Saturday, August 5, 2017

Greenspan is Right About Bonds - You Better Listen

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Greenspan is right, but the evolving train wreck is so slow that the majority believes headlines like the one below must be true.

Central banks bought government debt during QE to relieve the burden on commercial banks. In theory, the debt would disappear from the Fed and other central bank balance sheets and everything would return to normal, if and only if governments would stop borrowing. We all know that's impossible. If central bank withdraw as buyers (as announced in the spring of 2017), who's going to fill the void? Private buyers? Yeah right! A better bet would be Santa Claus comes to the rescue.

Interest rates have the potential to rise much faster than anyone expects because the private sector is not stupid! Here's the evil twist, if rising rates cannot entice buying from the private sector - they hold and auction and nobody shows up, the system of perpetual spending and borrowing by government will break, and the public will realize that Greenspan was right.

Headline: Greenspan Is Wrong. There Is No Bond Bubble

With the 10-year Treasury yield at 2.27%, Alan Greenspan says he's worried that the bond market is in a bubble.

"By any measure, real long-term interest rates are much too low and therefore unsustainable," Greenspan told Bloomberg TV in a July 31 interview. "When they move higher they are likely to move reasonably fast. We are experiencing a bubble, not in stock prices but in bond prices. This is not discounted in the marketplace."


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