Short Term Yields on the Rise?

“Here is a weekly chart of the yield on the 2-year Treasury note going back to 1990,” Dan Amoss offers. “It has risen from 0.8% to 1% over the past two months. It could easily keep rising, especially considering the scarily low duration of the U.S. national debt. The average maturity of all outstanding Treasury securities is a little over four years.

“If 2-year note yields keep rising, the Fed may soon have to abandon its ‘zero for an extended period’ policy. This is why most Fed governors will keep playing the tired, industrial-era “output gap” card as long as possible; that is, until investors no longer believe the argument that they should fear deflation in a world of fiat money and “make-up-any-earnings-you-want” accounting in the banking system.

“The risk of a deflationary depression ended in late 2008, once the Fed figured out how to stop the panic in the shadow banking system, which paralleled the banking panic in the early 1930s. The new administration in early 2009 then decided to recruit the big banks as deficit-financing allies, rather than restructure them with new capital and new management. From there, it was necessary to suspend honest accounting in the banking system; engineer a wide yield curve for the carry trade; and, ultimately, claim a ‘profit’ on TARP investments.

“But just because the worst-case deflation scenario is off the table doesn’t mean the stock and real estate markets should be ‘off to the races.’ On the contrary, valuations and hopes are high for an economic rebound that’s based in faith and little else.”

As with the Greek scenario, the system of sovereign finance is one of confidence -- a “con game” in the classic definition of the phrase. Agora Financial