Submitted by Bill Bonner via Bonner & Partners,

Addicted to Debt

Yesterday, U.S. stocks continued their climb, with a 26-point step-up to yet another all-time high for the Dow. Treasurys, meanwhile, continued to sell off. The yield on the 10-year T-note – which moves in the opposite direction to prices – rose 8 basis points to 2.2%. This follows last week’s turbulent action in the bond market, which saw Treasury yields hit a six-month high.



We have our eye on the U.S. bond market. Prices have been going up – and yields have been going down – for 32 years. And as prices have risen to the highest levels ever recorded, so has the amount of debt.



It is as though the world couldn’t get enough of the stuff. It got to be like heroin: The more debt the world took on, the more it wanted… and the bigger the dose it needed to get a buzz on.



But after the 2008 credit crisis, it is as though the major developed economies are immune to the stuff.



The Fed, the Bank of England, the Bank of Japan, and now the European Central Bank, have been buying it on the street corners. In the largest quantities ever.



But nothing much happens. At least, not in the real economy.



Sooner or later (a phrase we can’t seem to avoid), the entire economy is bound to get the shakes.



But we don’t know when sooner, or later, will come.



If it comes now, it will be a source of great satisfaction here at the Diary. “Finally,” we will say to no one in particular. “We knew it couldn’t last!”



A Healthy End to the Bond Bull?

There is an alternative explanation for falling bond prices. Bond prices should fall, and yields should rise, when economic growth picks up. As economic growth rates speed up, wages tend to rise… and people open up their wallets. Demand starts to outstrip the supply of goods and services. This drives up consumer prices. And interest rates start to rise. As rates go up, that raises bond yields and drives down bond prices.



This would be a healthy end to the epic bull market in bonds. A robust economy would allow central banks to raise rates and still allow debts to be paid down.



But that is not what is happening. And it won’t happen. Junkies rarely go out and get a job... and gradually “taper off” their habit. No. They have to crash... hit bottom... and sink into such misery that they have no choice but to go cold turkey.



Now, major central banks are committed to QE and ZIRP forever. They have created an economy that is addicted to EZ money. It will have to be smashed to smithereens before the feds change their policies.



An Impotent Fed

As colleague Chris Hunter reported yesterday to paid-up Bonner & Partners subscribers in The B&P Briefing:

In April, industrial production fell for the fifth straight month. And in May, consumer sentiment fell to a seven-month low. And now GDP growth is flat-lining… Following the 0.1% annualized growth rate in the first quarter, the Atlanta Fed’s “real-time” GDPNow forecasting model is predicting 0.7% growth for the second quarter. The U.S. economy may not be in an official recession – often measured by two back-to-back quarters of negative GDP growth – but it’s not far off…

Oh, but what about the big boost the economy was supposed to get from lower oil prices? What happened to that? Didn’t happen. Americans didn’t spend their gasoline savings; they saved them instead.



After adjusting for inflation, the median household income is down 10% since 2000. So it’s no wonder most Americans aren’t feeling very expansive.



And now, the price of oil is going back up. After hitting a low of $44 in March, today a barrel of U.S. crude oil sells for just under $59.



That leaves the Fed’s “stimulus” just as impotent as it has been for the last six years.



Interest rates remain ultra low. But the real economy remains as flat and dull as a joint session of Congress.



And the markets shudder...