The U.S. Federal Reserve has tamed bond vigilantes. Because prices move inversely to bond yields, historically, active investors reacted to adverse monetary or fiscal policies by dumping bonds that consequently raise yields. Because the FED was the only game in town, US investors had no real place to find safe assets. The policy of quantitative easing worked by depressing long term interest rates. By easing the cost of money, the FED hoped that everyone would seek comity in aggressive commerce.
It never happened.
Today’s bond market exhibits trends that portend weak longterm economic growth. But that’s only half the story. Team Trump’s continued good jobs report coupled to pro-business tax cuts and regulatory relief continue to animate expectations of domestic growth.
Our main threats are fiscal. Entitlements are crowding out constitutional provisions for defense. Even threats of an impending trade war with China can’t seem to rattle the American consumer. China is stuck in appealing to U.S. interests while backing any policy that would damage the American image. Wether it be a U.N. veto against Assad or backing the Kim dynasty in North Korea; Russian and Chinese interests are purely disruptive. To continue getting your voice heard, phone calls returned or threat deterrents believed, you’ve got to credibly threaten emboldened enemies abroad.
Beijing cannot dump dollar denominated assets, its impact would only boost U.S. exports by pushing down the U.S. dollar. China cannot seek another devaluation for it cannot stand another round of capital flight.
The key to winning domestically is fiscal. It means addressing structural shifts in the U.S. economy related to demography, currency parity, employment and capital expenditures.
In nominal terms we have an unrivaled political system that underwrites our status as a reserve currency. We have room to fix what ails us even if their is no political leadership to address an impending fiscal crisis engendered by entitlements.
Reagan fixed it when everyone said it was impossible. The road to confronting an impending fiscal crisis is well trod. Let’s get on with it.