US Treasury 30-Year Long Bonds Are Back
What Does it Mean?
How Bushonian Trickle Up Economics Works
BY AL MARTIN

(AlMartinRaw.com) It should be remembered that the Bush-Cheney Regime canceled 30 year Long Bonds in 2001. These instruments were first issued in 1977, when the Carter Regime’s budget deficits and accrued debt rose to the point that an additional, longer-term instrument was necessary in order to finance US debt.

Then the Reagan Bush regime effectively did what the Bush Cheney regime did: Early on, the Reagan Bush regime, understanding that it was going to institute the practice of Bushonomics (i.e. negative debt finance consumption that would swell the nation’s budget deficits and lead to a massive new accrual of public debt) wanted to shift the ‘debt cycle,’ as it is called in Treasury parlance, increasingly from the long to the short end.

Why? Because short-term rates are, obviously, less than longer-term rates. Therefore the cost of overall governmental debt service can actually fall for a period of time, even though long-term interest rates are rising.

And this is the important part -- the political reason for doing this is to help disguise the actual size of budget deficits which Bushonomics produces.

In other words, if the cost of debt service is falling because you’re shortening the yield maturity of government debt instrument, then you can afford to produce more debt and still have that debt service not rise, at least for a time.

And how transparent is this subterfuge? To those who understand, it was very transparent. To the average citizen, who does not understand Economics 101, it was not so transparent. This is not usually written about or discussed, but to those who understand Economics 101, the subterfuge of the Reagan Bush regime was obvious. When asked how many citizens understand what budget deficits and the national debt are, Gallup-Harris polls still claim that only 18% respond yes, a number which has remained essentially unchanged for 20 years. (Likely a victim of the dumbing down of America strategy)

Another interesting question would be -- what leverage did the Bush Cheney regime have on Greenspan and the Fed board to allow this to take place?

The Fed initially was not opposed to this because interest rates, both long and short rates, were in the process of peaking when the Reagan Bush regime first came to power.

Remember, it wasn’t Alan Greenspan; it was still Paul Volcker’s time. What Paul Volcker did, wisely, as we now know, was to actually act to push rates higher, to contract the money supply, in order to bring on a recession early in the Reagan Bush regime to squeeze out inflation. And the tactic worked.

Now part of that tactic, after 1983, after the recession had happened, now recovering Q-2 1983 - what Volcker agreed to do was to encourage the Treasury effectively to increasingly shift debt burden from longer-term instruments to short-term instruments–i.e., from bonds to notes to bills.

The spread at that time, even beginning in 1983, between the 30-year long bond, for instance, and the 90-day Treasury bill, was still 7%. That’s a significant spread. If the government could shorten the average maturity of debt from what had been approximately 7 years and 4 months, down to about 2 years and 9 months, which is what the Reagan Bush regime was able to accomplish, then it would represent a potential 4% per annum savings in debt cost, which is significant, particularly if you intend to dramatically increase governmental debt.

Such was the intent of the Reagan Bush regime, both in order to foster economic growth and in order to expand wasteful military spending on multibillion-dollar weapons procurement projects that didn’t work in an effort to consolidate wealth.

The 30-year bond then wasn’t stopped until 2001. The reason why that was done was to forcibly contract the so-called Treasury spread/yield curve. People that owned 30-year bonds couldn’t buy them anymore. They now had to buy 10-year bonds and 10-year bonds yielded at that time about 50 basis points less than the 30's.

And why was the Fed doing this? It was the same reason it had done so under Reagan Bush. They effectively colluded with Bushonian interests in the White House to contract the yield curve in order to facilitate the expansion of debt, since they knew, just as Paul Volcker knew, Alan Greenspan knew that under Bushonomics it becomes the job of the Federal Reserve to try to accommodate the subsequent massive buildup in debt that Bushonomics causes.

One way to accommodate said massive increase in governmental debt created by Bushonomics is to shorten the yield curve of the serviceability of that debt. Therefore micro-management at this level has to continue -- and there always has been.

When Bushonomics rules the day (or rues the day, depending on your investment), both the Treasury and the Federal Reserve have to look for every machination to reduce debt service.

The re-institution of the 30-year bond, for those who understand Economics 101, and the reason why the bond market sold off so hard on it, despite bond bulls on CNBC trying to say it really wasn’t a big event because the bond market is full of people who do understand Economics 101.

They understood that the re-institution of the long bond was not a decision the regime was making voluntarily; it was a decision they were being forced to make because who better to know than a Bushonian regime, which is creating said deficits, that the deficits will continue to rise as debt levels rise, as is part and parcel of Bushonomics. Therefore they needed to increase the depth and liquidity of the bond market necessary to finance what will be ever-expanding governmental debt as long as Bushonomics rules the day.

All buyers in the beginning are institutions, before the paper gets sold retail. But, surprisingly enough, the 30-year long bond has the largest percentage of public holders. Because 30-year U.S. Treasury bonds are stuck away, are purchased by the so-called long-term U.S. government mutual funds, or bond funds, of which the American people are big buyers.

Domestic mutual funds were always, and will always be, substantial buyers of 30-year U.S. Treasury paper. Individual foreign investors are also substantial purchasers of them for the same reason. That is, to effectively lock in a higher yield. And the implied stability, which comes with a U.S. Treasury instrument, which, of course, is only implied stability. Something that Bushonomics is sorely testing.

Don’t think for one minute that the Bush Cheney regime wanted to do this. This is a forced move and a de facto admission that: Despite recent marginal improvements in Bushonian budget deficits, over the longer term, Bushonian budget deficits and the accrual of aggregate national debt that they cause will continue to expand, and the bond market had to be made wider, deeper, more liquid by the re-institution of a popular issue in order to service what will be ever-expanding debt levels in the future.

So what forced their hand? Now, this is going to be a costly move to the Treasury because what you’re doing is reversing the debt/yield cycle of the last 5 years. Now you are expanding that cycle along what’s called the curve instead of contracting it. You are selling now more longer term instruments, which carry a higher coupon cost to the Treasury.

You are now increasing the cost of carrying Bushonian debt. And that’s the tradeoff, that, in order to continue to allow Bushonomics to function, the enormous debt that Bushonomics creates has to be financed. You have to guarantee that you can continue to finance it down the line.

What forced their hand to make this move was the realization, as Comptroller General David Walker put it in his comments on the re-institution of the 30-year bond that Bushonomics will create geometrically expanding debt and that, in order for that debt to be serviced, you have to deepen the debt market. And the best way to deepen the debt market is to re-institute an instrument that you know is popular.

So they made this move before it became a crisis. This is a preemptive move in order to help finance Bushonian budget deficits and the aggregate accrual in national debt that they cause in the future.

From the Bushonian perspective, they’re right, from what John Snow says. I listen to John Snow’s comments about this. In the short run–let’s say, over the next 5 to 7 years–this will increase the cost of servicing Bushonian debt because you’re now selling instruments to service that debt which yield a higher coupon.

But what John Snow said is correct; that is, because of Bushonomics (he didn’t put it that way, but that’s what it comes down to) because Social Security, FICA tax current surplus payments exhaust in 2014, the U.S. Treasury will need to raise significantly more capital 10 years from now than it does currently because the accrued effects of the destructive fiscal nature of Bushonomics will be more evident in 10 years’ time than they are today.

This move makes it obvious that the regime understands that Bushonian deficits and aggregate debt will rise, and will continue to rise; that under the fiscally destructive nature of Bushonomics, government’s future need for capital will continue to increase.

Therefore the United States will likely have to expand (and this can be a prediction) It is likely that the U.S. Treasury will bring back other old canceled series of bonds, such as the 7-year bond, and perhaps even the 4-year bond again.

This is called the Bolivianization of debt (or more rightly called Bushonianization.) In other words, when a country is under stress because of economic mismanagement and it needs to finance that debt, it will introduce ever more channels, ever more variety of ways, ever more instruments it can sell to the public.

The TIPS bonds, for instance, were introduced for a wholly different reason. The TIPS bonds, or Treasury Inflation-Protected Securities, which are issued in 5-, 10- and 20-year series, with, as we have pointed out before, the top 10% of the nation being heavily invested in the 10-year instrument.

The real reason these bonds were introduced and people should understand this: This wasn’t to do the average Joe Six-pack investor any favors to protect him from the future inflationary consequences of Bushonomics.

Because it isn’t the average Joe Six-pack investor that’s buying these things because they don’t understand them.

What they understand is the current yield that they are getting, and the coupon yield on TIPS is actually much less because the total yield implies something that is unknown, and that is: what inflation is going to be in the future.

We would note, however, that the Big Smart Republican Money have been the primary investors into, for instance, the 10-year TIPS. We have noted before -- ‘why not invest in the 20-year TIPS?’ since the current coupon is higher. You would actually be receiving greater current income.

The reason why is because the top 10% of the nation does not expect that whatever regime is then in power would necessarily be able to service a 20-year TIPS bond until the end of its maturity cycle.

This then is a crafty way of protecting the wealth of the Bushonian Cabal and the top 10% of the nation. How? Because, by selling an instrument whose yield is principally tied to inflation by now making concessions, as you see the regime is doing on the manner in which inflation is calculated at this Consumer Price Index level, which will in the future make that inflation more real and more genuine.

This is the reason for the creation of these 10-year TIPS bonds and the reason why the Big Smart Republican money is buying them -- because they know it is protection of their wealth and they Are prepared to sacrifice current yield for the future preservation of purchasing power; that the U.S. Treasury will continue to service this debt come what may because there is a little unknown clause–and people aren’t generally familiar with this–wherein, should the U.S. government ever default, the TIPS would be the last to be defaulted on. In other words, there is an implied seniority.

So they can dump them by the time it gets to that crisis point because they would know.

And how will you know in 5-6-7-8 years’ time that the U.S. Treasury is about to default?

When you see dumping of 10-year TIPS bonds by the top 10% of the nation, particularly the top 1% of the nation, 78% of whom are Republicans with a median net worth of $132.4 million.

The 10-year TIPS bonds have really been created to protect the wealth of the top 10% in the inevitable inflationary spiral that Bushonomics is going to cause.

Also, the consequences would mean that. let’s say, in 5 or 6 years’ time, the 10-year TIPS bonds are going to have a yield that may be twice as much as the straight 10-year U.S. Treasury, fixed-coupon note because inflation has risen to such a level.

Therefore, what is happening? Effectively the bottom 80% of the American people in their capacity as taxpayers are financing a double-digit, or effectively a double yield (double return) to bonds owned by the top 20%. And that’s one way to look at it.

Ten years from now, when the Joe Six-packs and the unwashed, who don’t understand, are still investing in 10-year straights (they’re called straight or fixed U.S. Treasuries) either directly or bond mutual funds or whatever, and, let’s say, they’re receiving a 6% yield, those who bought 10-year TIPS today are getting, in 5-6 years’ time, a 12% return, 6% of that return is an effective gift by the people of the United States to the holders of said TIPS.

Since 83% of all public holders of the TIPS are those who fall within the top 10% of the nation, it becomes, yet again, another Bushonian mechanism to transfer wealth, another trickle-up wealth concept of Bushonomics.

Read this again, and let it sink in…

This is just another Bushonian redistribution of wealth.

Here’s a humorous aside that comes to mind. You may remember how the Republicans denigrated George McGovern in 1972. They went after McGovern for his statements about the redistribution of wealth. Frankly, the reason why McGovern made such a poor showing is because he frightened even the middle class with that concept.

What Bushonomics does is a reverse distribution of wealth but for some reason, you do not hear the Democrats trying to use it against pro-Bush faction Republicans.

I heard Ted Kennedy say this on C-SPAN because Brian Lamb asked him this very same question. And Ted Kennedy said, paraphrasing here of course, unfortunately, we can’t use it as ammunition because such a small fraction of the people understand Economics 101.

So for those who do not understand Economics 101 and are not making money in the market, the most valuable skill you can learn for the future is picking carrots