But bond markets do not always behave that way.

When the Treasury was issuing well over a trillion dollars of debt in the financial crisis, I predicted incorrectly that interest rates would rise. They did not. The demand for bonds was so great that these massive auctions that happened every week were many times oversubscribed. Interest rates stayed low, and went lower.

People buy US government bonds for safety. This is not the case with other countries. Greek interest rates did not go down during their crisis; they went up.

I think the hardest thing to do in the capital markets, hands down, is to forecast the direction of interest rates. The bond market makes fools of people—all the time.

So it would be easy for me to sit here and say that government spending will crowd out private spending and that interest rates will go up, because who knows? The bond vigilantes are nowhere to be found. But with China selling, not buying bonds, and who knows what in our future (free college, etc.), it’s hard not to make the argument that over any length of time, interest rates will rise, not fall.

The Endgame

There is a conclusion to this that I won’t spell out for you. Or I could just refer you to Alan Greenspan’s “Gold and Economic Freedom” essay from 1966, the truest thing I have ever read in finance.

We will probably see it play out in Japan before it plays out here. At some point in Japan (where debt-to-GDP is 220%), supply and demand of Japanese government bonds (JGBs) will matter, and interest rates will rise. They won’t have to rise much for it to be checkmate for Japan. Of course, through quantitative easing, the BOJ has pretty much bought the entire bond market, so there really isn’t a bond market.

But at some point it will matter. That day will come.

From 2009 to 2011 (and beyond), I was one of those wild-eyed gold bugs most people make fun of today. The laws of economics are not like the laws of physics. You can break them from time to time. You can break them for years. But not forever. Eventually, they will snap back into place.