Bond markets sniff inflation and turn down
Posted on 15 October 2008 with no comments from readers
Bond markets have started heading south despite the falls on Wall Street – not the normal reaction and an indication that this huge market has begun to sniff its biggest enemy: inflation.
This is odd because deflation of assets – from houses to stocks – is the big issue now. Could this fall in bonds indicate that after this period of deflation, the multi-trillion dollar attempts to rescue the banking system will knock deflation concerns out of the picture and put inflation back on the map?
This is all beginning to look like one of the greatest boxing contests in the history of economics. In the deflation corner, we have potentially the greatest contraction of credit ever.
In the inflation corner we have the largest concerted government bail out/injection of capital ever. The audience watches with bated breath to see which will be the eventual winner, while the cross-fire wipes out your assets, left, right and centre.
Precious metals
The only way to protect yourself is with gold and silver. The bond market is the biggest market in the world. If money floods out and heads for that other perceived safe-haven of precious metals, we should see huge price rises as the gold and silver markets are much smaller.
If the bond markets collapse the wider consequences will dwarf those of the US property market. A collapse could mean a run on the dollar, and hyper inflation. This is frightening stuff. Consider Jens O. Parsson’s Dying of Money: Lessons of the Great German & American Inflations, (Wellspring Press, 1974):
“Everyone loves an early inflation. The effects at the beginning of inflation are all good. There is steepened money expansion, rising government spending, increased government budget deficits, booming stock markets, and spectacular general prosperity, all in the midst of temporarily stable prices. Everyone benefits, and no one pays. That is the early part of the cycle.
“In the later inflation, on the other hand, the effects are all bad. The government may steadily increase the money inflation in order to stave off the latter effects, but the latter effects patiently wait. In the terminal inflation, there is faltering prosperity, tightness of money, falling stock markets, rising taxes, still larger government deficits, and still roaring money expansion, now accompanied by soaring prices and ineffectiveness of al traditional remedies. Everyone pays and no one benefits. That is the full cycle of every inflation.”
Banking crisis phases
In the 1930s the banking crisis that produced the Great Depression went in three phases: first, the credit crunch and initial bank failures; second, a bond market crash; and finally a flight to precious metals as depositors left the banks.
Who is to say history will not repeat itself and that this is just another case of deja vu all over again?
no Comments posted by readers:
Well said, Peter!
One of the big differences between the early 1930s and now is that events of 2008 seem to be unfolding far more rapidly than those of 75 years ago.
These days, each day brings with it an unbelievable number of major events, some of which can turn out to be catastrophic for the world economy. . . or maybe it just appears that way since we’re all interconnected (TV, Internet, etc.), and events today travel at the speed of light.
Richard D.
You may want to consider a fourth phase that occured after people rushed (or tried to rush) to the “safety” of precious metals.
http://www.strike-the-root.com/columns/Chkoreff/chkoreff1.html
Let’s hope that history doesn’t repeat itself with a repeat of FDR’s 1933 confiscation of private ownership of gold (Executive Orders No.s 6073 and 6102).
I believe however that numismatic gold coins were exempted from this “gold grab.” Just something to think about…
If we went back to the gold standard this phony “government bailout” could have never happened and goold old competition would have restored order. Now it’s anybody’s guess as to what will hapen.
Comment 2. Eric all you have to do is hold gold offshore in a non-US jurisdiction like Australia’s Perth Mint.
Comment 1. Yes this does all seem a bit speeded up, otherwise this is the same thing happening all over again – someway between the 30s and 70s – perhaps the speed is the new part for the 2000s. I think it is time I went back to my history books to do some more research. My forte is modern twentieth century history with two books published. This looks like it will end up the third!