Peter Schiff reports on the fed's US treasuries bubble trouble.
(emphasis mine)
The Fed' s U.S. Treasuries Bubble Trouble
Jan 09, 2009 - 02:15 PM
By: Peter Schiff
A few weeks ago when the Fed announced a strategy designed to bring down long-term interest and home mortgage rates through unlimited Treasury bond purchases, government debt staged a spectacular rally. To the unschooled market observer, the spike may be difficult to understand. After all, why would the value of Treasury bonds rise while their underlying credit quality is deteriorating faster than Bernie Madoff' s social schedule? The move is actually a perfect illustration of the tried and true Wall Street strategy of “buy the rumor and sell the fact”.
If it is well known that Fed will be a big purchaser of Treasuries, those buying now will be positioned to unload their holdings when the buying spree begins. If the Fed pays higher prices in the future, traders can earn riskless speculative profits. If the traders lever up their positions, as many are likely doing, even small profits can turn unto huge windfalls.
The downside of course, is that all of the demand for Treasuries is artificial. Treasuries are now in the hands of speculators looking to sell, not investors looking to hold. These players are analogous to the mid-decade condo-flippers who flocked to new developments for quick profits. They did not intend to occupy their properties, but rather flip them to future buyers. Once these properties came back on the market, condo prices collapsed, as developers were forced to compete for new sales with their former customers.
This is precisely what will happen with Treasuries. Just as the U.S. government issues mountains of new debt to finance the multi-trillion annual deficits planned by the Obama Administration, speculative holders of existing debt will be offering their bonds for sale as well. In order to prevent a complete collapse in the bond prices the Fed will be forced to significantly increase its buying.
However, since the only way the Fed can buy bonds is by printing money, the more bonds they buy the more inflation they will create. As inflation diminishes the investment value of low-yielding Treasuries, such a scenario will kick off a downward spiral. But the more active the Fed becomes in their quest to prop up bond prices, the bigger the incentive to hit the Fed' s bid. The result will be that all Treasuries sold will be purchased by the Fed. But with the resulting frenzy in the Treasury market, and with inflation kicking into high gear, we can expect that demand for other debt classes that the Fed is not backstopping, such as corporate, municipal and agency debt, to fall through the floor, pushing up interest rates across the board.
In order to “save” the economy from these high rates the Fed will then have to expand its purchases to include all forms of debt. If that happens, run-away inflation will quickly turn into hyper-inflation, and our currency will be worthless and our economy left in ruins.
To avoid this nightmare scenario, the Fed should pull out of the bond market before it' s too late and let prices fall to where real buyers, those willing to hold to maturity, re-enter the market. Given how high inflation will likely be by the time this happens, my guess is that long-term Treasury yields will have to rise well into the double digits to clear the market.
The grim reality of course is that when the real estate bubble burst the Government was able to “bail-out” private parties. However, when the bond market bubble bursts, it will be the U.S. Government itself that will be in need of the mother of all bailouts. If U.S. taxpayers or foreign creditors are unwilling or unable to pony up, and if the nightmare hyper-inflation scenario is to be avoided, default will be the only option. If misery really does love company, Bernie Madoff' s clients might finally find some comfort.
My reaction: For the "nightmare hyper-inflation scenario" to truly be avoided, our government would have to not only default on its debt, but also back out of all its guarantees (FDIC, PBGC, etc). I doubt that will happen.
Check out these videos by Peter Schiff if you haven't already:
Peter Schiff Analogies about Economic Crisis
Peter Schiff VS Wall Street Promoters
Great Video About The Dollar's Collapse
Also check out this Peter Schiff interview on Russia Today. He talks about how a deflationary crash will lead to hyperinflation because of our huge Trade Deficit and the huge drop in imports that will come as China's exports continue to drop and eventually stop as they focus more on domestic consumption. And basically to save the Agency debt the Treasury debt has to be destroyed through massive printing of dollars, and the Agency debt will still not be saved, it will be destroyed along with the Treasury Debt because with the high prices caused by the massive printing of dollars the products will not be affordable and the Agency debt will crash anyway. This is not good for anyone holding US dollars.
here's the video interview.
http://www.youtube.com/watch?v=UIKVseq97DU&eurl;=http://allamericangold.com/&feature;=player_embedded
Basically I'm saying even if we did default on our debt, hyperinflation would still show up through a huge decrease in imports and goods we can buy which mostly come from outside the USA and will no longer be coming if we stop paying for them. So hyperinflation is coming even if the debt is defaulted on and the govt. stops printing dollars, the govt. is just delaying it and making the hyperinflation worse by printing more dollars. I believe that they know that if they try to let the free market fix this because of our huge trade deficit and lack of American made consumer goods, hyperinflation will be so high that the US dollar will not be able to survive and the Federal Reserve Note will collapse.
Peter Schiff basically says this when he says "Given how high inflation will likely be by the time this happens, my guess is that long-term Treasury yields will have to rise well into the double digits to clear the market.
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On top of that it's not the yield that will attract buyers it's America's fundamentals. We're going to have to start producing and have something to sell the rest of the world because the dollar is nothing with nothing backing it. The sad and scary thing is America's fundamentals are so bad it's going to take allot of work and producing to get out of this mess. This is why the govt. does not want the free market to handle things because the free market will expose how much of a mess the US is in. This is not a manufactured plan to destroy the Federal Reserve Note, The Federal Reserve Note was just part of a bad Monetary Policy and the Free Market is exposing it because the Free Market always wins. Throughout history the Fed and Govt. have been doing everything they can to suppress the price of silver and gold and to hide hyperinflation. Believe it or not no one including the govt. and Fed want hyperinflation because that will just bring the dollar closer to collapse. The Federal Reserve Note is their money not the US constitutional money, why would they want to destroy their money. They tried to destroy US' money by supressing it but Gold and Silver are coming back even stronger than before. Don't call it a come back! What the govt. and Fed is doing now with these bailouts is trying to stop the free market from exposing hyperinflation but hyperinflation is sooner or later. Sooner if they decide to default on the debt right now or if they don't it will be even worse later through all these bailouts with new dollars.
Wow that was long.