Why The Ongoing Push To Inflate The Debt Overhang By The Fed Is Suicidal

Tyler Durden's picture

One of the once again widely accepted market certainties is that the economy has now openly reentered a deflationary phase. Nothing surprising here, and it is consistent with huge demand for UST paper, as every incremental auction demonstrates, an outcome that will eventually confirm yet again that credit is leaps and bounds ahead of stocks (today's most recent record of gold priced in Euros is not an indication of inflation or deflation, but merely of mistrust in paper -  a totally separate dynamic). Yet, as always, the market is not efficient, and does not exist in its own vacuum - every analysis about market trends has to include at the very top, an assessment of what the Fed will and will not do. And the Fed is fully determined to inflate the economy by any means necessary: the debt maturity cliff in CRE, in Financials, and even in the LBO HY names, is rapidly approaching (yes, that long REIT trade may soon be in jeopardy if nothing is done to "fix" the first issue). Therefore Bernanke has T minus 2 years and counting to pull an ink-stained rabbit out of his monetary printer. The problem, as David Rosenberg points out in his letter from today, is that due to the short maturity profile of government paper, an all out attempt to reflate will certainly lead to that most expected black swan of all - a failed bond auction, absent fully-blown debt monetization. It would also have various other unpleasant side effects, such as a complete eventual collapse of the economy, which is the second backstop reason why gold will likely continue going higher, despite numerous risky-asset liquidation episodes still to come.

Some more perspectives from Rosie:


Maybe this is why Bill Gross was rumoured to be in buying long Treasuries late last week. It is never too late to change one’s mind, and secular trendlines offer all sorts of opportunities to do so. Imagine the labour market softening at a time when underlying inflation is running below a 1% annual rate. And, we haven’t even seen the full impact of the stronger U.S. dollar and the pullback in commodity prices hit home yet. If German bund yields are heading down to 2½%, make no mistake — Treasury and Canada yields are not far behind.

We highly recommend The Deflation Dilemma (page 18) and A Winding Path to Inflation (page 84) of the current Economist. The second article is particularly enlightening because it shows how ineffective a policy aimed at creating inflation will be because the bond maturity profile of most industrialized countries is short. Over half of U.S. government debt and 40% in Germany and France roll over within the next three years and so an overt policy to inflate away the massive public debts will be self-defeating if the bond vigilantes demand a higher premium upon refinancing time. Besides, an inflation-is-always-around-the-corner culture still permeates most central banks: the Bank of Canada hiking, the Fed district banks clamouring for a rate hike, the tightening moves this year by India, Brazil and China, as well as the refusal on the part of the ECB to go beyond shifting the composition of its balance sheet and actually expand it in a classic quantitative-easing style.

The biggest problem here, as in dealing with North Korea, is assuming rational behavior out of the Fed, namely one which seeks the best possible outcome for as many participants involved. This is very flawed assumption. The Fed will merely do what is in the best interest of the Wall Street oligarchy, and will most certainly ignore the implications of an increasingly diluted US balance sheet, which even without a new episode of QE, is currently ongoing courtesy of the massive incremental losses incurred by Fannie and Freddie, which have become nothing but a backstopped trash receptacle for all the worst paper in the US mortgage market. The fact that these are still not on the official balance sheet is nothing short of a travesty. Yet even the marginal benefit of GSE dilution will end, and at that point the Fed will be forced to flood the market with even more money. And as we learned over the weekend, the ECB is unlikely to follow the Fed into this most recent printing bonanza. This simply means that the euro will keep on dropping up until some point, at which point the focus currency of devaluation will once again become the dollar, as the schism between the Fed and the ECB becomes fully-blown. At that point, expectations of a controlled deflation or inflation will go out of the window, as we will be in an unprecedented environment, where no historical parallels have any application. At that point, the only safe-haven will be non-dilutable assets, be they vulcanized tires, wheelbarrows, gold, and anything that the Fed can not print billions of on a daily basis.

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Gold...Bitches's picture

Unless you're Johnny Bravo, then you like to invest in fairy dust and unicorns.

Cognitive Dissonance's picture

Pixie dust and dragon tails are much better. I dip the tails in hot sauce and snort the pixie dust for one hell of a wild ride. Though I understand ground up unicorn horns are better than Viagra.

hbjork1's picture


Don't forget vulture brains.  NPR piece today of the threat to African vultures.  It seems vultures are smart enough and have the visibility identify a sick or wounded animal at great distance.  Hence local medicine men are making a good living selling vulture brains to folks who believe it will enable them to better see which are the best wagers to make in the local gaming pools.  



trav7777's picture

No way...I thought africans were deeper and purer and nobler than white people and were in tune with the land and all of that...?

faustian bargain's picture

You're saying that vulture brain method doesn't work? Sounds more plausible than some Technical Analysis I've seen.

trav7777's picture

Must have something to do with all that colonial oppression by climate control and electrical power

Mako's picture

"At that point, the only safe-haven will be non-dilutable assets, be they vulcanized tires, wheelbarrows, gold, and anything that the Fed can not print billions of on a daily basis."

There is no safe and there is no reward without risk.   Living is dangerous for your health.

You will need to be able to produce food and protect your food storage, good luck when the non-funded liabilities stop being fed.  Might want to invest in a rabbits foot for luck because you are probably going to need that this time.  Most are going to have luck --- hard luck.

Cognitive Dissonance's picture

Nice song.

Unfortunately 7 Billion people suddenly skinning bucks and running trout lines might be a bit more pressure than the natural "system" can handle.

schoolsout's picture



and CD, I'd expect a good number of those folks to not make it too far should this happen.  I guess I'm fortunate enough to live on the ICW where fish can be caught off the dock as well as shellfish and whatnot...


Gotta get the garden going, though.


Long live Awendaw

Cognitive Dissonance's picture

"Trotline. Now move back to the city :)"

Spell check made me do it. I put in trotline and spell check told me I was wrong.

I believe everything spell check tells me. :>)

See.......trout line..... it wants to change it again. ;p)

MayIMommaDogFace2theBananaPatch's picture

I believe everything spell check tells me.

You might want to talk to your sponsor about that.

Cognitive Dissonance's picture


My sponsor is Bill Gates.

And Bill Gates told me to always trust spell check............unless it's not an official Microsoft spell check product. So clearly ZH doesn't use Microsoft. :>)

breezer1's picture

cognitive, thank you for your insane articles. 

as for 7 billion survivalists suddenly scouring the hinterland you are dead on. most young people i know cannot light a fire, catch a trout or rabbit or wipe their arse without a healthy supply of double ply. the life of entitlements is about to end. many will find salvation thru family and friends who can adapt and are willing to share as supply systems break down.

bill buckner forecast the unfolding events with an eerie precision about 2 years ago. his suggestions included  making friends with butchers and bakers and farmers.

the largest group of victims will be those who are in shock as things unfold and are unable to mentally adapt to the new way. this will be no small feat in a world of guns and hunger without airconditioning and abundant clean water. not to mention transportation and refridgeration. i hope this collapse can be stretched out for another few years so as many as possible can make some preparation. i am not optimistic about that though.

prayer will help.

pan-the-ist's picture

Prayer won't help.  It might provide hope, but it should be quite obvious that if there is a god, God doesn't give two shits about anyone.

Mako's picture

Now all you have to worry about is the rest of the lemmings.  

I was in Louisiana 2 days after the Hurricane hit, saw people walking around covered in mud and were begging for water.  Yet, they were we surrounded by fresh water which they could have made fit to drink. 

schoolsout's picture

There will be obstacles to overcome, no doubt...But my town has voted no to public water so as to keep developers out.  They are somewhat united...and some still use outhouses in some places...those folks sell veggies/fruits right up the road.  I think I'm pretty lucky where I am now....for many others, not so much.

Our neighborhood has refused to pave roads and whatnot as to keep from being incorporated into the city.  Our neighborhood pond is stocked with bass/bream by a resident in the neighborhood.  One fella that does landscaping takes care of the irrigation/roads on his own time....several other families have horses and farms there.  The people in the neighborhood are pretty united when it comes to needing to band together....Hurricane Hugo proved that...


anyways, I'm just rambling now, but hopefully none of this will ever be experienced as it will still be very difficult. 


Oracle of Kypseli's picture

I want in.

How much do I need to buy a small piece of land there?

Give me a clue of the wereabouts. Long Lat. will be good

faustian bargain's picture

Hugo is probably the clue you need.


schoolsout's picture

or the name of the town mentioned earlier... ;-)


that said, there are plenty of Yum Yums that have invaded my fine region that don't even know how to mow the lawn....they are about 20 miles south of us.

Cognitive Dissonance's picture

God's country, as my mom used to call that neck of the woods. :>)


schoolsout's picture

She from around these parts?  It is still nice...the people are nice, but plans for developing a huge tract of land that Int'l Paper sold popped up a few years back.  Thank God the economy tanked (to an extent).  One of the residents of the hood (his family) put in an offer of $8M (I think) to buy property and keep it like it was...he got outbid by Vanguard, though.

Land still sitting there, bare from the harvesting of trees...and that makes me sad.


schoolsout's picture

Some of y'all might enjoy this video


It has a reference to gold, too...haha


Cognitive Dissonance's picture


Tell me that's you in the video. Lie if you have to but tell me that's you. :>)

schoolsout's picture

unfortunately, not me...


pretty good for a local guy, though, eh?

trav7777's picture

They weren't covered in mud, they were black.

hbjork1's picture


Growing up, I heard cracks about certain people that weren't smart enough to boil water.  This is the first actual case report I have heard about.

JohnG's picture

Boiling the water will do a lot to make it "safer," but it won't do it all.

To remove the most common parasites (cryptosporidiam and giardia) the water must be filtered or distilled.

Other waterborne critters are worse.

The dumb thing about the Katrina aftermath is that these people wandering around begging for water had millions of gallons of fresh potable water all around them: in the water supply pipes.  Open a fire hydrant.

Reflexivity's picture

Finally!  Good to see you promote this song. It plays in my mind everytime I hear about each newly exposed negative economic Black Swan.

Should link up a cafe press mug with the quote on it.

If you string out a trot line, you'll have pretty a nice meal with a little bit of work (fresh pan fried catfish anyone?) faster than you could trade in your cold coins for a Big Mac.

Trotline B****s!



Spitzer's picture


The ultimate deflation event of all time bar none was 2008, that amounted to a temporary $300 drop in gold.

The bancruptcy of Goldman, Lehman, Citi, AIG, Wells, GM, B of A, you name it, amounted to a $300 drop in gold. That would bring todays gold price to $944. Big fucking deal.

Yet it did show that it was either the dollar or gold that was going to make gains in that situation. The dollar did and gold didn't.

If no asset is safe in that situation then both the dollar and gold would have fallen.




MayIMommaDogFace2theBananaPatch's picture

Don't screw around -- if you invest in fairy dust, BE SURE TO TAKE PHYSICAL DELIVERY.

Flyingtrader's picture

Aside from the illegality, and the logistical nightmare that sourcing, transporting and securing it would be; my choice for inflation resistant asset of the year remains a warehouse full of raw opium.

DoChenRollingBearing's picture

Growing the poppies is still legal...

WineSorbet's picture

Just came back from a trip from Southern California.  Literally EVERY strip mall along the way from LAX to Ventura county has For Lease signs on them.  It was frightening to see the levels of vacancies.  Some of the parks were completely vacant!!  Why anyone sees a rebound in CRE is beyond me.

Apply Force's picture

I'll see your vacant SoCal CRE and raise you a flush of vacant SE Florida CRE.

But I think Detroit has us both beat...

WineSorbet's picture

You are correct.  Detroit is a wasteland.  It's actually fascinating(and downright scary) to see what can become of a city in decline. 

trav7777's picture

see death of johannesburg blog for a similar story on another continent.  It's almost as if there is some unknown link between the two places, some connection that would explain the similar outcomes...

Kataphraktos's picture

Sorry for the OT rudeness, but:


Caruso Cabrera, left nipple only WTF

lizzy36's picture

Pimpco full on stated, last week, that they were buying (recommending being synonymous with buying, ones assumes) "high quality government bonds".

Unfortunatley for Pimpco investors, they also sold half there gold holdings.

El-Erian Cuts Gold, Urges `Stay on Sidelines' for Stocks, Motley Fool Says By Wes Goodman - Jun 2, 2010

Pacific Investment Management Co., which runs the world’s biggest mutual fund, recently cut its gold holdings in half in its multi-asset products, Co-Chief Investment Officer Mohamed El-Erian said in an interview published on the Motley Fool website.

Gold may weaken as the result of “deleveraging” among borrowers worldwide, El-Erian said.

Investors should favor high-quality government bonds as a source of income and “stay on the sidelines” with regard to equities amid concerns about European sovereign debt, he said, according to the article.

To contact the reporter on this story: Wes Goodman at wgoodman@bloomberg.net

Duuude's picture


I call Bullshit on tha sale of gold.


Talkin tha book.

Mitchman's picture

Isn't "high-quality government bonds" an oxymoron?

Mr Lennon Hendrix's picture

Is your question rhetorical?  ;)

Mitchman's picture

Perhaps ironical is the better adjective?  :-)

BTW, great posts.  Follow you religiously.

Mr Lennon Hendrix's picture

Awesome.  Thanks bud.

You do great work as well.  Lets keep it up!

Mr Lennon Hendrix's picture

Well today they eat crow.  I hope for their sake they are full.  Wait, no I don't, because I could care less what all these funds do.  Snake oil salesmen, the whole stinkin' lot of 'em!

Agent P's picture

Investors should favor high-quality government bonds as a source of income and “stay on the sidelines” with regard to equities

Whether you agree with him or not, you have to admit taking advice like this from the world's biggest bond fund manager is a bit like asking a barber if you need a haircut.

ZackAttack's picture

Doesn't do them the least bit of good to inflate because the bulk of future US obligations are inflation-indexed anyway.

RichardENixon's picture

That doesn't mean they will remain inflation indexed.