American Consequences - September 2019

We are approaching the second-best opportunity I’ve ever seen to make huge Ɛ gains in the world’s markets. Hopefully, you’re skeptical that anything important is about to change. That’s exactly how you should feel. It’s also true: Most of the time, you can safely ignore macroeconomic forces like the stuff I’m going to describe today. Most of the time, you can simply sit back and let your dividends grow. But during rare periods – periods of acute stress in the world’s currency and bond markets – you can make stupendous gains and avoid huge losses. And it seems likely – though not policies – unsustainable debt loads, defaults, illiquidity, and ultimately horrendous losses to purchasing power as the government further devalues the U.S. dollar in response. Many will perceive this coming monetary inversion as an opportunity. And it’s true... We are approaching the second-best opportunity I’ve ever seen to make huge gains in the world’s markets. The flip side of this massive liquidity event, however, is stark... For most Americans, what’s about to happen will destroy much of their liquid wealth . No, it’s not fair. Not at all. It is a rigged game. If I could, I would put America on a diet of sound money, sound banking, and balanced government budgets. But I can’t do anything about it.

inevitable – that we are about to enter one of those periods. Whether it happens over the next few days or not, it’s coming. Most people will think this is a “new” crisis... This is merely the next phase of the crisis that began in 2008. And if you study the GFSB carefully, you’ll understand exactly why.

WE ARE ENTERING THE NEXT PHASE OF THE GLOBAL FINANCIAL CRISIS

Explaining the bond market goes well beyond the scope of this essay. But at a basic level, everyone should be able to understand that what investors expect to earn by lending to the U.S. government for 10 years depends – most of all – on inflation rates. If investors see that inflation is going to increase, they will demand higher interest rates on their loans to the government. The expected “real” return on these bonds is the yield on 10-year bonds that provide inflation-protected returns – the so-called “TIPS” bonds (Treasury Inflation-Protected Securities) that the Treasury also issues. How we measure it isn’t important. What matters is that when the global financial system is functioning normally, investors can make a profit from lending to the government. What should investors earn by lending to the U.S. government?

American Consequences

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