Phase 3 – Bond Market Collapse

Stage 9The third phase of America’s Financial Endgame™ is the time when America’s bond market for government debt securities will collapse.  The prospect of a bond market collapse is not a pleasant one, since it will result in the retirement plans and pensions of many people being simultaneously decimated.  It is the unfortunate, and inevitable outcome of unlimited debt financed spending.

There is no way to tell how much longer the world will continue to finance the US government’s spending habits, and there is no way to tell exactly when the proverbial “bill” will come due.  However, it is a matter of complete certainty that the current trajectory of spending on the part of the US government will eventually lead to a bond market collapse.  It is my sincere hope that these events do not unfold, but it is also my sincere belief that the current national trajectory makes it only a matter of time before they do occur.

The trigger event that precipitates “Phase 3” of America’s Financial Endgame™ will be inflation.  Not modest to high-normal inflation, but persistent double digit inflation that decimates the savings and bond yields of an entire generation.  When inflation finally roars through the economy and cannot be contained by subtle government action, it will set a chain of events in motion that is all but certain to culminate in a collapse in the price for US Treasury securities.

The first step in the progression stems from the current price of US treasuries.  Prices for US treasuries are currently at all-time highs, with yields at all-time lows.  The reason for this is because “scared money” has flowed into the United States from foreign investors who are afraid of monetary instability in the Euro Zone and Japan.  There are many people who are more concerned with the return of their capital than the return on their capital.  For this safety, they are willing to sacrifice a reasonable rate of return and are choosing to loan capital to the US government at a rate slightly below published inflation rates and significantly below the real inflation rates that most people experience.

As inflation increases, the real rate of return on US bonds will continue to decline.  This will create pressure on the part of fund managers and investors to seek yield from the debt securities of other countries in an attempt to preserve the purchasing power of the capital under their management.  The current high prices and low yields of US treasuries in an inflationary environment is a situation that cannot persist indefinitely.  When there is something that can’t go on forever, the funny thing is that it usually doesn’t.

This chain of events has already been set in motion, but will not unfold immediately.  There is still a large amount of collective fear in the global investor community, and the United States still represents the last vestige of security for capital.  It is quite possible that the current paradox of government bond yields below the rate of inflation (creating negative real returns for investors) can persist for quite some time.  It is also possible that the United States will experience a “turn” in its fiscal and monetary policies that steer the government and national economy back toward a sustainable growth trajectory.  There are many uncertain aspects about America’s financial future, but one certainty is the fact that our current path is not sustainable, and will eventually result in a massive global financial crisis if it is not addressed.

The next chapter of America’s Financial Endgame™ will be Stage 9, where the Federal Reserve reduces the money supply to stabilize prices.

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