Bondage

By: Rodney C. Cook | Sat, Jul 19, 2003
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Everyone is watching the bond market. Rates appear to have turned upwards for the longer term. Pundits and investors speculate that the bond bubble has now burst. Many hypotheses and forecasts will now be tested. As prices drop and bonds are sold, where will the money go? A simple question it seems. A correct answer would be worth untold riches. Untold indeed.

Same As It Ever Was

Sitting before Congress, Mr. Greenspan seems to know. He remains rather calm right here. He must have the answers: Everything is fine. The economy is showing signs of recovery. Never mind our posturing over the past year, but the Fed needn't consider unconventional methods to keep long rates down. After all, we can just revert to our old ways. Deflation was just a passing nightmare. And the Treasury, with a little help from its friends, can just sell paper gold again to hold down the long rate. Plenty of time to buy it back with printed dollars. Or net out the paper ledger. As long as the Fed does not run out of friends. And useful idiots.

And sorry to those deemed less worthy. Sorry that you were caught wrong footed on this one. Perhaps a few are a bit better off after the unexpected adjustment to Greenspan's policy course corrections. After all, someone had to be on the right side of this trade. Someone deemed most worthy.

Grumblings

But do I not detect a bit of stress among the Congress Critters? All this talk of debt and joblessness and disparity of wealth. Ungrateful vermin. You would think that some of these folk have lost their minds. Or are hanging out in Bear or Gold Bug forums. Sheesh. They are even demanding an accounting from our GSE's, despite Mr. Greenspan's assurance of their excellent management of such gigantic derivatives positions. In the face of these recent rises in interest rates? Easy to do, I guess, when you have a telegraph line to the Fed. But he is quick to remind us that there is no public guarantee on these entities, just in case.

Chinese Puzzles

To his credit Greenspan acknowledges the accumulation of debt, err ah reserves, in the coffers of a few central banks is not sustainable. This was in reply to several comments and concerns about China's peg to the dollar. Interesting. There seems to be political sentiment emerging that China is "cheating." And these politicians can spot a scapegoat a mile away. Especially one with legs. So perhaps the nascent indications of a reflate and default strategy (Refault, 5/12/03) are building. And stiffing China may become popular public policy.

But China does not appear willing to relent. Only reluctantly and incrementally will the Yuan float. Because it will inevitably appreciate against the dollar. And China will only reluctantly pay tribute to America by importing deflation. After all, they prefer to import industry and jobs. And accumulate foreign debt. And gold. At every step of the way, concessions will be exacted.

As holders of bonds and gold, they are nicely straddled. They can bob and weave, as the Fed contorts to ratchet down interest rates and simultaneously control the price of gold. After all, the Fed has Gibson's paradox working for them. Until either the physical gold market or the international bond market or the currency market to call its bluff. So is China sitting by the river waiting for the body of its enemy to float by? Or is China aware of a coming event in the river's headwaters. Or in Korea.

Even the honorable Mr. Greenspan asserted his point of view. China's currency must eventually float, or suffer. But he qualifies this by saying an invisible hand is active in this market often to the befuddlement of the Fed. Translation: something bad is going to happen here, and it won't be our fault. (There's that scapegoat angle again.) Perhaps the tension between the dollar and the Yuan will release, and end the imperial dollar bubble.

If so, the Fed may have to return to unconventional methods with a vengeance. Unconventional may be an understatement. With additional forms of debt being monetized, well beyond those just taken from the table.

But the political landscape may prove to be a growing problem. If debt becomes increasingly monetized, how long will it be before the dollar itself is recognized by Americans as an instrument of slavery? Much as it is in the rest of the world today. This recognition will manifest itself in a profound movement to shed debt. To escape this monetary bondage. To strive to achieve personal sovereignty through hard assets. Real estate in which to live. The skills and means of production for the creation of income and wealth. Gold and silver as a store of value. And in extreme circumstances a medium of exchange.

Fractional Reserve Slavery

The debt implied by the size of the bond markets is obscene. If debt is slavery, then just what does the ownership of debt imply? The answer is becoming increasingly obvious and odious. And as deflationary forces overtake America it will become undeniably apparent to the masses. As assets deflate, namely stocks and real estate, the debt remains to torment. As jobs are exported, the ability to service this debt is hindered. There is a tipping point at which this bondage is recognized by a critical mass of debtors. And political change is precipitated. And the most likely change will include, or be driven by a populist default on debt.


 

Author: Rodney C. Cook

Currently Rod is the founder and manager of Bull Trout Capital, a boutique investment company, and author of the FishWrapper, a private investment newsletter. Bull Trout Capital was founded to maximize returns based upon long cycle dynamics and Austrian economic principles. Dr. Cook uses internet based methodologies to identify sectors, strategies and shares that will most likely outperform at the current point in the cycle whilst maximizing upside exposure to potential economic dislocations. The FishWrapper features Dr. Cook's personal investments, methods and strategies where he has demonstrated extraordinary returns. Before Bull Trout he founded Sightward and authored patents (now owned by InfoUSA) to forecast human behavior on the internet; co-founded Ark Interface (now owned by xSides) to develop and patent innovative computer user interfaces; founded Optimas (now owned by Media Cybernetics) for medical and scientific image processing systems; and founded BioSonics Imaging division and developed their Optical Pattern Recognition System. Dr. Cook began his career as a Biometrician for the International Pacific Salmon Commission applying his doctoral dissertation in applied pattern recognition from the University of Washington College of Ocean and Fisheries Science.

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