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.


While excessive private-sector debt (especially in mortgages) was blamed for financial meltdown of 2008 that began in the USA, the supposed remedy for the economic turmoil was to boost spending based on more public-sector debt. Now, the imbalance of excessive debt is now far worse due to what has become a massive “bubble” in public-sector debt that has crowded out private borrowing and lending.

As it is, private commercial banks earn large profits in buying government bonds since lending to private borrowers involves much higher costs and greater risks.

Consider that from 1974 to 1980, each $1 increase in GDP was accompanied by increased debt of between $.20 & $.47. After 2009, each $1 increase in GDP was accompanied by $2.50 increase in debt such that the growing expansion in the additional amount of debt needed to support increased each $1 of GDP will stifle economic growth & destabilize financial sector.

In Q1 2012, GDP rose $142B & debt rose $355B, such that $2.50 additional debt only generated $1.00 additional GDP.

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