Low rates are a kind of hustle. They take money from savers and redistribute it to debtors. Borrowers – such as the big banks – get money at a preferentially, artificially low rate. But savers pay the price.
Recently, thanks to the shale oil story, scammy rig operators are promising returns as high as 14% PER MONTH. Retired people, supplementing their Social Security payments with interest income, are tempted. At today’s rate, the pensioner gets less than $2,000 on his $100,000 of savings. He is desperate for more. Even to the point of listening to shysters and investing with fraudsters.
But in a system pumped up by counterfeiting…hoist on the gassy petard of economic BS…and kept from blowing away by the short memories of the investing public…
…what is not a scam?
A partnership that promises a 14% per month rate of return is surely a flimflam. But what about an IOU from the world’s biggest debtor…promising almost nothing?
Investors must have had the same faith in bonds back in 1946. Then, bonds had been going up for a whole generation. Stocks crashed in ’29…and again in ’37…and in ’42…and bonds went up. Real estate sank and stagnated for two decades…and bonds went up. A Great Depression lasted, on and off, for 12 years…and still bonds went up.
Even throughout the biggest war in human history…the full faith and credit of US Treasury bonds was as solid as Ft. Knox. Now, in 1946, with the war over…Europe demolished, and the Soviets ready to invade…millions of returning soldiers who might find no work…
…what better to buy than US bonds?
But monetary policy held more or less steady. Despite double digit inflation and despite a series of post-war recessions…monetary policy was relatively calm. It let the money supply fall…and prices rise…
And the bond market gave way.
Bonds went down for the next 36 years. An investor who bought US Treasuries during the Truman administration years lost 83% his money before Ronald Reagan moved into the White House.
Meanwhile, prices rose to more than 4 times what they had been in the post-war period. The poor investor. Hammered by inflation…smashed by the bond market. He was black and blue all over. And by the end of the ’70s he considered government bonds nothing more than “certificates of guaranteed confiscation.”
But those were the good ol’ days. Now, nearly every central bank – especially the Fed – aims to fulfill all market expectations. Stock market buyers expect higher prices; if they don’t get them, it won’t be the fault of the Fed.
Bond market buyers also expect higher prices…or at least stable prices for their US Treasury bond. The Fed is on their side too…buying up bonds in staggering quantities in order to keep yields low and prices high.
This time, an activist Fed is on the case. And bonds are doomed…even more than in ’46.
for Markets and Money
From the Archives…
A Sub-prime Crisis State of Mind
2012-04-20 – Bill Bonner
How The Belief in Australian Property Will Go With the Generational Wind
2012-04-19 – Greg Canavan
Chinese Communism and the Human Cost of the Cultural Revolution
2012-04-18 – Dan Denning
Lifting the Curtain on the Chinese Communist Party
2012-04-17 – Dan Denning
How Empires Really Work
2012-04-16 – Paul Craig Roberts