either by selling goods or services that foreigners want to buy, or by reducing its standard of living.

Taking what you want because you have the biggest guns. We are approaching a banana republic, after all.

It also signals the beginning of the end of Obama's recovery program.
As quickly as the federal government pumps money into the economy, it will be readsorbed by the Bond Holders in interest.

All that was accomplished over the past year or two was to push the reckoning into the future, and make the adjustment more vicious when it happens. It's like charging one's mortgage payments on one's credit card. It ends badly when the credit limit kicks in.

The US standard of living will also fall becuase of the downward pressure on wages from 3 to 4 billion asians, hungry for work.

As an unalienable Right must be re-defined pronto. That idea has gotten us into deep doo-doo. For each of us, a re-definition of happiness should be more analogous to the third world's view of meaning 'survival', ours being economic, and not to 'accumulating mounds of useless stuff that we can show off'. For sure until we dig ourselves out of this mess (say 50 years or so?).

"All I know is just what I read in the newspapers." - Will Rogers

The best place to put your money? the big question is when will the US default on interest payments on its debt? will they try to pay their creditors in dollars? what will the dollar be worth towards the end of the nominal 30 years of these 30 year treasury bonds that now have to be offered at over 4 % to make them sell?
I am sorry, I am abjectly sorry and apologetic to my children and theirs. They will bear a staggering debt. Did Obama have a choice given how totally fucked our banks and long subsidized auto industrry were allowed to become?
Would failure of the mega banks REALLY mean I could not borrow money? No. the repackaged dung of ARM mortgages has already gone down the toilet but the little bank in my neighbor hood that did not seek glitzy riches and hung on to its lending guidelines is still solvent. It will still talk to me if I have income or a good risk proposition.

let the car giants fail. they have failed us by lobbying for the worst leadership our country could have...their demise won't just be good for the environment. Let the megabanks fail. They make nothing that you or I can eat, wear or live in and they no longer loan to those who could make such things. Let them fail and see if their bosses, workers and CEOs can find a job doing something honest and useful. We have been told that if they fail they will take us all down. That is a mistake or a lie depending on whom you listen to. Those failures would force us into a new economic direction but it is not possible to go in a worse direction than we have recently.

So, the big question is, will treasuries keep up with inflation? HOw will you know it is time to dump your US bonds? Bonds, after all will be how a citizen gets back his money that his government has stupidly obliged itself to give away.

The US basically only taxes income. Could one have a large valuable collection of low-paying assets, live modestly and ride out the debt-storm that we all see coming? The bastards congress wouldn't start taxing assets the way counties and cities do. would it?

Freedom is not more important than fairness, just easier to sell and a lot easier to fake.

I would have missed it without this analysis.

The administration needs to learn what "quid pro quo" means. A housing market dependent on 740 credit scores is beyond strange, it's intellectually dishonest.

Thanks for the comment on bank fees. I'm surprised how little is written on this in MSM. Some major portion of bank profits are based o on late fees. The 20 somethings are the hardest hit. No wonder a plurality of that group favors "socialism" over capitalism.

Excellent post!

..., from Wikipedia, "Rukeyser was famous for his pun-filled humor, and for trying to get investors to ignore the short term gyrations and think long term. In answering a letter on investing in a hairpiece manufacturer, he quipped that "if your money seems to be hair today and gone tomorrow, we'll try to make it grow back by giving the bald facts on how to get your investments toupee."

I always loved his pun and methaphor filled monologues. And I don't recall Lou ever uttering the word "bond" without attaching the word "ghouls" behind it. As in, "The stock market," such and such, "meanwhile, the 'bond ghouls'," such and such. I never quite understood why..., but seeing Numerian use the phrase "bond vigilantes" inspired me to look up "ghoul" in the dictionary.

ghoul: a spirit which robs graves and devours corpses.

I wish Lou was still around..., but then again..., his take on the current financial situation and where it is headed might be too macabre for me.

Brad Setzer: Record demand, record angst

Follow The Money, By bsetser, May 29

The bond market vigilantes are (supposedly) back. And this time, they aren’t just Wall Street traders. America’s foreign creditors are no longer willing to provide endless amounts of long-term credit to the US at low rates. So argues Mark MacQueen of Austin, Texas- based Sage Advisory Services (via Bloomberg):

“The vigilante group is different this time around … It’s major foreign creditors. This whole idea that we need to spend our way out of our problems is being questioned.”

From all this talk, you would never know that the world is actually still buying record amounts of US Treasuries. In fact, Treasuries are the only US financial asset that the rest of the world is still buying in large quantities. Demand for Agencies — and asset backed securities — has fallen off a cliff. Demand for equities has been anemic (though the last data point comes from March). By contrast, the 52 week increase in the New York Fed’s custodial holdings is way, way up.

[...]

To be sure, not all is well.

Foreign central bank demand is still concentrated at the short-end of the curve,* and the US is issuing more long-dated bonds.

Tim Duy's Fed Watch, By Tim Duy, May 28

At the moment, the economic dynamic is exceedingly complicated. An understatement, I fear. The crosscurrents in the data and the markets are treacherous, and I suspect will have Fed officials scratching their heads. Hold steady with existing plans? Step up the liquidity provisions? More actively engage plans to tighten policy? The latter option seems almost inconceivable; for the moment, the debate will focus on the issue of further easing. At this point, I think the Fed will sit tight, allowing further easing to come from the already active TALF program, rather than expanding outright purchases of Treasuries.

The core issue is the steep rise in Treasury yields, which apparently were kept in check only by the expectation that the Fed would continued to gobble up the endless stream of securities issues by the US Treasury. The Fed sank that hypothesis at the last FOMC meeting, and a subsequent statement by Federal Reserve Chairman Ben Bernanke made clear that the Fed does not have a 3% target on 10 year Treasury yields. Since then, yields have climbed as high as 3.75% before prices rebounded today, bringing yields down to 3.61%. Should we be concerned with the gains?

[...]

Bottom Line: I want to believe that the rapid reversal of Treasury yields is a benign, even positive, event. This is likely the Fed's view; consequently, the will hold steady on policy. Challenging this benign view is that the reversal appears to be lock step with a return to dynamics seen in 2007 and 2008 - exceedingly low US rates encouraging Dollar outflows, stepping up the pace of foreign central bank reserve accumulation and putting upward pressure on key commodity prices. I worry that policymakers have forgotten the external dynamic that was hidden by the crisis induced flight to Dollars last fall. Indeed, capital outflows (indicated by a foreign central bank effort to reverse those flows) would signal that much work still needs to be done to curtail US consumption to bring the global economy back into balance. Policymakers are unprepared for this possibility.

Naked Capitalism, By Yves Smith, June 1

Lordie, if this Reuters article is to be taken at face value, the Fed is even more detached from reality than I feared. The Fed does not understand why the Treasury bond market had a mini-panic last week. Is it that investors believe the “green shoots” story and are seeking riskier assets? Or is it that they are worried about burgeoning Treasury auctions and a possible fall in the dollar?

Note there is another theory, that it was Fannie and Freddie moves to manage their duration risk that caused the mess. However, it did appear that the selloff in the dollar and longer Treasuries was triggered by Standard & Poors’ announcement that it was putting the UK on negative watch, meaning it is at risk of losing its AAA rating.

While both factors, a shift to riskier assets and worries about a tsunami-like incoming tide of Treasuries, bizarrely, are in play, from what I can tell, the second, the fear of the growing Treasury calendar, is the big driver. Look, the Chinese have done everything but put up a billboard in Time Square to let the US know that it is not happy about US fiscal deficits (really, it ought to be, they need the economy to be something other than prostrate) and has moved aggressively to the short end of the yield curve.

[...]

Yves here. The funniest bit of the piece is a part I omitted, where the Fed types figured that the jump in yields couldn’t be due to the big supply, after all, that had been known for some time. Gods, they actually believe that rational expectations stuff. People are inertial, and Bill Gross and his buddies have believed that the Fed would protect him, since it has done such a good job until now.

Bloomberg, By Daniel Kruger & Susanne Walker, June 1

For all the hand-wringing over the dollar’s slide, the expanding U.S. deficit and the nation’s AAA credit rating, the bond market shows international demand for American financial assets is as high as ever.

The Federal Reserve’s holdings of Treasuries on behalf of central banks and institutions from China to Norway rose by $68.8 billion, or 3.3 percent, in May, the third most on record, data compiled by Bloomberg show. The Treasury said bidding from foreigners was above average at its $101 billion of note auctions last week.

U.S. government securities have tumbled 4.3 percent so far this year, the worst performance since Merrill Lynch & Co. began tracking returns in 1978, as so-called bond vigilantes drove up yields to punish President Barack Obama for quadrupling the budget shortfall to $1.85 trillion. The purchases by foreigners show that, at least for now, there’s little chance of buyers abandoning the U.S. or threatening the dollar’s status as the world’s reserve currency.

“The U.S. Treasury market is the widest, deepest, most actively traded market in the world,” said Jeffrey Caughron, an associate partner in Oklahoma City at The Baker Group Ltd., which advises community banks investing $20 billion of assets. “There’s really no other game in town.”