Government Bubble

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    Some people claim that after the housing bubble, we have a government bubble. What does this mean? Does it refer to the buying of U.S. treasuries by the Fed. Would such a bubble burst through higher interest rates? BTW when do interest rates on government bonds increase?


    I second these questions! Peter Schiff seems to be one of the biggest promoters of the “government bubble” which I think he also refers to as a bubble in treasuries.


    Interest rates on Treasuries follow market interest rates up and down. There is usually a spread between Treasuries of a given maturity and the same maturity private debt because investors perceive lower default risk on Treasuries. However, Treasuries move up and down with market interest rates. Here is the 3-month Treasury Bill rate:

    So the capital value of Treasuries moves inversely with interest rates, just like the capital value of other assets. If market interest rates rise, then the capital value (i.e., the market price) of Treasuries will fall. One factor that makes market interest rates rise is unanticipated price inflation.So if price inflation picks up and investors haven’t built it into interest rates already, then the prices of existing securities, including Treasuries, will fall.


    Speaking of bubbles, what will the student loan bubble look like when it pops? What would make it pop? Any time frame predicted?


    I just finished Peter Schiff’s “The Real Crash” it predicts that foreign investors and governments will ultimately dump the US bonds and currency holdings, unless much higher interest rates are offered. He wrote that the FED is buying much of the US bonds or rather banks purchase the bonds to deposit as their reserves at the FED. When the FED buys bank loans are there unseen strings attached?

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