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Guest Post: The Treasury Bubble in One Graph
Submiited by John Aziz of Azizonomics,
What are the classic signs of an asset bubble? People piling into an asset class to such an extent that it becomes unprofitable to do so.
Treasury bonds are so overbought that they are now producing negative real yields (yield minus inflation):
That’s right, after taking into account inflation, many investors in treasuries are standing over a drain and pouring their money down it.
And so America’s creditors are now getting slapped quite heavily in the mouth by the Fed’s easy money inflationist policies.
I propose (much, I am sure, to the consternation of the monetarist-Keynesian “print money and watch your problems evaporate” establishment) that this is a very, very, very dangerous position. And I propose that those economists who are calling for even greater inflation are playing with dynamite.
See, while the establishment seems to largely believe that the negative return on treasuries will juice up the American economy — in other words that “hoarders” will stop hoarding and start spending — I believe that negative side-effects from these policies may cause severe harm.
There is the danger of a bursting treasury bubble. What would happen if America’s creditors decide they want to liquidate their positions? After all, they’re getting slapped in the mouth , and the Fed is promising to continue with the zero interest rate policy until at least 2014.
And we know for sure that even before real rates on treasuries turned negative that China were selling:

The Fed has been picking up the slack, and will have to continue to do so for the forseeable future (the private domestic and international markets have no reason to increase purchases assets with a negative real rate of return).
This means that to keep the Treasury’s interest payments low, the Fed will have to start printing more money, which brings us to the second danger: the danger of runaway inflation.
Bernanke might well believe he can do this without triggering runaway inflation. He might point to his track record of tripling the monetary base without triggering hyperinflation.
But inflation has stayed (relatively) low for one reason: the money he printed isn’t circulating. The primary dealer banks are holding the money as excess reserves. Can this last?
I doubt it. As I noted last month:
So, does the accumulation of excess reserves lead to inflation?
Only so much as the frequentation of brothels leads to chlamydia and syphilis.
Excess reserves are only non-inflationary so long as the banks — the people holding the reserves — play along with the Fed-Treasury game of monetising debt and trying to hide the inflation . The banks don’t have to lend these reserves out, just as having sex with hookers doesn’t have to lead to an infection.
But eventually — so long as you do it enough — the condom will break.
This trend of amassing excess reserves (done, lest we forget, as a stability measure to protect primary dealers against another shadow banking collapse) is closer to going to sleep upon a bed of dynamite.
But inflation is only the most obvious risk.
The greatest danger is illustrated here:
America — for most of last century exporter and creditor to the world now runs the biggest trade deficits the world has ever seen.
Let’s not forget that these creditors that U.S. monetary policy is now slapping in the face produce most of our consumption, much of our military hardware, and most of our oil.
Of course, many neocons seem to believe that this position is sustainable; that America can slap her creditors in the face all she likes because she has thermonuclear weapons and can tell the rest of the world to go and bite the big one.
Not so fast.
As VeteransToday noted in December:
“Surprise, Surprise, Surprise”, to quote Gomer Pyle. The secret spy mission to create photographic proof of Iranian nuclear intentions has gone horribly wrong.
China is the country of origin for many, many of the semiconductors used by the US Military. It was most likely that China provided the hardware with the secret backdoor that allowed the Iranians to seize control of the Stealth drone while the drone was on a secret CIA mission over Iran.
Working together, they captured a state of the art US Military stealth aircraft.
What this means to all US Military personnel serving anywhere in the world? It means that control of any electronics system in any type of platform, can be seized and used against the military that launched it.
I don’t doubt America still has great technological and infrastructural advantages over her Eurasian creditor rivals. But do we really want to test the limits of our power? Do we really want to try and provoke a trade war with China and the other Eurasian nations (who of course are testing the petrodollar reserve to its limits by creating their own reserve currency agreements) by obliterating the value of their dollar-denominated assets?
So now we know, beyond a shadow of doubt that U.S. Treasuries are in a historic bubble.
We know that to some degree the Federal Reserve and Ben Bernanke are guilty of stoking up this program by buying U.S. Treasuries (artificial demand) and thus constricting supply. We know that this is screwing America’s creditors who happen to produce a lot of America’s consumption, components, military hardware, energy and resources. We know that these nations are using increasingly violent rhetoric regarding their relationship with the United States (Putin for instance described America as a parasite), and are activating agreements to ditch the dollar as the reserve currency.
Do we really want to continue in this vein? Do we really want to continue screwing our creditors by forcing them to accept negative real rates on their investments? Do we really want to risk the inflationary impact of continuing to print money to monetise debt (and hiding the money in excess reserves, thereby temporarily hiding the inflation). Do we really want to find out if all those Chinese semiconductors in our military hardware have backdoors that allow America’s enemies to shut down American military hardware?
I’d call that playing dice with the devil.
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The Careless Whisper Morning Update & Threadjacking
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And to imagine, this is all based on the "official" inflation rate!
Yes, also shows the overwhelming neivety for TIPS buyers to believe the government inflation numbers.
Same crap as the housing bubble. Everyone wants in on the action, no one wants to be owning a condo when it pops.
“The Fed has been picking up the slack”
Viagra is good, but it loses its effectiveness after the patient’s heart stops beating.
Nice analogy.
Belief has little to do with it at this point. More like watching lifeboats being capsized due to overloading by those desperately seeking refuge.
Even though the market it a cannibalized zombie, there are still managers of OPM that have to seek a return somewhere. Eventually, they too will be consumed with a hollowed-out carcass left in its place.
austerity = hunger games for the poor, while rich gets bailed out.
In a real free market, all the banksters and the fed will be out on the street unemployed, because their institutions went bankrupted due to failed policies.
CW, nice post... people need to realize the more the gubmint tries to take your freedoms away and tighten every screw the closer to the collapse of the economic ponzi we are!! They know it...
and jail the irresponsables.
The usa military doesn't care about that, they are sum dum fukz.
A nation that relies on foreigners to produce its military weapons is doomed to failure.
A nation that relies on central banks run by joos is doomed.
What's -.5% compared to a haircut of 80%?
If it was -0.5%. But the negative real yield is more likely -5% or more, and very possibly will grow as the cycle of unrepayable debt swirls downward. But the more important issue is that with the slow, alzheimer's-like degradation, the frogs (sheep) never know when to get out of the pot. Ripping the band-aid off wholesale and resetting while some threads of civility remain might be the better go.
Just my 2 oz.
Yeah. I'm using extremely conservative figures (i.e. BLS inflation rather than ShadowStats). The real figures may be far worse.
The Munger Games....lol on your mark, set, GO!
Hunger Games working class kill each other.
History has shown that sooner or later, the working class end up taking their killing skills aimed at the elite.
I hear that peasant is good with capers and brown sauce.
Bon Apetit !
The inflation v. default discussion is like debating death by beheading or electrocution. The bottom line is that treasuries are not going to return the purchasing power that was put into them. Thus the only prudent strategy is to convert as much fiat as possible to things that can store purchasing power (while maintaining solvency).
The tragedy is that doing so is impossible for far too many who are "awake" to the reality; for those who are "asleep," by the time they are "awakened" it may be too late.
So long as money flows into things that are good and right, the economy will improve. But government debt is wrong and buying government debt with stolen money is doubly wrong. subsidizing the defense of Europe and Israel on American tax dollars is triply wrong... you get the picture though
So, Muppet, WHAT do you recommend?
(Au, Ag, Pd, Pt, Pb?)
The problem with rampant QE
It's much like a bad STD
Initial inflation
Feels good as a nation
But more makes it hurt when we pee
+1630
We've loved your work at the Banzai Institute, TLK.
Much appreciated Mayhem...it's been a great experience.
second that
+1 How you never exhaust yourself for ideas is beyond me. Maybe I can hire your skills to write something nice for my wife. You can leave out thr STDs though, that may not delight her too much.
The mother of all bubbles!
Also the safe haven argument. Everyone screaming into Treas because they are still viewed as the safest most liquid investment, so that contributes to the Treas bubble...People are scared.
Do T-Bills have "best used-by" dates on them?
At some point interest rates start to go up. They're floating a trial balloon up in Canada:
http://strikelawyer.wordpress.com/2012/05/03/interesting-developments/
trying it out in a small economy which, despite its disingenuous denials, strongly resembles the much larger economy to the south, particularly with respect to debt and banking.
The raising of rates is the beginning of sticking it to the creditor class, which has thus far escaped any real pain.
I guess the point being that there are two groups of creditors: those in retrospect and those in prospect. Once the rates start going up, it is those who are holding debt at that time that will get screwed, because the principal value of existing debt will start to decline. The article seems to not realize this.
http://strikelawyer.wordpress.com
The only rates I expect to see climb are consumer credit rates. Think of everyone holding a CC balance who now ALL have a floating rate based on the prime rate. Rates have not moved yet (on my card anyway) since the time when they were all changed over from fixed rate to floating rate accounts. But you know they will... eventually.
Tick-tick-tick...
If president Obama had any economic sense about him he would fire Bernanke tomorrow.
"If" - you must be a Cubs fan; BTW - Barry can't fire the Bernank.
He can assassinate him legally though, right?
...as what, an enemy of the state? Clever...
(btw, don't answer that knock at the door)
Put him in a bag -- plenty of empty cells in GITMO...
Probably not. I'm sure the BIS charter ranks higher than TOTUS chatter. The board, you see, well they're kinda immune to every other legal body on the planet.
obama = empty suit
Nanky is doing just what Obama wants him to do
this bubble is due to explode. Heli ben might belive the dept pays itself off when the interest is negativ.
Geithner is fighting the Law of Supply and Demand. When the supply of something goes up, relative to other viable options, the price should go down (and rates increase).
US Bond Market Outstanding ($ Billions)
Data from SIFMA http://www.sifma.org/research/statistics.aspx
Good luck with that, Timmy FNG!
Fed can monetise, but it's gonna get harder and harder to hide the inflation and more importantly hide the fact that is screwing over creditors.
The fact that essentially all of the leadership of our foreign creditors are on the take (in petrol dollars) does make me think that the petrol dollar ponzi can continue for much longer than it should.
This is not the black swan you are looking for...the US Treasury can go on with its business.
They will only take a screwing for so long before they say enough. The next round of QE will be the deathknell of the petro dollar.
Truly, only a very few of the "They" that are being screwed are able to connect said screwing with the Fed's monetization and "Their" nations' leaders being on the petrol dollar take.
Blame will be placed on others things.
Look at KSA as an example.
TPTB Propaganda > "They" Understanding
Technically, they will be saying "MMMmmmrrrrppppphhhh!!!!" and a few other wholly unintelligible phrases.
This Egyptian protesting food inflation sure didn't get to say much.
The thing we have to remember is that gang members often kill gang leaders. Why? They want more.
I pray that it does. The more I look, the more I see that is corrupt and rotten. Let it end soon.
Most food prices (chocolate, grains for ex) have doubled in the past 4 years...some sectors are harder for the Fed to control...food is one of them.
...but the cost of an iPad, especially when divided by the number of functions it can perform, has gone down!
Being Bill Dudley.
Corporations have to be the most unpatriotic, collective bunch of stupid motherfuckers on the planet...all to save a fucking buck.
Also heard from a Marine buddy that the company the vendor to make their boots just changed the soles' plastic content. Before, they used what is commonly see on the FIFA "foot sleeves" for comfort and traction. Again, the US Govt to save a buck, went to China to mak their new boots. ANd of course, my buddy went on to say: "They are nice for a week...then you start seeing more holes in them than in the Red Sox starting rotation."
I mean, imagine the genius who thought vendoring out the semis to China would be a great idea:
"Yeah, lets contract out some of our super high-tech to a Communist Country that does business with our "enemies". Yes, that totally won't backfire."
Blunt way of explaining it but fine. Profit is their Holy Grail, not national sentiment or patriotic duty. It would seem most Americans are fine with the set-up. Market Nihilism accepts all apathetic individuals into its Temple. Helluva religion.
None of those things would be possible without the blessings of state. In a truly free market, harmful corps would be run out of business by lack of consumer demand for their destruction. Meanwhile, the other corps would have to focus on best serving the consumer instead of focusing their efforts as the do now upon lobbyists to raise the barrier to entry for competition in the form of regulatory statutes.
There is nothing wrong with enlightened self-interest. There is however, much wrong with the apathetic delegation of personal responsibility to criminal bodies in a pretend effort to control it for the benefit of all.
I'm familiar with all the popular libertarian talking points. The root cause makes its way to the 'State' one way or another. Corporations are somehow immune from moral constraint since, well: 'There is nothing wrong with enlightened self-interest.'
I wish to neither debate 'laws' nor trace the cause. The social pathology is the only thing of interest in this debate in my opinion. The social factor in the final analysis is superior to any kind of 'self interest'. Self interest is, again just an opinion, always unenlightened. Its very essence is that there is always something to be gained, that is about as far as it can go. Beyond that it's blind, a poor philosophy for life.
Corporations don't have homes the way quaint-old carbon-based "people" do. The concept of patriotism doesn't apply to a corporation.
Review the history of corporations during the run up to WWII. There are no "good old days".
What happens when a store selling nick nacks loses all its customers for shoddy quality?
That's right they go out of business.....unless of course the business is just a front for money laundering.
consumer price inflation has stayed relatively low, at least according to official sources.
What about asset price or commodity price inflation?
"What this means to all US Military personnel serving anywhere in the world? It means that control of any electronics system in any type of platform, can be seized and used against the military that launched it."
I never understood why a military that relied so heavily on technology would outsource anything. I think the Chinese have shown us more than once they can undermine our technology. A few years ago an undetected Chinese sub popped up right in the middle of the U.S war games and stunned the navy. And how many people remember the missile launch off the coast of California a couple of years back? Nobody could ever explain that.
Maybe update the post?:
http://research.stlouisfed.org/fred2/series/BOPGSTB
There's a timeline missing, which if one took at face value, it would appear worse than it actually is, not saying the graph is good to begin with though.
As long as Mr and Mrs Slob aka the public sat infront of the tv and the 2008 bandwagon traders keep slurping the 'Oh China need us to buy their stuff' 'USA is still number #1' koolaid the world will keep spinning as they can't see the wood from the trees.
The reality although it has been apparent to many of us for years, won't hit them like a ton of bricks for another decade probably or until they are in the sweatshops themselves but it won't be long now, China won't remain the benevolent tiger for much longer.
A personal anecdote: I don't know the full story behind the guy and why his family moved etc. but there was a Chinese guy in one of our classes years ago, he had trouble with English and would sometimes ask the teacher to repeat what was said again, one day the teacher flipped out after being asked to repeat himself, he said you should know English by now and was ranting and raving and the guy replied back to him 'you will have to learn my langauge to make a living in the future'.
How true he was, glad my current Mandarin lessons are going well, well worth the money.
"Do we really want to continue in this vein? Do we really want to continue screwing our creditors by forcing them to accept negative real rates on their investments? Do we really want to risk the inflationary impact of continuing to print money to monetise debt (and hiding the money in excess reserves, thereby temporarily hiding the inflation."
apparently
Come on lucky seven, Uncle Sam needs a new pair of shoes. Risk, what risk? Gambling is risky? LOL
When I read this what I hear is "thanks for the nice ramp in stocks and gold but I am becoming concerned that continued printing may lead to a ultimately lead to some loss of value in all the paper I've accumulated and really I have enough at this point. So please sir please stop thie presses not that you've accomplished what you set out to do but we never really believed that stuff about stimulus anyway right. The banks now have all the liquidity needed and if we continue to hoard it we will have enough for generous bonuses for many years to come.
DEFLATION DEFLATION DEFLATION DEFLATION DEFLATION DEFLATION DEFLATION
Of course, many neocons seem to believe that this position is sustainable; that America can slap her creditors in the face all she likes because she has thermonuclear weapons and can tell the rest of the world to go and bite the big one.
This position is just for the so-called neocon? The supposed liberal administration is going along too. Take away the handfull of wedge issues that keeps the masses divided, and you have little difference.
How can you have a bubble when, investing in bonds, you're expecting your capital back at maturity?
No one is expecting a 200% return like my friends in 2005 flipping houses.
Good article, AZIZ, and I agree with most of it. But the idea of hyperinflation rearing it's ugly head at some point when all those printed but unspent dollars start flooding out has a flaw: most of those dollars are being held by banks for the (almost) free carry, if I'm understanding a bunch of other articles on Ben and his printing press.
So the problem I see is who the hell is gonna borrow that fiat and spend it? Consumers? Unemployment only goes so far, extended unemployment is crapping out, and SI and SSI is not conducive to taking out big loans, unless you think even more student debt is coming. Corporations? They are awash in cash, with stock buybacks being all the rage. Local governments? Their ability to raise taxes to repay loans is already constrained to the max in most locales.
I just don't see hyperinflation 'green shoots' having the soil in which to take root.
Of course, with a total lack of any coherent fiscal policy now and in the foreseeable future, any damn economic excess is possible...
The dollar is backed by US Treasuries. If the value of US Treasuries falls off a giant cliff, so will the dollar. Is there a bubble in Treasuries?
One of the best ways to visualize a bubble is by looking at the price of an asset, correctly normalized on adequate time scales. Plot housing prices adjusted for inflation since 1970, and the bubble is obvious. Plot the Dow vs gold, and it's pretty obvious stocks are stagnant. What I've done is plot the inverse of the interest rate on a log-y plot since 1953, and the bubble is clearly visible. Let me explain the rationale:
The price of a Treasury is limited between 0 and 100% of the maturity value. The problem is that prices of equities and commodities vary between zero and infinity. The "infinity" bond price is a 0% nominal interest rate, as at that point, there is no point to buying a bond rather than holding cash. I'm not subtracting inflation because beating inflation actually requires successful speculatoin in the era of the Fed, and because you can profit by selling bonds as long as the interest rate can fall. A bond price of $0, complete worthlessness, is equivalent to an interest rate of infinity. And a log scale makes things look nice. This makes the bubble in short-term USTs patently visible, much more so than the graphs in the article.
http://img600.imageshack.us/img600/9899/574896393.png
If that doesn't make you nervous, nothing will. And how do I make the image show up in my comment?
Only Tyler authorised users can post graphics. Think of it as a good thing otherwise anybody could just post pictures of Auschwitz victims, plates of food or morbidly obese arses.
That makes sense. Anyway...the picture is a boring ol' line graph, not goatse. So click on it!