Jumping the Treasury Shark
Has the treasury shark been jumped yet? I’d argue not.
By now, it is is painfully obvious that the U.S. economy is not going to “recover” and that its fiscal situation will continue to deteriorate over the next few years, at least to those of us who value being truthful to ourselves. This will happen regardless of how much chatter is generated by the politicians about “fiscal responsibility” and the importance of reducing the deficit, or an imminent “government shutdown”. That begs the question, however, of what will actually happen to the U.S. treasury market and the dollar as a “store of value” during this time.
Those two investments are ultimately driven by the forces of supply and demand, just like all other ones. Their supply will be plentiful, as the federal government generates new credit to fund the increasing gap between tax revenues and spending, so the question is whether there will be enough demand to meet the supply. The answer to that question is not as simple as determining whether rational investors will maintain their confidence in the U.S. Treasury market and place their limited capital at its feet.
Your average financial investors (individuals, asset managers) are, A, not rational, and B, not the only source of support for the market. The latter is clear enough from the fact that the Federal Reserve, a privately-owned institution with no actual reserves, is now the largest creditor of the federal government, as its treasury holdings surpassed those of China earlier this year. The Fed (along with a few other central banks and the IMF) is merely a front for a cartel of major financial institutions that are primarily located in the U.S., Japan and Europe, as well as other multinational corporations that work with them to maintain their operations.
These institutions, unlike the average and irrational financial consumer, will not necessarily throw their support behind the treasury market out of panic or fear of a worsening global economy. If they choose to continue “investing” in U.S. treasuries, it will be a calculated decision that is based on what they believe is the best method of preserving their wealth and power. It is obvious to even the mainstream financial world that the public bond markets of the EU (and possibly the UK) and Japan are not going to last much longer, so those investments are not really options at all. [/quote]