The force of a market correction is equal and opposite to the delusion that preceded it. Given that the jackassery of the last 23 years was unprecedented in US history, so we can imagine that the will also be unparalleled.
Already, we have seen more losses in the bond market than ever before. Bonds have been going down in value since July 2020, with losses for the ten-year US Treasury of about 26% so far. That reflects losses from inflation (in the sense that the threat of inflation reduced bond prices), but to calculate actual purchasing-power losses for bond owners, you have to take off another 16% (that’s how much consumer prices have gone up since 2020) – for a total real wealth loss of over 40%. (The maths is a little tricky as the inflation adjustment applies to the residual, current value, not to the face value of the bonds).
Bonds are meant to be safe-ish sources of income. They’re not meant to be gambles or speculations. The US ten-year Treasury, for example, is supposed to be money-in-the-bank. It is considered “risk-free”. Banks were required to hold Treasuries as financial ballast. Retirees relied on them for their old age. Insurance companies use them to make sure they can meet their obligations. This loss of real value in Treasury debt shakes the entire financial edifice, from the humblest credit card balance to $33.5trn in loans to the federal government itself.
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So far, the losses are still on balance sheets – mostly unrecognised, sometimes hidden. Like the corpse of an aged relation whom no one bothered to visit, the horror of it has yet to be discovered. The presumption remains that if you hold to maturity you won’t lose a dime. But you can’t ignore bonds losses. The feds are running a $2trn budget deficit. One way or another, those deficits need to be covered, currently, not in the far-distant future.
Either higher interest rates bring forth more savings (and buyers of Treasury debt), or more money-printing brings forth higher interest rates (as inflation expectations drive them up). Either way, money is on the move.
Some assets disappear as debtors cannot repay. Much wealth simply changes hands. The federal government, for example, must spend a lot more to cover its deficits. But it’s not all bad news from the feds’ point of view. Inflation reduces the real value of federal debt. Savers earn more. But borrowers struggle to keep up with higher financing costs. All up and down the great edifice of American capitalism cracks appear as adjustments need to be made. Zombies go out of business. Stocks go down. Banks go bankrupt. Builders stop building. Mortgage costs soar.
The lay of the financial land has fundamentally changed. When you need to refinance loans, creditors want more interest. The US government itself is paying five times as much interest on today’s debits as it did in 2020. University tuition costs go up with inflation too. If you were planning to pay for it with the yield on bonds you bought in 2020, you will need six or seven times as many of them. Bread, petrol, rent – all go up. Ten years ago, you could have bought the median house with about $52,000 in household income. Today, you need more than twice as much. And the median household income is only $75,000 – $40,000 short.
None of this is surprising. It’s just what happens in a correction. As the things in need of correction are abnormally large and harmful, so the correction will be abnormally severe and uncomfortable.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
Bill Bonner is an American author of books and articles on economic and financial subjects. He is the founder of Agora Financial, as well as a co-founder of Bonner & Partners publishing.
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