This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

The 'Bond Vigilante vs. Fed' Mantra Makes No Sense

Stocks in this article: GLD

It's, like, "Why didn't anyone think of this before?"

The bond vigilantes have been neutered, we are told, because the Fed simply assumed unlimited powers. So it is therefore metaphysically impossible for interest rates to rise. If the Fed just buys all debt, then interest rates will be as low as the Fed wants forever, right?

Throughout history, all sorts of countries have been forced to cut back on spending when the basic forces of financial gravity have set in. You have to cut the budget in various places until you don't spend more than you take in. Just ask the Greeks right now.

Looking at the U.S. situation right now, why aren't all of these other countries asking themselves: Why don't we just establish a Fed as well, and then we can increase spending infinitely and simply have our own central bank buy all the debt? No pain, no problem.

Standard economic theory for centuries tells us this policy generates massive inflation, currency devaluation, rapidly rising interest rates. We need only go back to the 1970s right here in the U.S., and at that time the money-printing was a pittance compared to today.

The Fed's inflationary policy, in order to "accommodate" the federal government's spending binge -- 65% or more increase over 10 years -- has come with zero economic penalty. Interest rates are down and we are constantly being told by our government that we have essentially zero inflation.

Some people would say the effects of this policy is only a matter of time. Some time! Given the magnitude, if it hasn't happened already, the "catch-up" impact when we have to pay for all of this through higher interest rates would be as epic as the fall of Rome.

Just look at the data series of federal government spending :

  • 1996: $1.6 trillion
  • 2005: $2.5 trillion
  • 2009: $2.8 trillion
  • 2012: $3.8 trillion

Current (2012) tax revenue: $2.5 trillion. In other words, if federal spending were just kept to the 2005 level -- which included Iraq, Hurricane Katrina, etc -- the federal budget would be in 100% balance, right now.

But why bother keeping a budget anywhere near a balance if it's free to just spend an unlimited amount of money on top of it? The Fed buying all the extra deficit spending is, after all, free, we are told. No adverse impact on inflation, interest rates, the dollar or anything else. The price is not showing up in any column.

2 of 3

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 18,030.21 +6.04 0.03%
S&P 500 2,081.88 -0.29 -0.01%
NASDAQ 4,773.4720 +8.0480 0.17%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs