In their bold and desperate attempt to save the global financial system from collapse, the world’s largest industrialized economies continue to issue record levels of debt. And, as debt issuance hits the roof in 2009 and 2010, any hints of economic recovery are sure to rapidly deflate government bond markets as investors head for the exits.

The United States is set to issue about $2 trillion dollars’ worth of Treasury debt in the fiscal year that began last October – more than twice its previous level. Euro zone governments will issue about $1 trillion of debt in 2009 – an increase of 23% versus 2008. Either way you slice it these are spectacular levels of required funding and will ultimately put pressure on government coffers as the cost of absorbing all of this supply exceeds demand. Hence, “quantitative easing” to the rescue…

But what happens when the global economy manages a dead cat bounce once record levels of fiscal spending hits the real economy? Will central banks continue to absorb government paper the market doesn’t want to buy?

Economic growth implies rising price pressures as inflation escalates. Higher inflation or even the prospect of higher inflation is bad news for fixed income securities, especially government bonds in this economic cycle as the United States, England, Japan and the Euro zone all print massive amounts of money to bail out their battered and, in some cases, insolvent banking systems.



The best speculation over the next 24-36 months is betting against long-term government bond markets. In addition to death and taxes, I can’t think of a more pronounced certainty than rising government bond yields – except in the context of an outright depression or economic collapse.

Even with the Federal Reserve, Bank of England, Swiss National Bank and eventually the European Central Bank all buying their own paper (quantitative easing) the market will overwhelm these institutions if economic trends warrant higher bond yields.

For now, deflation, not inflation, is the primary threat to the financial system and capital markets as the United States and Great Britain recently reported negative CPI for the first time since 1955 and 1960, respectively in March. But at some point over the next 12-24 months, government bond markets are sure to implode if inflation begins to rise.

There is no better speculation than betting against government debt in 2010 and beyond.

I have zero faith that the Federal Reserve, The Bank of England and other central banks will be successful and timely enough to drain all of this monster sized liquidity from the financial system once the credit crisis stabilizes. History is on our side; inflation has nearly destroyed paper money since 1971 when Nixon broke the gold standard and this financial disaster will only ensure the death knell for fiat currency. No central bank can indefinitely control a market or an asset class; fundamentals will always overwhelm an institution, even the Fed.