Where are the bond vigilantes?

Feb 11, 2011

Baltimore, Maryland

US Bonds fell yesterday. The feds borrowed more. The deficit for January was nearly $50 billion. The record for January was hit two years ago -- $63 billion.

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This puts the US on track for a record deficit of $1.5 trillion.

Wait a minute. This is the 5th year after the crisis began. You'd think federal finances would be getting back to normal. And normal means deficits of 2% or 3%, not 10%.

What gives? They cut taxes!

Associated Press has more of the details:

"The Congressional Budget Office is projecting a record deficit of $1.5 trillion this budget year, which ends in September. The estimate was revised upward last month based on a tax-cut package brokered between the White House and Republicans that will add $400 billion to this year's red ink.

"That will mark the third consecutive year that the government's deficit has been over $1 trillion, unprecedented imbalances that have been caused by the worst recession since the 1930s. That meant a sharp drop in government tax collections as millions of people lost their jobs while at the same time the government was boosting spending to stimulate the economy and stabilize the banking system.

"Obama is facing GOP demands to slash billions from government programs as he prepares to unveil his budget for 2012 on Monday. That spending blueprint will contain a five-year freeze on many domestic government programs but GOP House members contend it is far too timid in slashing deficits. They are putting together a proposal for the current 2011 budget year that will trim spending by $32 billion, a down payment on their pledge to roll total spending back to 2008 levels."

The feds are spending $1.50 for every dollar they collect in taxes. We have no comment on this kind of public finance program. Anything we could say, no matter how provocative or grotesque, is dwarfed by the facts.

But what is really puzzling is how they get away with it. Where are the bond vigilantes?

The funny thing is that if you believe the 'recovery' story, you naturally think inflation will pick up and bonds will go down. You should be a vigilante. You should sell bonds. Bonds should go down.

If you don't believe the recovery story, you can buy bonds without worrying. If the economy weakens, bonds should go up. Heck, the Fed will probably keep buying them, helping to keep prices high.

At least for a while. There's the rub. There's the itch. There's the festering sore.

If the economy 'recovers,' bonds go down.

If the economy doesn't recover, the Feds buy bonds with dollars they created out of nowhere. Dollar holders everywhere - including those who own US Treasury bonds - should be alarmed. They should be vigilantes too.

Either way, sooner or later, bonds should go down.

The one thing that bothers us about this logic is the fact that so many people think it is true. Everyone now seems to expect stocks to rise and bonds to fall. What if it is the other way around?

Wouldn't surprise us.

But what if you don't like stocks or bonds? What if you think the whole damned capital structure is going to fall down? What if you think stocks will sink with the economy...and bonds will sink with the dollar?

Not necessarily in that order.

What do you do then?

You buy gold. You wait.

How long?

A year? Two years? Five years?

What's the hurry?

*** "Most people want to be rentiers," said Elizabeth. "I know I do."

Rentiers are people who collect 'rentes' - that is, they are people who live on their investments. If you have an investment in an apartment building, for example, you collect rents. That's why you own the building. You want the income.

That makes you an investor. If you buy the building because you think it is going up in price you are not an investor; you're a speculator. You're speculating that you'll get an increase in your capital.

"Most people who call themselves 'investors' are not really investors," we explained, to know one in particular.

"If you are a real investor, you have to study your investments carefully and make sure they produce a stream of income that justifies the investment. But very few stocks provide enough in dividends to give you any real return on your money. The dividend yield is only about 2%, on average...or about the same as the official inflation rate. The real inflation rate is much higher...meaning, you lose money unless your stocks go up in price."

How likely is it that stocks will go up in price? Everyone seems to think they'll go up. Ben Bernanke - the most powerful economist in the world - says he'll make sure they go up. And they've been going up for almost 2 years.

So...why not buy stocks?

And guess what...they're cheaper today than they were yesterday.

The Dow went down 10 points yesterday. If the Dow goes down another 5,000 points, we'll be a buyer too.

*** "Why don't you bring your new friend down for the weekend," we suggested to one of the children.

"Elizabeth will ask him questions about St. Augustine. I'll see how he handles a chain saw. We'll all see how he holds up."

We used to be reluctant to involve ourselves in our children's personal lives. That was their business, we said to ourselves. Now, we're not so sure...

"Americans have very funny ideas," said a French friend. "They don't believe in giving money to their children. They're afraid it will ruin them. I guess the idea comes from Americans' history as frontiersmen and settlers. Each pioneer had to make it with his own wits.

"But in most of the world, people want to help their children as much as possible. It seems only natural to me. The world is a competitive place. You give your children every kind of help you can. If you have a skill, you pass it on. If you have a nice house, you give them that. If you have money, you want to make sure they get it, rather than it going to someone else's children. Money gives them something to work with. And it makes their lives nicer and easier.

"And if you don't have any money, at least you should help your children find suitable marriage partners. When they do it on their own, the result is hit or miss. Often, they just make the wrong choices. And then they have to get a divorce - which undermines their financial plans. Or they live with their mistake, unhappily, all their lives.

"It seems crazy to me. Parents are older and wiser. They should help guide their children into happy marriages. If they don't, they are failing in their parental duty."

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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1 Responses to "Where are the bond vigilantes?"


Feb 11, 2011

What you mentioned about children to be supported by parents is most natural thing in faworld's youth and modern societies looking down at it is something very silly.

I do not want to be a preacher but for what ails the world today (not economically but socially and for day-to-day living and for environment) the world must adopt the traditions followed by India i.e. Family living, young adults being helped by parents/grand-parents until they are married, and thereafter too), home-cooking rather than eating out, carrying lunch, recycling/reducing on use/throw culture, using water than other beverages etc. However irory is even Indian youth/parents are moving away from these values/traditions. Everything new/modern is not always sensible. On the other hand, most of the daily routines/traditions the past generations had were worthy and saved those generations big time.

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