Before we talk about why government bonds are no longer the safe and secure investment, let's talk about how it all started. What in the world are bonds? Why were they considered safe and secure? What has changed? And finally, what does the future hold? 

What In the World Are Bonds - Compressed History (USA Context)

We can't start this discussion by talking about bonds. In fact, we can't start by talking about taxes. We have to begin at the dawn of this modern civilization. This is right at the beginning of the industrial age. 

The electric bulb was invented. And soon enough, the idea of lighting people's houses (with electricity) gradually became a need (not luxury). Rapid growth was happening with transportation too. It wasn't just merchants that were interested in traveling from city to city anymore. 

Many of these things were pioneered by private individuals with private companies. But as they became absolute necessities, governments quickly realized that these private entities wielded so much control over the people. The thought of living without these inventions gradually grew distant. 

And if you study modern history, there were several times private companies faced off against the government. The businesses were operated for profit. But when conditions were unbearable to the people, they always turn to the government to do something about those giant companies (whose products and service they can no longer do without).

The most obvious showdown of this we got was the breakup of Rockefeller's Standard Oil. But it wasn't the first. And it certainly wasn't the last. The point here is that governments now need money to fund amenities due to people's improved living standards. But it wasn't that much of a grind until the next catalyst.

The next catalyst was the wars. Majorly the world wars. And with that begun the introduction of the income tax. The government needed funding to win the wars. Due to advancement in technology, it isn't just horses and rangers that is needed anymore. Now, bombs, fighter planes, etc., needed to be manufactured. And that takes lots of money. 

So, the income tax was introduced as a temporary measure. But after the wars, the taxes never stopped. Now, all of this is in America. Generally, the issue of taxes have been existing for a long time. 

In fact, the whole American fight against the British for independence was due to taxes. They wanted to stop paying taxes to the British. But apparently, a few generations later, they started. And today, the USA is one of the most taxed countries in the world. (I don't think the founding fathers would be pleased). 

But taxes wasn't enough. Yes, you heard that right. After the wars, the taxes didn't stop. It continued. But people's lives were improving. Now the government is responsible for defense, infrastructure (such as roads and bridges), law and order, etc. 

Private businesses figured out doing any of those projects and trying to monetize it later brings a clash, especially when they try to monetize fast. When there is a clash between the people and private businesses, the government has to step in. So, why not be hired by the government to do the necessary?

It was a genius idea. Government started using taxpayers' money to finance necessary infrastructure. But the government quickly ran into another problem. There was so many things to finance and not enough money. 

So, how will government finance everything they want to if there is simply not enough money from taxpayers. An obvious option is to increase taxes. But when the people got taxed so much and any more taxes could lead to the destruction of the government, bonds were introduced. Now, this is when the bankers stepped in. 

What in the World Are Bonds - Enter Bankers

Banking started to grow under the radar. After what happened to businesses like Standard Oil (that was considered an opposition to government), bankers used a much smoother approach. They played close alliance with governments. And that wasn't easy. 

The growth of banking and financial services was gradual. Unlike product companies, their business relies heavily on government policy. And instead of pushing their own agenda, they wait until the government needs a solution before "suggesting" their agenda. 

After a series of bank failures and bank runs, the government wanted a solution to make all of that stop. This was the opportunity they have been waiting for. They came up with the Federal Reserve Bank of America.

Now, the US was not the first country to implement a central bank. But after WW2, the Federal Reserve was solidly on top of the world. Initially, the idea was just to guarantee the safety of banks, but apparently, it was a more detailed setup.

Central banking changed the financial world forever. After WW2, virtually all countries of the world were cornered into central banking under the authority of the Federal Reserve. The US dollar became the global reserve currency.

The final nail in the coffin was given by US President Nixon in 1971. The US dollar was pegged to nothing. And the American government had a central bank that can print money. 

That was when the rogue era of bonds started. 

Previously, bankers gave the government a solution with the creation of bonds. Not enough money from taxpayers? No problem. Let the government issue a kind of promissory note that offers to pay the bearer an amount (plus interest) from the money they will collect from taxpayers in the future.

This was the birthplace of bonds. The government created these things and used them to raise money from the public. From those who had excess money to invest. Now, the public has another option outside stocks. Interestingly, someone who owns a government bond can sell it to another person.

The bankers solved the problem of the government (which is not enough money), and scratched their own itch too. Meanwhile, the taxpayers don't understand what was going on. But the US dollar pegged to nothing made this unhinged. 

What In the World Are Bonds - Clarity

Now, if the US government wants to raise money, they just have to come up with a cause. Then, hustle the Congress and Senate to pass laws or regulations that allocate money to it. New bonds will then be created (by law). Then, the Federal Reserve will print money to buy it. And new money enters the system. The government doesn't “need” investors to buy bonds anymore. But they still need investor activity on bonds to display confidence in the financial system. 

This is what is going on. This is the real reason wars can't stop. War is a good reason to get Congress to allocate money. Once, it passes the House and Senate, it's chilling time!

But chilling time isn't looking promising anymore. Let me explain. 

What Has Changed

Bonds used to be the safest investment. This is because it is the word of the government. They will pay it back from future taxes. And as long as the economy is growing, there is really no cause to worry. 

But today, there is so much bonds in the US that the government has to create more bonds to pay the interest (not the principal) on exisiting bonds.

And the rate at which the economy is growing is not optimistic to anyone. The debt to GDP ratio in America is crazy. And the rest of the world are hinged on the fate of America. 

This was made obvious in 2008. That financial recession was supposed to be in American real estate, but it touched everything. It touched every country in the world. The world is tethered to the US dollar. And the US dollar is tethered to the US financial stability.

Countries like China have now seen the handwriting on the wall and trying to hold on to something else. By the way, China and Japan are the world's largest holders of US bonds. 

And countless other investors, everyday people, millionaires and billionaires, pensioners, etc., have their wealth domiciled in US bonds. What do you think if the US cannot afford to pay anymore? 

Just imagine if the US government forgave itself of those debt obligations and the two largest holders of US debt go along with it? That would be ridiculously devastating. And honestly, if the system is not going to collapse, that is looking more likely. All they have to do is create a fancy accounting term for it and say it is temporary.

With these things, temporary interventions become permanent real quick. Income taxes was temporary. Taking the dollar off the gold standard was temporary. What if the US government temporarily stops servicing its debt “temporarily”?

And this is a real concern because it is just too much now. The US government needs debt to service the interest (not the principal) on its debt. And if you think your country is doing any better, wait till you hear how much they are tethered to US debt. 

What Does the Future Hold?

No one knows. For now, the USA is creating more debt to service the interest on the debts they have already. And they seem comfortable with that. And of course, they are trying to squeeze the taxpayer more. But people are smarter more than ever. Not that they are trying to avoid taxation, but they want to hold the government responsible in the way they can. 

The world has gotten used to money printing. This is way more now based on the events of 2008 and 2020. And that is not sustainable for any economy. Growth was fueled by money printing and that's why the world kept experiencing inflation.

Inflation is like the second taxation by government. The purchasing power of money goes down as more newly printed money enters the system. And this drives an insane wealth gap. 

The richest people are not capitalists anymore. Contrary to what you may think or read. The people with the most money in the world are bankers. And they don't create anything. 

The closer you are to the new money getting printed by the Federal Reserve, the richer you are. That leaves two options for investors who want to thrive in this new level of uncertainty brewing. 

The first option is to get as close as possible to the money printing. Proximity is power. 

The second option is to try to insulate your wealth as much as possible and brace for impact. No matter how insulated you are, you will still be impacted. But you can reduce the severity.

The impact may happen next month. It may happen 25 years from now. No one knows exactly when poop will hit the fan. That depends on too many factors. 

But for now, the strategy of the best economists in the world is to kick the can down the road. And the further they kick it, the bigger it gets.

I'll keep you updated when I see new signs in any direction. 

Play smart.