Japan, Here We Come!

The Stupid Burns

The stupid, it burns!

Investors are plowing cash into new U.S. Treasuries at a record pace, making economic growth rather than budget austerity a key issue as President Barack Obama andMitt Romney face off in November’s presidential election.

Bidders offered $3.16 for each dollar of the $1.075 trillion of notes and bondsauctioned by the Treasury Department this year as yields reached all-time lows, above the previous high of $3.04 in all of 2011, according to data compiled by Bloomberg. The so-called bid-to-cover ratio was 2.26 from 1998 to 2001 when the nation ran budget surpluses.

I love this sort of misdirection.

First, investors are “plowing cash into Treasuries” because they are convinced that they will at least get their money back, and further, they believe that a positive real rate of return can be had.

The latter means deflation will win.  The former means that investors believe they will lose money in anything else.

Now maybe you can construe that as “bullish” on Treasuries, but that’s a bit of a stretch.

Actually, it’s more than a stretch — it’s really bad, especially when a distorted market sends bad signals into the market and people listen to that in making policy decisions.  Japan has bricked themselves inside a building of their own design; if rates go up ever the nation’s government will be immediately bankrupted.  We’re not far from the same position; run our figures with a 5% average coupon across the curve and you find that we have a $750 billion annual interest cost, or 20% of the federal budget or more than three times what it is today.

That would make interest expense greater than we spent on any of Defense, Social Security or Medicare and Medicaid last year!  Needless to say that won’t happen without bankrupting the Federal Government — yet that sort of average coupon was normal just a few years ago.

This sort of market distortion is not good, it’s ruinously bad.  And as we have seen repeatedly over in Europe, rates have a habit of going from “heh, this is really nice” to “screw you” in extraordinarily violent moves, often with little or no effective warning.

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