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Inflation Begins
Think of it as the early rumblings of thunder preceding the storms that will eventually explode into a tornado. The more lyrically-minded might see visions of a single butterfly flapping its wings somewhere off Bora Bora, creating the tiniest of ripples on a glasslike sea and setting in motion the eventual tsunami that will wreak havoc many thousands of miles away. That was the role of the bond market last week, as the yield curvethe difference between yields on the Treasurys two-year and ten-year notesexpanded to 2.75 percentage points, their widest differential ever. Thats rightever. Thus did the bond market herald the inception of the developing inflation tidal wave created by out-of-control spending and ever-yawning budget deficits. As part of the stimulus/recovery package, the Fed has been buying up massive amounts of Treasurys as well as mortgage-backed securities. But as the grim reality of delusional social-realignment programs and trillion-dollar deficits emerges from the dissipating post-election rapture, it is becoming clear that the governments printing presses will have to keep spinning at dizzying speeds around the clock to fund both the stimulus as well as future outlays as the government either nationalizes or reforms anything that moves or breathesfinancial institutions, autos, healthcare, markets, energy, credit cardsthe list grows by the day. The money has to come from somewhere, and not even fleecing the wealthy will cover the cost of recasting the nation in the Obama vision. No, the government will have to continue to sell massive amounts of Treasury bonds, although it is no longer clear who will be lining up to buy them as the world begins to lose faith in robustness of the dollar and the ability of the U.S. to control unthinkably profligate spending in its quest for a utopian societyor at least one that more resembles Europes mildly-modified socialism. Ah, supply and demand, one of the myriad simple economic laws that for some reason appear to exist beyond the grasp of an Obama administration chock full of Harvard graduates and Nobel laureates: When supply outstrips demand, prices fall. The burgeoning surfeit of Treasury securities is beginning to overwhelm the demand for them, so the price goes down and the yield rises. This will make it even more expensive, of course, to kite this bacchanalia of government growth, influence, and power over its citizens. So investors shun and abandon long-term paper, with its open-ended inflation exposure, and seek safe haven in short-term securities. Thats how the yield curve steepens. And so the vicious cycle continues: The more the administration proposes to spend, aided and abetted by congressional cohorts, the more funds the government will have to raise at increasingly disadvantageous terms. Higher Treasury rates will, of course, push up interest rates across the board. Attention, Obama acolytes: Its called inflation, and it is a cancer that eats away at a nations economic well-being and social fabric. Go and ask nearly any Latin American or Eastern European country. Rest at link Posted by: ed 2009-06-03 |
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