John Klar: Understanding the inflation dangers to America’s Treasury and currency

Many voices are warning that America’s important Treasury Market is under threat. As interest rates rise and monetized debt increases, the value of treasury assets — upon which the entire banking and money system depend — becomes unstable or declines. This volatility threatens the entire economy and monetary system in ways not seen in the United States since the Great Depression.

John Klar

The potential risk to the nation stems from the fact that Treasury securities form the foundation of the “free market.” These investing instruments are distinct from stocks, which represent ownership interests in companies or physical assets. Treasury Market securities include bonds, bills, notes, and TIPS (Treasury Inflation Protected Securities). These instruments are regarded as “safe” because they are dependent on the full faith and credit of the U.S. government. The values of these instruments are closely watched, as they impact all other interest rates, and also the stock market.

Investors (including pensions and market funds) generally apportion some part of investments into these interest-bearing treasury instruments as a safeguard against stock market volatility — if stock prices decline, bond instruments usually hold strong. But treasuries can also become volatile, especially when the Federal Reserve sharply increases interest rates (and when the federal government swamps money supply with new borrowing, in the name of “inflation reduction”).

These bonds, bills, notes, and TIPS are all basically “debt instruments” — a loan of money to the government with a promise of repayment over time. The face price of an instrument tends to decrease as interest rates rise, essentially shifting the value of existing investments to reflect current real interest rates. After all, why would someone buy a bond with a guaranteed 2% interest rate when interest rates climb to, say, 4%? — the price of existing 2% bonds drops (become “discounted” by the market) to reflect the current 4% offering.

Recent hikes in interest rates have impacted Treasuries precisely this way. As the Federal Reserve has warned:

Cracks in liquidity in Treasurys, the biggest, deepest part of the U.S. bond market, have begun to emerge as both the 2-year Treasury TMUBMUSD02Y, 4.688% and the 10-year Treasury TMUBMUSD10Y, 4.125% rates have shot above 4%, highs last seen around 2008.

If investors distrust treasury instruments and don’t buy them due to fears of rising inflation, that increases their effective yield, increasing the “true” interest rate. The Fed explains it this way:

“Low liquidity amplifies the volatility of asset prices and may ultimately impair market functioning.”

Liquidity woes “could also increase funding risks to financial intermediaries that rely on marketable securities as collateral,” the report said, while pointing to potential ripple effects that could ampl[if]y financial stability risks.

Importantly, the report also said that market participants thus far “have continued to meet their margin calls to date.”

This last part is “important” because it alludes to the potential for large institutions to essentially become insolvent due to plunging bond prices, a la Lehman Brothers in 2008. If rising interest rates cause bond values to plummet precipitously, a domino effect in bond markets could ensue that exceeds the implosion of the mortgage-backed securities collapse of 2007-2008.

The problem is that America’s borrowing is so massive that many foreign nations no longer buy our debt, and private banks and hedge funds can only fund so much leveraging:

In 2022, bonds have suffered the worst drawdown in over 100 years, with a 60/40 stock and bond portfolio returning a horrifying -34.4%

The Government requires continuing debt issuance to fund spending programs as it requires the entirety of tax revenue to pay for social welfare and interest on the debt. When debt buyers evaporate, the ability to issue debt to fund spending becomes increasingly problematic. The problem is that outstanding Treasury debt has expanded by $7 trillion since 2019. However, at the same time, the major financial institutions that act as the “primary dealers” are unwilling to serve as the net buyers.

As one observer wrote:

The word “crisis” is not hyperbole. Liquidity is quickly evaporating. Volatility is soaring. Once unthinkable, even demand at the government’s debt auctions is becoming a concern. … Make no mistake, if the Treasury market seizes up, the global economy and financial system will have much bigger problems than elevated inflation.

History teaches that there are many potential risks in the Treasury market. The Fed also now warns of threats to the markets by under-regulated crypto-currencies. But some view the threat as just the opposite: that runaway spending and money-printing will break the entire financial system, and that an untrustworthy federal government will use that crisis to usurp market freedoms and dominate the very currency itself with a new electronic currency controlled by the government.

The Biden administration in March issued a disturbing Executive Order (EO) that purported to raise alarms about potential impacts of cryptocurrencies, but in fact proposes to create one itself:

President Biden has instructed the federal government and Federal Reserve to lay the groundwork for a potential new U.S. currency, a digital dollar. … If the United States were to adopt a digital currency like the one discussed in Biden’s executive order, it would be one of the most dramatic expansions of federal power ever made, one that could put individuals and businesses in grave danger of losing their social and economic freedoms. … A digital dollar would not merely be a digital version of the existing U.S. dollar, but rather an entirely new currency that would, at least at first, exist alongside today’s currency. … Unlike the current dollar, though, a central bank digital currency would not exist in physical form, meaning you wouldn’t be able to go to a bank or ATM and withdraw it.

This is clearly a “plan to use a future central bank digital currency to control Americans’ behavior.” The collapse of the Treasury market — caused by overspending, and subsequent money printing in the name of reducing inflation — is the necessary event required to implement it. I warned of this well before President Biden’s executive order, and raised the alarm again when the ironically-misnamed “Inflation Reduction Act” was proposed. This is a clear plan to implement a totalitarian domination of all Americans by a far-left extremism that must be opposed at every step.

John Klar is an attorney and farmer residing in Brookfield. © Copyright True North Reports 2022. All rights reserved.

Image courtesy of Wikimedia Commons
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3 thoughts on “John Klar: Understanding the inflation dangers to America’s Treasury and currency

  1. $205 billion? A mere bagatelle…. The Federal Reserve (which is not a part of the US government, just a legally constituted assembly of major banks given the mission of constraining unemployment and boosting the economy through application of interest rates, paid Wall Street banks (basically, itself) $27 trillion to get over its sadness about their role in the 2008 meltdown. According to basic principles of math, that’s 131 times as much as the Obama administration might have cost the economy

  2. ““The Biden administration has created a bevy of new federal regulations amid rising inflation that experts believe has made the problem worse and cost the economy ”

    Specifically 100billion to the illegal war in Ukraine to support a Nazi fascist
    government.. which Drats voted would not have watchdogs to follow the spending. Hence we get a probably 20billion of real military spending and 80billion of waste and graft…. The 80billions in weapons left in Afghanistan had to be replaced as well.

  3. Read this Mr. Klar….Democrats love to spend on new regulations that cost $$$. Trump reversed many after Obama, and but put them right back in!

    “The Biden administration has created a bevy of new federal regulations amid rising inflation that experts believe has made the problem worse and cost the economy at least $309 billion.

    The Biden administration has issued 450 new rules as of Nov. 4, which would require roughly 197 million hours in paperwork for American businesses, the American Action Forum estimates, according to the Washington Times.

    By contrast, the Obama administration had imposed 647 rules by the same point in his presidency, costing $205 billion for the U.S. economy. AAF estimates that said rules created 87 million hours of paperwork time.”

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