Professional investors understand the "game" that propped up the U.S. debt market, and by extension, the global economy, is kaput. The Fed and other allied Central Banks can no longer suppress overnight interest rates, encourage allies to borrow at these low rates, and then urge them to purchase higher yielding sovereign debt. The "duration miss-match" trade, the one that was the cause of the "subprime" crisis, can no longer work. To see the essence of our collective problem, consider this. From 1962 through 1999, the annualized overnight borrowing rate for "connected" financial institutions (the "Effective Federal Funds Rate") was 6.81% or 90% of the average yield on 10-Year Treasuries. By comparison, Fed Funds averaged 0.145% or just 5% of yields on 10-Year Treasuries that averaged 2.77% during the four years from 2009 through 2012. It cannot make sense to continue borrowing at rates so far below "inflation," while encouraging investment of these borrowed funds in longer-term debt securities, issued by a Federal government that has proven its dysfunctionality beyond all reasonable doubt. Is there a solution? I suggested one approach in February 2013, in the Washington Times. It starts with a return to a sound dollar; tough, comprehensive and regular audits of the Federal Reserve System; and a trillion dollar commitment to inject common equity inside the Fed, sourced by proceeds from orderly sales of federally owned lands and natural resources. Over one weekend or another, and in months, not years, the largest bailout ever seen could soon come and it will not technically "work" for the United States because the Fed will ultimately surrender its exclusive right to direct traffic in the global financial system.
The Phoenix That May Rise From the Ashes
Remarkably, leaders in erstwhile anti-capitalist nations such as Russia are now practicing economic common sense. Amazingly, Vladimir Putin, reputedly a man of enormous first-generation wealth, is enforcing low, flat tax, capital-friendly policies that are thousands of miles geographically to the right of Democrat and Republican policies inside the United States.
It cannot be much longer before leaders in rising nations, sovereign wealth funds, and pioneering investors decide to create a new, mammoth financial institution that will supplant the existing market for opaque, fiat currency debt securities with a market for term deposits whose interest rates are linked to price changes in brackets of essential commodities.