by David Stockman, International Man:
The implicit notion–extant on both ends of the Accela Corridor—that the present financing arrangements for the $31 trillion of publicly held US Treasuries represent the natural order of things in the financial markets is just damn nonsense.
And that’s to say nothing of the brobdingnagian task ahead—finding a home for another $142 trillion of US Treasuries by mid-century at a sustainable yield that does not blow the bond pits to smithereens.
The fact is, the existing global market for USTs is a wholly artificial, jerry-built construct arising from the money-printing central banks of the world, led by the Fed. The latter have sired three forms of artificial demand for USTs that make all the difference in the world between today’s ultra-low unsustainable government bond yields and the far, far higher levels that would otherwise prevail under a regime of sound money and honest supply and demand-based pricing.
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These three sources of artificial demand for USTs include:
- The Fed’s own bloated balance sheet.
- The central banks of mercantilist exporters and the GCC oil exporters.
- The massive holdings of global hedge funds and other relative value traders and speculators.
Before we delve into the details of these three fake demand factors and the role they have played in financing a nine-fold increase in the publicly held Federal debt, from $3.4 trillion as recently as 1995 to $31.3 trillion at present, it needs be reminded that the yields which have prevailed over this 30-year interval have been anything but natural, rational or sustainable.
Indeed, the graph of the inflation-adjusted yield of the fulcrum US Treasury security—the 10-year note—speaks for itself. By the time the Fed had pushed the real yield on the single most important security in the entire global financial market to the absurd rock bottom level of -4.2% in August 2022, the real yield had been frog-marched downhill for the better part of three decades, falling by more than 900 basis points!
That’s right. There is not a snowball’s chance in the hot place that a 30-year collapse in inflation-adjusted bond yields like the one shown below could have happened in an honest supply and demand-driven market operating with sound gold-backed money.
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