Gold News

A Clear Signal of Financial Danger

And an illustration of just how undemocratic Europe is becoming...

CONSENSUS on anything is really just a lack of imagination, writes Dan Denning, editor of the Daily Reckoning Australia.

In markets, when everyone agrees on something, everyone is usually wrong. Another way of looking at it is that if everyone is on the same side of the trade, you should probably be on the other side. But is this the case today with bonds?

Government bond yields in Europe's northern core (Germany, Denmark, and Switzerland) have dipped into negative real yields recently. That sounds complicated. What it really means is that once you've adjusted for inflation, short-term government bonds aren't paying a real yield.

Why would you loan your money to a government for the privilege of losing a fixed amount of yield? Why settle for getting back 98 cents for every Dollar you lend? The only world in which that makes sense is a dangerous financial world. In a dangerous financial world, investors value liquidity and the perception of safety more than the chance to make money.

Conclusion: we live in a dangerous financial world.

But does putting your money in government bonds make you any safer? Well, government bonds are at the core of the world's financial system. They are considered – rightly or wrongly – the best collateral in the banking system. Governments can always raise taxes to make interest payments on bonds, or print money to pay them off. Until recently, the default risk was low.

When you look at the chart below, it's hard to believe that bonds are NOT in a bubble. Ten-year yields on US government debt are below two percent. But quite clearly – because they're not at zero yet – they can go lower. And if the US Federal Reserve intends to suppress interest rates by any means necessary for the next few years, you could see more people flee from the periphery of the world's financial system to its corrupt and rotten core. Yields could go lower still.

Source: StockCharts

It's important to remember that the Dollar and the fiat money system are the main products of the Federal Reserve and the banks that own it. It is in their interest to perpetuate this system, not destroy it. This system is the source of their political and financial power. They want it to last.

For investors, it would be unwise to underestimate the creativity of the powers that be when trying to keep the game going. 'Extend and pretend' is all about pretending the collateral in the banking system (especially government bonds) is good collateral. The goal, from the insider point of view, is to prevent another Lehman Brother's collapse at all costs.

But that goal – preventing the unintended consequences of a major default of bankruptcy in the financial system – is increasingly at odds with democracy. Just ask Italian Prime Minister Mario Monti. Warning of the 'psychological dissolution' of Europe because of tensions over debt and the Euro, Monti said last week, 'If governments allow themselves to be entirely bound to the decisions of their parliament, without protecting their own freedom to act, a breakup of Europe would be a more probable outcome than deeper integration.'

Well there you have it. Democracy – the accountability of elected governments to the people that elect them – stands directly in the way of deeper political and economic integration in Europe. You couldn't get a clearer example of how undemocratic and anti-liberty the European project is.

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Best-selling author of The Bull Hunter (Wiley & Sons) and formerly analyzing equities and publishing investment ideas from Baltimore, Paris, London and then Melbourne, Dan Denning is now co-author of The Bill Bonner Letter from Bonner & Partners.

See our full archive of Dan Denning articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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