Meet the dollar vigilantes-Strong words but destined to fail

Editor: Vlad Rothstein | Tactical Investor

Meet the dollar vigilantes

One way or another – interest rates are going up. The Fed and/or markets will see to that. The dollar is going to be de-valued. The dollar vigilantes will see to that.

First – some history. In the early 1990s, so-called “bond vigilantes” threatened to sell U.S. government bonds in the face of exorbitant spending plans by the Clinton Administration that would have significantly increased the national debt. There were political repercussions.

From late 1993 to late 1994, the ten-year Treasury note climbed from roughly 5% to 8% in a selloff. That led to a Republican takeover of the House of Representatives, the first time in forty-two years. Clinton’s plans were halted because borrowing costs were too high.

America’s Debt Is Rising

Now America’s national debt is over 105% of Gross Domestic Product, much higher than in 1994. With no economic growth to speak of these past eight years, inflation has been subdued.

However – Trump’s planned tax cuts and regulatory reform will spur economic growth, but also fan inflation. A week after he was elected, the ICE U.S. dollar index hit its highest level since 2003. A month after the election, the dollar had strengthened 4.3% versus the Euro, and the recent 25 basis point hike by the Fed, while not much, can only make the dollar more attractive. Despite all of this, though, the rally in the dollar is a mirage. Full Story

One of the inspirations for our name, The Dollar Vigilante, was what used to be called the Bond Vigilantes.

Last seen in full force in the inflationary early 1980s, bond vigilantes were anti-establishment figures who were said to have rebelled. They had decided to keep central banks and governments honest by raising long term interest rates in the open market. They would do so whenever the authorities kept their own interest rates too low, or let budget deficits grow out of control.

It was in 2010 that I overheard the term “bond vigilante” on a radio program once again and laughed for a moment, saying in my own head, Ah, yes, with interest rates at near-zero or negative per cent, Quantitative Easing to infinity and budget deficits in the US stretching the boundaries of belief, where are the bond vigilantes now?

And I thought to myself, I guess the system is so far out of control now that you can’t sell bonds to keep central banks or government under control as they’ll just print up unlimited money to keep buying it.

I then had an epiphany and told myself, “What we need today are dollar vigilantes!”

That’s what started this all…

In a sense, George Soros is a fellow dollar vigilante. An outsider who once tried to break the system… and he did. Full Story