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Who Shot U.S. Bonds?: A Lesson on 21st Century Risk

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( Bullion Bulls Canada ) -- In my opinion, the mainstream (corporate) media is nothing less than the unofficial accomplice of the banking crime syndicate that is running/ruining our markets and economies. Nowhere is this despicable relationship more apparent than in its deliberate efforts to grossly misinform investors on the critical subject of risk.

I partially dealt with this issue in a previous commentary titled "Volatility Does Not Equal Risk." In that article, I did something that you will never, ever see the mainstream do: I provided an explicit and detailed definition of the term "risk."

I would encourage even those readers who read the original piece to re-read it, as I simply don't have the space to repeat that multi-paragraph definition here, and (as I always stress) the definition of terms is a crucial prerequisite to understanding any concept.

Equally important, that previous piece clearly distinguishes the entirely distinct concepts of "volatility" vs. "risk." In contrast, one of the principle propaganda assignments given to the mainstream media has been to entirely blur the distinction between volatility and risk.

In its simplest form, "risk" (in the realm of investing) refers to two interrelated probabilities: The probability of suffering a loss on the investment, and the potential magnitude of such a loss. Conversely, "volatility" (i.e., what an investment does in between the day one buys and the day one sells it) is totally irrelevant. A simple example will illustrate this principle.

A hypothetical investment that moved straight to zero in a perfectly smooth, linear progression has (literally) zero volatility, while (by definition) represents maximum risk: A 100% loss. As we see, there is no rational connection or logical relationship between volatility and risk -- they are entirely independent concepts. For convenience (and future use), let's label this hypothetical investment "bonds".

Critics will argue that I'm being unfair and discriminatory in singling out the bond market with such a label. However, as readers will see shortly, choosing to be a 21st century bond-holder is nothing less than one of the most foolish bets in the history of markets.

To illustrate this obvious point, it is necessary to provide some historical context. Again, this is something in which the mainstream media never, ever engages.

One hundred years ago (roughly at the time the Federal Reserve was created), Western economies were strong and healthy, and their sovereign governments were all totally solvent. Thus, when those governments borrowed money (i.e., "issued bonds"), being a holder of that debt was a very safe investment.

In addition, the "inflation rate" (i.e., the speed with which our currency is being destroyed by money-printing) was very low at that time, meaning that bond-holders were able to make a real profit on the interest being paid on their bonds. It was a smart time to be a lender.