Why Seeking Refuge in Government Debt Won’t Save You

Oh, a storm is threat’ning
My very life today
If I don’t get some shelter
(Ooh yeah) I’m gonna fade away.

– Gimme Shelter, The Rolling Stones

Nassim Nicholas Taleb says “every single human being” should bet these assets will decline…

Jim Grant says these “certificates of confiscation” represent a “surefire way to lose one’s invested money”…

And Dr. Marc Faber, not known for mincing words, says they are “for idiots”…

Our question this morning, therefore, is why would anyone hold US Treasuries?

The obvious answer – keeping in mind that an easy conclusion does not necessarily make for a correct one – can be observed in the “flight to safety” argument. Fears of a deepening global crisis have spurred investors to seek shelter in the perceived safekeeping of US government debt.

“Treasuries have rallied amid speculation the global economic recovery is faltering,” reported Bloomberg yesterday, “driving yields on two-year notes to a record low of 0.4892 percent today.”

The trough in two-years, the newswire continued, came a day after the Federal Reserve “reversed plans to exit from monetary stimulus and decided to keep its bond holdings level to support an economic recovery it described as weaker than anticipated.”

Huh?… So yields are at record lows because the Fed is buying bonds from the Treasury? Isn’t that a little bit like loaning a $20 bill from your left pocket to your right?

Well, no, it isn’t…because the left pocket also has a printing press, and it’s not afraid to use it, as Ben Bernanke reiterated yesterday. In the midst of this high-level shell game, therefore, what enduring value will a dollar bill have? And if the dollar’s value is suspect, how much more so for those pieces of paper that promise to repay dollars in the future?

Treasuries might be a great trade. But the “Gimme Gvt. Shelter” logic appears a tad funky, especially when taking into consideration the fact that government bodies are nothing if not wealth destroyers and that, historically, their preferred method of destruction is to inflate away the value of their respective currencies.

In 1970, a year after the Rolling Stones released the greatest rock ‘n’ roll track of all time, you might have picked up a front-row ticket to see the British invaders for around $20. Adjusted for “official” inflation, that same ticket (or any other $20 item) would today set you back $112.35. That’s a 461.8% jump in price. (Adjusted for unofficial inflation – i.e. actual prices – a front-row Stones ticket would cost something like $350). Some safekeeping!

Nevertheless, the case is as it is…at least for now. All the same, one is given to wonder just how long the government can continue to churn out record deficits in tandem with vastly expansionist monetary policy before the consequences show up in consumer prices? Could inflation (or, more precisely, the effects of inflation) be, as Mick Jaggar crooned, “just a shot away?”

Joel Bowman

for The Daily Reckoning