10 Signs That Confidence In U.S. Treasuries Is Dying And Financial Armageddon Approaches

car cliff

Selling government debt is a gigantic confidence game.  For decades, investors all over the globe have gobbled up massive amounts of U.S. debt at low interest rates because they believed that it was a certainty that they would be paid back and make a little bit of profit on top of it.

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Unfortunately, things have changed. Confidence is U.S. Treasuries is dying, and if confidence in U.S. government debt completely collapses at some point we could literally be looking at financial Armageddon. 

Why is that so? 

Well, when the world totally loses faith in U.S. Treasuries, interest rates on U.S. Treasuries will have to keep going up until enough investors are found to buy them.  But much higher interest rates will mean much higher interest on the national debt and thus much higher federal budget deficits.  That will erode confidence in U.S. Treasuries even further.  In the end, a vicious cycle of eroding confidence and higher interest rates could ultimately lead to hyperinflation as the U.S. government and the Federal Reserve flood the system with endless amounts of paper money to try to keep the system solvent.

Faith in U.S. Treasury bonds is absolutely critical if the world financial system is going to continue to operate in a stable manner.  In the post-World War 2 era, U.S. Treasuries have been largely viewed as the absolutely safest investment out there.  So if there comes a point when the market for U.S. Treasuries completely collapses, it is going to cause unprecedented financial chaos.  The worldwide derivatives market, which is already highly unstable, would almost certainly implode.  Credit markets all over the globe would seize up.  Global trade would quickly grind to a standstill.

This isn’t going to happen overnight (hopefully).  Rather, the loss of confidence in U.S. Treasuries is something that is likely to take months or even years to play out.  But once that confidence is gone, it is not something that will be able to be rebuilt easily.

Think of it this way – once you drive a car off a cliff, is it easy to reconstruct it? Of course not.

Well, that is where we are headed with U.S. Treasuries.

The Federal Reserve is flooding the system with new dollars, Barack Obama and the U.S. Congress seem poised to pass a new tax deal which does not include corresponding spending cuts which will cause U.S. government budget deficits to become even more bloated, and there is a tremendous lack of faith both in U.S. political leaders and in the Federal Reserve at this point.

The rest of the world is losing faith that the U.S. government is going to be able to handle all of the debt that it has accumulated.  We may be approaching a “tipping point” soon.

Moody's just threatened a U.S. downgrade

The financial community is concerned the tax deal Barack Obama is pushing will dramatically increase U.S. government budget deficits over the next two years. On Monday, Moody's warned that if Barack Obama's tax deal with the Republicans becomes law, it will increase the likelihood that Moody's could soon be forced to slash the rating of U.S. government debt.

The biggest two-day treasury sell-off since Lehman

Already there are signs that some bond investors are looking for the exits. Last week, U.S. Treasuries suffered their largest two day sell-off since the collapse of Lehman Brothers back in September 2008.

The yield on 10-year Treasury bonds set a six-month high on Monday before pulling back a bit and most analysts believe Treasury yields will push significantly higher in coming weeks

Source: CNBC

The trend of rising yields has been going on for a while. Yields on 10-year Treasury bonds have been steadily rising since October 7th

Source: NYTimes

The largest November budget deficit EVER

Before the recent tax deal was announced there were troubling signs regarding the growth of U.S. government debt. The U.S. government budget deficit rose to $150.4 billion in November, which was the largest November budget deficit ever recorded.

The rest of the world is furious at Ben

It is not just the new tax deal making investors around the globe spooked. The truth is the rest of the globe reacted very negatively to the new round of quantitative easing the Federal Reserve announced back in November. The Federal Reserve is flooding the system with liquidity and the rest of the world is not amused.

The American people have less faith in the Federal Reserve and in the financial system than at any other point in recent memory

For example, a new Bloomberg National Poll has found that a majority of Americans now want the Federal Reserve to either be held more accountable or to be abolished entirely.

Investors all over the globe are starting to wake up and realise that America's debt problem is unsolvable. David Bloom, the currency chief at HSBC, raised eyebrows when he recently stated that 'if yields are rising because people think America's fiscal situation is unsustainable, then its Armageddon.'

There is a growing feeling among investors that the Federal Reserve does not care about the danger of inflation, making bondholders very nervous. Stephen Lewis of Monument Securities recently put it this way: 'There is a feeling that the Fed doesn't care about inflation -- in fact, wants more of it -- and that is certainly not in the interest of bondholders.'

The U.S. needs to refinance 28% of its GDP in 2011

Over the next 12 months, the U.S. government will be rolling over trillions of dollars in debt along with the new borrowing that it will do. In fact, the U.S. government is somehow going to have to find a way to finance debt that is equivalent to 27.8 per cent of GDP in 2011.

Check out a view of how the deficit can be reduced...

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