The inevitable coming of the “DUH” moment….

“Anything that can’t go on forever, won’t.”

Everyone understands the above statement covers all things; except when they are caught up in the midst of an asset “bubble”.

Despite so many memorable crashes recently, investors remain in denial of the “mother-of-all-bubbles” in government bonds.

Purchasing government bonds at near-zero or record-low interest rates involves a combination of dreadful risks & certain losses.

The dreadful risks arise from the inverse relationship between bond prices & their returns on yield.

With central bankers playing God with interest rates to keep them artificially-low for so long means that the only possible direction is for them to rise, eventually. Higher interest rates will bring capital losses on the prices at which most bondholders bought in.

The certain losses arise from the loss in purchasing power from rising price indices, like CPIs, that swamp the interest earning from holding government bonds.

Somehow government bonds hold the allure of preserving capital due to their “risk-free” nature. But the above comments show how misguided this rationalization is, especially given the risk of capital loss, lost purchasing power of capital & the increased possibility of sovereign defaults.

There will eventually be a “DUH” moment when investors realize, game over. Then there will be a flight from government bonds that will see interest rates spike sharply higher.

In the meantime, it is delusional to think central bankers & governments shuffling or exchanging pieces of paper (fiat currencies for bonds) will solve fundamental economic imbalances.

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About christopher

Content of "Natural Order" attempts to reflect the commitment of Universidad Francisco Marroquin to support the development of a society of free & responsible individuals. The principal commentator for this blog is Christopher Lingle.

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