Wall Street Henny Pennys tumble into bondage

The US debt market is, ironically, the haven investors have chosen even though the US economy is as precarious as any.

 

The US debt market still remains the No.1haven for capital. Photo: Phil Carrick

THE US bond market was the place to be this week as frightened investors took the long handle to shares and commodities.

What a paradox! The US is in such trouble financially, why would any sane investor want to park their money in US debt? They did though, in droves. The US debt market still remains the No. 1 haven for capital.

Short-term paper even attracted inverse yields. Such was the frantic rush for a safe place to hide last night that banks were even charging their customers a fee for parking money in treasuries. In other words, rather than getting a yield on your money, you paid a fee.

At least that was short-term money with Bank of New York. At the long end, a 10-year bond yields just 2.41 per cent. Bear in mind that when it comes to the bond market, prices are the inverse of yields. The prices of all bonds soared yesterday, driving the yields to their lowest point since the depths of the crisis in 2009.

Even though the risk of the US as an investment destination had escalated to new levels, global capital continued to flee into US debt. This even as the prospect of the US ever paying back its debts, or meeting its future obligations, becomes more remote.

It’s a reflection of how desperate things have become. The conundrum: where to put your money? Sharemarkets are overvalued, especially now that the latest ructions will wreak all sorts of dislocations and current earnings forecasts will have to be reined in. Commodities are plunging on the diminishing prospects for global growth and demand. Gold is already sky-high and bond markets are groaning under an ever-increasing weight of supply.

Meanwhile, the problem for governments is simply having a viable policy to meet the sovereign debt crisis. What’s the plan? The mother of all stimulus programs hasn’t worked. It just created a mountain of debt. Instead of reviving the world economy, governments had effectively transferred private sector leverage to the public.

Broadly there seem two options on the policy menu now. One, the deflation option: let market forces take over, let the defaults begin and provide a social safety net.

Two, the inflation option: keep splashing the cash to reduce the debts to zero. This is clearly the favoured Wall Street option. Wall Street’s proxies in Washington may duly deliver more stimulus, stimulus the public can ill afford, stimulus which could bring on another Weimar Republic, but stimulus which will reduce the size of the debt.

Bear in mind the once-lauded US Federal Reserve is merely a private entity controlled by the Wall Street banks which brought the crisis on in the first place thanks to its ultra-low cash rate settings, settings designed to appease the sharemarket and the financial elite. Then, in the wake of the 2008 rout, Washington gave the Fed another $US2 trillion, expanding its balance sheet to buy US government bonds and keep interest rates down.

It’s likely that some on Wall Street, and other assorted speculators, even exploited the end of the most recent stimulus plan – the last round of quantitative easing which ended in June – once again by ”shorting” the markets to make a profit. The markets have been in trouble every time the taxpayer ”play money” runs out.

Over here in the lucky country though, we are lucky we don’t have much debt, and very lucky there has been a China boom on, although for how long now, nobody could be sure. And governor Glenn Stevens must be thanking his lucky stars the Reserve Bank opted not to lift interest rates again earlier this week.

New Michael West Podcast

Created by PodcastOne, this 3 part series looks into how Australia has gone from one of the cheapest countries in the world for energy to one of the most expensive, and reveals just what has happened with our gas and electricity supply and why we are on the verge of an energy crisis.

Listen to THE ENERGY TRUTH on the PodcastOne website

Get Involved

Independent journalism needs your support. Share on social media, submit comments. Subscribe today for free updates. Community support is vital for this project to succeed.

Supporters

This website must remain free, to reach the largest possible audience. If you can spare $5 a month, join the fight.

Don't pay so you can read it. Pay so everybody can read it.

Democracy is under threat from powerful vested interests.

$5 per month

$20 per month

$100 per month


Subscriptions can be changed at anytime by logging into

my account