text: BMF Investments. Inc.: Why US Treasury Notes Will Eventually Yield Nothing - Aug., 2010
  Why US Treasury Notes Will Eventually Yield Nothing - Aug., 2010
  For all investors seeking income, I have some bad news for you. US Treasury notes and bonds will eventually yield nothing. That's right, I said it. "Zero percent interest coupons". Many pundits would argue the opposite. And yes, the argument for higher interest coupons in the future is valid and sound. The US is currently following a strategy of debt destruction such that as I write, the nation is closing in on $13.5 trillion in debt. To see the number is quite startling. It is: $13,500,000,000,000.00. Mercy! The number is so large, most calculators can't account for all the numeric placeholders. The number is so large, we now round up by hundred billions. The number is so large, the late astronomer, Carl Sagan, referred to really large numbers as "billions and billions". The good news is that there appears to be a limit. Zimbabwe wrote the book on trying to print their way out of economic dysfunction and eventually stopped printing with a z$100 trillion bill. As we all know, a printing press that never stops promotes inflation that eventually makes the printing press irrelevant. Not long after the introduction of the z$100 trillion, Zimbabwe thought about introducing the z$1 quadrillion bill. But, I suppose they reconsidered due to the idea that it would take too long to make change at the McDonald's drive thru. Actually, by the time they got through destroying their economy, a z$1 quadrillion bill would not even buy a Big Mac! Have we not learned anything!
  The first issue in the debt process is the return of principal. The Federal Reserve and the European Central Bank have both said, and demonstrated over the past year or so, that they are committed to printing money to keep their member banks afloat. Whether they physically produce the currency or they electronically create credits on a balance sheet does not matter. Credit expands the money supply because it allows for leverage in borrowing. Why haven't the Fed and the ECB failed like the central bank of Zimbabwe? Because the stuff that the Fed and the ECB produce as currency has some value and purpose whereas the Zimbabwean currency did not. For instance, several years ago, Zimbabwe owed the IMF several hundred million dollars in a loan repayment. To repay the loan, the Zimbabwean central bank ran off tens of billions in Zimbabwean currency (due to the exchange rate at the time), bought enough US dollars (the loan was payable in US dollars), and repaid the loan. I don't know what happened to the Zimbabwean dollars but if the bank that exchanged the currency is still holding them, they are probably trying to sell them as novelty items on eBay. They are a total loss.
  Reason #1: In 2008, the US had $12 trillion in debt and in $2009, $13 trillion in debt. Again, I'm rounding by hundreds of billions. In 2008, the Treasury reported that the average interest coupon was 3.4%. In 2009, the average interest coupon was 3.1%. Do the math. The interest owed in 2008 was $408 billion and the interest owed in 2009 was $403 billion. The result is, even though the debt increased by a trillion, the interest owed went down $5 billion. To illustrate the impact of falling interest rates, a $20 trillion dollar debt financed at 2% would yield just $400 billion in interest. According to the Congressional Budget Office, the US took in $2.5 trillion in revenue in 2008 and spent 8% of that in interest payments. 2.5 trillion times 8 percent equals $200 billion. Now take $20 trillion in debt (most pundits see us there in less than 10 years) and finance it at 1%. The interest payments would equal $200 billion. If tax receipts stay at least steady, the US can continue to pile up debt as long as interest rates fall. Do you feel me?
  Reason #10: The 'death cross'. A lot of people have written about the bearish 'death cross' concerning the 50-day and 200-day moving average on the S&P 500. When the 50-day crosses below the 200-day moving average, it is considered very negative. Of course, as soon as Benjamin Shalom Bernanke heard about this event, he ordered his minions down at the NYSE to goose the indices. And so they did. But I consider another 'death cross'. The chart below shows the 30-year US Treasury bond price, 30-year US Treasury bond yield, and the US dollar over the past 20-plus years. The real death cross occurred in 2001. Here's what is interesting. We all know that to buy Treasuries, one must have US dollars. So, it makes sense that prior to 2001, the US dollar appreciated with bond prices and the opposite was true of the bond yield. Something significant happened in post-2001. Ever since, the dollar has moved in tandem with bond yields and inversely with bond prices. (The horizontal line in the bond price was for the few years when the government did not issue the maturity.) What does this tell us? I believe the message is simple. The economy has experienced a fundamental change. A true depression has been trying to metabolize. The government has attempted to circumvent the natural business cycle by inflating and manipulating the components of measurement. A declining dollar fuels inflation. Gold observers would note that 2001 was the launching year for gold's furious run higher. Now the government is trapped by its own game of intervention and debt. If the Federal Reserve would cease and desist its dysfunctional and incestuous Treasury purchase program and allow capitalism to function, the likely result would be for Treasury prices to fall, yields to rise, and eventual currency recovery bringing real support to asset prices. But doing so would crush the institution of the central bank and this will not be allowed by the illuminati. What happens when we get to zero? Either we then come to our senses and adopt intelligent policy or we expire. With the de-evolution of human intellect accelerating at warp speed, prepare for a hard landing!