Stocks, Forex and Other Money Matters

Serious attention is being paid the the U.S. Treasury bond market in recent trading. When T-bonds show action, the dollar does also. If there is a decline in long-term Treasury bond prices, the dollar also plummets. According to the March 2009 report of the Fed’s Flow of Funds, there was $14.5 trillion outstanding in agency securities, mortgage-backed securities and Treasury securities.

China is the first holder of U.S. bonds and other countries heavily invest in the U.S. debt as an investment. Many economists suggest that if China stops purchasing the U.S. bonds, the economy would have increased interest rates which would make U.S. debt more enticing.

The actual value of U.S. Treasury securities is increasingly being focused upon because of out-of-control governmental spending. China wants assurance that their assets will be safe; if the question of U.S. credibility would arise, they may likely liquidate some of their U.S. assets to cover themselves.

If other nations do not buy U.S. debt, the only other option is for the U.S. Treasury to buy Treasury securities and, thus, increase the money supply dramatically. In order to attract investors, rates of interest would have to rise. As what happens when the Federal Government begins to habitually buy Treasury bills, inflation will soar. In the current climate, the Fed bought over 500 billion dollars in mortgage-back securities.

Normally, high interest rates is associated with the central bank as the government attempts to ward off inflationary pressures that come with an expanding money supply. Yet, there is less demand for Treasuries and the only other viable option is to have higher interest rates to entice buyer demand. Unfortunately, higher interest rates would only further decline the economy. As the result of higher interest rates, a greater burden is placed on the citizen which results in an escalation in mortgage defaults and more consumer debt.

Washington’s record breaking Treasury offerings to fund the deficit and the Fed buying the debt through its spinning out of dollar bills is staggering. The floodgate opened by the U.S. Treasury is pushing bond yields higher. Bill Gross, of PIMCO told Bloomberg, “The market is beginning to wonder who is going to be buying these bonds.”

Inflationary deficit spending can destroy a nation. The renowned late economist, Milton Friedman warned that “Inflation is a disease, a dangerous and sometimes fatal disease that, if not checked in time, can destroy a society.”

China remains the #1 holder of our nation’s debt. Economist Milton Friedman warned that the fate of a country could not be separated from ”the fate of its currency”. High inflation and high interest rates are not comforting to an already fragile global economy. The increasing debt boosts bond yields at the same time that the government’s budget deficit is not putting on the brakes.

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