The Bond game, artificial inflation and dark bubbles

By Jaime Ortega.


US Treasuries are considered the safest of all securities in the financial world. The US knows that in order to dominate the global economy, investment grade treasuries must be ranked above all other foreign bonds. Bonds must be of the highest grade to prevent a devaluation of the US Dollar which in turn could cause systemic risk in the never ending bull market that continues to grow artificially with constant corrections from the Federal Reserve trying restore investor confidence in equities and debt markets.

In my opinion, the US Government has set up an ingenious scheme to control the phase of foreign bonds. Their goal is to push tariffs, trade deficits and financial sanctions in emerging markets like Russia and China that expand transnational investments to the Middle East, Europe, Central Asia and East Africa. Russia and China acquired in the past decade thousands of metric tons of precious metals to collateralize their fiat currencies against the US Dollar and push undecided investors to rethink their holding positions in the US debt market. The US knows, the American greenback has zero intrinsic value compared with Russia and China’s gold pegged currencies, so they must apply a different strategy to buy time and find an exit strategy as the Fed keeps hiking interest with much uncertainty in the market. The US is also aware other BRIC economies look forward for alternative partners hoping to finally end the US spell of running a trade deficit of debt to these countries through central banking.

Russia and China know that the best way to expand financially is to issue their foreign bonds and dump US treasuries to other desperate buyers in Open Market Operations. Countries that park their currency in Russian and Chinese bonds know that incase of default –unlike the US dollar which can only print more paper to restore confidence in the market– they will receive precious metals in exchange to hedge their loss. The Trump administration despite their quarrels with the Federal Reserve, know full well that a destabilization of US treasuries in foreign markets would end the reign of the US dollar as the choice of trade. The Trump administration must be secretly working alongside the Fed to fix the economy and buy time, by also not allowing other nations to surpass the US by issuing more secure debt.

The reason why the US has imposed new financial sanctions and tariffs to rival world powers is to create a form of artificial inflation that would eat up the value of short term foreign notes and bills, so investors move back again into purchasing US treasuries. This artificial inflation is created when normal inflation is influenced by a combination of sanctions, tariffs or other externalities that simultaneously affect the market at the same time like a perfect storm created by government. Artificial inflation can be manipulated by the US to sporadically destabilize any foreign economy. With high inflationary rates the GDP of the country slows, and pushes away investors trying to seek new economic opportunities as was observed recently in Turkey.

Artificial inflation triggered by outside governments offset competitors creating what I denote as a “black bubble”. A black bubble is formed not out of normal domestic growth or lines of credit, but through direct outside intervention. This was the case of Qatar, a famously known wealthy country, which suffered an embargo of goods from the Arab League. A normal bubble originates from risky investments, but a black bubble is not created by risky investments but foreign trading obstructions.

With slapping sanctions in effect, the prices of commodities drastically increase as a shortage of consumer goods creates immediate demand, which in turn stagnates corporate growth and hurts the performance of stock prices and affects the volatility of underlying assets inside short term future contracts. With chocking tariffs, the US can intercede with crude oil barrel production and sell it at a better price than Russia, which also creates a dark bubble in oil trade, where Russia is forced to sell oil cheaper than its domestic market value in relation with regular inflation to stay competitive. In essence, bond holders of Chinese and Russian sovereignties panic as artificial inflation eats up the value of the yields of interest they promise to repay in coupons forcing Russia and China to borrow from banks, since their weakened central bank is unable to print more money because an excess of yuan’s and rubbles in the world economy would only devalue their currency against the dollar making manufacturer goods and services more expensive in the global economy.

Artificial inflation is double the size of regular inflation. Whereas volatility in prices during regular inflationary stages takes a long time to manifest and eat up a 30 year bond, artificial inflation eats up the bond in a faster time frame. Devaluation occurs faster as prices spike out of control from normal inflationary conditions which results in a modern day financial weapon made by the policy making of Washington that regulates foreign markets to bolster its in own survival. If China and Russia continue to aggressively expand their investments and influence worldwide, the United States can only watch or try to slow down their growth to look for a solution to its own emerging debt crisis that is likely to collapse in the form of derivatives through shadow banking and a lack of central regulation.

What Next?

Recent Articles