One of THE BEST Articles that I Have EVER Read!
When termites eat your house, you don’t notice a thing. You don’t hear a thing, you don’t see a thing—you’re house stands there, silent and staid, while you and your family happily go about your days, without a care in the world—
—until your house crashes on top of your head.
Right now, we are at a stage where Treasury bonds are as weakened as a termite-riddled house. They look fine: Nice glossy coat of paint, pretty shingles, bright clear windows, sturdy-looking plankings on the open-aired porch.
But Treasuries are well on their way to a complete collapse. Why? Because of the way they have been mishandled and mistreated by the Federal Reserve Board, and the U.S. Treasury. Whether by incompetence or by design, U.S. Treasury bonds have become the New & Improved Toxic Asset. The question is no longer if they will collapse—it’s when.
Let me explain why.
Excellent article. Thanks, Davos.
Thanks for the great article Davos. Tyler Durden makes an interesting point when he says that bonds are not assets, they’re debt.
Maybe someone can help me understand a detail I am foggy on. Would I be right in saying that when GSEs are bundled from mortgages, the debt is effectively monetized twice? For example, the real estate acts as collateral when the homeowner signs an IOU. Then, if that same mortgage is bundled in a GSE, more money is created on the same debt?
I agree, great article. I’m glad he mentioned his disagreement with Mish because I think he is really getting to the heart of the matter here. Having just listened to the discussion between Mish, Erik T. and Michael Hamptom http://globaledge.podbean.com/2010/08/31/hyperinflation-ends-the-game-so-it-is-unlikely/ I will have to go back and read this article again and listen to the podcast again to see if I can crystalize exactly the difference in their perspectives. One camp says that inflation and hyperinflation are impossible and deflation is inevitable when what we’re dealing with is a mountain of debt that has to be unwound and the other is saying that inflation or hyperinflation is inevitable under the same circumstances. I hope that somewhere in that discussion is a kernel of objective evidence that will lead to a better understanding of what’s coming and how to prepare for it. It seems clear to me that so far Mish has been right, we are in a deflationary environment and it just seems to be getting worse. OTOH, it seems likely that at some point there will be a “moment of clarity” when people lose their “full faith and credit” in the value of the USD and Treasury securities, and a dash to the exits will begin. I’ll admit to total confusion about which theory has the most merit.
All good merits. Who knows who will be correct?
All I know is what they are doing, have done and continue to do. And it ain’t making the dollar any stronger. I see a collapse of the currency, with that comes hyperinflation.
Just my 2 cents, sure we will know for sure which it is soon enough.
Did you mean to write GSE? That’s a government sponsored enterprise, not a security of some type. As I understand the subprime mess, mortgages were bundled into bonds which were, in turn, bundled into collateralized debt obligations (CDOs) by tbtf banks and sold as AAA securities to hedge funds, each other and other big investors. Then a few enterprising greedheads figured out the scam (see The Big Short by Michael Lewis) and started buying up credit default swaps that were essentially side bets on whether the CDOs were going to fail. Those greedheads made out big time. Or at least that’s my take. I would happily change my mind if someone can explain why I got it wrong.
Thoroughly confused Doug
Gonzalo is in fine form, as he scourges the flat-earth fiateers. I posted this comment at his blog:
‘I’m going to write a detailed take-down of these MMT fools in a couple of weeks. But for now, let me limit myself to just a couple of paragraphs.’
Awww, you shouldn’t have! Can I help with the takedown? 😉
Actually I’ve been doing my small bit already over at ‘MMT central,’ a/k/a Nude Capitalism. As I commented this morning in response to a wacko paper by Jim Hamilton, arguing for the Fed to exchange its entire stock of T-bills for T-bonds,
‘Worst of all, driving long yields farther down would recruit a whole new crop of Bond Bubble Believers, like the folks I saw the other day wheeling a shopping cart full of empty soda bottles toward a broker’s office, hoping to exchange their worldly goods for a small denomination T-bond to secure their financial future.
‘When the last sucker spends their last nickel to get on board the Magic Beanstalk of ever-rising bond market total returns — LOOK OUT BELOW!’
Following this provocative post, a menacing band of MMT’ers with $-sign nose and ear jewelry attacked me with broken beer bottles. But I whacked their pimpmaster, ‘stf-up,’ over the skull with a motorcycle chain, and they scurried off, hollering ‘Ben’s gonna get you.’ Losers!
However, as Gonzalo says, these scrip-strewing screwballs are gonna be back, and we need to be prepared for SHOWTIME! Carry on, GL!
I thought the article was good too. Mish gave Lira a bit of kicking in the the podcast that Erik T. submitted to the Daily Digest on Sept. 31. The podcast, which Erik participates in is well worth a listen.
(Sorry, now see it was mentioned above.)
There is too much dogmatism on both sides of the inflation/deflation debate, I think. I tend to be in the “both” camp, i.e. much asset deflation now tipping (perhaps as described by Lira in his article) into inflation, or possibly hyperflation. We will know before long.
I would argue against the Moment of Clarity issue here in the US. Clarity has never been our strong suit and there are very powerful forces trying to keep this aloft. I fear (yes it is a fear) that they may be able to keep this aloft for decades. Why? Because it is all about belief and when you listen to the clap trap being slung around and the numbers of people who believe every word you realize we are not doomed because we refuse to accept it. For now we can continue to kick the problem down the road.
EXCEPT – if foreign bond holders have a shazaam moment (as they properly should) THEN we’re toast. But, there are far too many people involved in the deception to allow it to fall to mere reality.