Bond Market Bubble?
We are nearing the end of the feds "twist" program I talked about back in September. As expected the program has flattened the yield curve in the bond market slightly raising short term yields and lowering long term yields. For the most part, the economy has made a big shrug-
GDP grew an uninspiring 2.2% the first quarter of 2012 a significant slow down from the 3% growth rate seen the fourth quarter of 2011 and well below most projections made by the "experts". Unemployment and lack of private investment remain persistent issues while inflation remains steady at 2.65% making most Americans poorer in terms of purchasing power. Residential real estate remains anemic, however, I do believe that we have hit the bottom in most areas.
Sheila Bair wrote an interesting article suggesting that we are in a bond bubble and the fed should start deflating it now gradually before it bursts. This idea isn't anything new, several economists outside of the mainstream have been harping about the bond market bubble for several years now and are generally brushed off as crazy doomsayers by the "experts", the same "experts" who told us housing prices could never collapse.
I believe we have been in a bond market bubble for about five or six years. It will collapse when inflation occurs at a quick enough pace that the fed has problems controlling it. This will be a significant problem for companies that are heavily invested in bonds such as banks. Since the fed has shown no indication of doing anything to deflate the bubble, and even doing quite a bit to inflate it, I think it is only a matter of time before the bond market bubble bursts and probably send us into another recession.
Unlike many of the people predicting this, I don't believe it will be worse than the housing/credit bubble because the bond market is fundamentally different. However it is salt on the wound of a struggling economy and our banks which have been struggling to remain solvent. The sad part is that the problem can be solved, but rather than making any serious attempt to deal with our financial problems our leaders are fighting over the stupid shit, pointing fingers and settling for short term measures that only patch things up a few months at a time.
Meanwhile, Americans will continue to live their lives in ignorance believing that these issues will magically disappear. I wish I knew a way to get Americans to want to learn how our economy works so that they would hold our representatives responsible come election day. Sometimes I just want to scream "WAKE UP" to our entire ignorant country. We live very comfortable lives right now, there is no guarantee that we will continue to do so in the future, especially when we continue to elect politicians who are either ignorant, negligent or corrupt.
It was morality that burned the books of the ancient sages, and morality that halted the free inquiry of the Golden Age and substituted for it the credulous imbecility of the Age of Faith. It was a fixed moral code and a fixed theology which robbed the human race of a thousand years by wasting them upon alchemy, heretic-burning, witchcraft and sacerdotalism.-H.L. Mencken