Our Harry Dexter White has submitted a question regarding how we might devalue our currency without, at the same time, creating a monstrous bond bubble? And, by the way, who would be buying those bonds today? Here are my responses:
At present, the biggest bubble on the planet IS in bonds, absolutely, without question. Already huge and growing bigger by the day. Google it, there’s so many voices on this I don’t know where even to begin. The private sector continues to de-lever, the public sector – true to it’s Keynesian philosophy – is picking up the slack.
And, for the record, I agree with Mr. White….it’s really hard to imagine that anyone is buying this debt….what did you say? People are smarter than that? Well, maybe they are, maybe they aren’t.
There are still plenty of individual and institutional investors who are completely and utterly invested in (no pun intended) the following creed: a) the full faith and credit of the United States of America is as trustworthy as the day is long, b) the CPI is a reasonable and accurate measure of inflation, handily provided by the planet’s largest purveyor of bonds-on-demand, c) sometimes a 3% yield is all you really need, and d) where else are you going to put your money?
OK, not enough motivation for you, the savvy investor? Good thinking.
Naturally, the one of the biggest questions of the last year or so has been “who’s gonna buy all that debt”? Well, there’s the Chinese, of course, they have to do it, don’t they? Well, to some extent yes, although, as we all know by now, their appetite for long-term debt has waned. Who else?
How about all of those TARP banks? Well, gee, that’s a great idea. After all, the Fed can loan them the money to buy the bonds, and then get paid back after they re-sell them to….wait for it….the Fed? OK, that might be an interesting twist.
Actually, looking a bit closer at the Fed balance sheet, it seems that the largest share of the post-2007 asset increase (of somewhere between $1.3 and $1.7 trillion) has been in mortgage-backed securities, rather than treasuries. Still, there’s been so much obfuscated back-door swapping going on between these TARP banks and other central banks that it’s a bit hard to know exactly what’s happening.
As noted on Zero Hedge, an increasing share of bond purchases have been through so-called “indirect” buyers, typically comprised of foreign central banks. Earlier last year, however, Geitner modified (enlarged) the definition of “indirect”, mostly to disguise the true amount of foreign purchases, simultaneously claiming that foreign demand is as high as it’s ever been. But, even that ruse hasn’t always worked out so well. More recently? Well, there’s nothing like a bit of trouble in Euro-land to boost US treasury demand.
The truth, unfortunately, is that we really don’t know who’s buying all of that debt. As it happens, we don’t really know who’s buying stocks either. (see a couple of relevant video clips provided by the nifty blogsite “Financial News Express for reference.)
These increasingly non-transparent markets are, in my opinion, exactly how the bond bubble get’s even bigger and how, today at least, newly minted money is force-FED into the system (pun intended)
Of course, as this bubble continues to stretch the thin veil obscuring the “wizard behind the curtain”, it becomes increasingly obvious that our trading partners will, at some point, insist upon a new approach to balancing our accounts with them. This day of reckoning is coming, and right quick.