My Density Factor

I must be dense. There is something really odd about today’s activity in the US bond market. Treasury prices rose. The 10 year bond now has an interest rate below 2%. With inflation over the last twelve months running at around 3.5%, that means investors are getting a negative real rate. They are paying us for the privilege of lending to us.

Under normal circumstances – when did we truly experience ‘normality’? – this is absurd. Creditors are in such a panic that are willing to park billions and billions of their cash at the US Treasury, and get nothing in return. Less than nothing if we accept the headline inflation rate. Or exactly nothing if we accept core inflation as the appropriate measure of price level fluctuations.

The deficit hawks must be twisting and turning trying to justify this. It isn’t supposed to be this way. Not in their magical mystical never land.

You see, the crisis that is spawning all this panic, fear and general running for the hills – aka the safety of the US bond market – is … roll the drums … the failure of the US to deal with its long term budget imbalance. That long term deficit, according to the wise people who are not as dense as I am, is flooding the world with US debt and thus devaluing it. This flood of US bonds is supposed to be putting an almighty fright into the credit market, driving up interest rates as investors realize how much the dollar is being ‘debased’, and causing a flight to safety in what the credit market sees as a safe haven. Somewhere nice and secure while investors wait out the storm.

That safe haven is … roll the drums agin … in US bonds.

Now, I realize that I am not as smart as those Wall Street gurus who made personal fortunes turning the lead of sub-prime mortgages in the gold of AAA rated collateralized mortgage obligations. Nowhere near as smart. They have a special kind of smartness most of us silly folk mistake for rank stupidity. Nope I am not that. So I realize that I must be missing an obvious point. My density factor is way too high.

So let me run through this again. For my own benefit:

The credit market is in a panicked fit about the oversupply of US bonds. That oversupply is due to the uncontrolled profligacy of the US government whose overspending ways are debasing the dollar and thus undermining the credit market’s willingness to invest in US bonds. This generates fear in the credit markets. As a consequence investors flee US bonds and seek alternative, much safer – aka safe haven – investment opportunities. This flight to safety is made much worse by every successive failure in Congress to reach a deal to close the budget gap. A gap which, as we all know, is the root cause of the debasement of US bonds to begin with.

So.

Investors abandon US bonds in droves causing panic in right wing debt ceiling and deficit hawk circles. Their calls for austerity become more shrill. We are lectured that we need to get our house in order before the pool of willing investors dries up and we spiral over the cliff, Argentina like, into the throes of a bout of hyper inflation, and pariah status in the international bond markets.

And.

Where do these creditors fleeing the US bond market flock to?

Ummm.

The US bond market. Thus driving down our borrowing costs and making it very attractive for us, the safe haven par excellence, to flood the market with bonds in order to take advantage of our rock solid reputation.

Now, as I say, I am very dense. So I admit I must have missed the extra special nuance in this train of events that the deficit hawks are able to pick out. My debasement antenna is just not that finely tuned.

Only in the unbelievably specialized world of high finance, up there on the dizzying brilliant peaks of Wall Street, is there sufficient genius to unravel the mystery of why a flight from US bonds into US bonds requires the US to react by slashing its budget to limit the supply of US bonds that the market seems not to have a large enough supply of.

See what I mean?

I am just too dense to figure all that out. So I will leave it to the clever people who know about the importance of balanced budgets and sound money to preach austerity.

I will simply nestle back into my density factor and remain in awe of their worldly understanding.

Who needs facts, when they can rely on the magical mysticism and superstition of attractive fiction?