The Linguistic Psychology of Misinformation and Why a US Treasury Bond Bubble Unquestionably Exists

I hate using the term “boom-bust” to describe a period of capital market appreciation and then collapse, for the use of this term is very deceptive to the reality of economic conditions. Intentionally or not, using this term helps to brainwash the masses into believing the agenda of the Keynesian economists that an economic “boom” is occurring when in fact massive price distortions only create the illusion of “prosperity” when none exists. When we hear the term “boom”, most of us associate economic prosperity with its use. When we hear the word “bust”, most of us associate this term with the end of economic prosperity.  The Great Deception that occurs, of course, is that there can be no “bust” when there was no “boom” to begin with. The use of the “boom/bust” term to describe a period of rapid price appreciation and then decline is every bit as problematic as the current media use of the “double-dip recession”.  Just as a double-dip is impossible if the economy never emerged from the first phase of the recession, a “bust” is impossible when there never has been a “boom”.

Anyone that uses the term “boom-bust” contributes to this misunderstanding of what really happens during this appreciation/ depreciation cycle and assists in keeping the sheep misinformed. Much more accurate terms to describe this cycle would be “inflationary/deflationary”, “malinvestment-driven distorted-price mania/ price collapse meltdown” or even “bubble/bust”. Although my least favorite of those three pairs is “bubble/bust” at least the word “bubble” implies unsustainability and is therefore accurate in describing Central Bank monetary policy-driven periods of rapid price appreciation in capital markets. Any of these aforementioned terms among countless others would serve to enlighten the public to the reality of the mechanisms behind artificially-created steep capital market rises and artificially-created collapses much more than the inappropriate and extremely deceptive “boom-bust” term.

However, here is the problem with the world “bubble”. Financial shills often use the term “bubble” to conjure up images of imminent collapse. Thus, if the “bubble” doesn’t burst within two weeks of someone’s “bubble” proclamation, then this non-event provides loads of verbal ammunition for the financial shills to improperly validate their erroneous viewpoint that a bubble does not exist. It provides perfect fodder for the shills to attack someone that courageously tries to inform others of a hazardous bubble situation as someone that has no idea what he or she was talking about.  Of course, when the bubble eventually does pop, these shills never bother to reminisce about their dozens of erroneous predictions over the past several years, and proceed to continue to fool as many sheep as they can with future declarations of unjustified recovery.

Most importantly, financial shills NEVER discuss the mechanisms by which bubbles in capital markets are created. If they discussed the mechanisms behind the creation of bubbles, then people would realize that Central Banks’ assumption of low and ARTIFICIAL interest rates goad months/years of malinvestment into capital markets. In return, this excess of cash created by Central Banks chases assets and creates enormous price appreciations, that in reality, could never occur under free market conditions. When Central Banks discuss the fear that raising interest rates will end economic prosperity, this is not what is at stake here. As I already explained, Central Banks create massive distortions in prices that are only sustainable by creating more massive distortions in prices. Central Banks fear raising interest rates in these situations because doing so will end the ARTIFICIAL period of massive price distortion it has created. If the public understood this, then they would understand that timing should never factor into the definition of a bubble, though the media seems to give great heed to the timing element whenever a bubble is discussed, as if it is impossible for a bubble to exist if it does not burst one month after a bubble declaration is made. If the conditions I just described exist, a bubble exists. And whether this bubble implodes two days later or a year later does not preclude the FACT that the ramp up in prices in this asset class was:

(1) Artificially created by Keynesian economic principles;

(2) Unsustainable;

(3) Would never exist if free markets, and not Central Banks were setting interest rates; and

(4) Destined to implode.

And when bubbles implode, I cannot agree with the oft-given explanation that massive amounts of wealth are being destroyed during this time. I aver that not wealth, but only massive price distortions, are being destroyed. For example, consider a scenario in which you bought a home for a million dollars. In five years, the value of your home appreciated to $2 million because of a massive real estate bubble created by the Fed Reserve. In the sixth year, the real estate bubble collapsed, and the value of your house dropped precipitously and rapidly to $1.2 million. Housing “experts” will ride the boom-bust explanation of the RE market to inform you that trillions in real estate wealth had just been destroyed. This is not real wealth as these price distortions were never sustainable and were never a function of supply and demand, but a direct result of greed and speculation driven by artificially ludicrous interest rates set by Central Banks.

So let’s look at the current US Treasury Bond bubble and try to understand why many experts claim that no “bubble” exists and that all is well in the US bond market (an irresponsible statement, that in my opinion, should be adequate to forever revoke their journalism license).  In light of the definition of “bubble” that I have provided in this article, any fund manager or investment firm strategist that does not understand that the Treasury bond market is a massive “bubble” should be banned from ever providing clients with advice on the bond market. A stable bond market is as inappropriate a term as possible to describe the current state of affairs of the US government bond market.  As surely as the inappropriate use of the term “strong dollar” proves that the person using this term has no idea that a fiat currency can rise relative to other currencies against which it is measured without ever “strengthening”, the argument against the existence of a Treasury bond bubble today exposes a person for his or lack of understanding about the mechanisms of US Central Bank monetary policies.

Of course, timing the bursting of a bubble correctly is paramount to making money from the side-effects of unsustainable Central Bank monetary policies. However, this is an entirely different issue than whether or not a bubble exists. Many investment strategists are unequivocally claiming today that a bubble in the US Treasury bond market does not exist. A bubble in the US Treasury Bond market undoubtedly exists. A bubble in the US Treasury Bond market undoubtedly exists today. The only question now is how big the sound will be when it eventually pops.

About the author: JS Kim is the founder and managing director of SmartKnowledgeU, a fiercely independent wealth consulting and research company. Since its inception in June, 2007 his Crisis Investment Opportunities newsletter has returned a cumulative yield of 182.38% YTD (as of August 26, 2010).

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