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"What Were They Thinking?"
by Bill Bonner
Ardmore, Ireland - "The great rout in the bond market - the biggest financial story of the last six years - continues. The Wall Street Journal: The benchmark 10-year Treasury yield reached 5.304% Wednesday, its highest intraday level since May 2002, according to Tradeweb. Yields had slipped earlier, after the Commerce Department said that core PCE inflation rose by 3% over the 12 months ended in August, down from 3.3% a month earlier and milder than forecast.
And in Britain, This Is Money reports: "Britain’s 30-year government bond yields hit 6 per cent for the first time since early 1998, piling further pressure on the Chancellor ahead of the Budget. The longer-dated 30-year UK gilt yield, which rises as its price falls, rose as high as 6.029 per cent, its highest level since January 1998."
What will they say? The financial historians of the future? And what will they think of us...that they can’t believe people were ever such cretins? ‘Did they really think they could make people richer by printing fake money,’ they will ask each other. ‘Yes, at first, it gives them a bit of a rush. Later, they get the shakes.’ We’re in the ‘later’ stage now, like the come-down from a drug fueled all-night shindig. And every attempt to ‘print our way out’ makes the heebie-jeebies worse.
For 50+ years, with the blessing of the nation’s most pre-eminent economists, the authorities added new, ‘fake’ money to the money supply. The idea was to stimulate buying, selling, manufacturing...the whole kit and caboodle of modern commerce. The proof would come in higher GDP growth rates, the experts insisted, crossing their hearts and hoping to die.
But the higher growth rates never showed up. Generally, GDP growth rates went down not up - even with the internet fully built out...AI coming on strong…and geniuses such as Ben Bernanke and Scott Bessent in the control room. GDP growth averaged between 3% and 5% in the ‘60s and ‘70s...and now is down in the 1%-3% range, with last year wheezing to only 1.7% growth.
You’d expect an intelligent race would give the matter some thought...and question its assumptions. ‘Did they not walk on two legs,’ future experts might ask. But the bipeds of 2026 are still spending more than ever. 'What were they thinking,’ the scholars of 2050 might ask. ‘Were they thinking at all?’
We don’t know...but here is what they might want to think about. We expect no Nobel Prize for this...nor even a ‘thank you’ from Donald Trump. We offer it for free, just as though we were civic minded, in the hope that someday we will get to say that classic phrase: we told you so.
As bond prices go down, yields go up...making it more expensive to carry debt. So, whatever is gained by adding more credit (inflation) is largely annulled by the rising cost of the accompanying debit. The mother-in-law comes with the bride; that’s just the way it is. The feds add a dollar to the money supply. It is lent to the financial industry...and ends up as both a credit...and a debit. It stimulates ‘demand,’ say economists. But it also draws the bond vigilantes out of the saloon to saddle up. They need higher interest rates to protect themselves from inflation. The higher interest payments then cause real ‘demand’ to shrink. Abracadabra - Mr. Market has cancelled Mr. Inflation.
But only in a manner of speaking. Prices still go up. What you don’t have is the kind of inflation they were hoping for. You get higher prices. But no extra growth. That darling has been smothered in the crib by higher interest rates. At this point, you’re ‘printing’ money to cover the steeper interest on your debt. And the more you print and borrow, the more you need to print and borrow to pay the interest on the money you printed and borrowed already.
Inflate or die? When debt becomes too heavy...and interest rates go up...the policy choices evaporate. You have to inflate, because...as Tom pointed out yesterday: The problem is, there’s so much leverage, committing to a strong dollar [the die option] means bankruptcy. It’s a hopeless situation. And in the meantime, interest rates are going to keep rising.
The ‘leverage’ Tom mentions is around $130 trillion in public and private debt in the US, about a third of the world’s total debt. Bond investors react not only to the fact of inflation...but to the expectation for more of it. Let’s look at the math.
Say, for example, that an auction of US Treasury bonds fails. Even if the bids are weak, the feds can’t just take the bonds off the market as if they were a Tintoretto painting that failed to make its reserve price. They need the money. So, instead of withdrawing the bonds entirely, the Fed buys them and effectively ‘prints’ the money to pay for them.
The auction might have been for only $50 billion in bonds. This adds $50 billion to the nation’s ‘money supply.’ But bond investors see it as the beginning of a trend. Like the first day the temperature hits 100, they think it foretells a hot, dry summer. So, they sell bonds and drive the interest rate up...say…25 basis points - a quarter of one percent.
Not much. But that is now the prevailing rate on the whole shebang of of debt. At 5% (if it were applied across the board) that debt costs the nation $6.5 trillion per year in interest. At 5.25%, the total annual interest charge jumps to $6.825 trillion.
In other words, the $50 billion in ‘inflation’ leads to $325 billion in extra interest charges...on mortgages, credit cards, business loans, auto leasing...as well as US bonds. The result? A net deflation of $275 billion. The economy shrinks. People get poorer. The voters turn sour. Motor home sales roll into the ditch.
And the tidy, controlled ‘inflate the debt away’ scheme is off the table...along with the silverware. Does that make sense? We hope so."
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