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When the bond market bubble bursts

Feb 11, 2009

Some time ago, Peter Schiff said that the current economic stimulus plan is the "worst possible solution" to the economic collapse.

He says that the real problem is that the American people are so far in debt that they cannot spend the kind of money it would take to turn the problem around. So the government is now doing what the public can no longer do.

Then he says, "when the bond market bubble bursts, then the government will need a bailout." And that is where things will begin to get really serious.

It is too early to say for sure, but Bill Bonner's blog commented today that the bond market went above 3% for the first time in the past three months. One day does not make a trend, but it is possible that this may be the beginning of the bond market collapse. If so, it is obvious that the cause is the current economic stimulus package. Here is what Bonner writes:

But the big news yesterday [Feb. 10] was the sell-off in the bond market.

"All eyes on sudden spike in US Treasury yields," says the headline in the Financial Times.

"The yield on the U.S. 10-year note rose above 3% for the first time in three months. The two-year note, meanwhile, moved above 1% yield. What does it mean?

We are bearish on U.S. government paper--in all its forms. And here's why. The latest estimate from Goldman Sachs puts US government borrowing for this fiscal year at $2.5 trillion. Meanwhile, foreigners are showing less and less interest in U.S. debt. They're switching to short term paper--bills and notes, which are less vulnerable to inflation and currency declines. And they're pulling out of U.S. Treasury market generally. The total percentage of U.S. debt owned by foreigners is falling from 60% down to about 40% . . . a huge drop.

Either one of two things will happen. If the government funds its deficits honestly--by borrowing from willing lenders--this huge extra demand for credit will force up yields . . . thereby lowering bond prices. Or, if the government resorts to 'monetizing the debt,' -- that is, funding its debt with printingn press money--investors will flee bonds, in fear of higher inflation.

Either way, it will be bad news for bond prices.


The stock market reacted to the bailout bill by dropping nearly 400 points. No doubt the government's Plunge Protection Team had to work overtime today to stop the plunge below 7800, the trigger point for a further collapse. Even so, the market only recovered slightly, while the price of gold and silver spiked on expectations that the value of the dollar will be eroded by the creation of so much new money.

By the way, on Sept. 18, 2008 the economy came within a few hours of a total meltdown. By 11:00 a.m. financial institutions had withdrawn $550 billion from the system, and at that rate the economy would have collapsed by 2.00 p.m. The story is told by a Rep. Kanjorski on this short video clip:


If nothing else, this shows us just how fragile the economic system is and how quickly it could melt down within just a few hours. The congressman says that America's entire economic system would have melted down by 2:00 p.m., and that the entire world economic system would have collapsed within 24 hours! That, he said, is why the $700 billion bailout bill last September was necessary. If that is the case, then is this why the current $838 billion bailout bill is also necessary? Is this why President Obama is telling us that this bill is needed immediately to avert "disaster" and a "catastrophe" that is "irreversible"??

We are living in interesting times.

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Category: Financial

Dr. Stephen Jones

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