Guest Post: A Termite-Riddled House: Treasury Bonds

Submitted by Gonzalo Lira

A Termite-Riddled House: Treasury Bonds

When termites eat your house, you don’t notice a thing. You don’t hear a thing, you don’t see a thing—you’re house stands there, silent and staid, while you and your family happily go about your days, without a care in the world—
 
—until your house crashes on top of your head.
 
Right now, we are at a stage where Treasury bonds are as weakened as a termite-riddled house. They look fine: Nice glossy coat of paint, pretty shingles, bright clear windows, sturdy-looking plankings on the open-aired porch.
 
But Treasuries are well on their way to a complete collapse. Why? Because of the way they have been mishandled and mistreated by the Federal Reserve Board, and the U.S. Treasury. Whether by incompetence or by design, U.S. Treasury bonds have become the New & Improved Toxic Asset. The question is no longer if they will collapse—it’s when.
 
Let me explain why.

 
First of all, what exactly were Toxic Assets—does anybody remember? I do: They were bonds made out of bundles of dodgy real estate deals. They didn’t seem dodgy at the time. What’s that old expression, “safe as houses”? At the time they were made, those bonds seemed safe as houses. Now we call them “Toxic Assets”—because now, we know better. But back then—before they collapsed—they were called “Mortgage Backed Securites”, or “Commercial Mortgage Backed Securites”, or else “Collateralized Debt Obligations”.
 
Essentially, all these sophisticated-sounding terms were to emphasize that the bonds were secured loans—the houses and commercial real estate were supposed to back up these debts. If the payments failed, the properties could be confiscated and auctioned off. So the bonds would be repaid. So the bonds were safe—safe as houses. Or so it was thought.
 
Of course, we saw how that show ended.
 
For those who missed those exciting episodes, a recap: Sub-prime mortgages began to default first, as the economy slowed down. This in theory should not have affected Mortgage Backed Securities based on those sub-prime loans. But the real estate which had been purchased with sub-primes weren’t worth what they had been purchased for—they were worth much less. So the bonds backed by the sub-prime loans began to explode.
 
Soon after the sub-primes, alt-A loans and prime loans, and finally commercial real estate—their prices all began to collapse, and so the bonds manufactured out of these loans also began to explode.
 
All those banks holding all those “safe as houses” MBS’s and CMBS’s and assorted CDO’s all of a sudden found that those bits of paper were not safe as houses. They were so un-safe in fact, that the banks damned near went broke—they would have, too, if it hadn’t been for the Fed and the Treasury, who bailed them out: The Treasury with TARP (cash), the Fed with “liquidity windows” (more cash).
 
But even that didn’t work—so we got “extend & pretend”, whereby the accounting rules were suspended in order to create the illusion of solvency among the TBTF (Too Big To Fail) banks. (My discussion of that is here.) That’s how bad the Toxic Assets were.
 
The reason these debts became “toxic” was that it became obvious in 2007–’08 that those bonds would never be repaid. They couldn’t be repaid: The properties which backstopped the value of the bonds had fallen irretrievably in price—or more properly, the real estate bubble which had goosed the valuation of those properties to absurd, Tulipmania levels had finally burst.
 
So even if the real estate was foreclosed and sold at auction, the holders of these now-Toxic Assets would only receive a fraction of the nominal price of the bonds. What had once been worth 100 was now worth 80, 60, 40, and in some cases, Cop Snacks.
 
I’ve never liked the term “asset”, when discussing bonds. They’re not “assets”—they’re debt. They’re a loan. And a loan only has value so long as it’s being repaid. If the debtor defaults—or tries to pay back the loan with something of less valuable than what was originally lent out—then this “asset” becomes a loss.
 
So to prevent these catastrophic losses, Backstop Benny—Ben Bernanke, Chairman of the Federal Reserve—essentially did the ol’ switcheroo on the Toxic Assets: In order to save the banks whose balance sheets depended so heavily on these now-dead turds, the Fed purchased the Toxic Assets at their nominal price. Then the banks—the so-called Too Big To Fail banks—took that cash and purchased U.S. Treasury bonds.
 
I have yet to find a better chart than this one here, that describes so succinctly how the Fed expanded its balance sheet to bail out the banks. (Hat tip Ashley Huston at WSJ.com: Alex Lowe designed the chart, based on reporting by Phil Izzo—extra-special kudos to them both.)
 
Meanwhile, the U.S. Treasury, in its attempts to finance bailouts, stimulus, health care, Social Security, and endless pointless wars, went into further debt—to the tune of $1.4 trillion dollars, roughly 10% of U.S. gross domestic product, for both 2009 and 2010.
 
Or to put it another way—a very scary way—in both 2009 and what’s projected for 2010, the Federal government has issued $1 of Treasury debt for every $1 of tax receipts. Between the actual budget deficit, plus Social Security liabilities, the U.S. Federal government is in the hole for about $13.5 trillion—or roughly 100% of GDP: That is what the Federal government owes. And if 2011 continues to be the same (as is almost certainly to be the case), then another $1.5 trillion or so (give or take a couple of hundred billion dollars) will be added to that tab.
 
All told, the United States will have a fiscal-debt-to-GDP ratio of 100% this year, and 110% next year—if not higher, depending on the tax receipts in 2011. A lot of wishful thinking is going on for 2012, but the way the numbers are playing out, another trillion dollars’ worth of debt is very likely in the offing—which would put the total fiscal-debt-to-GDP ration to 120%.
 
(Funny: That number—120%—reminds me of something . . . what was it? Oh! Right! Greece! This past spring, Europe had a medium-sized meltdown when Greece—roughly 2% of the EU as measured by GDP—revealed it was running a 120% fiscal-debt-to-GDP ratio. The Europeans and the IMF finally caved and bailed out Greece. Ah, the Greeks! But I digress, sorry—after all, the United States is not Greece. The United States has absolutely nothing in common with Greece—not at all! First of all, buddy, and for your freakin’ information, the United States is roughly 45 times the size of Greece, and . . . oh . . . wait a sec . . . )
 
Let 2012 take care of 2012—right now, September 2010, we have 100% fiscal-debt-to-GDP, in an environment of falling tax receipts and more strains on the various social safety nets. Right now, we have debt matching tax receipts dollar-for dollar. Right now, the interest on the outstanding debt, for 2010 according to government projections, is $375 billion—in other words, 25¢ of every dollar of tax receipts goes to pay interest. Right now, with recent economic numbers, the likelihood of a turn-around are unlikely—so because of the inevitable political pressure come the winter, more “stimulus” is likely in the offing.
 
Meaning more Treasury bonds, floating out into the market.
 
But who is buying all this new Federal government debt? Why, that’s very simple: The Federal Reserve.
 
The reason that the Federal government could go into the aforementioned massive spending spree was precisely because of the Federal Reserve’s bail-out: The Fed created money out of thin air (as is their power), in order to buy Toxic Assets from the Too Big To Fail banks. The banks, in turn, took this cash and bought Treasuries—which financed the Federal government’s deficit.
 
This is what I call Stealth Monetization: Unlike in some banana republics, which dispense with the niceties and simply turn on the printing presses whenever they need more money to spend, the U.S. Federal government and the U.S. Federal Reserve got creative, and used the TBTF banks to essentially hide the monetization of the fiscal debt in plain sight.
 
Many people complain that the bail-out money the TBTF banks received was never lent out—oh, but they’re wrong: The money was lent out. It was lent out to the Federal government. 
 
After all, what did the TBTF banks do, with all that cash they got from the Federal Reserve for unloading all those Toxic Assets? Why, they went and bought themselves boatloads of Treasury bonds.
 
It’s been the Federal government that has been “mopping up excess liquidity”—mopping it up and spending it on stimulus that doesn’t work, wars that can’t be won, dodgy dinosaur-projects that aren’t going to do squat to improve people’s health. That’s why the TBTF haven’t been lending money to businesses and “getting the economy back on track”—they’ve been too busy lending to the Federal government.
 
Clever people call Treasuries “assets”—but like I’ve said, I’m just stupid: I just call it debt. When I look at all this Federal government debt—unprecedented amounts of fiscal debt—I can’t help but notice that it is all unsecured—because it is unsecured. At least Toxic Assets had something backing them up, even if they were worth much less than advertised. Treasury bonds, on the other hand, are based only—solely—on the “full faith and credit” of the United States Federal government.
 
Y’Know: The one in Washington. The same U.S. Federal government that is running 100% debt-to-GDP ratios this year, 110% next year, and likely 120% the year after that—if not more.
 
Mm-hmm . . .
 
What happens when a debtor becomes so over-extended that he cannot possibly pay back his loans? Naturally: They default—or they try to wriggle their way out of the debt, by giving you something less valuable than what you are owed.
 
It is not controversial to say—and indeed, it is widely discussed—that the U.S. Treasury has only two options: Default on Treasury bonds, or debase the currency by way of inflation, so that the nominal value of Treasuries is stable, but their real value decays by inflationary attrition.
 
Default is politically unacceptable—apart from pissing off foreign Treasury holders, it would cause havoc in America if the Federal government woke up one day, clapped its hands like a schoolmarm, and announced to the world, “Okay Treasury holders! Time for a haircut!” Default ain’t gonna happen.
 
So that leaves “controlled” or “induced” inflation—the only method for the Federal government to get out from underneath this debt.
 
Backstop Benny is doing his damnedest to bring about precisely this scenario: He is trying to print the economy out of this Global Depression. With QE, the recently anounced QE-lite, and the likely-to-be-coming-soon QE2, Bernanke is going to pump more and more money into the system—“Print ’til you puke!!” seems to be his motto.
 
Bernanke is being egged on by everyone, from Paul Krugman to the Republicans to Larry Summers and Tim Geitner—everybody wants him to print more: Either because they want more fiscal spending (Krugman, et al.), or because they want asset prices to be pumped up again to unnatural highs (Wall Street and their Washington lackeys).
 
And Benny is obliging. The way Bernanke is doing this printing is by buying Treasuries. The Federal Reserve buys Treasuries and squirts some more dollars into the system—just as he propped up the prices of Toxic Assets by buying them up, when there was the need.
 
Yields of Treasuries are at absurd lows, there is a veritable T-bond rally every single day that equities drop even just a bit—in other words, Treasuries are in a bubble. Why? Because the market knows that Bernanke and the Fed will backstop Treasuries—
 
—backstop them right off the cliff.
 
The more the Fed prints, the more it encourages the Federal government to “stimulate”—id est, go further into debt in an attempt to grow the economy out of this Depression by way of fiscal spending. But as I said, right now, 25¢ of every dollar of tax receipts goes to pay interest on the fiscal debt. How long before 50¢ of every dollar goes to pay interest? 100¢ of every dollar? Is that when the fiscal debt finally becomes insurmountable?
 
Or will there be a Moment of Clarity in the markets? Will there come a day when the bond markets collectively realize that Treasuries will never ever be repaid—cannot be repaid? And when that day comes, when that Moment of Clarity falls on the markets, will it spark a panic?
 
In two previous posts, I essentially said “yes”: “Yes” to a collective Moment of Clarity, “yes” to a panic in Treasuries. I further argued that such a panic would lead—inexorably—to a flight to safety in actual, physical commodities, which would then result in a massive hyperinflation that would kill the dollar dead. Part I is here, Part II is here.
 
What is most important is, I do not know when such a Moment of Clarity will occur—but I have no doubt that it will occur. Inevitably, unavoidably: Treasury bonds are bound to collapse, triggering the sequence of events that I have described.
 
Plenty of people disagree with me. Actually, most people disagree with me.
 
Weirdly, plenty of people told me in no uncertain terms that, not only would there never be a panic in Treasuries—these people claimed that there couldn’t be such a panic. A couple of these people claimed (I swear to God) that it was systemically impossible for there to be a panic in Treasuries—“Because the government can just print its way out of a panic!”
 
Uh-huh. So no hyperinflation after a Treasury bond collapse, ’cause the government can—y’know—print all the money needed to shore up Treasuries and avoid hyperinflation. Okay.
 
The people who defended this insane argument are under the spell of MMT—Modern Monetary Theory. It’s currently the most fashionable dismissal of the importance of Treasury over-extension. People in this camp effectively say, “Treasury debt doesn’t matter!”, and explain how government debt is basically a numbers game.
 
According to this theory—which is just a modern-day retelling of the chartalist myth—all money is basically government chits, which are moved around within a game-board, said game-board being owned and controlled by the government. According to MMT, governments which issue their own currency may go into as much debt as they wish, certain and confident that nothing bad will happen because the government controls the currency. In other words, macroeconomically speaking, MMT claims that it’s a government’s world—we only live in it.
 
My objection to this, in snooty eccy terminology: I think that these MMT macro-economic theorists are purveyors of an interesting new meta-neo-Keynesianist world-view. It seems they are employing a closed-system, zero-sum proto-monetarist model. This model—though compelling—does present certain structural issues and disappointing limitations, vis-à-vis the uses of a reserve currency, which might make the theory less than apropos, were it to face a real-world scenario. Or not.
 
My objection to this, in just plain ol’ regular words? I think this MMT theory is full of shit, propagated by fucking idiots.
 
MMT is just a clever way to justify insurmountable levels of fiscal debt—it’s a rationalization of this insurmountable debt, using a veneer of economic terminology to cloak the purveyors’ political ideology of spend!-spend!-spend!-your way out of a recession or depression: In other words, Keynesianism-redux. Keynesianism on steroids—Keynesianism gone fucking in-sane.
 
(I’m going to write a detailed take-down of these MMT fools in a couple of weeks. But for now, let me limit myself to just a couple of paragraphs.)
 
These irresponsible peddlers of MMT claptrap—because that’s what they are, irresponsible buffoons for peddling such irresponsible, arrogant bullshit—simply do not understand what money is: It is a medium of exchange. The government—which controls this medium of exchange, especially in a fiat currency—is supposed to be the honest broker between economic participants who use this medium of exchange for their transactions.
 
A government issues the medium (the currency), and the government can debase it at will, for whatever reasons it deems worthy. But if the medium—the currency—is debased to a tipping point, then the economic participants will no longer believe in the currency’s worth. They will therefore run from the currency, and turn elsewhere to fulfill the need that money satisfies, which is: To store wealth, and to act as a medium of exchange.
 
If the dollar and Treasury bonds are pushed hard enough—that is, debased hard enough—there will come a point where people will lose trust in them both, and not want them. It’s one thing if a currency organically inflates by way of ordinary demand on consumables and expansion of credit—that’s just normal fiat currency wear-and-tear. It’s quite another if economic parties realize that a government is deliberately trying to debase the currency, in order to get out from under insurmountable debt.
 
If people no longer trust dollars as a medium of exchange and Treasuries as stores of value, where will they go? They will leave both and go to something else—commodities, as I have argued. And when that day comes, people will do anything to get out of the dollar and Treasuries, and into something that is stable in terms of value storage and medium of exchange.
 
MMT doesn’t see this—it just sees spread-sheets and board-games. This story here, which giddily, girlishly describes Federal Reserve drones “printing money”—and how wonderful and magical that process is—is pretty indicative of the fundamental detachment from reality of this world-view.
 
It’s why MMT fails at describing both reality, and predicting the future. It’s why—among other reasons, which I will discuss more fully in another post—MMT is a big ol’ steaming crock of shit.
 
MMT is one theory as to why nothing bad will happen to Treasuries.
 
The other theory—much more sensible, and backed up with empirical evidence—is what I’d call the Japan Is Us theory of Treasury bond stability. It’s the only truly serious challenge to the argument of Treasury bond collapse which I am arguing. Therefore, it’s a challenge that must be met.
 
On the blogosphere, Michael “Mish” Shedlock is probably the smartest proponent of the Japan Is Us theory.
 
I have a lot of respect for Mish—he was one of the very few serious commentators who argued that the U.S. economy was going to experience deflation. He argued that position literally years before it caught on. People now—in 3Q of 2010—are wising up to deflation. Because of Mish’s insights, I was on to deflation as of 3Q of 2008—and was fortunately able to plan accordingly.
 
Mish also thinks I’m full of it, for claiming that there’ll be a Treasury bond collapse, commodity spike and then hyperinflation.
 
His rationale is, we are experiencing deflation (which I agree). This deflation has been brought about by destruction of credit (check again), brought by the bursting of the housing bubble and the concomitant reduction in mortgages and loans (check once again).
 
Mish further argues that, like Japan, the U.S. Federal government will spend-spend-spend on all sort of needless projects, but that the deflation is much stronger. Therefore, no matter how much the U.S. spends, there is no way to escape from a Japan-style Lost Decade (or two) of stagnant growth and systemic deflation.
 
This is where we part company.
 
Mish is convinced that through these deflationary years/decades, Treasuries will continue to be the only safe store of value. From a recent post, here’s a representative quote:

I do think corporate bonds, especially most junk is playing for the greater fool. regards to treasuries, there is going to be an exit problem for sure, but that could be years away. In Japan, yields stayed low for a decade. Why can't it happen here?

Yields certainly might stay low for an extended period. Whether or not they do remains to be seen.  

(The underlining is mine.)
 
Mish thinks that there’ll never be a Moment of Clarity, regarding Treasuries. He admits that there might be an “exit problem” in Treasuries, but vaguely posits that that might be “years away”. In the meantime, he thinks that Treasury yields will remain low, prices high (or go even higher), as companies and banks basically “keep money under the mattresses”.
 
Mish has a good case in arguing for the Japan Is Us theory—but he is wrong, on two fronts.
 
First, Mish doesn’t realize that Federal Governments’s deficit spending is rapidly approaching its limit. Because unlike Japan in 1990, when its deflationary death-spiral began, the U.S. Federal government started this depression already with a massive deficit. The eight years of Bush 43, to be precise, were all borrow-and-spend years: In those eight years, the fiscal deficit had already goosed the economy.
 
That’s why the massive stimuls Obama implemented hasn’t really helped—the economy is already hung-over from the Bush stimulus years.
 
Besides—and so obvious that it shouldn’t even be up for debate—yearly fiscal deficits of 10% of GDP per year are simply unsustainable. I don’t care what argument you make, deficits of this ever-increasing size will lead to a collapse in the economy. Certainly a blow-up in Treasuries—the instrument of this deficit—long before.
 
Mish further fails to realize that the Federal Reserve has abandoned both of its mandates—to fight inflation and to maintain full employment—in favor of its new mantra: Maintaining aggregate asset price levels. Whatever it takes. This means essentially inflating asset price levels back to pre-Depression levels.
 
Everything the Fed has been doing since September 2008 has been in the service of this goal. The MBS buys, the alphabet-soup of liquidity windows, QE, now QE-lite, QE2 soon to come—the Fed is hell-bent on maintaining the bubble it created between 1987 and 2007.
 
Since September 2008, the way the Fed achieved this goal was by effectively nationalizing private debt, and turning it into public debt—one look at the Fed balance sheet is enough to convince any skeptic. This means that all the bad debt accumulated during the last two-and-a-half decades have been effectively turned into Treasuries.
 
So Treasuries are getting squeezed and pulled two ways: By the U.S. Federal government, and by the U.S. Federal Reserve. Because of the massive fiscal debt of the Federal government, Treasury bonds will not be repaid, at least not in real terms. And because of the Federal Reserve’s constant goosing of their prices in order to both maintain low interest rates and prop up asset prices, Treasury bond prices have left planet earth altogether, and are in the realm of Bubble-land.
 
In a couple of private e-mails, Mish objected to—and dismissed—my Treasury-run/commodity-moonshot/hyperinflation scenario altogether. According to him, I was arguing for a Shazaam! moment: When all of a sudden—for no reason whatsoever—people would collectively panic and—Shazaam!—they would exit Treasuries en masse.
 
Mish is actually right—that’s what I’m saying. I pompously call it a “Moment of Clarity”, Mish more cuttingly calls it a Shazaam! moment.
 
But that is, in essence, what I am arguing: Because in a termite-riddled house, no one can predict when the house will collapse—but we all know deep in our bones that it will collapse. So the second you hear a creak in the plankings, what do you do? You run for the exits.
 
I have no idea when that Shazaam moment will happen: Tomorrow, next month, next year. But it will occur—because everybody knows that Treasury debt cannot be repaid. So it’s not a question of if—the damage has been done, and is irreparable. It’s now just a question of when.
 
I hope I have explained why.

Comments

[i.knoknot]

i wonder when cat food will replace steaks in the CPI 'basket of goods' calculation

[RockyRacoon]

A good notion there.  In case your point is missed by some, here it is in a nutshell:

http://www.quickmba.com/econ/macro/cpi/

[thermroc]

Yeah, I've started seeing them too.

"The problem with xxxx is that they don't understand Modern Monetary Theory".

So I went and researched Modern Monetary Theory.

Saying it's full of shit, propagated by fucking idiots, is generous.

[StychoKiller]

As an Electronics Engineer, I was taught about a phenomenon called thermal runaway.  A traditional Bipolar-Junction Transistor will heat up as collector current runs through it (thermondynamic effect), which will lower the internal resistance opposing the current.  As this internal resistance goes lower, the current flow will increase, which will heat up the transistor even more.  This effect will continue until the transistor destroys itself, unless the collector current is limited via external components.  Draw your own conclusions.

[Gonzalo Lira]

Had to read that twice (okay, three times) to get it fully—but once I did, it's actually quite clever. 

GL

[RockyRacoon]

Think of microphone/speaker feedback looping.  Something's gotta blow.

[Hephasteus]

"Saying it's full of shit, propagated by fucking idiots, is generous."

You can't propagate shit with anything other than idiots. Smart people won't do it so you have to overwhelm them with energetic persistant idiots.

[i.knoknot]

and dam, they *are* persistent.

also, sometimes smart people go along with the idiots' shit, because the idiots have guns...

i'm sure there are some sharp contemporary iranians that are really wishing their current leadership... wasn't. but they know better than to take *that* one on head-on.

(pick your dictator of choice)

[Hephasteus]

Iranians have full understanding of the world. They aren't the problem. They know governments are entirely seperate entities stirring up crap between each other trying to drag their sheep along with them. So yes they don't pick at thier leaders like a scab. They just ignore them as much as possible. If laws pass they don't want to do they spend every effort trying to get around them.

[i.knoknot]

yes.

oddly, your point seems to resonate with me as an amerikan... don't have to go to some remote dictatorship to feel like your leaders have no idea what your interests and values are.

welcome to amerikiran? the beginnings of the new global village...

another thing occurred to me re: your point:

at what point does it become practical to actually take on the so-called leadership directly, rather than skirt their continued lunacy...

[Wilderman]

It will take much longer than most anticipate because the dollar is the world's reserve currency, but when it goes (and it must, as there are so many bagholders worldwide) it will be spectacular.  Really sucks that the dollar is the only locally accepted currency where I live, as we will experience the greatest negative effects.  Trying to plan around this, but the timing is difficult...

Dandy article by the way, Gonzalo, and I have also much enjoyed and forwarded your previous posts on this subject.  Nice combination of economic understanding and realspeak, please keep it up!

[Gonzalo Lira]

Thank you kindly!

GL

[Calmyourself]

I forgot to thank you for your articles.  They are very clearly written in a style that is informative and entertaining.  I look forward to reading your perspectives.

Thank you

[tentimestwenty]

A second thank you. Best articles I've read on ZH. Tend to agree with the content, but even otherwise, very well written.

[Gonzalo Lira]

To Ice-man (otherwise known as calmyourself) and to 200 (otherwise known as tentimestwenty, I can TO do math!) thank you very much for your kind words. 

Preview: On Friday, I'm doing the prosecution's case against Alan Greenspan. Hope you enjoy it!

GL

[Nikki]

I am truly looking forward to that.

Spare no punches..

[NorthenSoul]

The author does not examine what would happen if the Fed started to slowly and progressively raise interest rates.

[Wilderman]

On a scale of one to ten, what do you think the chances of that happening in the next year are?

My guess is less than one with the current puppet show. 

[drwells]

The market will do it for them. At that point maybe they will follow it in a last, desperate attempt to keep the lid on. Letting gumnut borrowing costs increase is suicide, but the Shazaam moment is worse.

[i.knoknot]

let me take a shot at this one:

right now the FED is ZIRPing. they are doing everything they can to get money to start moving. it won't. right or wrong, there's no trust/confidence in them or their projected "tomorrow".

even slowly raise rates and ... it's harder to get money... and money moves... less?

i would gander the real risk cost of an average house loan at 8%+ and a small biz loan at 10%+ - just guesses - as in, how much would i charge if it were my money being loaned?

4% my butt.

yet rates are 4% - but you can't get a loan... but the rates are 4% - but you can't ...

not my specialty, but i don't see it doing anything but spooking people into inflation fears/responses.

[Wilderman]

From what I've seen, if you are nominally credit-worthy (can demonstrate income, have reasonable plans for use of loan, etc...) credit money is available. 

I think the larger problem is there is very low demand for additional debt in this debt-ridden US society.  The sheep are reacting as planned, paying off debt at the worst possible time in the face of seemingly certain inflation.  If I was a better trader, I'd be borrowing to the hilt right now with historically low interest rates.  As it is, I'm so crippled by the ongoing asset deflation that I can't make myself borrow for asset investment, hell, I can't even spend cash for it yet.  But that time will come shortly, I believe, and 5% service on debt will look so very attractive. 

One contrarian's view...

[Roger Knights]

"The author does not examine what would happen if the Fed started to slowly and progressively raise interest rates."

Banks, no longer able to extend and pretend with free money, would strt to topple, as the Fed realizes. (Shoring up the banks is a major rationale for low interest rates.)

[Escapeclaws]

"Or will there be a Moment of Clarity in the markets? Will there come a day when the bond markets collectively realize that Treasuries will never ever be repaid—cannot be repaid? And when that day comes, when that Moment of Clarity falls on the markets, will it spark a panic?"

Antal Fekete has a very nice analysis of this using elementary mathematics, which solidifies what Gonzo Lira is saying here. See

http://www.professorfekete.com/articles%5CAEFGrowthAndDebt.pdf

Fekete starts off by saying, "Perpetual debt is more than toxic. It behaves like nuclear fuel: once the threshold is reached
and exceeded, chain reaction sets in and the monetary system explodes. To understand the
dynamics, we need to refer to the liquidation value of perpetual debt."

[palmereldritch]

Or as the Farm Film Report would say, "May the Good Lord take a likin' to ya ..."

http://www.youtube.com/watch?v=_dfoVqhQVyQ

[fearsomepirate]

Half the reason I read ZH is commenters like you.  Thanks.

[zaknick]

Marc Faber (as Taleb and Schiff) certainly endorses Mr Lira's view and he's no "wild-eyed, conspiracy buff". He also recommended gold.

[tentimestwenty]

I'm on board with all the USA is toast arguments, but playing devil's advocate, what is stopping the likelyhood of everyone just resetting their debts to zero and starting from scratch on the bet that nobody wants the US to stop buying or get angry enough to start invading? It's like taking away a spoiled kid's supply of sugar. If he's twice the size of you, do you really want to deal with the anger?

[i.knoknot]

it would probably give the world banking community the excuse they want to migrate the reserve currency to SDRs much sooner than Ben/Timmy/Lloyd want to surrender it...

otherwise it makes sense, and countries have done it and done well post-default. some have even done it multiple times  and still engage in world trade. steal a zillion, go to white-collar jail for a few years... no biggy.

[RockyRacoon]

Don't look now but the USPS has its foot in the door.  International Priority Mail Insurance rates are now converted to SDRs.  Migration has begun.

http://pe.usps.com/text/imm/immc3_007.htm#ep332706

Accepting Clerk’s Responsibility

The accepting clerk must do the following:

1. Indicate on PS Form 2976-A the amount for which the parcel is insured. Write the amount in U.S. dollars in ink in the “Insured Amount (U.S.) block.”
2. Convert the U.S. dollar amount to the special drawing right (SDR) value and enter it in the SDR value block. For example:

INSURED VALUE
$100.00 (U.S.)
65.76 SDR

[RockyRacoon]

You imply that the kid's sugar is intentionally removed.  That may not be the case.  If the sugar simply disappears -- now that's a different matter.   The house gets trashed, the cat skinned, and the mailman molested.  That's how that turns out.

[DonutBoy]

That's a great article and a great chart.  I think a key reason we're not Japan has been made by Vitaliy Katsenelson who's posted about JGB's on ZH. 

http://www.zerohedge.com/article/japan-land-rising-debt-0

The Japanese people with their high savings rate have bought their government's debt to the exclusion of everything else.  The Japanese are tribal, they would have no one else's debt.  Thus 200% fiscal debt to GDP at zero or negative real interest rates is possible because of the captive purchasers.

Even if US citizens are forced into buying government debt, and they may be, they don't have the savings rate to allow for the same growth in fiscal debt.  That is why we're not Japan, we have no captive treasury investors.  Thus - as posted at ZH today as well, the Fed will buy other assets besides real-estate.  They must induce inflation.

The closest thing we do have to captive treasury investors, oddly enough, are Japan and China.  They are trapped. I think the moment of clarity will occur, but not here.  The moment of clarity will occur when one decides that they cannot simultaneously prop-up the market for US debt and lighten their exposure - and they must take their medicine.

I thought this may have happened in June with the funny story about two Japanese men stopped in Italy with 134 billion worth of US "bearer bonds" in a suitcase.

http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=a62_boqkurbI

That can only have been US debt held by the Japanese government.  There's no private company with 134 billion in treasuries.  I think some of our betters made that case go quietly into the night because it foreshadows a disaster - a US sovereign debt crisis.

Full disclosure - Long TBT (Ultrahort treasury).  Sold all equities in August.  Buying gold for physical delivery.  If you are using the GLD ETF I would read the prospectus - that gold can be loaned.  If I could short JGB's I would - but I don't know how.

[HedgeYourself]

That can only have been US debt held by the Japanese government

Or, maybe it was just paper with even lesser value than present USD notes - http://www.reuters.com/article/idUSN1944623120090619 ?

[DonutBoy]

Thanks for that.  It may be that they were forgeries, but it seems odd.  Who are they going to sell forged 500 million dollar bearer bonds to?  Who is in the market for bonds of that size and yet is so unsophisticated they would accept a piece of paper they could not authenticate?  If I were a forger, I would expect more success forging the $100 bills.

[delivered]

Welcome to the ultimate irony or should I say insult. For a company to be able to borrow, it must have sound collateral (to pledge), positive cash flow (to repay the debt), a strong balance sheet, quality management, secondary repayment sources, and a well developed business plan. And if you have all of these, then, maybe then you can obtain credit from a bank. Now let's apply these to UST's. No collateral is pledged, the government has been running deficits (i.e., negative cash flow) for decades, has no balance sheet to speak off, lacks any real management (speaks for itself), has no plan, and has a secondary repayment source of the Fed (simply printing USD's to pay off debt). Yet the banks continue to gobble up USTs with no end in sight. I believe this is also where Greece's government parked so much crap before their crisis. In the banks.

Also, a couple of other quick comments. USDs are also known as FRNs or federal reserve notes. A note is a debt instrument and assumes value is available on the other side of the balance sheet to support the FRN value. And what's on the Fed's balance sheet? Tons of toxic MBSs, USTs, etc. which we all know have no readily available markets. Can you imagine what would happen if the Fed attempted to dump these "assets".  Just apply basic business economics/finance 101 as when your assets are impaired and negative cash flows become the norm, the other side of the balance sheet will also become impaired. Translation, FRNs will lose value.

As for the arguement on Japan, one thing to remember is that I believe 90% of their debt is held domestically so having to access global capital is not as critical. In a way, the Japanese seem to have embraced a defacto tax in that the country continues to purchase government debt (almost a given) in exchange for a stable social/economic environment. A different environment than the US.

And finally, the when part of the UST imploding. For years, they crammed down this debt around the world (e.g., China and the Middle East). So the world got smart and stopped buying. Then the Fed steps in and starts buying directly or indirectly through currency swaps (to help with the supply). Works for a while but given the size of the problem they need help. So enter the banks and Corporate America, they have plenty of new capital (thanks to the Fed, TARP, new equity offerings, elimination of dividends, contracting balance sheets, hoarding earnings/cahs, etc.) to invest. How much, I'm not sure but I think the banks and CA can handle the supply of USTs for at least a year if not two. And then after these two groups, let's turn to the US population and raid their retirement accounts (by forcing them to invest in US debt). The ideas been floated and will eventually take hold in one form or another.

So as for the "when", it still looks like enough sources are available to support this monster for a while longer. However with yields at less than 2% for anything with a medium term duration, the risk reward relationship is now completely out of snyc so its time to exit. Where to, well that's the real question now isn't it as PMs, commodities, some of the biggest and baddest global corporations, and segments of the globe better positioned for growth are all on my list.

[darkpool2]

To the person who questioned why anyone would be foolish enough to remove their finger from the dam, I say just watch me......its for the better good. Stand there and let me see you washed away and drown. 

[i.knoknot]

while i agree, my fear is being able to proudly say "well, I bailed out *my* part of the titanic..."

[williambanzai7]

WIZARD OF FARCE

http://williambanzai7.blogspot.com/2010/08/wizard-of-farce.html

[Spitzer]

That is the best article ever written, I just love every word.

Great job Gonzalo Lira

[What_Me_Worry]

All we hear time and time again is the Japan correlation argument.  However, those same people keep their head in the sand when you try to actually compare and contrast each.

Japan had massive foreign reserves to back up their debt.  Their citizens had a much higher savings rate.  Their citizens had a much lower debt load.  Much more of their debt was owned domestically.

AND MOST IMPORTANTLY- They ran a massive trade surplus, year after year!

United States has about $130B in stated forex reserves(http://www.ustreas.gov/press/international-reserve-position.html).  Granted, they carry gold at their ridiculous book value.  However, it is up for debate whether all that gold actually exists in non-encumbered form, either.  Even if you take their word for it(The U.S. has never lied, obv), then that gold is worth closer to $300B.  Taking them up to the $400B range.

However, the U.S. citizen has/had a extremely low savings rate.  Probably the most indebted individuals in history, on average.  Very low domestic ownership of government debt, relatively.  Let alone, a deficit that is officially running above $1T year after year now and no end in sight, even by their own projections!

AND MOST IMPORTANTLY- They run the largest trade deficit in the history of the world.

Even when you ignore the fact that the U.S. true debt is easily $100T, there isn't much you can point to that says they can ever pay back this money at even close to the same value.  With Japan, you could argue(back when they went down that road) you would get paid back since they had massive foreign reserves and ran a large trade surplus.

The housing market was not considered in a bubble, until it was.  The tech bubble was not considered a bubble, until it was.  Oil was not considered a bubble, until it was.  

In every case, once consensus is the bubble is popping there has always been a large overreaction in the other direction.  That is all fine and good when talking about a somewhat isolated asset class.  Now we are talking about the biggest asset class in the world which has enormous derivative aftershocks attached to it.  The second everyone runs for the exit, it will trigger currency derivatives and interest-rate derivatives so large that no intervention would be able to stop it from imploding every global economy, almost instantaneously.  

I think the author is wrong about everyone running to find commodities.  There won't even be time to take delivery before commerce shuts down or some sort of moratorium is announced.  Many of the large players may execute large commodity trades.  But, there won't be enough time to finalize the trade and take actual delivery before shutdowns.

Forget the stock market.  Even if you own shares in miners or even shares like Physical PM shares.  Don't forget, all you own is a claim to the shares owned by the DTCC.  Anyone who thinks there aren't more claim tickets than actual shares are fooling themselves.  The DTCC will shutdown and no one will be able to get access to any trading.  You will be in basically the same position the GLD holders will be in(actually... GLD holders will be screwed twice over, once by DTCC and again by GLD itself).  SIPC coverage is pointless.

Wow, that was depressing.  I almost wish I didn't just write that.

[EconomyPolitics]

If I had a choice I would move to Brazil.  Very little unfunded liabilities. 

Long ago, I said that this crisis will change the order of the universe.  I am expecting little green men to invade...  No wait I never said that, I just want my passport up to date so I can move to Canada. 

Will crunch numbers for food. 

[Treeplanter]

Unless you have a ton of money or marry a Canadian or legal resident, Canada does not want you.  

[A Proud Canadian]

...unless you come by way of Sri Lanka

[Dreamwalker420]

Mr Lira,

I don't think that you and "Mish" disagree.  The distinction between your perceptions is found in the relative value of bonds at a given time.

Mish is saying that the yield of the treasury will be the safest asset class, continuing to pay the yield you purchased on a note.  For instance, a 10Y bond that cost $100 with a $3 dividend will continue to produce the $3 yield.  Mr Lira diverges from Mish in saying that the underlying instrument will decrease in value ... at the Shazaam moment, the bond will find itself trading at $50, yielding 6% in a short period of time, and eventually loose all of it's relative value ... perhaps sending the value of that bond as low as $15 (creating a whopping yield of 20% ... that is when I would consider buying them).  To the bond purchaser, however, the $3 yield wont go away.  The notional value is largely irrelevant to the bond holders perception of wealth.

I'm not sure what the actual 10Y USD note is trading at, nor it's actual yield.

What is at issue is the conclusion: Will the US default on the Federal Reserve Note?

It seems highly unlikely that the sheeple will stop trading in FRNs.  Most believe that it is the nations currency.  Belief is the major engine that drives the value of the fiat currency.

The average retail investor is unaware of the hidden affects of inflation until it is too late.  They hold their wealth denomnated in FRNs and fail to adequately account for "volatile" food and energy "hardline" inflation.  Caught in a deflation death spiral, the Fed will undoubtedly continue to print more money to appease political naivity.  Bonds will tumble in price while commodities will rise ... but the retail investor wont see the train wreck.  They are, by and large, illiterate to the "store of wealth" that money should represent.  Having $100,000 in notional value is more important to them than gold at $1,000 or $10,000 an ounce.

It is easier to see what one has than what one doesn't : ($100/$1 = 100 vs $100/$10 = 10)

Most people, regardless of their underlying wealth, are not savvy to understand even the most simplistic of economic concepts.  They understand that they live in a nice house and the "system" is working because they have money in a bank account and daddy bought them a new car.  My generation of inheritance brats makes it easy to take their money daily.  After they go bankrupt, they often accuse "day traders" and other "speculators" of some nefarious illegal plot to defraud them ... they cannot and will not take responsibility for their own stupidity.

State Pensions are the biggest target for these shenanigans (inflation).  The collective wealth is managed by pencil pushers that owe their allegiance to the banks selling the toxic assets to the funds.  The fund manager is straight out of Harvard with an MBA and $250,000 in debt.  They have absolutely no idea of how to "make money."  That is to say, much like the pensions they represent, the store of wealth aspect of money escapes their MMT theories they learned burying themselves in debt.

Eventually, the hyperinflation will erode the complacency (lack of knowledge) held by the general public and a significant shift in political allegiance will bring about the types of social programs and changes that were evident during the Great Depression.  Enough people starving in the streets ... maybe at 25% unemployment.

At the breaking point, when bond prices become so low that the TBTFs are again insolvent, there will be another push to bail them out.  Have we reached a point where that is politically impossible?  How about after the November elections?  What then?  Uncertainty.

Uncertainty amongst bankers is their biggest concern.  After decades of abusing the Greenspan put and other subsequent benefits of never facing bankruptcy, these banks along with retail investors think everyone else should be subject to the Rule of Law ... except themselves.

A kid standing on a street corner waiting to cross the road is talking on his cell phone.  He is unaware that a few feet from him an officer is arresting someone.  The victim of the arrest is lying face down on the road with a cops knee in his back.  Suddenly, the officer points to him  ... and WHAM!  He is thrown to the ground and wakes up in the hospital.

Rampant abuse by the police is okay ... until they get you.  His dad happened to be a retired police officer.  He thought he was safe because of years living under the protective umbrella of his dad's identity.  But the reality of the Rule of Law meant that he could be abused at anytime for any reason ... after his concusion, false arrest, and being charged with crimes he obviously didn't commit ... he no longer believes the cops should be allowed to act with impunity.  A random traffic surveillance camera exposed the arresting officer's lie that he "tried to stike me" clearly showing that the kid didn't interact with the officers; he was grabbed, thrown down, and knocked out. (Denver, CO)

The expectations of reasonable authority have lulled many American's into a false sense of security about the legitimacy of their government and the leaders who purport to display exceptional fiduciary responsibility.  We have many great men and women in this country serving in many aspects with dignity and honor ... at the point of bankruptcy, the leaders re-wrote the rules so the banks, and by extension rich people, cannot go bankrupt.  This double-standard will become evident to unemployed foreclosure victims awakening them to the corrupt nature of the Federal Reserve System.

Starving homeless academics look for answers and they will find them in the Senate hearings of the 1930s.  Basically, we have a choice when it comes to the nations credit.  We can trust bankers to do the right thing ... and do nothing about it when they violate us ... or we can trust politicians and vote them out when they violate us.

A political quagmire of problems is all that is left for my generation created by bankers that have used Congress like a whore.  See, we want to believe in fairy tales ... and refuting the truth with accusations of "conspiracy theories" has become the MSMs weapon of choice.

My mom says, be part of the solution:

I believe the only way forward at this point is to revoke the Federal Reserve's authority to control the nations currency by eliminating its existence.  Debt doesn't solve problems.  A private cartel of bankers does not a free society make.

History teaches us important lessons about political will:  Until enough people die in a GULAG, people will not act.

[economicmorphine]

"It seems highly unlikely that the sheeple will stop trading in FRNs.  Most believe that it is the nations currency.  Belief is the major engine that drives the value of the fiat currency."

I'm not so sure.  People are buying cull Morgan's and Peace dollars in anticipation of using them to buy food where I live.  I've talked to a number of coin dealers who can't keep them stocked.  Culls, of course, are numismatically worthless.  People are buying them for their silver content.  In my mind, that is the sheeple abandoning FRNs.

[i.knoknot]

not in argument with your logic, but two things occur to me:

 - the numbers of folks buying hard PMs is still in the noise compared to folks we sit in traffic with,

 - if you google 'ferfal' the argentinian architect who documents his argentinian inflation experiences, he noted that the base currency regained value in the local contexts, because folks had no other abstract currency when they needed - which indicates that it (fiat) worked, it broke, then it worked again. alla trust thing. i don't know if this would happen again, but it was interesting to me.

[alexwest]

the Federal government has issued $1 of Treasury debt for every $1 of tax receipts.

yes baby yes... truth sets you free... no phony GDP/debt %,, none..

just simple, pure beauty in words ' $1 of Treasury debt for every $1 of tax receipts'

thank you 
alx

[Real Estate Geek]

It’s why—among other reasons, which I will discuss more fully in another post—MMT is a big ol’ steaming crock of shit.

Ya know, for an Eye-Tie this Lira guy really knows the US of A's vernacular.

[MrTrader]

Well, I agree with the author in many points, BUT he has forgotten about one important side aspect :

He´s a taxpayer, too.

[nmewn]

"I’ve never liked the term “asset”, when discussing bonds. They’re not “assets”—they’re debt."

Thank you...someone finally get's it.

"When I look at all this Federal government debt—unprecedented amounts of fiscal debt—I can’t help but notice that it is all unsecured—because it is unsecured."

Correct. Loosely, like revolving credit, a credit card. They have no cap though. But the ability to repay is gone.

It is only backed by the ability of the Federal Government to collect taxes to service and pay back the principal. There is a reason why some taxes are called by different names...fees...surcharges etc. They have lost the ability to raise what are properly called taxes because they take too much of peoples labor now.

By the time the normal taxpayer finishes with plain vanilla federal income taxes and the myriad of federal acronym named taxes...they face the robber barons in sheeps clothing at the state & local level.

Simply, there is nothing left to tax more heavilly in any meaningful way to escape the commitments (the velocity of the debt) made by our government. There are certainly "rich" in the nation. But you could confiscate all their wealth...seize it outright...and it would run the federal government at it's present size for at most six months...then what?

And look at what is defined as "rich" these days. 200K-250K dollars a year? Are you fucking kidding me?...LOL.

That is how large the problem is and how far down the ladder they are willing to reach.

There are simply too many riding in the cart and not enough pulling, any BLS report (no matter how they massage it to read) shows it and has shown it for years.

They will, shrink government, cut taxes and allow the people to prosper by choice or by necessity.  

But it will happen.

[boogey_bank]

My compliments for your article, Gonzalo.

Mish is one one the best financial blogger but on the UST issue is wrong.

An UST collapse in the long term is inevitable. But how play it if u don't know the timing? How to avoid a short squeeze? I think Fed could reach to keep the car running for a few years. And how to play the UST collapse in Europe where the TBT play is (imho) harder to manage for fiscal reasons? And again, are we sure we can play this event even if it could happen in a shazaam fashion?

Finally a more important issue. Imagine we do our homework well and the day after the shazaam moment we find ourselves with a PM stockpile on hand...

How to cope with the mobility issue? How to move those assets to another continent? I think people are interested in allocated gold accounts not becouse they trust bullion banks, but becouse they need a PM stockpile in another country.

This is an hard to cope with issue, becouse I think in the next future gold will be higher in price, but I also think the gold market will be no more an unique market. It will be fragmented and regional and we'll see spectacular spreads in its price in various countries. It could go like this: gold price: in Eu 100, in CH 150, in US 200 , in China 400 and so on.

[Roger Knights]

“I pompously call it a “Moment of Clarity”, Mish more cuttingly calls it a Shazaam! moment.”

There’s already a semi-official term for this “final straw” moment: the collapse of “fingers of instability.” These are the weak streaks in a sandpile (or rotten streaks in a house) that turn into avalanches after one-too-many grains have been added. Here’s a link to a Google search page on the phrase, which in turn has links to many interesting articles on how catastrophist scenarios can play out once those fingers let go:

http://www.google.com/search?q=%22fingers+of+instability%22&ie=utf-8&oe=utf-8&aq=t&rls=org.mozilla:en-US:official&client=firefox-a

Because it’s impossible to quantitatively model such final-straw scenarios, and because termites are out-of-sight-out-of-mind, left-brained types (whom Taleb calls “nerds”) shove them off the map. Until the roof falls in.

[QuantumCat]

Gee, hyperinflation, should I buy more gold still?  Kitco article reprint?

[MarketFox]

Here's another question....

What currency is going to be THE ONE ?

I do not see the IMF currency as a solution....and in fact all I see are debt ladened or inadequacies in some form or another....

There is a very core basic in life...to know what bad is ....one has to know what good is....

Thus the question would relate to currencies such that they are all bad/inadequate....

Which comes to this....transactions are essential...currency...good or bad....

Seems like more of a mathematical constant issue....

[drheywood]

Is four periods the "official" secret sign for rock'n roll weed?

[pseanthebull]

Gonza

That was an excellent discussion.  The MMT'ers just fill me with disgust.  All the beautiful charts and graphs and theories are great until their not.

They work until they dont.

Every now an then the laws of nature remind man who is boss.  And economies do have natural laws and the dollar is fast approaching its maker.

Well done.

[airedalesrule]

Read in concert with Ask Not Whether Governments Will Default But How? (Mares, Aug 25 2010). It is clear the strategy of the Fed is not to resolve but to avoid several likely outcomes

• a US$ crisis,
• a crisis in the US Treasury market
• domestic bank liquidity crisis
• foreign bank, rather Western European bank, liquidity crisis

in favor of attempting to induce controlled, chronic inflation. Default is off the table. The Fed has no more ideas, options or ammo.

[web bot]

Mish' recent article presented the issue as if we lived in a closed monetized world, solely working as to micro-economic influences. No thought was given to trade balances, debt/gdp levels, currency movements, the impending collapse of the USD, etc...

I was pretty brutal in my criticism, but felt that he missed the issue and completely misrepresented the topic (unintentional, I'm sure). The current level of deficit and debt is unsustainable and will collapse. You can't eventually pay 100% of tax receipts to interest on government debt and not go bust.

[Jim B]

That is why the FED is terrified by deflation.  In the short term deflation would increase government liabilities and accelerate the collapse.  Without inflation to devalue the debt and increase tax revenues, the game would be over sooner!

[onealpha]

Excellent post!  The only thing that I did not agree with was the proposed outcome.  Read the IMF Blueprint and then it sounds like what the Fed really wants is to destroy the dollar so that we will have no choice but to make the Bancor the reserve currency and then it will be game over.

http://www.imf.org/external/np/pp/eng/2010/041310.pdf

[Gordon_Gekko]

Spot on Mr. Lira! Very well said - excellent work.

[Gonzalo Lira]

Thank you Mr. Gekko—and as everyone else here, I'm looking forward to your coming appearance on the big screen once again. 

GL

[RockyRacoon]

I miss your frequent posts, Mr. Gekko.  Nice to see your smiling avatar.

[Calmyourself]

I have prepared fall back positions like many of you have and have done so for years once I became convinced that fail was coming.  That being said those fingers in the dam (not dyke) think Hoover, will stay there much longer than you think.  With the exception of men who just want to see it burn(darkpool), most men will keep holding this avalanche of fail back as the alternative is truly horrible, I know I will even as I want to weather this storm before my small children truly understand.  The ramifications of a governmental collapse in this country is truly apocalyptic and psychologically most men will do anything to maintain status quo.  Yes they will work around the edges with shorts and other instruments to profit but virtually no one has an interest in pulling their metaphorical finger first.  This will be an exogenous event, a governmental black / grey swan once the external actor has confidence they can escape most consequences.  Confident in their ability to rise quicker than the rest of the ash heaps (countries) and take the mantle of superpower or at least a regional hyper-power unchallenged by others. China fits this description better than most with unquestioned obedience or the ability to compel it, the build-up of commodities yet their systemic weaknesses are legion and so this exogenous actor is not prepared and the fingers stay for now. When you see a country prepared better than most watch for tipping points and perhaps we can approximately time these events.

[Panafrican Funk...]

1.  If the primary buyer (either directly or by proxy) has unlimited quantities of the medium of exchange for buying treasuries, why would there ever be a failed treasury auction? 

2.  I agree that adding to the money supply debases the value of each monetary unit, but relative to what is it debased? 

[The Navigator]

IMHO, (long time lurker, 1st time poster) I see both deflation (in housing) and inflation in products I need/buy (groceries, gasoline, etc). The problem with trying to inflate housing prices back to pre-crash times is 

1. buyers need to have (real) income - no more NINJA (no income no jobs) buyers.

2. unemployment at (official) rates of 9.x% (and real unemployment probably closer to 20%)

In order for housing to make a comeback, prices have to be at levels where the income can support the monthly payment (approx 33% of gross monthly) with 20% down at purchase. If so, home prices have some more to come down before those that do have jobs go into 'buy' mode.

I don't know which will win (deflation or inflation) but with Helicopter Ben printing those FRNs and QE2 on the horizon, my bet is on inflation, and my further bet is on PMs, including lead.

Also, that "moment of clarity" could have been yesterday if Mondays rumors about Zhou Xiao Chuan defecting turned out to be true.

There will come a time when someone tries to sneak away from the poker (bonds) table and then it goes down in 24 hours, IMHO.

Thanks Gonzalo for the enlightening articles, loved all 3.

Thanks to all the ZH guys for the lively discussions that help me think about the 'possibilities'

Semper Paratus, the Navigator

[John123456]

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