Here's The Solution To The 'Ultimate Financial Contradiction'

At, Jeff Nielsen has a very conspiratorial post essentially arguing that the US Treasury market is an epic fraud, and that it’s only because Bernanke is printing money like crazy that yields on US debt are so low, and that the entire thing is a scam.

It’s four pages of conspiracy-mongering, but part up front is what we wanted to address. This is where Nielsen introduces what he calls the “ultimate financial contradiction”, the fact that supply of Treasuries is so great while prices on them are so low.

Previously, my own writing has focused upon one particular aspect of this absurdity: the highest prices for U.S. Treasuries at a time of maximum supply. This, in itself, is an absolute financial contradiction. The highest supply in history directly implies the lowest prices in history, for every market in the world — except U.S. Treasuries.

But that is merely Act One of this theatre of the Absurd. These maximum prices are occurring at the point in history where the U.S. has never been less solvent. This also directly implies that U.S. Treasuries should be fetching the lowest prices in history — as is occurring with their deadbeat counterparts in Europe.

No one has been able to explain this ultimate financial contradiction, and so I have previously done so myself. My solution for this conundrum was based upon the Holmesian Principle of logic asserted by Sir Arthur Conan Doyle: When you eliminate the impossible, whatever remains (no matter how unlikely) must be the answer.

In applying this principle to the logical/financial contradiction of the U.S. Treasury market, I was left with only one possibility: that B.S. Bernanke is secretly (and illegally) counterfeiting U.S. dollars — and using those bogus dollars to prop up the U.S. Treasury market.

When Nielsen says that “no one has been able to explain this ultimate financial contradiction” we wonder if it’s just because he hasn’t asked anyone to explain it, since this isn’t that much of a puzzle.

Here’s the deal: Treasuries are being issued at record levels because the government is spending money at record levels. And this record amount of government spending goes into the private sector, where all the dollars eventually wind up in banks, and in other accounts where Treasuries are purchases. So you don’t need evil Bernanke in the back room printing up dollars. It’s the dollars that the government is spending that match the Treasury issuance. Mystery solved.

In fact, here’s a chart that might blow Nielsen’s mind.

In the chart, the blue line is the size of the national debt and the red line is 1/the yield on the 10-year Treasury (so the red line goes up when yields fall).


For 30 years, yields have been falling (represented by a rising red line) at pretty much the exact same pace as the national debt has been rising.

If anything, higher deficits and lower yields are the norm (note: It’s been this way in the UK and Japan, too).

What really matters to Treasury yields are inflation, growth, and so on. Supply is irrelevant because supply of Treasuries is always matched by government spending, there’s never an issue of where the money comes from.

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