Increasing Inflation And The Perfect Storm

It's all about the money or as Deep Throat in the Watergate scandle stated, "follow the money". If anyone doesn't know, its the rise in the 10 year and 30 year U.S. Treasury Bonds yields, now at 2.83% and 3.14%, almost 1 % higher than a year ago that is spooking the world markets. Here are just a few reasons why.

In economics today, we should really be saying "Follow the Debt" becasue the money is literally being created digitally by our government. The need for printing presses is pretty much obsolete. A one percent increase doesn't sound like much but it's an important indicator of rising inflation rates. The idea that the U.S. Government is over $20 trillion in debt and U.S. consumer debt is at an all-time high in most categories like credit cards, student loans, and auto loans, rising interest rates, even just 1% over a year, is in fact scarcely because of the potential reactions and adjustments other markets will need to make.

The perfect storm, like in 2008, is again starting to form over our economic system with the lack of Treasury demand on everyone's radar. China has even publically stated, it will not be buying anymore. Japan is already up to their eyeballs in Treasury debt as well as their own bonds and commercial paper. Our Federal Reserve Bank and banks have them all over their balance sheets as does the Federal government itself.

When there is limited demand, prices generally rise; a supply-demand function. Any investors will want higher yields on their investments which equates to lower treasury prices. This means interest rates will rise and the government will have to sell even more bonds to make up for the lower prices. Everyone around the world is asking themselves who is going to step up and by the Treasuries when their prices are falling. Who and why would anyone do such a thing unless they had to.

The fact that the Government is not cutting spending and are actually increasing it and the recent tax cuts only exacerbate these problems. Our political system is increasing the debt at a time when demand for that debt is waining.

Because of excess spending during teh Vietnam War, in 1973 the U.S. agreed to go off the gold standard during the oil embargo by OPEC, and Nixon decoupled gold set at $35 an ounce, from the USD and it started to float against gold and other currencies. By 1983 the USD has lost over 50% of its value and teh resultant double-digit inflation caused the interest rates on FNMA home mortgage loans to peak at about 14% before taking several years to come back to normalized rates of between 6% and 8% annually.

Some of us older folks remember this tumultuous period in our economic history and it is not one that we would prefer to go through again. The storm is getting larger and well foormed because we did not learn from our history. As if the 1970s and 2000s were not good enough lessons, the political system has double our Treasury debt since 2008.