Mish's Global Economic Trend Analysis Message Board

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Strategies & Market Trends : Mish's Global Economic Trend Analysis

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To: mishedlo who wrote (33976)	7/21/2005 4:07:13 PM
From: Tommaso	Read Replies (2) of 116555

>>>Selling of junk - buying treasuries selling of corporates buying - treasuries Selling of equities buying treasuries People with cash seeing attractive yields buying treasuries Pension plans buying treasuries instead of junk, corporates, or equities Bill Gross selling junk and buying more treasuries Foreign govts buying less agencies an more treasuries Money flies out of stocks into money market funds, those funds buy treasuries<<< Where does the money come from to buy the junk, the corporates, the equities--money that is then available to buy treasuries? And if there is an effort to exchange all these other assets for treasuries, the result will be a collapse of equity prices and also a big decline in the prices of less secure bonds. A bond in actual danger of default can sell for pennies on the dollar, and bonds even of profit-making companies can be cut from par to half their value, when their interest rates go from 8% to 16%. For the last ten years or so a great deal of the money spent on treasuries has come from foreign sources and represents dollars exported from the United States to pay for the huge trade imbalance. The amount of money does not currently exist inside the United States that would be sufficient to buy U. S. Treasury bonds and finance the operations of the government. The Treasury risks being unable to sell the bonds to refinance the debt. To make them more attractive, they will have to raise interest rates. This will in itself lower the value of the bonds. Holders of those bonds outside the United States will see the quoted value of the bonds declining even as the dollar declines. The only way the government can function at that point is for the Federal Reserve itself to buy the bonds, which it can do by creating bank balances. This means an instantaneous ballooning of the money supply, a decline in the value of the dollar, and an increasing loss of confidence in the currency.

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