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Wednesday, October 20

Us Bond Market Needs Terror Attack

Why is the US dollar in freefall against Oil? Why did the US hit a Debt limit?Well, It's over issuing debt that nobody wants to use their US dollars to purchase. Therefore, there's a glut of US dollars in relation to the oil supply.How to get people to buy bonds? Increase the interest rate (the payoff). Sell 1000 dollar bonds for 900 dollars rather than 990 dollars.The purchasers of bonds (banks in Tokyo, Zurich, London) need a reason to buy US debt to finance the war - a terror attack - interest rate hike. The US cannot afford to pay more to borrow more, so the interest rate is a constraint.Therefore, if the US raises interest rates before the election (or in the short run) there will be no Terror attack. If interest rates decline or stay artificially low, inflation occurs, which will devalue the holdings of US dollars and outstanding debt. Nobody want to buy debt in that case, and the cost of war skyrockets.Oil is increasingly expaensive in the US, but not as bad in Canada or the EU.Remember also that low taxes now and high government spending imply high taxes and low spending in the future to repay the debt. A government that does not recognize this is about to default.



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