Bond Vigilantes No More

What happened to all of the bond vigilates in the world of finance? These are the traders that in the past kept the profligate spending of governments in check by selling sovereign debt of 5 + years of maturity. This would take interest rates higher and force fiscal discipline upon governments issuing debt – otherwise forcing the debt issuers into a spiral of insolvency. This was a classical supply and demand force that made sense. If the bonds were sold off too low and the government was still in good standing financially, investors would get paid well to step in and buy the issues.
Fastforward to the present day G-7 central bank actions. The age old forces of supply and demand have been COMPLETELY derailed. What happened? Central banks worldwide have been buying their own government’s debt. That’s right, the low interest rates that you have been told are because of a recession are ARTIFICIALLY low by central bank market manipulation. To put numbers on it the Federal Reserve over the last few years has purchased over $1 trillion in treasuries (now owning a total of about $1.7 trillion) and the ECB (European Central Bank) has handed out over a $1 trillion to European banks to by sovereign debt. According to Bank of America, the FED will own over 50% of 6+ year treasury debt by the end of 2014. This is just a quick snapshot of central bank chenanigans (completely ignoring bank bailouts, private debt purchases, Freddie and Fannie paper, etc) that have completely hamstrung bond market supply demand forces and eliminated the bond market vigilantes. The result? There are no repercussions for government profligate spending. The US has trillion dollar annual deficits as far as the eye can see and the European Union is attempting to strong arm the sovereign nations of Europe into a fiscal union that will allow reckless spending of an even higher order.
Free markets can only be manipulated for so long – then a black swan event breaks the whole system down. How will this translate into our present world financial markets? HUGE currency swings. As long as interest rates are so artificially low and the interest rate markets manipulated, the free markets will express themselves by revaluing currencies. The Japanese Yen is the canary in this coal mine as their sovereing debt DWARFS that of any of the other developed nations. They are embarking on an intentional devaluing of their currency while attempting to keep interest rates low that will spiral into a hyperinflation and billions of people will lose huge portions of their life savings.
The leadership of the “free” world has lied to us, and as long as these “elected” officials have no leash around the neck of their social spending, we will continue down the road to insolvency that will end with the debasement of currencies, the ripping of the social fabric of our societies and likely end in war and huge debt restructurings…


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