Why Government Promises Aren't What They Used to Be

The Dow dropped 297 points yesterday. October may have been the best month for stocks in 37 years. But November could be the worst.

Gold fell a little yesterday, too, down $13. Oil is still over $90.

The newspapers tell us that investors are disappointed over the European deal. They thought they had that problem wrapped up with a bow. Apparently not…

First, Italian bond yields rose. All of a sudden the problem wasn’t solved at all. It was bigger than ever.

And then the Greeks said that they were going to have to vote on any further austerity measures. And you know what that means. They’re going to vote no. No sensible people would agree to give up their ill-gotten goods so that they could be given to investors, speculators and the banks.

Ambrose Bierce described an election as an “advance auction of stolen goods.” But today’s elections auction off goods that haven’t even been created yet…and probably never will be. A government bond is really a promise that the government will steal enough money to pay the interest and principle. Investors don’t doubt its willingness. They doubt its ability.

So do we. Every government in the developed world is deeply in debt. Most countries have little margin to increase taxes, without hurting economic growth. You can only squeeze so much blood out of a population of turnips. When you get to the pulp…you have to find a new source of revenue. And few voters are willing to accept austerity just so rich, greedy capitalist bond buyers get what they’ve been promised.

The betting is that Greece will run out of juice sometime in the next few months. Greek bond prices have fallen so low that you can now buy Greek 1-year notes with a 200% yield. If all goes well, you will double your money in a year. If it doesn’t go well…

…well, you take your chances!

It’s precisely because investors don’t want to take chances that the yield on America’s 10-year note has fallen to under 2% again. The Greeks may not be good for the money. The Italians may be untrustworthy. And who knows what the French are up to! But you can count on good ol’ Uncle Sam. He may be a rascal and a scalawag…but he’s got a printing press.

Besides, the way things are going, it looks like the dollar…and US government debt…may be the only things you can count on. That is, until they blow up.

But we’re beginning to think it could be long time before this show is over. The world’s financial system lurches from one crisis to the next. Risk assets go down. People seek the safety of the US government bond market. And the feds get to finance their deficits at low rates. What’s not to like?

Besides the fact that everyone gets poorer and poorer…

Bill Bonner
for The Daily Reckoning

The Daily Reckoning