U.S. Treasuries: Infinite Supply = Infinite Prices?

 

By Jeff Nielson

It is said that “no publicity is bad publicity”. If this cliché is indeed true, then I should be heartened by the fact that my recent commentary “The Continuing Mystery of the U.S. Treasuries Market” has drawn even more criticism than my past writing on this subject – both inside and outside the precious metals community.

I’m obliged to Marc Prosser, Publisher of this site for alerting me to one of those individuals, a writer named Joe Weisenthal of Business Insider. His critique of my article was notable in several respects. Sadly, none of these “notable respects” were positive. It may seem peevish to mention that Mr. Weisenthal mispelled my name throughout his brief diatribe. However, I note it because it may be suggestive of the writer’s state of mind.

Specifically, one explanation for this lapse was that he was so inflamed by the topic about which he was writing that he was not thinking clearly.  Indeed, this is one of the reasons I deliberately endeavour to be provocative in my writing. Anger someone (or annoy them severely) and they may blurt out something which they would never say in a calmer frame of mind. Let’s see if we find further evidence of such a state of mind.
Weisenthal writes:

…This is where Nielsen [sic] introduces what he calls “the ultimate financial contradiction”, the fact that supply of Treasuries is so great [high] while prices on them are so low.

Here he has not only gotten my own argument entirely backwards, but the actual facts of the Treasuries market itself, where supply is at the highest level in history while prices are also at record-highs – not lows. One must assume this was just another mental lapse by Mr. Weisenthal rather than ignorance of the basic parameters of the Treasuries market, since the remainder of his analysis implies a market with maximum supply and maximum prices.

Here I use the term “analysis” loosely, since much of Mr. Weisenthal’s one-page rant is devoted to rhetoric. Indeed, the primary problem for anyone seeking to rebut his piece is the sparsity of reasoning, forcing the reader to ascertain for themselves what he is implying. This will become more obvious as we examine these reasoning fragments individually.

Weisenthal writes:

…Treasuries are being issued at record levels because the government is spending money at record levels…where all the dollars wind up in banks, and in other accounts where Treasuries are purchased. 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 the real “mystery” in that statement is attempting to translate Mr. Weisenthal’s explanation of the Treasuries paradox. What he seems to be saying is that demand for U.S. Treasuries automatically equals government spending, since the recipients of payments from the U.S. government immediately go out and plow every penny of that government spending into buying more Treasuries.

The U.S. government’s employees don’t spend their paycheques making mortgage payments and engaging in other such trivial spending. Rather, like loyal Americans they line-up to spend every penny buying Uncle Sam’s bonds (i.e. loaning Uncle Sam their money). Who needs non-essentials like food and clothing? True “Americans” can sustain themselves on patriotism alone.

Similarly, senior citizens don’t spend their Social Security cheques on food/clothing/shelter, they simply buy more and more and more Treasuries. And when they feel a pang of hunger or a draft of winter they just launch into another chorus of “God Bless America”. Perhaps the more craft-oriented knit all those stacks of Treasuries into articles of clothing?

What this implies is that the U.S. has the world’s (and history’s) only self-funding government. Employees fund their own paycheques. Senior citizens fund their own Social Security. Suppliers of the gigantic U.S. war-machine fund the U.S. military through lining-up to buy Treasuries – apparently no longer needing to buy raw materials, or pay their own employees wages.

Note what is also absent in Mr. Weisenthal’s disjointed explanation: price. Not only are the recipients of government transfer payments supposedly willing to reinvest every penny they receive from the U.S. government in more Treasuries, but apparently these buyers find the attraction of Treasuries so irresistible that they will literally pay any price the government asks – just to increase their personal Treasuries hoard a little further.

Who cares that in the real world inflation rages in double-digits, while interest rates on Treasuries are near-zero : the most-negative “real” interest rates in economic history? People who don’t require food, clothing, or shelter to sustain themselves aren’t going to be daunted merely by the prospect of paying roughly 10% per year for the privilege of lending the (insolvent) U.S. government more money.
However, it would be unfair to imply that Mr. Weisenthal was completely silent with respect to what I called the “ultimate financial contradiction”: maximum supply occurring simultaneously with maximum prices. Here he lets a picture do most of his talking for him, a chart showing how Treasuries prices have been spiking higher at least as exponentially as the issuance of new supply, which readers can see here.

The saying “a picture is worth a thousand words” is certainly borne out by Mr. Weisenthal’s chart, as the implications are staggering (to put it mildly). My mistake according to him is in not understanding that bond markets – unlike every other market throughout economic history – are not bound by the principles of supply and demand, where increasing the supply automatically implies falling prices. No, in the universe in which Mr. Weisenthal dwells, bond prices are supposed to increase (higher and higher and higher) along with supply, ad infinitum.

We are justified in assuming that he believes that Treasuries prices will continue rising on into infinity with supply, since there is not one word about what should be the absolute (theoretical) ceiling on Treasuries prices: the 0%-barrier. Not only is Mr. Weisenthal firmly convinced that Treasuries-buyers are willing to suffer potentially infinite losses on their Treasuries once inflation is netted into the equation, he directly implies that Treasuries-buyers will soon begin paying the U.S. government for the privilege of lending it money. And as the government borrows more and more money, it’s lenders will not only infinitely increase the amount of money they are willing to lend to the U.S. government, but they will literally pay the U.S. government an infinite price for that privilege.

What this also implies is that along with the world’s bond markets (supposedly) having supply/demand fundamentals which are totally opposite to every other market in the known universe, in order to accept Mr. Weisenthal’s vision of the world we must also believe that Treasuries-buyers all individually possess infinite financial resources themselves.

Here we get to the crux of Mr. Weisenthal’s “explanation” of the U.S. Treasuries market versus my own, what he refers to as “four pages of conspiracy mongering”. He wants us to believe there is an inexhaustible supply of Treasuries-buyers, who willingly lining-up to accept ever-growing losses on their Treasuries (literally going to infinity) – and with every one of those buyers having infinite, inexhaustible financial resources to continue their Treasuries buying.

Conversely, we have my own “Holmesian” explanation: one crooked banker with a printing press, operating within an institution which has never had an outside audit in its 100-year history. I’ll leave it to readers themselves to judge who’s explanation is the more plausible. However, before I end my rebuttal, I must take a minute to note one other factoid Mr. Weisenthal divulged in support of his own theory.
According to him, the bond markets of both the UK and Japan exhibit the same, identical charts/trends of bond prices rising to infinity while bond supply rises to infinity. As I noted at the beginning of this piece, anger someone and they are prone to blurt out things which they may have never uttered otherwise. Given the increasing attention which my own theory on the U.S. Treasuries market Ponzi-scheme is attracting, I can only suspect that there are a lot of central-bankers in the UK and Japan who wish that Mr. Weisenthal had not pointed out the identical appearance of their own bond markets.

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Comments

  1. dave says

    where is inflation raging at double digit levels? Do you have any facts/figures? I do agree with Wisenthal is pretty sloppy

  2. Steve Hamlin says

    Jeff,

    It might help your point, and address the main arguments from your critics, if you talked about demand as well as supply. Higher supply doesn’t always lead to lower prices, if demand rises even more than supply. That’s the main (fatal?) rebuttal of your argument – demand for UST is not static, it has greatly increased since 2008.

    Non-UST AAA assets have been removed from circulation, starting with the financial collapse, and subsequently via Fed and ECB monetary facilities, leaving the deep UST market to become the focus for anyone needed AAA paper.

    I’ve found that I understand the UST market better if it’s also viewed from a MMT perspective.

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