Bud Conrad: The Bursting of the Bond Bubble Is Now Upon Us

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At the recent Casey Research conference in Tucson, AZ, Chris sat down with Casey chief economist Bud Conrad to discuss his concerns about the latest and potentially most destructive bubble in danger of popping.

At the conference, Bud stepped up to the podium, reached into his pocket, and pulled out a balloon, which he proceeded to inflate. As it grew, it become clear the word "BONDS" was written across it. For dramatic effect, Bud continued inflating the balloon until it popped. He then looked at the audience and said, "I hope I'm making a point."

Like many critically-thinking analysts today, Bud is watching the growing U.S. debt bubble with alarm. And now that the Fed is monetizing an ever-greater percentage of American debt issuance, he sees no way out for our current policies other than stalling for time until the inevitable happens:

Interest rates are at the lowest they have ever been; that includes the Great Depression.

Our Federal Reserve is buying up all the government debt, as well as buying up the mortgage-backed security debt, such that the buyers and sellers in the bond market have driven all interest rates down. Complicit with that is the advantage that banks get with very low borrowing rates and moderately low, but still higher, other rates. The spread for banks is huge. It is sometimes called “financial repression.” And it has destroyed the income of older folks' fixed income, and given that largesse back to the banks.So, the Federal Reserve’s policy has greatly benefited the large banks and they have done it by stealing from old folks.
 
I also want to get to a little bit about the other beneficiary of low interest rates. That is the government. Who has the biggest debt? They almost cannot survive if rates were to get back to even natural levels. Government debt, $17 trillion; increasing $800 million a year in four years gets you to $20 trillion. Nice round number. Let’s pick 5% as a long-time historical basis for what interest rates probably should be. And I think even you could do the math on that: a trillion dollars a year of interest payment.
 
About $2.5 trillion in round numbers. So it is almost – or getting there – to half the taxable income of the Federal Government.
The point is under normal circumstances, without this huge support from the Federal Reserve, our government is very close to bankrupt. And I would say it is easy to put a trajectory. Just add a few more years onto that of compounding that trillion dollars of interest (which then has to be borrowed), to the basis, to you saying you have a completely broke government, and you discount that back to now. These rates should already be well above 5%.

We are an empire that I think is weakening, not crashing. But would you want to be confident in the credit-worthiness of the U.S. Government this year as much as you would have 20 years ago? Obviously not. And that is my point about why rates are really under-pricing the risk going forward.

What happens to the 30-year Treasury? It has got to be bought by the Fed. And that means there is no exit policy. Yeah, they could taper to $10 billion a month somewhere, but I suspect the Fed is going to continue marching over the cliff of destroying our currency. And when people wake up to that, that is why interest rates must rise, and why, I suggest, that people should invest in – to protect themselves, maybe gain and prosper from – the fact that interest rates will rise. 

When people find that they are losing money [as bond prices fall as rates rise], they say, I don't want these bonds: Sell them. Then the question is, To whom? The Fed is the only answer. So they cannot taper. But where does that lead us to? Worldwide destruction of currencies, often called currency wars. So that is the backside of the bursting of the bubble.

And I will go one step further. We are in the bursting now because interest rates – instead of falling during the last year’s biggest rate of QE – a trillion dollars a year, $85 billion a month (Treasurys and MBS) – that rate rose. It did not fall this year, 2013. As the Federal Reserve increased its purchases and increased its balance sheet, rates tended to go exactly the opposite direction because they are driving them down. They are driving the price of bonds up as they buy them.

This year it went the other way. Now, is that just a fluke or is this it?

My claim is: This is it. We have already passed the bottom of rates.

Click the play button below to listen to Chris' interview with Bud Conrad (34m:50s):

This is a companion discussion topic for the original entry at https://peakprosperity.com/bud-conrad-the-bursting-of-the-bond-bubble-is-now-upon-us/

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According to statistics from the Fed, for five months, a foreign-investors sell more bonds than buy. We can already say that foreign investors have confidence in the bonds and do not want to fund the growth of the deficit ( http://crisismir.com/analiticheskie-materialy/ekonomika/110-padenie-ekonomicheskix-indeksov-rezultat-gubitelnoj-ekonomicheskoj-politiki.html ). Fed realizes that the QE program should minimize, but do not know how to do it without bursting financial bubbles and the collapse of stock markets. Painless way out of the current situation does not exist.

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Right On!
Were you confused? You were supposed to be. It is a magic conjuring show, watch FED, the magician, pluck the shiny coin from behind the pretty girl's ear! Wow! Isn't it amazing?

No? Seen it all before? Well, wait till you see his next trick-  as he magically transforms into a lovely elderly lady. Who could possibly say nasty things about her? Wait-where has he gone? He has got my money!

Don't get rowdy now Rube- the exits are guarded by some heavy bouncers.

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[quote=Arthur Robey]Right On!
Were you confused? You were supposed to be. It is a magic conjuring show, watch FED, the magician, pluck the shiny coin from behind the pretty girl's ear! Wow! Isn't it amazing?
No? Seen it all before? Well, wait till you see his next trick-  as he magically transforms into a lovely elderly lady. Who could possibly say nasty things about her? Wait-where has he gone? He has got my money!
Don't get rowdy now Rube- the exits are guarded by some heavy bouncers.
[/quote]
Yes indeed Arthur.  While everyone's eyes are on the magician, it's his pickpocket accomplices that are fleecing the audience.  Mr. JPMorgan Chase and Mr. Goldman-Sachs are two of the better known ones, wearing their businessman disguises.  And then there're newer players on the scene like Mr. Hidden Tax And Control (wearing his healthcare abdomination disguise).  He's even slicker than this guy.
http://www.youtube.com/watch?v=W1_BpNAeeX0
And for the muscle, Mr. Military Industrial Complex and his equally beefy brothers, Mr. Banking Finance Insurance Complex and Mr. Pharmaceutical Medical Agricultural Complex.  Their father, Mr. U.S. Congress is roaming through the audience as well but he's gotten older and more feeble, can't control what his boys do any more, and lives off what they give him because, after all, he is their father.
Oh yeah, it's an interesting crowd.  And don't be surprised if you wake up in the morning in a bathtub full of ice, down a couple of pints of blood and with a kidney and your first born child missing … if you're lucky.

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I'm frequently trying to grapple with the question of how much does the Fed and TPTB actually realize what's happening. You listen to the Fed's official public comments and there's no way they could be that dumb. On the other hand, I'm sure they don't understand the three E's so there is a limit to their understanding of the economy. I'm sure they understand the bond market and monetary systems very well and to that end they know exactly what's happening, and are therefore very skilled at juicing the system with liquidity to benefit the financial sector and elites at the expense of everyone else. However, I'm sure they probably rationalize this as being some kind of wealth "creation" activity, that as long as the parasites can retain control of the financial system for a continuation of BAU, then ultimately everyone will benefit. Of course, the more the elite parasites benefit, the more the average person suffers because the economy isn't growing anymore and there is no more wealth to create. In terms of understanding why things aren't improving like their theories say should happen, they are probably scratching their heads, because they're merely applying the same Keynesian policies they always have that always worked. I think Chris summed it up well:

So if it is a little confusing, that is okay, because it is wildly confusing. Because I believe nobody has any idea exactly what is happening right now, and that includes the Fed, which gives me a little bit of comfort and a lot more fear. And it is a reason to be concerned, because the Fed is playing with something it has no clue about, which is, they are playing with the trust that society has within and among itself.
Yes, it's confusing that no matter where you put our money, it simply is no longer possible for the majority of investors to make a real return above the true inflation rate anymore (unless you understand how things are going to unfold and place your assets there, i.e gold and silver -- but this wealth "creation" for goldbugs will come at the the expense of everyone else). However, if one understands where real wealth comes from -- the natural world -- then it's all so plainly obvious why it's not possible for the average investor to realize real returns anymore. Money is supposed to represent a claim on wealth, which ultimately is just a claim on natural resources. If there are no additional natural resources, then how can the investments have a positive return, on average? It's impossible, except in Ponzi schemes.

But I never bought into this idea that the US will soon go bankrupt because of future "entitlement" obligations (how is expecting to receive basic living provisions through your retirement after working your whole life an "entitlement"?) For thousands of years society has been able to take care of the elderly and I see no reason why it can't now. Because we have an aging population, A bubble of old people? Well, kids, which make up a large proportion of the demographic in a growing population require just as much, if not more resources, to maintain as do the elderly.

No, the reason we can't fund retirement "entitlements" is 1) the US dollar has lost all relevance to genuinely representing the real world, 2) the tax base that would be able to support those "entitlements" is drying up as the middle class' transition to serfdom is completed. The elites who now control and own basically the entire country, its productive resources, its governments, and its people, can hire some pretty skookum lawyers to avoid taxation. We have all been victimized by a highly unfair income taxation system that should be ditched and replaced with a wealth tax. Every billion dollars that a parasite steals and evades tax on comes from everyone else, in some way.

If and when we get a new currency and debt is purged from the system then we could easily support the elderly and their selfish "entitlements". No one has been able to counter my observation that farming and manufacturing have seen staggering automation efficiency gains over the decades which directly result in the loss of jobs, but allow us to "produce" just as much stuff as before. Since this technology is supposed to make our lives easier, we should be able to work 3 days a week now and achieve the same living standard we had when we had to work 5 (all else being equal). Of course the US is a bit of a special case because its reserve currency status has resulted in the exporting of its manufacturing sector, but for every other country, I simply don't accept that we cannot all work 4 days a week to achieve the same standard of living, and at the same time take care of the elderly. The problem is that the tax base that should be supporting these "entitlements" is very good at avoiding taxation. Although we're at Peak Oil now, we are still likely a ways away from Peak Coal and Peak Natural Gas, and I fail to see how supporting Granny to pay her rent and take the bus to the market to buy some food is so taxing on the system.

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Maybe the bubble is in the equity market not the bond market. 
Everyone assumes that we are in a normal business cycle and that growth will eventually come.  I don't think that is correct for the simple reason that we are entering the age of declining energy production.  This is unprecedented for last 250 years.  This is their blind spot. Therefore when people realise that GDP (ignore the made up government figures) has peaked and the full employment numbers has peaked (ignore the made up government figures again which include part-time jobs) they will realise equities are wrongly priced and it is the equity market that will crash while sending bond yields to all time lows (Japanese lows).  The people who are calling the bond market bubble don't mention energy production at all, as was the case in this podcast.  Energy. It all about energy.

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I like your idea of a wealth tax to replace income tax. However it’s like turkeys voting for Christmas. The wealthy own the media and the politicians, so it will never happen. In response to another thing you mentioned. To have a smaller working week while maintaining the same living standards requires zero population growth. Population growth control together with the coming energy scarcity are the two topics you are forbidden to talk about. The wealthy decree it. (Energy scarcity will have a say in population levels eventually though)

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They know exactly what they're doing, and have every move planned.
They've been doing the same thing for hundreds of years, and gotten away with it every time.  

Why this is even questioned on this site amazes me.  It's been proven over and over on this site, as well as through history that:  The Banking Cartel is in total control!

Please people, stop asking this question and listen.

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[quote=Mark_BC]I'm frequently trying to grapple with the question of how much does the Fed and TPTB actually realize what's happening. You listen to the Fed's official public comments and there's no way they could be that dumb.
[/quote]
 I agree with LogansRun. They have been working the system since the very beginning. They aren't that dumb. They may make mistakes in execution, but they have a consistent objective. They understand the exponential function and are using it to their advantage.

I'm not sure what "BAU" is. If they create wealth, it is only so they can eventually "earn" it via usury.

You've nailed it here! There may be isolated pockets of growth, but it isn't universal. When our usage of energy was increasing exponentially, the general trend for wealth creation was also approximately exponential. Now, we're closer to a zero sum game (but not quite.)

Again, you've mostly nailed it here. Actually, all Ponzi schemes eventually fail. Eventually, the pyramid base can't grow enough to support the top.

Here is where we part company. You seem to have a basic understanding of Ponzi schemes. The main characteristic of a Ponzi scheme is that it is a "pay as you go" system. The system has no intention of generating wealth to pay "investors." The dividends to investors are simply a flow of payments from new "investors." The system works as long as we have an increasing supply of new investors. At some point, the base cannot grow enough to support those receiving dividends. At that point, it fails. All Ponzi schemes eventually fail.
In the '30s, Social Security was created to socialize the care of the elderly. As you noted, for thousands of years, society has been able to care for the elderly. This care was basically a Ponzi scheme. I'll care for my parents and my children will care for me. Their children will care for them. The more children you have, the less it costs each to care for you. Of course, eventually there will be too many people on the finite earth to be able to live. Eventually, all Ponzi schemes fail.
It is made worse by the increase in longevity of life. In the '30s when SS was created, the mean life expectancy was 65 years. Half the people would die before collecting a dime. Many would die shortly thereafter. Now, we've got a life expectancy at least a dozen years longer. Have any changes been made to accommodate the length of time an individual draws SS? We've had some increases in the tax rate and a slight increase in normal retirement age, but not enough to offset the cost of paying for all the elderly.
On top of that, LBJ changed the US Budget in the mid '60s to a Unified Budget so he could get access to all those funds in SS. He wanted to wage the wars in Viet Nam and on poverty. He needed funding to do so, but knew he couldn't raise taxes. All those SS funds quickly entered the economy. These funds caused the rampant inflation of the '70s and also forced Nixon to "temporarily close the gold window." We lost the war in Viet Nam and we're still fighting a losing battle against poverty.
All the money that was taxed into the Social Security Trust Fund has been stolen by politicians and used to make the national debt problem seem less onerous. At the end of the day, all the existing funds in the SSTF are swept out and loaned to the General Fund. When GNP (gross national product which is basically GDP minus government expenditures) increases and SS trust fund disbursements decreases, the fund actually has a surplus. When the opposite occurs, the fund sucks money from the general fund - which makes the budget shortfall appear worse than it actually is.
That is where we are today. Seniors are living too long. There aren't enough contributors in the system to fund the disbursements. Given the large Baby Boom generation and the smaller GenXer generation, the only way this dynamic could work is if the economy was growing by leaps. Unfortunately, we're seeing a plateau of peak oil and are seeing that the economy has really stagnated recently. As the available energy drops, the economy will follow suit. The social safety net will fail (as all ponzi schemes do.)

  1. The US dollar has as much relevance as (toilet paper since August 15, 1971) to genuinely representing the real world. It is a fiat currency. It only has as much value as people think it has. It has been this way since the inception of the federal reserve (and fractional reserve banking.) The only reason it appears to lose relevance is that people are seeing the results of abuses that have occurred in the past. We've got $12T+ of private debt and another $4T+ of public debt (mostly from social security.) Then there are the unfunded liabilities that are essentially treated as "promises that can be broken" rather than unfunded obligations.
  2. The tax base is diminishing.
    So … the rich have skookum lawyers to avoid income taxation, but they'll magically pay wealth taxes??? Really? Could you explain why these same skookum lawyers wouldn't shield the rich from wealth taxes? I'm sorry, but this is just an exceptionally stupid idea.
    We need to accept that there will be limits to growth. The future economy will be smaller than the current economy. The trend will be that it gets smaller each year. With a smaller economy, there will be smaller revenue takes each year. We cannot continue to fund expanding promises without expanding revenue. We need to accept a decreasing role of government. The sooner, the better. If we wait too long, the system will collapse and we'll likely have a despot seize power.

Your premise only makes sense in a command economy where prices are dictated. In reality, I may gain temporary advantage by innovating. This will increase productivity. Unfortunately, my advantage disappears when my competitors incorporate the same strategy (or some other innovation.) The end result is that we all produce more, but prices drop as a result. The only one who really benefits is the consumer.

I certainly hope that I've helped you understand that the system has been robbed blind by the politicians/economists who continue to lie to us. I'm sure you'll have questions and take objections to some of the information I'm posting. That's fine. Let me know where you have heartburn and I'll clarify it a bit more.
Grover

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[quote=Mark_BC]I'm frequently trying to grapple with the question of how much does the Fed and TPTB actually realize what's happening. You listen to the Fed's official public comments and there's no way they could be that dumb. On the other hand, I'm sure they don't understand the three E's so there is a limit to their understanding of the economy. 
[/quote]
Some really great insights Mark_BC. Perhaps I can add some commentary to your observations and musings.
 
On the FED, and its apparent ‘stupidity’. Not stupid, not part of an elite conspiracy and certainly not clueless. In my opinion, the truth is blindingly simple- we are observing the desperate machinations of a society, an economy, and large quasi-governmental institutions to try and feed a truly horrific and enormous monster, that which is to keep a society of some 310+mm people employed so as they may exchange their labor for sustenance income. This singleness of purpose, at any cost to the environment, at any cost to social relations, at any cost to moral hazard, freedom or self-respect is what constitutes the modern American system of political economy.
 
To have a result wherein large numbers of people are unemployed, cannot find jobs, and cannot exchange their labor for sustenance income is an unimaginable catastrophe that simply cannot be allowed, and (apparently) no price is too high to pay in prevention of this condition. Among several institutions, the FED has been tasked with ‘maintaining full employment’ and under this charter- and the consequences for failure-their actions become more logical, if lamentable.
 
Another key perspective in making sense of this mess is the concept of close coupling between capital and the government, and the integral, symbiotic nature of this coupling. The government exists, as a first priority, to sustain capital, to stabilize what is inherently unstable, and to allow and provide for global access to not only resources but labor, as well as new and emerging markets. In return, capital provides revenue to sustain the government, as well as another critical contribution, which is jobs for which the populace can (supposedly) sustain themselves.
 
The enforced equilibrium of this Faustian bargain is under great stress, faced with declining natural resources, an expanding population, loss of social mobility, diminishing aggregate demand, growing wealth inequality, declining incomes, and perhaps most importantly with respect to destabilizing forces, declining profit margins for the corporations that the working class depends on for labor exchange, we are witnessing a leviathan in the throes of its death knell.
 
The financial system is a contrivance of capital to lubricate and encourage business investment, as well as provide (now obscene) profits for the purveyors of ‘fictitious capital’. The state makes a bargain with the devil to insure continued employment, staving off the looming vision of rioting millions unable to provide for themselves (and therefore eat) if businesses stop creating jobs.
But why would businesses stop creating jobs?
Because of declining profits, decreased demands, and a general lack of salable business ventures at a scale relevant to the exponential expansion of a population needing jobs.
 
Why do profits decline? The coercive laws of competition explain much of this, but there is also the notion that the (developed) world has just about everything it needs, and lots it does not need. There is a diminishing pool of “profitable” opportunities left to exploit that has a scale commiserate with an expanding population base. The government, the FED, and various quasi-governmental institutions are scrambling like mad to relieve this inevitability, promising “growth”, more jobs and the (disappearing) American dream for all.
 
You mentioned machine automation, a good example of the coercive laws that apply to productivity enhancements, the reason we do not have 3 day workweeks is because the productivity gains have been apportioned asymmetrically, the capitalist gets most of the gains, still some of the gains (a small proportion) are passed down to the worker. This results not in a reduced work week, but in a (slightly) higher standard of living.
 
Natural resources do indeed limit and govern growth, both economic and population growth, but it is labor that unlocks the value of any natural resources. Without the labor to mine ore, extract and convert natural resources into a form accessible to the capitalist mode of production, the value is quite low-even nonexistent. In this context, money- or wealth if you prefer, is a claim on future labor, not natural resources.
 
You’re entitlement observations are spot on. It is the first responsibility of any society, whether it is a hunter/gatherer/feudal/pre-capitalist, etc. you name it -to provide for its young and it’s old as its primary obligation. Any political economy form that cannot pass this most basic litmus test is doomed to failure, and vapid attempts to valorize some survivalist contest awarding style points to those that grab one of the seven chairs in a room with eleven people when the music stops playing must be rejected at face value.
This is not an indication of a functioning society, rather, the rule of the jungle.

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[quote=darbikrash]It is the first responsibility of any society, whether it is a hunter/gatherer/feudal/pre-capitalist, etc. you name it -to provide for its young and it’s old as its primary obligation. Any political economy form that cannot pass this most basic litmus test is doomed to failure, and vapid attempts to valorize some survivalist contest awarding style points to those that grab one of the seven chairs in a room with eleven people when the music stops playing must be rejected at face value.
This is not an indication of a functioning society, rather, the rule of the jungle.
[/quote]
Not to be a nit picker, but many advanced, functioning societies at times could not afford to care for the "unneeded" or untimely newborns (infanticide) nor, less commonly, the nonproductive elderly (senicide). The primary responsibility is rather to maintain the integrity of the society even if individuals are sacrificed. We are just not used to it in the US.
http://en.wikipedia.org/wiki/Infanticide
http://en.wikipedia.org/wiki/Senicide
 
 

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I think your point is correct, but in my mention of hunter/gatherer societies, feudal systems, pre-capitalist cultures, etc., I make the assumption that there is surplus. It is the first responsibility of a society to create an equitable distribution of the surplus to those that cannot provide for themselves, e.g. the very young or the very old. Obviously in a wage labor economy an infant cannot get a job nor support itself, the same is true in all forms of society.
 
The inference and assumption is that there is a surplus to distribute. As you point out this is not always the case. However, if there is not a surplus, the social relations are fundamentally changed, and the comparison with the point I as trying to make is not really valid. If there is no surplus, this becomes a survivalist culture, all bets with social norms are off. (Donner party, etc.)
As the links you provide indicate, the vast majority of cases of societal level infanticide are economic in nature. This is most commonly the result of insufficient natural resources. Cultures in geographic proximity to abundant natural resources (such as North America) as a rule do not have these phenomena. Actually, the case of America illustrates several points, as this highlights the fact that when abundant natural resources are available, the opposite problem exists, e.g. families must get larger to provide the critical labor mass to extract the natural resources (specifically farming). Large families in agrarian American culture were necessary to farm land of suffice size to provide a robust (and reliable) surplus.
Your point raises the prospect as to what happens to the social relations in first world countries when abundant natural resources no longer exist- history suggests that the outcome will not be pretty, and the examples you cite may well make a comeback.

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I like Chris and his views on sustainability but many followers seem terrified that we will find solutions.  Fossil fuel use is declining, energy efficiency is increasing (rapidly) as is the efficiency and cost of alternatives. I view fossils as a mixed blessing - breathing room until the next transition. I truly believe we have started early enough to make the transition seamlessly.    Job growth will never return for two reasons  demographics (fewer kids / less demand) but mainly the disruptive nature of technology as more and more humans are displaced by machines.  This is occurring in almost every field with the resultant decline in the work force.  I have long said that the FED would never be able to raise interest rates again without dire consequences  since the higher interest will also have to be monetized (a dog eating its tail).