America’s finances are deteriorating. The Federal debt has increased by more than 50% over the past three years. New liabilities in 2011 totaled $1.3 trillion. And there is no prospect of a quick fix that would bring this snowballing debt under control. As a result, rating agencies have warned that the U.S. credit rating is at risk of a downgrade.
Nonetheless, U.S. Government bonds have been in a major bull market – some analysts are even calling it a bond bubble. Indeed, just as easy money produced a boom in technology stocks in the late 1990s and a housing bubble six or seven years later, a similar boom-and-bust cycle now appears to be under way for government bonds. Prices of long-term Treasuries are up as much as 30% since early this year. Why have such big gains occurred at a time when the finances of the U.S. government are getting so much worse?
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