Guest Post: The Treasury Bubble in One Graph

Tyler Durden's picture

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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Careless Whisper's picture

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redpill's picture

And to imagine, this is all based on the "official" inflation rate!

TheSilverJournal's picture

Yes, also shows the overwhelming neivety for TIPS buyers to believe the government inflation numbers.

economics9698's picture

Same crap as the housing bubble.  Everyone wants in on the action, no one wants to be owning a condo when it pops.

Manthong's picture

“The Fed has been picking up the slack”

Viagra is good, but it loses its effectiveness after the patient’s heart stops beating.



NotApplicable's picture

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.

AldousHuxley's picture

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.

jus_lite_reading's picture

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... 

midgetrannyporn's picture

The usa military doesn't care about that, they are sum dum fukz.

SeverinSlade's picture

A nation that relies on foreigners to produce its military weapons is doomed to failure.

buzzsaw99's picture

A nation that relies on central banks run by joos is doomed.

TruthHunter's picture

What's -.5% compared to a haircut of 80%?

mayhem_korner's picture



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.

Aziz's picture

Yeah. I'm using extremely conservative figures (i.e. BLS inflation rather than ShadowStats). The real figures may be far worse.

SheepDog-One's picture

The Munger on your mark, set, GO!

AldousHuxley's picture

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.


DOT's picture

I hear that peasant is good with capers and brown sauce.

Bon Apetit !

mayhem_korner's picture



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.

shuckster's picture

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

StychoKiller's picture

So, Muppet, WHAT do you recommend?

(Au, Ag, Pd, Pt, Pb?)

The Limerick King's picture



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


mayhem_korner's picture




We've loved your work at the Banzai Institute, TLK.

The Limerick King's picture

Much appreciated's been a great experience.

Dr. Engali's picture

 +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.

TheSilverJournal's picture

The mother of all bubbles!

battle axe's picture

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. 

StychoKiller's picture

Do T-Bills have "best used-by" dates on them?

Jerry Maguire's picture

At some point interest rates start to go up.  They're floating a trial balloon up in Canada:

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.

Jerry Maguire's picture

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.


NotApplicable's picture

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.


Everybodys All American's picture

If president Obama had any economic sense about him he would fire Bernanke tomorrow.

mayhem_korner's picture



"If" - you must be a Cubs fan; BTW - Barry can't fire the Bernank.

LongBallsShortBrains's picture

He can assassinate him legally though, right?

mayhem_korner's picture what, an enemy of the state?  Clever...

(btw, don't answer that knock at the door)

StychoKiller's picture

Put him in a bag -- plenty of empty cells in GITMO...

NotApplicable's picture

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.

Talons Point's picture

Nanky is doing just what Obama wants him to do

tuttisaluti's picture

this bubble is due to explode. Heli ben might belive the dept pays itself off when the interest is negativ.

hedgeless_horseman's picture



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


Good luck with that, Timmy FNG!

Aziz's picture

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.

hedgeless_horseman's picture



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.

Dr. Engali's picture

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.

hedgeless_horseman's picture



They will only take a screwing for so long before they say enough.

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


NotApplicable's picture

Technically, they will be saying "MMMmmmrrrrppppphhhh!!!!" and a few other wholly unintelligible phrases.