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The U.S. Government Bond Bubble
From Expected Returns Blog, which is a blog focused on gold and silver investments.
What follows will read like an indictment on our entire economic system. But underlying my (relatively mild) harangue is an observation that people are ignoring the most obvious bubble out there; that is, the bubble in U.S. government bonds. The following is my attempt to figure out why.
Efficiency Market Theory
Let's face it, markets are inefficient. The efficient market theory, manufactured from the ivory towers of academia, poses perhaps the greatest threat to the stability of our system. Here's why.
False assumptions produce false conclusions. The efficient market theory posits that bubbles aren't recognizable before they pop. The natural consequence of this misguided belief is that government officials will never act to preempt bubbles since they are, by definition, impossible to identify. This is one of the reasons why supposedly "efficient" markets are consistently marked by fat tails, outright panics, and "once in a lifetime" events.
The efficient market theory currently extends to U.S. government debt. In a circular manner, the strength of U.S. bonds is justified by low yields, which is evidence of the strength of U.S. bonds. But take a step back and remember that current yields are a product of government intervention. Stability, especially artificial stability, breeds instability. U.S. bonds are a bubble, and it's pretty damn recognizable at the present time.
Psychology and Cognitive Dissonance
I love incorporating psychology to economics because this dual framework explains the world a whole lot better than pseudo-scientific economic models that are consistently wrong. I'm convinced that one of the biggest barriers to investment success is cognitive dissonance.
To briefly explain, cognitive dissonance is a phenomenon by which people attempt to reconcile two opposing views. When faced with seemingly contradictory facts or opinions, most people will defend their existing framework by explaining away anything that refutes it. To understand why this human tendency is important in the context of a U.S. debt default, we must understand the framework most Americans currently carry.
Most Americans cling to a framework that goes something like this: The U.S. is the biggest economic power the world has ever seen. We are the engine of global growth. We are immune to panics that characterize "less developed" countries. Our debt is rated Triple-A. Therefore, we can never default on our debt.
Any evidence contrary to pre-existing frameworks will be explained away- this is human nature. So when gold goes to record highs, instead of recognizing that it is the free market's indictment of the monetary system, people will say "gold is a bubble." When Greece experiences a debt crises engendered by factors indistinguishable from ours, people say "we're not Greece- we can print our own money." Utter nonsense.
By going short U.S. government bonds, I am basically going short the human tendency to cling to a worldview that provides them the most comfort. Always let historical precedent and facts determine your conclusions, not irrational human tendencies.
Crony Capitalism and Collapse of the Rule of Law
The rule of law is perhaps the most underappreciated aspect of functioning markets. Once the system degenerates into a form of crony capitalism (think: Chrysler bond debacle), you know serious economic shocks lie ahead.
When people realize they can "game" the system, believe me, they will. Economics is all about incentives.
Think about the tragicomedy that is Wall Street. Banks on life support get bailed out from the government to "save" the financial system. But to appease the public, politicians throw in a provision that banks can't hand out bonuses unless they repay TARP. No problem! Banks issue stock and dilute existing shareholders to repay TARP. Then they hand out record bonuses. Follow the path of money and realize your tax dollars are going directly to the pockets of morons who brought down our system. The system is being gamed big-time.
What's the net effect? Investors lose confidence in the entire system and withhold their capital. This especially holds true for government bonds. The system can take only so much corruption before imploding at the seams.
Blindly Trusting Financial "Experts"
To rid you of any delusions that experts know what they are talking about, allow me to briefly walk you through the debacle known as subprime.
Most professionals couldn't see the bubble in housing inflating even though it was staring them in the face. And this was a mere 7 years after the collapse of the Nasdaq! Leading up to the crash of housing, the consensus could not envision a national decline in home prices since their "infallible" economic models used data of home prices over a 60 year period. All quants needed to do was adjust their models back about 15 years to the Great Depression and they would have understood that home prices do indeed fall. Garbage in, garbage out. Models are useless without a proper historical backdrop.
The experts, led by Paul Krugman, are now claiming that the U.S. is not Greece. Some people think this argument is sensible; to me, this is simply evidence of a world gone mad.
The key thing to understand here is correlation. CDO's were priced so richly because it was assumed that different tranches, which respresented a diverse range of mortgages throughout the U.S, were not correlated. This assumption proved to be false because all homes were inflated equally by the same credit bubble and the same fraudulent system.
False assumptions in correlation are prevalent as it pertains to sovereign debt. Somehow we believe the problems in Europe will not find their way to us. Unfortunately, we are experiencing a global sovereign debt crisis. Every single Western government is in debt up to their eyeballs. All bankrupt nations have lent money to each other in a complicated web that can be addressed only through default. Therefore, in the long run, all sovereign debts are correlated.
Failure to Predict Second and Third Order Effects
Perhaps the tendency that underlies policy mistake after policy mistake is the failure to think beyond first order effects. Politicians are especially adept at thinking at a linear level. Let me give you an example.
Imagine you are the governor of California and your state is bankrupt (doesn't take much imagination). Say you want to raise your revenue by $100 million dollars. The easy solution is to tax the arbitrarily defined "rich." Suppose your definition of "rich" is anyone with an income of over $1 million. Assume that the revenue derived from this demographic at current tax rates is $50 million. Simple arithmetic will dictate that you double your tax rate and your problems are solved.
Perhaps people don't believe this could possibly be the fantasy world our politicians live in. But this is essentially what the state of Maryland did. Millionaires promptly went "missing."
Our leaders fail to see potential second and third order effects of debt monetization; the subsidizing of the auto, housing, and financial industry; and the ad hoc disregard of the rule of law. If these trends continue, I am 100% sure capital will flee America. We need to start thinking beyond propping up failed corporations and running up our national debt; this course is unsustainable.
Linear World, Dynamic World
Let's go back to the subprime debacle for a second. Credit default swaps, which were an effective short against housing, only started to crater in mid 2007- even after it was obvious that the models pricing CDO's were seriously flawed. Market makers (Government Sachs) briefly manipulated bond prices to buy time as they faded their clients and ran for the exits. Once people understood the toxicity of CDO's, we saw an all-out stampede as bond prices crashed dynamically,
Does this sound familiar? Is our government not manipulating markets and delaying the inevitable by monetizing debt? Short of saying it outright, our government can't make it any clearer that trouble lies ahead. Seriously, what do you expect? Imagine Bernanke going on national TV and saying the following:
"I would like to inform the American people that we are bankrupt. We have been hoping to maintain confidence in our system by artificially suppressing rates by buying up bonds with money we printed from nothing. We hope that by keeping rates low, we can create another illusory speculative boom and kick the debt can down the road for another administration to take the blame for. I have no clue what I'm doing- after all, I'm the one who thought subprime was "contained."
Yea right. Our leaders are going to spend like drunken sailors until the entire house of cards comes crumbling down. I'm telling you, the evidence is staring you in the face. Gold is your only insurance.
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We are in a debt bubble, so anyone at any time is vulnerable to speculators trashing their currency
Awesomely succinct
AWJ-
Legalize weed first.
From: Atlas Shrugged
"Then you will see the rise of the men of the double standard--the men who live by force, yet count on those who live by trade to create the value of their looted money--the men who are the hitchhiker of virtue. In a moral society, these are the criminals, and the statutes are written to protect you against them. But when a society establishes criminals-by-right and looter-by-law--men who use force to seize the wealth of disarmed victims--then money becomes its creators' avenger. Such looter believe it safe to rob defenseless men, once they've passed a law to disarm them. But their loot becomes the magnet for other looters, who get it from them as they got it. Then the race goes, not the ablest at production, but to those most ruthless at brutality. When force is the standard, the murderer wins over the pickpocket. and then that society vanishes, in a spread of ruin and slaughter.
Do you wish to know whether that day is coming? Watch money. Money is the barometer of a society's virtue. When you see that trading is done, not by consent, but by compulsion--when you see that in order to produce, you need to obtain perimssion from men who produce nothing--when you see that men get richer by graft and by pull than by work, and your laws don't protect you against them--you will know that your society is doomed."
This written over 50 years ago, by an immigrant russian. Go figure.
Greenspan was a disciple of Ayn Rand...I could say much more, but think this alone is worthy of your focused consideration
Greenspan as Ayn Rand fan or disciple is a misdirection. I like the Black Eyed Peas, doesn't mean I want to live my life with Fergie. Greenspan enjoyed Rand's books. Nothing more. He is an economic terrorist.... Like Buffett, a pied piper so enamored of him self and his role as Maestro or Oracle that he fails to challenge his own assertions.
Amen. He also played the clarinet. Should we blame his foolishly low interest rates this decade on Benny Goodman?
Greenspan was and is a sycophant
Nuff said.
Btw, I do agree with Ayn that corrupt parasites are bad, and that have power of state taking away hard work of others will show up in money - markets, however my view of who parasites are and whose work is being used to enrich parasites is a bit more broad than hers. Think of any impoverished people in history, like say indigenous people working Silver mines in Spanish colonies in so. Am. or working on haciendas...think of Africna slaves on plantation in US, think of Chinese or poor Thai laborer scrabbling for work at the lowest wages in world compared to their price of housing and food..and then read Ayn
a $4 per Twinkie tax would solve all the U.S.'s economics woes and too would rescue us from the obesity epidemic
Or instead, more realistically, a 25c/gram tax on saturated fats, thus such would be comparative to the tax on cigarettes
Government MUST believe that the insanity of bailouts and QE will work. Their jobs depend upon it.
You know the expression "Nobody ever got fired for buying IBM" from Big Blue's pre-PC heyday? "IBM" meaning IBM hardware, not IBM shares or debt. IBM wasn't the cheapest or the best choice, but it was absolutely the conventional choice and was perceived as the safest. So it didn't matter if IBM wasn't the best or even the safest option for the company; it didn't even make much difference if the guy making the purchase decision was aware of that. Buying IBM meant that he was sheltered inside the herd if things went sour. He'd made the conservative decision, so it obviously wasn't his fault! See also the history of market crashes that "nobody saw coming", and the remark that a conservative banker is one who goes bust at the same time as everyone selse.
Nice illustration that explains a lot, possibly including so-called "cognitive dissonance". Frankly, I don't like that term. Dissonance can be a very good thing. Well-placed dissonance in music, for example, is often what distinguishes great music from mediocre music. You won't find any dissonance in the music of Czerny!
The only reason economists cling to the false ideas that markets are efficient and market players are rational is because they want to be considered economics to be considered a hard science like physics, when it is really just touchy-feely like sociology.
If only their image in science world was the main reason for their wrongness....instead, it's academic censoring, they ignore debt and the results of their research impoverishes every place their theories rule
And that's why Goldman Sachs, JPMorgan Chase and Morgan Stanley funded ELX Futures.
Great post, BTW.
FYI to anyone unaware: the US went bankrupt in 2004, 32 states are effectively bankrupt today, and the majority of US industries are majority foreign-owned....
I hope that explains everything...
I like your analysis.
But one minor point...you infer Krugman was one of the experts that didn't see the housing bubble. Actually he did - he encouraged it as lowering rates to encourage spending on housing would be one of the most effective ways to raise the spending capacity of the consumer, who otherwise be too laden with debt to quickly get us out of the 01 recession.
http://www.businessinsider.com/actually-krugman-was-a-huge-advocate-of-the-housing-bubble-2009-6
http://www.nytimes.com/2002/08/02/opinion/dubya-s-double-dip.html
delete
"I love incorporating psychology to economics because this dual framework explains the world a whole lot better than pseudo-scientific economic models that are consistently wrong. I'm convinced that one of the biggest barriers to investment success is cognitive dissonance."
There is absolutely nothing wrong with incorporating psychology with economic theory.... in fact, the whole of economic theory is based upon rationalization and inductive thinking. What I take issue with is the fact that you bash economic modeling without offering any alternative solution (kinda like the Austrian camp... oh wait, exactly like the Austrian camp). Unfortunately you offer much in the way of semantics but little in the way of direct analysis. What irks me beyond belief is that the vast majority of people are willing to believe that if you read "Economics in One Lesson", you'll come to quickly understand the problems that have plagued nations and people for the 300 years or so that the term "economics" has been around. In fact, the problems go way further back.... about 4,700 years or so, ever since the rise of nations and market exchanges.... Interestingly enough, the rate of interest was a valid topic in the fucking bible people (check Ezekiel in the old Testament).... this has been going on for a long time....
So how can economics be taught in one lesson if nobody has ever solved the problem? Simple... It can't be, nor can basic analysis provide the level of detail necessary to properly inform the reader (although too complex and you have the same problem). You are deluding yourself if you think that Treasuries work the way people have told you. The Federal Reserve notes you carry in your wallet are only the official medium of exchange, the only true currency in this country are the pennies in your pocket and the Treasury bills in your bank account.
Yes, gold acts as a medium of exchange since it can be transferred and there is always some guy who has some girl he wants to impress, that's a given. But what happens when you need to buy an item that costs $14 and you only have a $20 gold piece? Are you going to start shaving the coin? But I stray.
Treasuries are not in a bubble because Treasuries are actually a proxy for the cash reserves held in banks. If a bank has $100,000 in deposits from it's customers, then it must have approximately 10% of that balance in cash. Now, if the bank has a number 1,000x as large, it's rather silly for it to hoard notes earning no rate of return, so they move the credit to interest bearing notes issued by the US government that are effectively a form of delayed cash, moving that balance out to be received at a later date, along with a payment stream in the meantime.
So consider this.... If people sell stocks, they receive cash. They then have their cash at the brokerage, which is essentially a specialized bank... this bank then converts the credit/cash into a delayed form... in otherwords Treasuries and other authorized asset types.
So now I didn't use any math here, so everyone should understand this... But I only understand this because I actually took the time to read all of the books written by the man who created the mathematical models for the central bank (which quickly worked to remove this knowledge from public venues.... thank god for university libraries and Google).
This isn't saying that interest rates won't eventually rise later on.... I'm just saying that if you think it's a bubble now, you better place tighter stops on your shorts.... but then again I think I said that when the prices were about 15% lower than they are now and everyone thought I was insane.
Treasuries Bitches.
Wow. Douchebag. If I could kick anyone in the nuts right now it would be you. I majored in Economics so I've learned both "camps." And one is consistenly right and the other wrong. Austrian economics is sweet. Check out Poland, they recently went the Austrian way and their economy took off. Leave this country. Americans like you hold this country back. I'll kick you up the ass and send you to China bitch.
the last time I checked, interest rates tell me that treasuries are not a contrarian play.
funny how people get bullish at the top of a 30 year bull market.
*Yawn*
Amazing how quicly people run to short a bull market.
But I guess you know that personally... eh?
Yep... don't even say it, don't need to, you know that pretty damn well right? I mean after all, you read Zero Hedge.
Ask the founders about my credentials, I've never backed down about Treasuries..... I guess that's why I don't need a job, but I still have one... for shits and giggles.... Like this post.
As James Grant correctly points out, throughout history interest rates go through about 30 year cycles. 2010-1981=29
Class dismissed.
Maybe I missed it. Who is this man? And do you have links to point to his work? I'd like to follow up on this.
Thanks!
Above, he linked to The Purchasing Power of Money by Irving Fisher (MacMillan, 1926)(First edition 1911).
The .pdf from Google books comes in at ~575 pages, but the less introductions and appendices it's about 350. Because the Table of Contents looks so germane to our present predicament, I'd like to put my 3 day weekend to good use and read it myself. Alas, the automotive equivalent of Dancing with the Stars in Indianapolis beckons.
Magis00...
I have posted that link about 20 times in the year plus ZH has been around. Please do read it, it will be well with your time. I will say I'm decently smart, but I stand in awe of an intellect like Fisher's..... Fisher was about 100 years before his time and also created the framework for the establishment that we all rail against. Funny enough, the theories which Fisher promoted were not his alone, they were created by both Augustus Cournot and William Stanley Jevons.... Fisher actually stole many of their theories, which saddens me greatly, because it diminishes the awe which I felt when I discovered his brilliance. However, Fisher is easier to read than Cournot, but not nearly as easy as W.S. Jevons.... Of course, most of you have never heard of him. But then again, I read economic theory out of my own quest for knowledge, not a degree.
Seriously, if you enjoy the "Purchasing Power of Money", read "The theory of Politcal Economy" by Jevons..... and prepare for some severe re-assessment of what you know about politics and economics. If you can grok this sentence, then you understand what he might have been proposing before his life was tragically cut short.
If a bank has $100,000 in deposits from it's customers, then it must have approximately 10% of that balance in cash.
Ya really, really, really sure about that?
We don't need no steenkin customers!! We don't need no steenkin deposits!!
We just roll our donkeys up to the Fed window and borrow at ZIRP (nominal. The real rate is negative) and then we use the funds to buy government paper paying 3.5%. That generates a cash flow bonanza that permits us to pay our inflated bonus plus we make the government happy by buying up their worthless paper. This buying convinces others that there is real value there.
Poor Fred Dobbs thought you had to dig a hole in the ground to find treasure. Picking the pockets of the entire population is a much more profitable proposition.
Treasuries are not in a bubble because Treasuries are actually a proxy for the cash reserves held in banks. If a bank has $100,000 in deposits from it's customers, then it must have approximately 10% of that balance in cash. Now, if the bank has a number 1,000x as large, it's rather silly for it to hoard notes earning no rate of return, so they move the credit to interest bearing notes issued by the US government that are effectively a form of delayed cash, moving that balance out to be received at a later date, along with a payment stream in the meantime.
wat?
expand further. What you said makes sense, but....
what about all of M1 and M2? Are we to assume it's all in tdebt?
what about intragovernmental holdings?
total public debt outstanding is roughly 13 trillion or so. MB - M2 is only around 7 trillionish.
are you implying there are not other greater forces with power over the treasury debt market than etrade accounts and excess reserves? perhaps foreign creditors?
also...what happens when people start getting worried about inflation? Eventually 0% IR will have this effect....
Isn't irritating how simple it sounds? After all, we all use occam's razor and when another solution comes around that's even simpler, we have to re-assess all of our assumptions, which are largely based upon those of others who taught those opinions to you. Fortunately for me, I came to finance purely through mathematics before I started studying economics.
As for your question about the components of the money supply... yes that does factor in, but only certain types. The outstanding debt plays a key, but not necessarily in the way you may think (imy assumption is that it's the same way most think of it). While I understand the theory, how to explain the details is a bitch and a half to model (gee I wonder why so many economic models fail?). When I finally can explain it, you can bet it'll be on Zero Hedge and it'll be under my real name.
However, I can refer you to a good source if you're willing to do your own homework:
http://books.google.com/books?id=IOwJAAAAIAAJ&dq=purchasing+power+of+money&printsec=frontcover&source=bn&hl=en&ei=t28ATOGwFMHflgfGwenCCQ&sa=X&oi=book_result&ct=result&resnum=4&ved=0CCMQ6AEwAw#v=onepage&q&f=false
The truth is out there... you just gotta be willing to look.
United States of America
Home of the Brave
Land of the Delusional
Where everybody's free
Cuz the freedom is constitutional
It's so beautiful
Rep your land to the death
Pledge Allegiance
Head high
right hand on your chest
The truth we stay dodgin
and it's usually forgotten
Was an era when we was only used for pickin' cotton
Reading was not an option and writing legally banned
Got whipped if you was caught holding a book in your hand
Now freedom is a road rarely travelled by the masses
If knowledge provides freedom
then you gotta stop and ask this
Why would they deny the key to power and wealth
So the greatest enemy to yourself is yourself
Tiye Phoenix "revolving door"
The outstanding debt plays a key, but not necessarily in the way you may think (imy assumption is that it's the same way most think of it).
don't assume....
I understand how our entire monetary base is from the national debt.
the fact that you can't explain whatever you're trying to say in straightfoward language makes me think you may not know what you're talking about or fully understand it yourself. Perhaps you were making CDO deals in another life.....or a couple years ago?
And I yawn again at the naysayers.... Do none of you realize I've fought this argument for over 2 years and I've basically already won? Oh.... you're a newbie wannabe.... I'm truth.
Do your homework, read a few books not propogated by the establishment and then knock my argument. The fact that I am unwilling to propose a thesis in full format in a fucking blog commentary under a psuedonym doesn't invalidate my point, it proves that when I propose logic that will shatter foundations built upon lies it is because I have read the underlying theory, I will do it under my own name, open to the full wrath of the academic community.. It also means that I'm a capitalist at heart, without the desire to sell-out my morals like so many other americans.Funny that I call myself a socialist for all the two-party twits.
*yawn* You read Hazlitt and think he's a genius.... I think he's "Economics for Dummies", available at any store for 19.95 and devoid of any intellect and any knowledge.... just pure regurgitation.
Maybe you'd care to tell us how the sovereign debts will be resolved? Or have I asked you that a few times before?
One more thing: if there is some grand solution that all of us mere mortals don't see, and therefore won't be able to comprehend, it doesn't really have an application in the real world, does it? I mean, if we're all to stupid (except for you) to "get it", we won't accept it and it won't work, will it? Perhaps you should include this in the calcs somehow?
Thanks in advance.
I think he is having trouble jumping from Macro to Micro thinking. Most people are good in only one.
Nahhhh.... I started with Smith & Menger....
Oh, have you read any of Carl Mengers works? Did you know Carl Menger once told Irving Fisher that it was his lot to lay the foundation while it was the lot of mathematicians like Fisher to build the framework? There is no macro or micro... capital economic structure is independent of both..... Just like alll of us have 46 pairs, but some have tits and some have cock... Some have both, but rarely without massively instrusive surgery.
There is no cognitive dissonance here, just like there is no spoon.
Anyways, I'm tired of idiotic bashing, bring a real argument to the table, otherwise, y'all are just meaningless punks who are losing money in the market and like to feel big on someone else's blog.
I think the treasury yields could drop further as we watch sovereign debt crises rage overseas and our equity and corporate bond markets go really soft. After that, at some point, well, TBT or TMV again.
Oh, I fully expect to see the 30 year yield drop lower than 3% within the next 2 years.
I shit you not.
Anyways, nice name.
10 yr below 2% before we worry about "money printing" in earnest.
QE1 still wasnt enough to counter-act the effect of deflation and shrinking m3. Theres no V shaped bounce coming to velocity until the system is purged of bad debts.
So that'll be a slow motion deflationary framework a la japan.
Hyperinflation scaremongering is years too early and there are many variables to pontificate before that scenario becomes obvious or one to seriously worry about.
ps: i like gold , but not because of inflation. Gold is a SAFE haven from a collapsing system. Deflation collapses a system but once the market forces prevail i fear there will be massive margin selling of phy and paper gold just so folk can EAT and pay for shelter. I wouldnt be longer than 10-25% NAV in gold right now. It will go sub 1k as the bear market trend reasserts itself in risk assets this year.
Do you have a history of being bullish at market tops ? Your record might be a good contrary indicator.
I dunno.... do you name yourself and have a picture of a guy who pays women to have sex with them?
Do I have a picture of Lakshmi, the 8 legged child who was born on the Festival of Lakshmi in India?
hrmmm, guess we have different values. Kinda like a person who claims treasuries are a wise investment when the rest of the world claims they're the dumbest investment in the world?
I wonder who stands tall now.
Btw.... Suck it bitch, I'm sure your P&L took it from behind with your analysis. Check my credentials and read back from the time ZH was a blog. I'm still standing tall in my own analysis.... Upon whom do you base yours? Obviously anothers, because any independent analyst has never doubted my logic, just disagreed.
You... You sound like a married man cheating with a overpriced hooker.
Cheers... You're a customer.
And the banks love customers.
Peace.
Thanks for the thought-provoking posts tonight. Not necessarily the one I am responding to, but the whole thread.
the problem with your analysis is that you do not account for the effects of a loss of confidence on a systemic scale. while the institutional framework may be structured to realize your prediction of 3% 30y if the stock market crashes and people liquidate their assets and hold cash in the bank, this does not account for the loss of confidence that will ensue if people decide to keep their (now depleted) savings under their mattress. who then will buy treasuries? the fed could print the money with which to buy t bills, but in such a situation, gold would be an excellent investment, and t bills not so much.
im not a gold bug, but i do own gold, as i feel the risk of a systemic loss of confiedence is real. the system surely works as you understand it to under normal circumstances, but the system was not created to sustain withdrawls on a societal scale. if people see the system as corrupt and as offering no benefit to them, they will withdraw. when that happens, ill take gold over t bills any day.
brushfire,
Amen Bro,as "i feel the risk of a systemic loss of confidence is real".
Dam'n betcha it's real, only the sheeple are going to FALL for it again.
Nothing PAPER these Bstd's print, would I even consider investing in.
We would have to have a TOTAL RESET, and house cleaning before I would dare risk it.
Companies, and individuals investing in China, are going to get butt slammed also............
You have to be out of your mind to invest your money in a Commie regime,risk about the same as OUR's right now.
All these 3rd world tinhorn Dictators, Nationalizing, and seizing JV Projo's.....sheeut.
No way,for now we are useful to China, soon we will not be.
And WE will get gored badly.
eh... there's nothing wrong with owning gold.... hell, even armageddon is a possibility. As for cash under the mattress? Well, if our currency is majorly devalued (ala North Korea) do you think Federal Reserve notes are an investment? Or rather are the Red scrip that gets exchanged for the Blue scrip at a value of 1 to 10?
Now if the currency is reissued.... what will true currency delayed be worth?
Hrmmmm, perhaps the same nominal value?
Think about it.
im not saying holding cash under the mattress is rational. as you rightly point out, it is a terrible idea under almost any forseeable circumstance. however, people are not rational, and when TSHTF, people will seek out peace of mind at any cost. if this means holding their cash in a safe bolted to their basement floor or under their mattress, they will do so. behavioral economics my friend. people are crazy, irrational and often do the worst possible thing at the worst possible time.
i own a safe manufacturing business that was started during the great depression. guess what people did back then when they realized the system no longer worked for them? they bought safes to store all their worldly possesions. why? peace of mind. the world is different now, but human psychology is the same. you can bet that at precisely the moment when people should be buying t bills, they will be selling them. similarly, at precisely the moment when people should buying dollars, they will be selling dollars and buying gold. rational thought cannot be used to predict individuals' investment decisions, particularly during times of crisis. its not about what people "should" do, it about what they will do.
all that said, i think we probably agree on all this. if not, some reading on behavioral economics and human psychology may be in order. regardless, the question is timing. i dont trust myself to time the treasury market. however, i do trust that i understand human nature, and that if (when) some tsunami like finanical event comes out of nowhere (and i think most agree that given the degree to which govts have intervened in the markets, unintended consequences are inevitable), people will panic and seek peace of mind. they will, of course, be wrong. they will do exactly the wrong thing by holding "cash under the mattress," but do it they will. when that happens, people doing the "rational" thing will be trampled and the system will not function as intended.
Excellent analysis!
Behavioral economics is Larry Summers reason for living. I don't believe for one moment that this administration (and others) doesn't work 24/7 to pull our 'irrational' strings. Our cognitive biases make us blind to these manipulations. As humans, we take cognitive shortcuts all the time when we should be asking questions. A huge shortcut involves trusting those who are supposed to be experts and leaders in matters of economics and finance. We use our the knowledge gained from these sources to make decisions which may not work to our benefit. We become emotional basket cases and then engage in cognitive dissonance to make sense of things (and excuses).
As long as we are blind and confused we are controlable and the power structures remain unchallenged with our strings in their hands. Once awakened, everything changes. When we question assumptions such as "flight to quality", "full faith and credit", and "the US will never default" treasuries do indeed look like a bubble...A HUGE FREAKIN' BUBBLE. The only question that remains is; When will 'we the people' wake up to the fact that we are flat broke?
Sometimes I wonder whether to act like an Ostrich and exchange the red pill for a blue one. Oh well, too late now.
P.S. - As the complexity of managing each 'crisis of the day' increases then our puppet masters become more susceptible to being blinded by many of the same biases that blind us...hubris (illusion of control) comes to mind. :-)...
Summers may be into BE, but he has been consumed by becoming an insider. Remember, Larry "Harvard-TresSec/FedChair-in-waiting" Summers has sold his integrity to get close to his lifetime goal. He knows, but cannot speak or else he blows his best chance ever to climb to the summit!
So I say WTF! again!
It will soon be impossible to determine the value of anything, as the anchor of the global fiat currency system ($USD) is a token of an unpayable debt.
Yep. This fact is starting to be recognized and discussed. The entire global financial system is based on the so-called "risk-free rate of return" which is about to reveal its risk. Internaltionally-important real commodities are traded in dollars which will soon revert to their underlying value, that of paper. No one will know how to conduct trade, so the governments will start pointing guns at people and seizing property.
That there is serious seditious activity. Off to re-education camp for you - please report to the nearest Obama for America camp right away.