Monday, May 2, 2011

When Money Isn’t Money

Standard and Poor’s rating service put the US debt on ‘negative’ watch on Monday, April 18, 2011. The service said they might be forced to downgrade the US ‘AAA’ rating to something lower in two years. The stock market stumbled early in the week but recovered for a weekly gain. As with everything is this surreal market, the bond market reacted to the S&P news with a yawn. In fact, bond prices actually gained. Yes, that’s right. After the ‘negative’ pronouncement hit the market, buyers stepped in and bid the Treasury bonds and notes higher. The chart below is the 7 - 10 year US Treasury ETF, IEF, over the week with 10-minute bars. We can see that Treasury note prices turned out to have a good week. What could make the price move even higher? Maybe more ratings services could call the debt outlook ‘severely negative’. Maybe it could be ‘doomed for failure’ or ‘impending bankruptcy’. Of course, this would only drive prices higher and yields lower. The con job continues.
The bottom line is US government debt cannot be sold. First, there are no buyers other than the Federal Reserve and second, Treasury selling leads to higher interest yields. This cannot happen as the nation pushes towards $15 trillion in debt. If a higher interest rate trend were to continue, the nation would soon be spending more on debt service than anything else. Eventually the con has to end. But not now!
Our lesson for the week is this. Money is no longer money. Money is a liability. The Fed’s destruction of the currency through various ‘save the big banks’ programs has led to ravenous inflation that makes holding the currency a loser’s game. We have a precedence for this and it is Zimbabwe. A few years ago when their central bank set out to destroy their currency, inflation became so bad that people didn’t want to put their money in the bank. Why? Because even by the end of each day, their money would buy less stuff. The recourse is to, as Mr. Obama likes to say, ‘invest’ the money in something else. Anything else. Anything besides money. Spend it. Transfer it. Convert it. Buy hard assets. Do anything but don’t save it. Money is no longer money. While it evaporates in the saver’s hand, assets are transferred to the issuer’s hand. This is the central bank strategy.
So, risk ratings and earthquakes aside, people with money have to put the money in something other than money. And yes, they even buy bonds that are issued by failing governments rather than risk the purchase power destruction of inflation. Surely too, a lot of money will be allocated to stocks. One only has to look at a chart of gold or silver to see what investors really think of inflation and its impending destruction of currency values. The bottom line is simple. The Fed will continue to destroy the value of the paper money that they issue. And yes, the Zimbabwe Industrials soared in 2008 when all other markets tanked. It turned out to be a con. So too will our market. Until then, the real con is thinking that money is actually money.

4/18/2011 - 4/21/2011 IEF 10-minute bars
Chart courtesy
Disclaimer: The views discussed in this article are solely the opinion of the writer and have been presented for educational purposes. They are not meant to serve as individual investment advice and should not be taken as such. This is not a solicitation to buy or sell anything. Readers should consult their registered financial representative to determine the suitability of any investment strategies undertaken or implemented. BMF Investments, Inc. assumes no liability nor credit for any actions taken based on this article. Advisory services offered through BMF Investments, Inc.

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