Friday, November 11, 2016

z Present Day Bond Vigilantes


Pop quiz

Treasury bond yields have spiked higher because:

a - there is an increased risk of default by the United States
b - it means inflation is coming
c -  it means economic growth is coming
d – it means there is more supply of bonds coming

Answer: d

Remember the bond vigilantes during the Bill Clinton administration? They front ran Bill Clinton’s plans to increase deficit spending.  That is what is happening right now with the belief that fiscal policy will expand.  And bond investors know that it isn’t just the budget deficit (income statement); it is rather the total negative cash flow (includes balance sheet) that is the true amount of the problem.  Today’s bond vigilantes also know that there are reasons why China and other countries will not step up to buy the increased supply of bonds, meaning bond prices will have even that much more pressure to the down side. (I don’t know what those reasons are but I do read about it.  One thing I know, China has reduced its holdings.)

It is good when market interest rates are rising when the economy is growing.  It is a good sign.  Presently, the economy is not strong and there is more debt everywhere than before the great financial crisis.

As we now know, the Keynesian belief that interest rates are a reflection of preference for money is wrong, that interest rates in fact reflect the demand for loans.  In a growing economy interest rates rise as the demand for loans increases.  That is good.  In a weak economy, rising interest rates will reduce the demand for loans.


In a credit money based economy during weak economic times, the last thing the economy needs is reduced growth in credit money.

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