Upside Down U.S. Economic Lunacy!
Today is “S” Day – Shutdown Day!
If the United States Congress fails to pass a budget or a continuing resolution before midnight tonight, the federal government will have to start shutting down. All agree, chaos will result.
The last time that happened was back in the mid-1990’s during the Clinton Administration.
Disagreement over Obamacare is the stumbling block this time. It’s the talk of the town in Washington DC. Pig-headed politicians on both sides of the isle have dug in their heels.
Instead of talking about that, I’m going to talk about something that makes even less sense than that – U.S. Treasury yields!!
What you talkin’ about, Willis?
The chart above shows September’s daily 10-year yields. Trend line is down.
(Source: http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield )
Government bond yields are generally a reflection of the overall strength of a nation’s economy. The weaker a nation’s economy or the less confident investors become, the higher the yields. Increased investor risk means governments have to offer higher interest rate yields to sell them to fund their debt.
Don’t believe me? Just ask Greece, Italy, Ireland, Spain… etc., etc., etc.
That’s how things work in Europe and the world. It isn’t how things work in the USA.
Though not totally in the toilet bowl anymore, the U.S. economy remains fragile. The budget battle and the looming war over raising the debt limit have totally trashed investor confidence. The equity markets are tanking today.
Instead of going up like a rocket as they do everywhere else, U.S. Treasury yields are sliding down a happy, but slippery slope. They have for years. Why?
Of course, there are a number of mitigating factors that come into play:
- The rest of the world’s economy generally sucks
- The U.S. dollar is the currency of world trade
- Fed monetary policy (quantitative easing)
- Political bickering is just that – bickering
Those holding Nobel Prizes in economics tell us U.S. government bonds are a “safe haven” investment in bad economic times because the U.S. dollar is the currency of global trade.
Does that work even when the U.S. economy and massive, unchecked U.S. government spending are the problem?
If the dollar collapses, the world economy flushes down the toilet to.
I know, I know… I’m doing a lot of trashy potty talk today. Sorry.
But, for the life of me, I can’t understand why U.S. bond yields are falling – indicating a strong U.S. economy – when most economic indicators and U.S. government action says totally the opposite is true.
Will someone PLEASE explain that to me?