathan: I think there’s a psychological element, as with all economic activity. If I think prices are only going up 2% this year, it still makes sense to save money in a bank account. But if I think my money’s value is going to go down 20%, I’m going to want to convert my cash into something else as quickly. Between 2 and 20%, there’s a mental barrier that gets crossed. As that line gets crossed for more and more people, the prices of real assets shoot up and hasten the decline of the currency.
Jonathan: In reading your observation of the quote by Mises, I believe that Mises is using the term “inflation” to mean “an increase in the fiduciary fiat media used as the bases of market exchange”, and does not use it in today’s errant meaning of “an increase in prices of goods”. He cites the Continental currency, the French currency and the German currney as an example. Therefore, if a government continues to create fiat money, eventually the currency will be wothless. Inflation has nothing to do with “prices” in Mises’ view. Prices are an outer demonstration of the continuing and increasing number of units of currency being created. For Mises, gold and silver being used in a free market is subject to the same rule. When new quantities of gold discovered in the new world were taken to Spain all prices rose, but only in proportion to the amount of bullion delivered to Spain from the new world. When new bullion was no longer imported , prices no longer rose, but tended to remain at the level they had attained. Larry
Larry, I agree but the difference is subtle and the Fed knows that. What I don’t see is that inflationary policy per se NECESSARILY leads to self destruction BECAUSE at some point people realise the money supply is always going to be inflated. There is a lot missing in this logic. Sure, the FED could lose credibility with the public but you can be confident they read history books and will play their hand very carefully to avoid the stand out hyperinflationary episodes of the past. Can you imagine the layman wading through Greenspan’s testimonies? I would say the greatest risk they have now is the sound of deflating asset bubbles which will be at least short term deflationary, despite their printing presses.
Comments on this entry are closed.