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business newsThe Fed Declares War on America
Bond markets aren't as forward-looking as Wall Street may believe.
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The message, that the government has decided it's politically acceptable to torpedo the life savings of many Americans, is disconcerting. The fact that once again this is being done 80 days before elections to ease the burdens of even those who have borrowed in a reckless fashion is an unspoken but clear decision.
Skeptical? Think about the intrinsic value of the dollar and think about all of the Americans who measure their wealth in checking accounts, money markets, CDs, and bonds because “they’re safe." The revenue-generating ability of the government doesn't increase with “quantitative easing,” better known simply as “money printing," and the value of past US government promises to pay weakens while the supply of dollars increases. Ask any freshman econ student and he'll tell you that increasing supply without commensurate demand increase doesn't bode well for an asset.
Perhaps this is why, referring to the dollar, OPEC’s Mahmoud Ahmadinejad said: “They get our oil and give us a worthless piece of paper.” That's not a comforting comment to those American savers who are betting their financial future on “worthless piece[s] of paper” in the form of savings accounts, money market accounts, and bond holdings. At some point the dramatic expansion of our money supply (the simple definition of inflation) will lead to obviously decreased purchasing power of our dollars. As David Rosenberg highlighted, America is 234 years old yet more than half of our nation’s money supply has been created within the last four years. A 1929 repeat of being unable to get your dollars is unlikely, but historical precedent suggests the purchasing power of those dollars will be severely impaired. Recall the Bureau of Labor Statistics already shows that the purchasing power of the dollar is down by 80% in our lifetimes, yet looking forward the dollars' fundamentals have never been worse. Perhaps this is why in 1792 America’s founders instituted the death penalty for those who debased the savings of America’s citizens -- the way the Fed is doing today. Washington knows what it's doing to savers and the middle class in particular, but its actions shout that it doesn't care.
Bond market devotees, however, dismiss this, making the claim that for the first time in the history of civilization, it will be different this time, and that the debasement of the dollar somehow won’t be a problem. They point to Treasury yields at record lows as being indicative that no inflation is on the horizon.
The problem is that the bond markets have consistently failed to discount inflation. Consider even the dramatic inflationary cycle of the 1970s when inflation peaked at 14.8% on March 31, 1980. Bond yields as measured by the 10-year didn't peak until October 2, 1981 at 15.84%, a year and a half after inflation had already reversed. If one looks back to 1967, which is the first date of continuous Fed data on the 10-year bond, the credit markets have only predicted 0.06% of future inflation.
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