mathematically perfected economy™ (MPE™)    1  :   the singular integral solution of  1) inflation and deflation,  2) systemic manipulation of the cost or value of money or property, and  3) inherent, artificial multiplication of debt into terminal systemic failure;    2  :  every prospective debtor's right to issue legitimate promises to pay, free of extrinsic manipulation, adulteration, or exploitation of those promises, or the natural opportunity to make good on them;    3  :  our right to certify, to enforce, and to monetize industry and commerce by this one sustaining and truly economic process.

MORPHALLAXIS, January 14, 1979.

Mathematically Perfected Economy™ FORUMS, DISCUSSION

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 Post subject: The Bond Bubble Is Here?
PostPosted: 14 Jan 2009, 4:04 am 

Joined: 29 Jan 2008, 6:06 pm
Posts: 731
Ambrose Evans-Pritchard wrote:
The bond bubble is an accident waiting to happen!
The bond vigilantes slumber. As the greatest sovereign bond bubble of all time rolls into 2009, investors are clinging to an implausible assumption that China & Japan will provide enough capital to keep the happy game going for ever.

Last Updated: 12:22PM GMT 12 Jan 2009 - mpe Jan 14 2009 12:30 EST
Comments 67 | Comment on this article

Bill L. in Fuquay Varina NC USA on January 14, 2009 wrote:
AAA rated bonds....????
what a joke... just a piece of paper.... another debt note... Gold is real money... give me a stack of 10 oz. Silver Bars...
A woman from Viet Nam told me >> "Rice is Life"
Now is the time to buy 72 cans of beans, 72 cans of tuna fish, Bottled Water, Candles, not bonds...Beware the Ides of March.'09
Bill L . in Fuquay Varina NC USA on January 14, 2009 at 10:30 AM
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Ambrose Evans-Pritchard wrote:
They are betting too that debt deflation will overwhelm the effects of near-zero interest rates across the G10 and nullify a £2,000bn fiscal blast in the US, China, Japan, Britain, and Europe.

Above all, they are betting that the Federal Reserve chief Ben Bernanke will fail to print enough banknotes to inflate the US money supply, despite his avowed intent to do so.

Yields on 10-year US Treasuries have fallen to 2.4pc – a level that was unseen even in the Great Depression. This is "return-free risk", said bond guru Jim Grant.

It is much the same story across the world. Yields are 1.3pc in Japan, 3.02pc in Germany, 3.13pc in Britain, 3.26pc in Chile, 3.47pc in France, and 5.56pc in Brazil.

"Get out of Treasuries. They are very, very expensive," said Mohamed El-Erian, the investment chief at the Pimco, the world's top bond fund, in a Barron's article last week.

It is lazy to think that China, Japan, the petro-powers and the surplus states of emerging Asia will continue to amass foreign reserves, recycling their treasure into the US and European bond markets.

These countries are themselves bleeding as exports collapse. Most face capital flight. The whole process that fed the bond boom from 2003 to 2008 is now going into reverse.

Woe betide any investor who misjudges the consequences of this strategic shift.

Russia has lost 27pc of its $600bn reserves since August. The oil and metals crash has left the oligarchs prostrate. China's reserves fell $15bn in October. Beijing has begun to fret about an exodus of hot money – disguised as foreign investment in plant. The exchange regulator is muttering about "abnormal" capital flows out of the country.

China's $1,900bn stash of foreign bonds is a by-product of holding down the yuan to boost exports.

This mercantilist ploy is no longer necessary, since the currency is weakening. Beijing needs the money at home in any case to prop up the Chinese economy – now in trouble. Even Japan has slipped into trade deficit.

Clearly, the US and European governments cannot rely on Asia to plug the $3,500bn hole in their budgets this year.

Asians are just as likely to be net sellers of their bonds. Which implies that central banks may have to "monetize" our deficits.

James Montier, from Société Générale, has examined US bonds back to 1798. Yields have never been this low before, except under war controls in the 1940s when the price was set by dictate.

That episode is not a happy precedent. The Fed drove the 10-year bond down to 2.25pc, much as it is doing today with mortgage bonds. It helped America win World War Two, but ended in tears for bond holders in 1946 when inflation jumped to 18pc.

Mr Montier said yields have averaged 4.5pc over two centuries, with a real return of around 2pc. By that benchmark, the market is now banking on a decade of deflation.

Investors have drawn a false parallel with Japan's Lost Decade, when bond yields kept falling, forgetting that Tokyo waited seven years before resorting to the printing press. Mr Bernanke has no such inhibitions. He has hit the nuclear button in advance.

"Today's yields are woefully short of the estimated fair value under normal conditions. There maybe a (short-term) speculative case for buying bonds. However, I am an investor, not a speculator," he said

Of course, we may already be so deep into debt deflation that bonds will rally regardless. Fresh data suggest that Japan's economy contracted at a 12pc annual rate in the fourth quarter of 2008; the US, Germany, and France shrank at a 6pc rate, and Britain shrank at 5pc.

If sustained, these figures are worse than 1930, though not as bad as the killer year of 1931. The UK contraction from peak to trough in the Slump was 5pc. Gordon Brown will be lucky to get off so lightly.

The Fed's December minutes reek of fear. The Bernanke team is no longer sure that stimulus will gain traction in time.

The Fed's "Monetary Multiplier" has collapsed, falling below 1. This is unthinkable. We are in a liquidity trap.

So yes, printing money is not as easy as it looks, but to conclude that the Fed cannot bring about inflation is a leap too far.

The Fed has only just started to debauch in earnest, buying $600bn of mortgage bonds to force home loans down to 4.5pc. US mortgage rates have dropped 150 basis points in two months.

My tentative guess is that Bernanke's blitz will "work" – perhaps later this year. Markets will start to look beyond deflation. They will remember that the Fed is boosting its balance sheet from $800bn to $3,000bn, and that it sits on an overhang of bonds that must be sold again.

"The euthanasia of the rentier" will wear off, to borrow from Keynes. That is when the next crisis begins.


Great Commnets:
ernest james on January 14, 2009 at 08:44 AM wrote:
the author doesn't have a clue about how markets work today, anyone can look up a bloomberg chart and say.. 'oh hey, this thing has run up too quickly, and is due for a downturn'

(1) look at treasury yields adjusted for inflation expectations

(2) look at the holders of US treasuries.. what are they gonna do.. sell everything immediately?

(3) look at alternative instruments

(4) remember who the ultimate counterparty is... we are talking about the same authority that
-(a) banned short-selling in certain stocks
-(b) bailed out investment banks that still have proprietary trading operations
-(c) is planning to print itself out of this mess

(5) this is our theoretical benchmark measure for the risk-free rate

(6) the repo markets are filled with the most unsophisticated traders... this market is the easiest to manipulate/control

think about what bill gross said.. bet with the US government, not against

Good Luck

greg on January 13, 2009 at 06:06 AM wrote:
The time for subtle analysis has gone. Fundamentals will be the only reliable medium term guide from hereon in. The Chinese population can absorb as many goods as Chinese factories can produce, if anyone thinks the absence of a dollar will prevent the Chinese economy expanding, it will not. The Chinese have realized already that they can have their industrial revolution all on their own.

So we turn to the west: underneath all the froth, military power is propping up the west, not economic power. How long can this last? Just as long as it takes the "emerging" nations to realise they do not actually need western paper to function and develop economically, and the resource-holding countries to (a) be confident that the newer economies can protect them and (b) be confiedent in those countries' currencies.

Talk of bond rates etc., etc., is essentially pointless for anyone looking at the medium term. The west is bust because its level of consumption is not earned by its economic use, & whether it goes out with a bang (war highly likely) or a graceful bow (dream on) is the only question. The respondent who pointed out that western politicians are incapable of explaining to their constituencies the need for retrenchment and reductions to balance national income with national consumption is 100% correct.

Of course most western government bonds will come to be seen as worthless if western governments insist on borrowing more than they can repay. Anyone who thinks that the world's newer economies will buy western government bonds in the full knowledge they will either never be repaid, or will be repaid in monopoly money, is dreaming. Ambrose is right, but I believe his analysis stops short of the fundamental causes: the next industrial revolution has started and it does not need the the west. And if you think know-how will save us, belive me, the know-how will be bought, just as car-manufacturing technology was bought, from the west!

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 Post subject: Re: The Bond Bubble Is Here?
PostPosted: 15 Jan 2009, 12:26 pm 

Joined: 08 Nov 2008, 8:21 pm
Posts: 248
If the Chinese were really concerned at all about their people, they would use the downturn to attempt to build consumers in their own country instead of having an impoverished workforce. Sooner or later they will figure out that the cheap products they are sending to us will be paid back in cheaper dollars as the currency continues to slide.

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While 12,000 homes a day continue to go into foreclosure, mathematically perfected economy™ would re-finance a $100,000 home with a hundred-year lifespan at the overall rate of $1,000 per year or $83.33 per month. Without costing us anything, we would immediately become as much as 12 times as liquid on present revenue. Transitioning to MPE™ would apply all payments already made against existent debt toward principal. Many of us would be debt free. There would be no housing crisis, no credit crisis. Unlimited funding would immediately be available to sustain all the industry we are capable of.

There is no other solution. Regulation can only temper an inherently terminal process.

If you are not promoting mathematically perfected economy™, then you condemn us to monetary failure.

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