Monday, June 08, 2009

Let the Bond Market Unraveling Continue


The Fed is between a rock and a hard place. It is struggling to find an equilibrium between keeping mortgage rates low and financing the huge government deficit. Undoubtedly, Fed economists are running countless optimizations that minimize the theorized negative effects of their proposed solution. Unfortunately it's difficult to model a situation that has to be extrapolated from data when the data does not have a clear example of the current situation.

The tipping point keeps coming closer as we move towards sovereign or private default. If Ben keeps up his Quantitative Easing, then we will see sovereign default through money printing and artificially low interest rates. I really doubt this will work though. The bond market is simply too big to really make a difference unless the Fed decides to take the bid of every bond market participant.

We're likely in for the next wave of deflation, bank failures, and unemployment. This will happen at some point. Americans are simply faced with too much debt and too little income to pay it off, even at artificially low interest rates. Transferring this debt to the Treasury via stimulus and monetization simply passes the bill from those who were responsible for making bad financial decisions to the collective society in the form of interest payments on the national debt. These payments primarily go to the money center banks and foreign creditors like China and Japan.

Until this debt is truly cleared out, including the crap hidden on Goldman Sachs and JPMorgan's balance sheet, the country will face a drag on true economic growth. To do your part do the following:

1. Pay off or default on all unsecured credit
2. Withdraw deposits from any bank that received TARP money
3. Walk away from secured obligations where the loan balance is greater than the liquidation value of the collateral (check with your lawyer)

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