Why-USA-Bond-Sales-Can-Upset-Your-Economic-Future

The bond purchases by the Federal Reserve Private Bank stopped yesterday. This will force a need to increase demand for bonds as I have written elsewhere. We have an amazing quote from an analyst from Cantor Fitzgerald, one of the 18 treasury bond dealers.Certainly he should know what he is talking about:

“The Fed also happens to be exiting the Treasury market at a good time,” Goncalves added. “Other markets, such as equities, which performed well due to the expansion of the Fed’s balance sheet are retreating and that will provide a backstop for the Treasury market.”

See the update here for more information.

This is virtual proof that the the stock market is a liquidity driven market, which has little to do with fundamentals of stock earnings and profit. The stock market must be taken down by removal of this liquidity, and this is done by the Fed to facilitate the selling of bonds. Without this pushing of the market downward, the Fed would have to offer much higher interest rates for bonds, which would be a market driven, capitalistic notion. How novel!

So, just remember, the stock market and the bond markets are giant ponzi schemes, and the big boys know when to get in and out, but you don't!

 Hi Matthew, we cannot afford inflation because it would piss off the Chinese, and kill the foreclosure flipper market, and the auto market for clunkers. Also the government can't afford to pay more interest on treasuries.

Having said that deflation is a problem too, because people and commercial real estate companies will have to default because income will not match the bills due.

More importantly, Pimco fears that our desire to deflate will not be maintained if the US loses position with the dollar as the world reserve currency. That could cause the dollar to lose value and we would really be messed up. So, yes, deflation is important to maintain, but can it be done, or are we on the road to being a banana republic.

One more issue is that if we fail to keep inflation in check, the BIS will tell FASB to immediately implement a severe mark to market, and that will give us a very painful depression, IMO.

Thanks for reading.

Gary Anderson
Reno, NV
http://bank-abuse.com/TowerofBasel.html
http://rid-of-debt.com/deflation.html

PS, I will use this email content on a website but if you respond, if you choose not to be quoted please let me know.

Update: I believe that weak demand for bonds, coupled with the Fed's announced plan to cut back on bond purchases as described below, will require that the stock market crash. Remember, Ben Bernanke is first and foremost a treasury bond salesman. He will tolerate a cutback in stocks to accomplish the end of selling more bonds. Will this plan work? We will see. It will shake out even more retail investors, but apparently our corrupt government doesn't care.

Update: Bonds in early May were weak. Interest rates shot up to past 4 percent on the 30 year treasury.

US bonds are not seeing the usual demand at the long bond range. Even 5 year bonds were a little softer on 3/24/09 than normal. With lots of bonds needing to be sold, due to the huge deficits required to pump up an economy with deflation, that lack of demand for US bonds could result in higher interest rates down the road, with accompanying higher mortgage rates just as Alt A and Option Arm loans reset massively.

As links below show, the fed has a difficult new conundrum. In order for bond yields to remain low, the economy must continue to decline, and deflation must continue out of control. But that is not what the fed wants. They just want a little deflation. So, any data that shows some improvement in the economy is having the effect of causing just the opposite, a rise in interest rates on 10 year notes.

The difficulty is that the fed wants a result, low bond yields, that it can only have with continued economic weakness. Since the fed certainly does not want economic weakness, this is for them a conundrum.

Since the fed has decided to buy US bonds to the tune of 300 billion dollars, they want to make up for softness in demand with those purchases. They want to manipulate the bond yields, driving them lower. However, they cannot buy too many bonds or inflation will become a major factor. And if you buy a house with artificially low interest rates, you may have to sell that house into much higher rates in the future.

For certain, interest rates will rise if the economy picks up. Interest rates will not rise if the economy does not pick up, but the deleveraging will continue. House prices will decline, etc.

Now an exception to this scenario is based upon major global distress. If war causes a pick up in global economic activity, then perhaps people will invest in US treasuries from all over the world, as a means of gaining stability. Since I don't see an immediate war on the horizon, it may be that the fed has tied hands. I certainly am not advocating war, but leaders do not always take the high moral road, and somehow think that their behavior in public office does not constitute moral bankruptcy. George Bush labored under that delusion.

The effect on each family could be enormous if the economy continues to tank. However, the effect could be equally enormous if the housing rebound is stopped by higher interest rates. I have advocated that people avoid the purchase of housing in this turbulent time because houses are overpriced, and because house prices could decline further based upon further deflationary unwinding or a spike in interest rates accompanying a modest rebound.

I am concerned that historically, house prices generally do not exceed 3 times annual household income. If it is in your economic interest to rent so as not to exceed your household budget, then rent.

I personally do not see an economic catalyst on the immediate horizon that can sustain economic growth other than a major war. That abhorent alternative is not what America needs, because with the level of our debt, that may cause a true economic meltdown once the war is over. I highly recommend avoiding war, not just because aggressive wars are immoral, but because the hangover will be perilous to our country.

Americans need to be informed and see where things are going in order to set their affairs in order to better survive the pitfalls all around us. I believe that we are in for years of slowdown. The golden goose of the consumer, who makes up over 2/3 of all US economic activity, has been hurt badly. This consumer has taken the entire world prosperity on its shoulders, and now that is no longer possible.

Ben Bernanke is a liar when he says a recovery is likely in late 2009 or early 2010. It is not going to happen. I don't disagree that money should be spent by the US government to offset the deflation and deleverage that is occuring in the United States. My gripe is that the spending is possibly too high, but certainly directed to the wrong people. Instead of bailing out dead banks, the consumer needs to be bailed out or we are going nowhere.

Spending on the banks is a mistake, and it is doomed to failure. The banks need to be nationalized, temporarily, and cleaned up like the Savings and Loan crisis of the early 90's. They are refusing this medicine because they are international in nature and they do not want to be curtailed by the sovereignty of any nation, including the United States. So they are raiding the treasury and they are bankrupting our nation.

So, be careful: get out of, or walk away from debt where you can. Save and don't completely trust the FDIC. Don't completely trust any governmental institution that exists to protect the banking class. Realize that this distress will not go away anytime soon.