Bernanke's Operation Twist has succeeded in sending yields on longer duration maturities to record lows. But what is now being lauded as a success by the interest manipulators at the Federal Reserve will very soon prove to be this country's Waterloo.
The problem is that America's addiction to artificially-produced low interest rates is becoming permanently cemented into the economy. By definition, artificially-low interest rates cannot last forever. Once debt supply and inflation pressures overwhelm the Treasury market, as they inevitably must, yields will soar. If you doubt that fact, ask the Greeks if a poor economy or the ECB is capable of holding down yields forever. The interest rate on their two-year note is now above a staggering 70%.
Much like the Greeks, we Americans have been duped into believing we could borrow much more money than we could ever pay back. If Greece never stopped using the Drachma, their interest rates would have surged much sooner and prevented the buildup of their onerous level of debt. It was the fact that the Greeks had the cover of the Euro which tricked the world into believing they could run a debt to GDP level above 100% with impunity. Likewise, the U.S. has used the benevolent cover of having the world's reserve currency to run-up $15 trillion in Gross Debt. Without that reserve currency status, interest rates would have skyrocketed and forced deleveraging upon our country.
However, by the time it comes for the US to face the reality of a free-market based cost of money, the U.S. banking system and indeed the entire government will have become completely dependent on the continuation of nearly free money to maintain solvency.
America's teaser rate and adjustable rate mortgage on her $15 trillion debt will most likely expire within a few short years. An insolvent banking system and an insolvent government will be the result of believing we can and should borrow more than $1 trillion above what we raise in revenue each and every year; simply because the cost of financing is so low.
The solution to European and American insolvency is always sought from the printing press. Is it really any wonder why gold is still up $260 an ounce YTD. This is why the gold bears and those who have given up on the gold market will be extremely disappointed in the weeks and months ahead.
President: Pento Portfolio Strategies
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