Saturday, July 05, 2003

Is the bond bubble over?
Investors shunned British and German government bond market auctions on Wednesday, fuelling fears that the three-year old bond "bubble" has passed its peak. The poor response coincided with a further fall in the price of US Treasury bonds, which hit a seven-week low during the day before recovering by the close.
If bond prices begin to fall, interest rates promise to rise and thus directly challenge the Fed to maintain its policy of -- at present -- negative short-term interest rates and low long-term rates into the foreseeable future to encourage borrowing and boost the economy. If the much promised recovery is around the corner, of course, this may be little concern. But in Germany, the recovery is nowhere in sight, and rising interest rates will surely exacerbate deflationary tendencies in the heart of Europe.

Could rising interest rates provoked by the largest US budget deficit ever choke off the nascent recovery? Remember that finance capital, which lives off of interest and financial transactions, has been remarkably quiet during Greenspan's assault on deflation since 2001. It is hard to believe finance capital will be silent for long. A return to long-term real interest rates (10-yr. T-bill minus inflation) of 6-8% rather than 3-4% has to be in our future. The politics of globalization -- and the politics of Republican borrow-and-spend fiscal policy -- demands it.

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