Minyan Mailbag - Fixed Income and Inflation
Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.
The only commentary in the media I hear about foreigners and their purchases of U.S. bonds is that, while it may be worrisome that we are relying on the kindness of strangers, it's a good thing because it keeps our interest rates down thus helping our economy.
In the past few months I have spoken to several senior citizens I know who live on fixed incomes, and every single one is complaining that they cannot make ends meet because of the constantly rising prices they are paying for everything from food to insurance to medicine---prices they are trying to pay with income from yields that are not rising as they normally should in a less manipulated economy. Isn't this a brutal cycle?
Yields stay low because of foreign buying, but because yields are artificially low investors have problems paying for things they need---which in turn causes debt to build as people borrow to make up for depressed returns. If you were the Chinese and you saw your main international rival as the U.S., would you make it easier or harder for that rival to earn a "normal" return?
If you adjust Babe Ruth's highest yearly paycheck for inflation, the most he ever earned was $1 million per year.
Is this because today's ballplayers are much more greedy today or is it because inflation has been misstated?
Of course ballplayers are more greedy today, but I am making the point that we all know inflation is much higher than the government is letting on. Everyone is closing their eyes to that fact.
All your points are correct. I don't trust the Chinese as far as I can throw them. They will do things in their best interest. Right now it is in their best interest to cooperate with other central banks, but that may be changing.
Austrian economics shows us that trying to heal the system through aggressive monetary policy works for a time, but the process greatly and artificially accelerates debt accumulation. This debt can be supported while the economies are expanding, but once recession takes hold, that extra debt makes the correction extra painful.
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