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The On-Going Collapse Of The U.S. Treasury Bond Market Is A Disaster In The Making

September 8, 2013
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Source: Lee Rogers, Blacklisted News

With an endless amount of criminality originating from Washington DC and the on-going rush to war against Syria there is one very critical development that has gone largely unnoticed outside of financial circles. The U.S. Treasury bond market which has been artificially propped up through the Federal Reserve’s bond purchasing policies has really started to unravel over the past few months. The interest rate on the 10-year note has quickly moved up from roughly 1.5% this past May and is now floating around the 3% mark. We have also seen the U.S. government run massive annual deficits around the $1 trillion mark that are piling on to an already enormous debt level. The official U.S. national debt total recently passed $16 trillion and that’s not including all of the unfunded liabilities which would make that number multiple times higher. If both the national debt level and bond interest rates continue to rise, it will soon become impossible for the U.S. government to service its existing debt obligations. Needless to say this type of situation would cause an untold amount of havoc to not only the American economy but the global economy as well. To counter this possibility the Fed will likely expand their bond purchasing programs but we are quickly reaching a point where these policies will soon have no effect in bailing out the system.

There is no question that the bond market has been in a bubble artificially inflated by the Fed. For some time now the Fed has enacted aggressive debt monetization policies by purchasing billions of Dollars’ worth of U.S. government debt with money that they simply created out of thin air. Despite all of these massive bond purchases it is fairly obvious that they are starting to lose control of the market. The Fed is now the most significant buyer of U.S. government debt as real demand is vanishing. The general market is finally starting to realize that buying U.S. government debt is a horrible investment. This is one of the reasons why we are seeing the bond market crash with interest rates greatly rising in such a short period of time.

China which has previously maintained an enormous appetite for U.S. government debt has been quietly diversifying and reducing their purchases. Between China and Russia both countries currently hold a combined total of over $1 trillion worth of U.S. government debt which is roughly 25% of all debt that is foreign owned. With geopolitical tensions on the rise between the U.S. and both countries it would not be implausible for them to more quickly diversify from these holdings. The fact that both China and Russia have become huge net buyers of gold is evidence of this. On top of this total foreign demand for U.S. government debt has also significantly declined in recent months.

Currently the Fed is creating $85 billion out of thin air each month to buy both U.S. government debt and mortgage backed securities. The Fed and their economic propagandists have referred to this policy as quantitative easing or QE. In the long term these policies do nothing but dilute the value of the U.S. Dollar as they increase the total aggregate amount of Dollars in circulation. The greater number of Dollars in circulation the less each Dollar is worth and the more it costs to obtain goods and services. Despite claims otherwise this by definition is inflation and it is clearly reflected to anyone who shops regularly.

The economic propagandists will have you believe that the Consumer Price Index or the CPI is the most accurate measure of inflation available. This is nothing more than a big lie. The CPI is a statistical calculation that has been consistently manipulated in order to make people believe that inflation is low. In its current form the CPI doesn’t even include food and energy in its calculation which makes the statistic an utterly meaningless measure of true inflation. The main reason why the central planners always refer to the CPI is because it allows them to falsely claim that inflation is low and this gives them the supposed justification to implement their reckless policies of money creation. The phony numbers also allow the U.S. government to rip off senior citizens whose social security payments do not get properly adjusted to the true rate of inflation. If let’s say the CPI were calculated using the statistical formula used during the 1970s the CPI would be closer to 10% instead of 2% as is currently claimed.

There should be no question that the U.S. Dollar is being devalued. In fact since the establishment of the Fed back in 1913 the U.S. Dollar has lost roughly 99% of its original purchasing power. This in of itself makes the U.S. Dollar a lousy long term investment and this is important to understand in the larger context of what’s happening with the bond market. The reason being is because as bad as a long term investment in the U.S. Dollar is, an investment in U.S. government bonds is far worse. Due to the Fed’s manipulation of the bond market these debt instruments offer a rate of return far less than the real inflation rate. So as it stands now it is extremely difficult to comprehend why anyone in their right mind would want to buy them. By purchasing these bonds you are in essence loaning money to the U.S. government in return for future interest rate payments that will be paid in devalued Dollars. Combine this with the Fed’s continued ultra-loose monetary policies and there is simply no way to predict how much purchasing power a Dollar will have a couple of years from now let alone 10 years or 30 years from now.

The Fed has put themselves into a situation that they can’t get out of. Fed Chairman Ben Bernanke has for some time talked about having an exit strategy to end their QE programs when there really isn’t one. In fact it looks as if the Fed’s exit strategy consists solely of them talking about having an exit strategy. Recently the buzz word “tapering” has been put out by various Fed officials and financial news propagandists. The Fed is not tapering or cutting back on their QE programs but is instead just talking about the possibility of doing so. If the Fed cuts back their bond purchases they will risk losing complete control over the bond market. The bond market has fallen dramatically over the past few months with the Fed just talking about the possibility of cutting back bond purchases. If the Fed actually went ahead and stopped or even just slowed down their purchases the reaction in the bond market would be violent to the down side.

Without the Fed’s on-going intervention interest rates would be much higher due to decreasing general market demand for U.S. government debt. The problem for the central planners is that if rates rise even just a few percentage points the U.S. government could face problems servicing their existing debt obligations. The U.S. government is already dependent on running massive deficits to keep the entire system operating. There is also a decreasing amount of people participating in the work force and fewer people with full time jobs. This means that less tax revenue is coming into the system which will force the U.S. government to borrow more. This poses a serious problem because if they can’t pay the interest on their existing debt obligations, borrowing more money to continue the status quo becomes impossible.

The talk about tapering and exit strategies from the Fed is meaningless as they will have no choice but continue their QE programs if they want to keep the system from imploding. In fact not only will they have to continue these policies but they will have to expand them in order to artificially cap interest rates on the bonds. The proper course of action would in fact be to abandon these programs and let the system implode so the market can reset itself. As painful as this would be in the short term this would at least be the start of a more permanent long term solution. Unfortunately this is not a politically feasible option. It is highly unlikely that the Fed will sit idly by and risk the U.S. government reaching a point where they are unable to service their debt obligations. It is also equally as unlikely that the empty suits in Washington DC will balance the budget and drastically reduce their spending hence avoiding the need to borrow. With this in mind, it appears obvious which direction the Fed will move towards.

Unfortunately for the Fed they are reaching a point where even endless QE policies are going to be entirely ineffective at controlling the bond market. At some point these policies will result in so much inflation that it won't matter how many bonds they purchase. When this happens there will be no real demand for U.S. Dollars and even less demand for U.S. government debt because inflation will have run out of control. As stated before, nobody will want to buy a debt instrument that is going to pay them interest back in a currency whose future purchasing power is in question. We are already starting to see this with the increased demand for physical gold and silver. This represents a growing number of people who are losing faith in the long term stability of the U.S. Dollar and are converting out of Dollars and into more tangible assets.

Another aspect to this collapsing bond market is the fact that interest rates for home mortgages generally correlate to the movement of Treasury yields. As the rates on these bonds move up so too will mortgage interest rates. In fact we have already started to see this happen over the past 3 months as the rates for both 15 year and 30 year home loans have risen sharply. These higher interest rates will reduce the demand for home loans resulting in less demand for homes which will cause home prices to move sharply lower. This is just one of many negative economic consequences that will undoubtedly result from a collapsing bond market.

In closing what’s happening is really quite simple. If the Fed continues printing endless amounts of money the Dollar’s purchasing power will eventually be destroyed and if they do nothing the bond market will crash resulting in the U.S. government being unable to pay its bills. No matter what course of action the Fed takes the end result is not going to be good. Besides being great for Israel and the Jewish lobby, this looming economic disaster could be one possible reason why the Obama regime is poised for a military strike on Syria based off of extremely dubious circumstances. The U.S. financial system in its current state simply cannot be sustained so why not start a war to distract people from what will undoubtedly be a horrific mess. If this results in a World War 3 type scenario, Obama could draft unemployed young people into the military under the guise of national security. This would help reduce the amount of young people on the streets rioting and protesting against his evil regime during an economic collapse. A war would also provide cover for the Fed to justify the expansion of their bond purchases and the Obama regime to blame the poor economy on the war. Whether or not the American people would buy into any of this is a whole other question especially considering that most Americans are against military intervention in Syria.

Despite all of that, what is happening in the bond market is extremely important. This is definitely something everyone should pay attention to over the next several months. It will be interesting to see what the Fed’s next move will be but it will likely consist of more money creation and bond purchases. After all, they will do whatever it takes to keep the evil Zionist controlled Washington DC enslavement system afloat as long as humanly possible.


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