This Blog Has Moved!

My blog has moved. Check out my new blog at

Your Ad Here

Thursday, August 25, 2011

Treasury Credit Rating And Bond Prices

Recently, S&P downgraded US Treasury debt.

Politicians are angry over the debt downgrade. They can't prosecute S&P for "downgrading US Treasury debt". Instead, they're prosecuting S&P for ratings on subprime mortgage bonds during the housing bubble.

That's a pretty standard trick. State police want to nail you for X, but instead they prosecute you for Y.

It's a pretty flagrant "Wink, wink. We really want to prosecute you for downgrading Treasury debt. Instead, we're prosecuting you for something else." If politicians really wanted to, they could probably send the CEO of any big financial institution to jail for the rest of his life.

It's pretty obvious selective prosecution, when S&P is prosecuted but not Lehman Brothers' CEO and CFO. Their "Repo 105" accounting lie was a pretty flagrant violation of Sarbanes-Oxley.

Amusingly, the CEO of S&P resigned (i.e. was fired with a golden parachute), and was replaced by another bankster figurehead. Hopefully, he learned a lesson regarding the value of honesty in the financial system. This continues with well-established precedent, that anyone who tells a bit of the forbidden truth has their career as an insider ruined.

Here's a good test of your knowledge of real economics.

After the US Treasury debt downgrade, what should be the effect on Treasury bond prices?


The net effect of the US Treasury downgrade on Treasure prices should be *ABSOLUTELY NOTHING*.

Why is that?

The Federal government, in collusion with the Federal Reserve and financial industry, buys back its own bonds. Because the Federal government buys back its own bonds, observed market prices for Treasury debt has nothing to do with the free market.

That's the reason that Treasury debt yields are low even though inflation is high. The Federal government buys back its own debt, making returns completely uncorrelated with real inflation.

The Federal government prints new money to finance the purchase of its own debt. It isn't explicit. It's done indirectly with the Federal Reserve and financial industry via "debt monetization". In a fiat paper monetary system, there is no restriction on the State insiders' ability to print new paper money to buy back their debt and manipulate interest rates.

The "credit rating" only measures the risk of technical default, that you won't get payments as promised. The real risk of Treasury debt is that returns will be less than inflation. S&P is ignoring that risk.

The only way a technical default can occur is if Congress refuses to pass a budget or raise the debt limit. The Federal government can keep on creating new bonds and new paper, to keep refinancing their debts.

There's a moral default on Treasury debt all the time, because interest payments are less than inflation. That doesn't count as a technical default, according to bankster logic.

Treasury yields are used as a benchmark for other types of debt, because banksters can borrow at the Treasury rate and buy other debt. The Federal Reserve isn't just lowering the price of Treasury debt. They are also lowering the price of all corporate bonds. You'd be an idiot to buy any type of bonds, not just Treasury debt, because returns are much less than true inflation.

It also is amusing, to see all the mainstream media hate directed against the "Tea Party", blaming them for the credit rating downgrade and debt ceiling impasse. Most "Tea Party" Congressmen are still shills for the State. Even that type of limited dissent is not appreciated.

The whole "Treasury credit downgrade" debate is a smokescreen and an illusion. The real problem is that Treasury yields are less than true inflation. There is a Treasury debt default continuously, at a rate of 1%-3%+ per month.

The banksters gladly buy Treasury debt. They borrow at the Fed Funds Rate (currently 0%-0.25%) and buy higher-yielding Treasury debt. They profit from the spread. The actual inflation rate is irrelevant.

As an individual, you'd be an idiot to buy Treasury debt. You are guaranteed to be robbed via inflation.


Anonymous 2274 said...

The same goes for the stock market, interest accounts, whole life insurance, etc. While it's possible to beat inflation by investing in the stock market, almost no one is skilled enough to do it. I'm able to invest in the market, but only because I understand economics.

For example, before the big collapse in 2008, I sold my entire portfolio and then bought it back after the market crashed. Still, even someone with the foremost knowledge of the market can easily be beaten gold. Outperforming gold or silver is nearly impossible over a long period of time. I now have 40% of my portfolio in gold. I may move more and more over as time passes.

Gold is an investment practically guaranteed to go up. If we go back to the gold standard, use of gold will skyrocket and gold will go up exponentially. If not, the dollar will continue crashing, making gold go up even further.

Scott said...

Buying gold sounds like a smart move if you believe that the government is going to be fair and reasonable regarding your investment when the shit hits the fan.

Historically the precedent is clear. Just as you are celebrating your good foresight to buy gold, a new law will be passed declaring owning gold is treason against the state and you are required, under penalty of prison, to transfer all your gold to the government, in return for which you will receive $1000 per ounce in New Dollars.

FSK said...

It can be just as bad or worse than that. The gold dealer sends a 1099 to the government, informing them of your purchase. The fact that you have gold is "leaked". You are robbed.

There literally is no safe investment.

In a checking account, you get robbed by inflation.

With the stock market, you get robbed by crooked CEOs.

With gold ETFs, you can be defrauded.

With physical gold, you can be robbed.

Literally, there is no safe investment.

dionysusal said...

>The banksters gladly buy Treasury debt. They borrow at the Fed Funds Rate (currently 0%-0.25%) and buy higher-yielding Treasury debt. They profit from the spread. The actual inflation rate is irrelevant.

Very true, but they still have to worry about hyperinflation, since that's a universal leveller.

Anonymous 2274 said...

To Scott:

Of course. The government could easily make owning gold Illegal at any time. Unless something drastic happened, though, I don't think people would go for that. If Obama did that, it would be equal to not seeking a second term.

Someone like Bachmann couldn't get away with making gold illegal. She'd lose all her supporters. Obviously Ron Paul wouldn't make gold illegal.

The only people would could get away with that are Romney and Perry.

Of course, I could be wrong. As FSK has pointed out, there's always something you could miss. The government could make gold illegal tomorrow and I'd look like a fool. That's the main reason why I'm still keeping the majority of my money in stocks.

From what I've seen, investing in gold is at least the only investment with a nonzero chance rate. Investing in the stock market is almost guaranteed to go badly, after the collapse occurs. I have enough distribution that if the market crashed, I'd be okay, and I'd gold collapsed, I'd also be okay. Of course, both could happen simultaneously, and I'd be in a big mess. Still, this is the only option I see with a nonzero success rate.

Anonymous 2274 said...


I should've said "only investment with nonzero success chance" as opposed to "only safe investment." In the stock market, I'm not too concerned about getting robbed by CEO's, as I subscribe to an investment recommendation firm ($200/year) that always meets with the directors, and takes that into serious consideration (they won't recommend a stock if they think it has bad directors). I've had excellent returns following their advice (of course, I still do research on the stocks myself, but they me a good group to work with).

You can still always be reeled in by parasites and psychopaths, of course.

I'm more worried about a complete collapse of the market. Having good quality stocks hardly guarantees good returns. Also, once everything collapses, a lot of the companies are going to be worthless anyways.

Once that happens, the price of gold should skyrocket.

Of course, though, you're right; and that's why I have so much in the market still; in case gold is confiscated. It could potentially be stolen during the collapse. You could hide your gold if the government doesn't confiscate it, but records will still show you own gold. It will be possible to force it of you where your gold is hidden.

Do you recommend a certain percentage of cash/market/gold/real estate/etc.?

FSK said...

With real estate, you can get robbed by property taxes. If the real estate market crashes, your property tax bill can be worth more than the property.

I decided that I'm keeping my stock investments, but that all new investments are going to paper gold and physical.

Anonymous said...

steamroller says:
FSK is right about the 1099 form and government "appropriations" - - - - again, the Socialist's trump card is: Once control has been achieved, ownership is unnecessary.

This Blog Has Moved!

My blog has moved. Check out my new blog at