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Monday, May 4, 2015

US Treasury Bonds,The Godfather Of All Bubbles

Bond Market-01
Charles E Carlson

The 30-plus-year-old bull market in US bonds, notes and bills may well be the most destructive man-made “Bubble” in all of recorded history.  It will sooner or later implode because it is unsound to the core.  A puncturing of the bubble may start when any of several huge holders sells.  Its implosion will trigger the sale of other overpriced corporate, municipal and foreign bonds, and the dollar itself may well be replaced as the world reserve currency.  The US bond bubble is the Godfather because it is so large that no other investment market can absorb the mass exodus which will come from it.  It is logical that those who have worked so deliberately to create this debt bubble will fight even harder to prevent its collapse.  When it implodes, it will probably bring down lesser bubbles and excesses, including the function of the dollar as a world exchange currency. 

A true “Bubble” must result from a successful, planned deception

The handling of US Treasury bonds, notes and bills, (“US debt” hereafter) has all the elements that make it a once-in-a-lifetime bubble.  It is much more than an overvalued investment or an idea that has become an exaggerated fad, like the “Dot Com Bubble”.   We have seen many of these come and go and we have survived each one.  A bubble must have the element of planned deception in order to reach proportions monstrous enough to draw in the money of a large body of public to it.  US debt floats on the unreasonable assumption of inflated value.  It deliberately and falsely promotes itself in the face of reality.  Charles Mackey, a Scottish journalist, first published Extraordinary Popular Delusions and the Madness of Crowds (1) in 1841, a study of ancient bubbles.  HIs most famous quote is, “Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”  The slow regaining of senses is why the bubble takes so long to burst, far beyond what seems reasonable.
The eventual loss suffered by Bernie Madoff’s investors was at least $18 billion.

“Bubbles” are always recognized by some (one by one) before they finally pop.  This was the case with the scheme of Bernard Madoff, now in prison for life.  Madoff started his famous Ponzi scheme, once called Ascot Partners, which, like the US debt bubble, lasted over 30 years. Several discovered it much earlier and tried to expose Madoff, but no one would listen because of the deep deception Madoff had surrounded himself with.  Madoff even held volunteer positions in regulatory agencies that should have policed him but did not.  He was also designing computer programs to backdate imaginary trades in order to achieve desired results for his customers’ accounts.  He made imaginary investments in real securities, but only on paper, and instead deposited the clients’ funds in his own discretionary account at Chase Bank. [Mechanics of the Madoff Bubble – (2)]

Madoff’s reported results exceeded all investment expectations, but investors were too satisfied to worry about it being too good to be true.  Hedge funds, pension plans and mutual funds all invested with Madoff.  His deception was simple: his fund always moved higher and never had a bad year!  This was a sure sign something was wrong, and one by one a few tried to expose him. 

The eventual loss suffered by Madoff’s investors was at least $18 billion, although those who got out early reaped gains at the expense of those who stayed in to the end!  Madoff admitted during his March 2009 guilty plea that the essence of his scheme was to deposit client money into a Chase account, rather than invest it.  When clients wanted their money, “I used the money in the Chase Manhattan bank account that belonged to them or other clients to pay the requested funds,” he told the court.

A True Bubble requires mass public participation 

On April 19, 2015, Bloomberg News reported that public investors, seeking safety, “may sink $350 billion into debt funds globally this year, adding to the $3 trillion they’ve already poured into bonds since 2008.” (3-A) This influx is mostly through banks, mutual finds and managed IRAs. Per a 2015 article, “In U.S.debt auctions this year, bond mutual funds have bought a record 43 percent of newly issued Treasuries, allotment data compiled by Bloomberg show.” (3-A)

A bubble-creating deception may be an illegal one, like Madoff’s, or it may be a legitimized deception, such as the Federal Reserve System (FED), enacted by Congress 102 years ago. 

 The measure of a bubble is not legality, but successful deception.  
The modern mutual fund business has learned how to prosper on US debt investments, considered in a previous era to be a dull and prosaic investment.  Mutual funds have added excitement to it by an implied promise of perpetual capital gains on top of meager income.  No word of capital loss potential is every mentioned.  We will detail one such example by fund manager, J P Morgan Chase Bank in this paper.

Bloomberg News further points out (3-A), “There are plenty of reasons to be bearish on U.S. government bonds. They pay almost nothing, the Federal Reserve wants to raise interest rates and money managers are largely convinced they’re [bonds] too expensive …[A] record 84 percent of professional investors in a Bank of America Corp. survey released this month said bonds were overvalued.” (3-B)

This writer agrees.  Treasury bonds are near the end of a 30 plus year bull market, a “Bubble” based on an unrealistic and  manipulated assumption that US Treasury bonds do or can be made to always sell higher and higher in the market place, translating into ever lower interest payments.  The Treasury keeps its hands clean by looking to the FED to manage the deception that keeps a line of willing lenders ready to loan money to the Treasury at higher and higher prices, (lower interest rates).

Three Deceptions that fire the US Debt Bubble

The Federal Reserve Bank of NY has its own style of deception, which varies slightly from Madoff’s and is about 1000 times larger.  It is the super-bank franchise dealer for US debt and claims to be the largest single holder of US debt.  But, unlike other buyers, the FED is allowed to purchase without investing capital, which explains why it is the biggest lender. The US debt bubble has been produced by three contrived deceptions

First, dollars are electronically printed on the books of the FED whenever the Treasury sells US debt directly to the Federal Reserve Bank for its own account. The Treasury then spends these dollars by writing checks on its bank account at the FED.  The deception is that the FED does not put up anything of value to acquire this new US debt, rather it uses electronically created dollars that recently have been conceded to be, and are referred to as “printed” dollars.  Thus the illusion is created whenever needed, that demand is outstripping supply, and that there is a constant shortage of US bonds and notes.  Chase Manhattan Bank and Morgan Guarantee Bank were original major stockholders of the privately owned Federal Reserve Bank (4), before they merged into the present J P Morgan Chase Bank.  Its money management division helps keep the US debt market creeping upward, as will be discussed later.

Second, after issuance, the market price for the newly issued US debt is manipulated, always upwardly, by the Open Market Committee of the FED.  It accomplishes this by making additional purchases in the open market, again with electronically printed dollars. The impact of all this new money on the US debt market produces smooth, little-controlled rises in the US debt’s market value year after year.   Because the interest rate paid on US debt and each instrument’s market price are inversely related, Treasury bond interest is currently at a record low, meaning the market price of the debt is at a near all-time record high.  This happens in spite of the clear fact that new debt is constantly being sold into the market, which should make the market go down, not up.  As with Bernie Madoff’s hedge fund, the illusion is created that the market for US debt can go only one way: UP.  Gradually this bubble becomes accepted as reality!  The madness of Charles Mackey’s crowd is achieved. During the course of this manipulation, according to its own report, the FED has accumulated $2.4 trillion in US debt, for which it paid nothing at all.

Third, value in US debt comes from “professional” managers of other people’s money (OPMM), who sell the specious notion that the open market value of US debt always rises enough to make up for the minuscule interest rate bonds and notes pay to the investor.  OPMM keep on buying and trading US debt and are the largest holders by far!  We must examine how this is accomplished in a real world of declining purchasing power for these bonds.  We will use as our example, the J P Morgan Chase Bank, whose two predecessor banks were original owners of the FED (4), and probably still are.  [Because the FED is unaudited, its present ownership is unknown to this author.]

As in the Madoff Ponzi bubble, manipulating parties, including the self-serving Congress, have contrived an UP, UP, and ever higher market for US debt that is hanging the least suspecting citizens out to dry.  Consider that the Social Security Trust Fund is invested almost entirely in US debt and that, with similar US agency funds, such as the military pension plan, they hold about 1/3 of all federal debt issued.  What would happen to Social Security checks and health care payments if, say, 25% of their assets evaporated in just a few months?

The military-banking complex continues to provide the need for vast sales of US debt with its serial wars in the Middle East, which started in 1991.  US debt expansion also destroys the underpinnings of the US Dollar as the world reserve currency because there is no limit as to how much dollar currency there will be in circulation.  This practice of making war, then printing or borrowing the money to pay for it, is surprisingly similar to the British course of action that broke the back of its economy by 1914 and which forced it off the gold standard for good, and in 1931, the world turned away from the Pound Sterling  as a world reserve currency and opted instead for the Dollar.
The British Empire destroyed itself by borrowing for foreign wars it never lost
England set the standard for brutality in war in the 1895-1910 era when it invaded and destroyed two far away and very different lands.  They moved into Sudan in 1898, followed closely by their invasion of South Africa in 1902.  Both campaigns were covered by youthful reporter/adventurer Winston Churchill.
The war to conquer Sudan was unpopular in England, but the British War Department overcame public objections by fashioning a publicity campaign for revenge on Mahdi Muhammad Ahman  because a year earlier he had led an independence movement that captured the garrison at Khartoum and killed a popular British war hero, Charles Gordon.  The war faction in Britain managed to sub-humanize the black Muslim Sudanese. 

English gentlemen have long been conditioned to accept the necessity for killing “wogs” going beck to Rudyard Kipling’s India.  

In the slaughter at Khartoum, it was British modern military supremacy against a primitively armed Sudanese independence movement. Propaganda-wise, the Sudanese had two ethnic strikes against them: they were both black and Muslim. The British Empire’s bloody success at Omdurman was recorded in a classic book by British author Alan Moorhead, The Blue Nile (1962).

England’s next war adventure was the invasion of South Africa in 1902, which in England turned out to be a very unpopular and expensive war. The Boer War was fought for control of South African gold mines.  It became the straw that broke the Empire.  

The Boers were white Europeans, and their casualties included some 40,000 Dutch wives and children of the Boer farmer-soldiers.  Under command of Herbert Kitchener first Earl, the wives and kids were gathered into British concentration camps and starved to death, to force the Boer farmers to yield to a treaty.  It worked.  Back home The British heard about this and could not stomach the facts. The detailed and painful account of this last British war for assets is told by Englishman Thomas Pakengham, in his classic, The Boer War (1979).

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