First, if you are going to accept some advice on where to place your money in a volatile world economy, you had better be listening to someone who has his finger on the pulse of the economy, a person who can see ahead so you don’t step on avoidable land mines down the road.
You may have what little wealth you have accumulated in real estate, savings accounts or maybe a few shares of stock. The value of these stores of wealth can be pummeled by what is going on in the bond market today. So you had better know what that is about.
A stand-up financial advisor who calls a spade a spade is Michael Pento, author of a new book The Coming Bond Market Collapse (Wiley 2013, 304 pages).
Well, you don’t own any government bonds so why should that matter to you? Right now, the whole world is sitting on a $17 trillion precipice – the amount of accumulated debt the United States has racked up.
The U.S. has borrowed trillions from Japan and China, and hundreds of billions from other overseas lenders. The question for lenders is – does the U.S. ever intend to pay us back?
Why financial Armageddon didn’t happen
There are a number of reasons why the gloom and doomers have had to sit on their hands. The first way to hide a collapse of the economy is paper-over the economy’s dismal numbers. The U.S. is running a shell game of sorts. It is hiding its real financial numbers – saying unemployment is ~8% when it is more like 22%, and saying inflation is ~2.3% when it is more like 9.3% (ShadowStats.com).
In a column I wrote at LewRockwell.com some time back, I explained that the U.S. avoided a predicted financial doomsday when it lowered interest rates on its borrowed money. Had it not done that, the U.S. would be paying more interest on its debts than any other federal outlay. That is something Mr. Pento says can no longer be avoided.
But a country pays a price for cheap money that can be borrowed at a low rate of interest. Right now banks offer loans at historically low lending rates, but in turn they have to offer low yields on saving accounts to do that. So interest on long-term savings is less than 1%.
Savers are watching the value of their money erode away as the cost of living is greater than the yield on their savings. Essentially, in 5-years savers will have about the same dollar amount in their long-term accounts but it will be able to buy about half as much as it once did.
Rubber money can’t be stretched forever
Getting back to the bond crisis Mr. Pento points to, when a country begins living off of expansion of credit, just like a household that keeps asking its creditors to expand the amount on its credit cards so it can continue on a spending spree, lenders are going to be remiss about lending more money and accepting U.S. IOU’s (U.S. Treasury Bonds).
It’s not like Mr. Pento stands alone here in his analysis that the bond market is going to trigger a collapse of the U.S. and the world economy. more