Are Investors Paying the U.S. 8% for the privilege of owning U.S. Debt? Zero Hedge and The Daily Capitalist think they are!
I like to read both Zero Hedge and The Daily Capitalist. I find Zerohedge perfectly amusing, but I actually get something out of The Daily Capitalist.
But then, the Daily Capitalist quoted Shadow Stats – saying that inflation might be closer to 8% than 1%. Fortunately, we have some market indication about what inflation might be. The equation for Treasury rates is generally given as
Treasury Rates = Inflation Rate + Real Rate of Return
Real Rate of Return = Treasury Rate – Inflation Rate
The real rate of return is important, because this is how much money you make after you take inflation into account. If you make a total return of 3% a year, but the inflation rate is 100% a year, you’re losing your ass in that investment, because you need 100% a year just to retain your purchasing power.
We know the yield for any maturity in the U.S. Treasury Market. We have numbers from yesterday for the entire yield curve – the market for U.S. Treasuries is one of the most liquid in the world. Let’s plug in the 6 month Treasury Rate and the Shadow Stats “8% inflation” number into see how much real return investors in U.S. Treasuries are getting.
RR of R = .16% – 8% = -7.84%
-7.84% Real Return. A negative real return!! These investors are losing truckloads of money in real terms! That means that investors are so desperate for Treasuries, they are willing to pay nearly 8% to lend money to the U.S. government for 6 months. Do you believe investors are paying money to hold U.S. debt? I do not.
If Shadow Stats is correct, issuing debt is a money making operation for the U.S. government. If these investors are getting a -7.84% return, that means the U.S. government is making 7.84% on every dollar it lends! That’s a solid return.
Clearly, the best way for the U.S. to get out of debt would be to lend as much money as possible right now – because they are making 8% a year on just lending money!
Of course, this isn’t the case. The U.S. government is not getting paid to lend money, and it is not making 8% on every Dollar it borrows.
I pointed this out a few days ago, but it bears repeating. Shadow Stats is very, very, very wrong about inflation.