Fifty Basis Points To Disaster
- Fifty Basis Points To Disaster
by MN Gordon, https://www.economicprism.com/
Fiscal stimulus, including the latest $1.9 trillion American Rescue Plan Act, is a terrible joke. And the means for financing it is a terrible fraud. A massive deficit, piled upon a mammoth debt, made possible by dollar debasement.
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Extreme credit market intervention by the Federal Reserve is a prerequisite. So, too, is the utter denial of price inflation by the Bureau of Labor Statistics. This week’s consumer price index (CPI) propaganda reported the all items index increased 0.4 percent in February and 1.7 percent over the last 12 months.
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The combination of extreme credit market intervention and bogus inflation reporting is making a mockery of credit markets. Where to begin?
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When you purchase a Treasury note you are lending money to the government for a specified period of time (i.e. 30 days to 30 years) at a fixed rate of interest or yield. The risk of default on Treasuries has generally been considered nonexistent.
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The federal government, with assistance from the Federal Reserve, can always print money to pay its debts. But this isn’t without risks. Because printing dollars to pay debts devalues the existing stock of dollar. So while the nominal return is preserved…the inflation adjusted return goes negative.
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In short, inflation destroys Treasury values for investors. To account for expectations of rising inflation, yields rise. But this presents another problem for long term Treasury investors.
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