Tuesday, August 31, 2010

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. In 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.


  1. Gonzalo
    Great article. I for one am afraid what your saying is a distinct possibility.
    I also agree with your Shazaam moment. Everyone knows of the bond bubble but why fight the trend... especially when the bubble is being backed by the government (similar to the housing market pre 2008???? Hmm)
    But when trader smell the weakness... thats when they'll jump and that could be the catalyst for your Shazaam moment.
    I saw the same thing prior to the stock market 'flash crash' in May. Everyone thought the market was overpriced with so much negative data comming out but for weeks, the trend was still up. As soon as the trend was broken and the selling started.... well, let me say, it wasn't pretty.
    Keep up the great articles Gonzalo


  2. I agree there's a huge problem percolating. Not to nit-pick your numbers, but "official" Debt to GDP for 2010 is around 92% right now and will end this year around 93%.

    "Official" net debt can be found here:


    And GDP is around 14.6. Thus, 13.4/14.6 is 92%. You keep claiming it's 100%.

    But it doesn't matter because the "official" net debt is bogus anyway....since it excludes the net present deficits of Social Security, Medicare, and Medicaid.

    Our debts, in other words, are officially less than you say it is but unofficially far higher--more like 500% debt to GDP. How's that one for a brain teaser.

    Anyway, yeah. The elephant in the room is exactly what you're saying.

  3. Anonymous I, the Treasury public debt numbers also do not include Fannie and Freddie-- they should include at least the GSEs' net liability, which is probably around $1 trillion.

  4. Anonyomous II, good point. I've heard it's more like $6 trillion. But who's counting, right? A trillion here, a trillion there....

    It's all untenable and unstainable no matter how one slices it, eh? Hasn't anyone else noticed the dollar has depreciated by 90% since we went off the Gold Standard in 1971? I expect we'll see the same only within 3-5 years or less.

    More buyers for our Treasury are on their way as Japan and Rumbles out of the EU start to surface again--once that run takes the 10 year down to 2%, it's time to short treasuries--there will be almost no downside to this trade at that point. It never hurts to sell short the run that will indeed happen on the great currency hoax.

  5. "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."

    It is secured; by our future labour (represented by the registrations of live birth held in 'trust' by the Fed/Depository Trust Company).

    That's what they're writing the FRN's against...Otherwise the Fed's books wouldn't balance.


  6. Gonzalo,

    This is a supurb article. You know, to a certain extent, Mish and you could both be right, in that order. First deflation (mostly housing prices as opposed to consumer prices), then printing and inflation in order to save the banking system.

    As you know, housing prices have not been reflated at all despite QE. If they fall another 20%, further collateral losses will really start to eat into the bone of the banking system, whereas most "conservatively" financed home purchases were buffered up to this point.

    My expectation would be that gold could be useful to maintain credibility for paper tickets if the government were to provide exchangability (either at market prices or by setting an exchange rate), but given the political landscape that may be impossible.

    In my book (Endless Money) I worked out that equilibrium price. Recently Adrian Douglas was pilloried for working through the numbers for 100% monetization of gold (which would probably see some pressure eased through bimetalism), and that eventuality -- where metal is used as the sole vessel of liquid wealth -- is closer to your prediction of a "moment of clarity."

    No one can know for sure how this all will play out, but I thank you for adding another voice to this fascinating and vital debate. For more on the inflation-deflation discussion, you might enjoy a post I made a back in early February: For Whom the Gold Bell Tolls http://www.conservativeeconomist.com/commentaries-article.cgi?showId=35

    Best of luck with the movies and books from another Dartmouth alum (actually T80),

  7. Why did God give us agility,

    If not to evade responsibility?,

    thought, pensive, pensive, tireless Ben

    as he gave his weighty press, another spin,

    under slops of ink, and silken papers

    Ben feared he'd got the vapours.

    No! instead, some primal termite knocked on wood

    And tasted it, and found it good

    And that is why your dollar's pay

    fell through the parlour floor today.

    But before he mops up and absconds

    He'll do all again to the world's bonds.

  8. When you include Fannie and Freddie debt, the USD debt:GDP ratio goes to 130%.

    In the last 200 years of history, each time a country's debt:GDP exceeded 90% there was an economic collapse.

    And furthermore...

    When you consider the total amount of interest bearing derivatives in the world's financial system is in excess of $600 Trillion, that means the WORLD'S debt:GDP ratio is in excess of 100%.

  9. There's one fly in the ointment that I can see (otherwise, sadly, I'm very simpathetic to these three articles). "Shazaam" moments happen; they're the shape of every collapse. But the problem is that there just isn't an alternative means of exchange around -- there aren't large enough stocks of gold, silver or lentils to serve as an alternative.

    Would you mind commenting on another possibility?

    ...that it will in fact be the big haircut, but it'll be unannounced -- everyone who pays attention knows they're going to lose 30-50% off of the top, but compared to the other woefully overpriced alternatives out there, everyone is just resigned to that fact (and the politicians will fight among themselves for how best to blame the other faction for the woes they both created). No panic, just a slow-motion train-wreck that relatively few understand, with the best-connected among us having their compensation ascend while the worst compensated languish.

  10. You should really look up the definition of asset. It isn't interchangeable with debt, loss or whatever other word you used.

  11. '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.'

    Awww, you shouldn't have! Can I help with the takedown? ;-)

    Actually I've been doing my small bit already over at 'MMT central,' a/k/a Nude Capitalism. As I commented this morning in response to a wacko paper by Jim Hamilton, arguing for the Fed to exchange its entire stock of T-bills for T-bonds,

    'Worst of all, driving long yields farther down would recruit a whole new crop of Bond Bubble Believers, like the folks I saw the other day wheeling a shopping cart full of empty soda bottles toward a broker’s office, hoping to exchange their worldly goods for a small denomination T-bond to secure their financial future.

    'When the last sucker spends their last nickel to get on board the Magic Beanstalk of ever-rising bond market total returns — LOOK OUT BELOW!'

    Following this provocative post, a menacing band of MMT'ers with $-sign nose and ear jewelry attacked me with broken beer bottles. But I whacked their pimpmaster, 'stf-up,' over the skull with a motorcycle chain, and they scurried off, hollering 'Ben's gonna get you.' Losers!

    However, as Gonzalo says, these scrip-strewing screwballs are gonna be back, and we need to be prepared for SHOWTIME! Carry on, GL!

    -- machinehead

  12. Very interesting analysis.

    I tried to do a thought experiment and came up with the following observations and questions:

    The Fed buys Toxic Assets (TA) from the Big Banks
    The Big Banks get cash from the Fed
    The Banks buy Treasury Securities (TS) from the US Treasury (UST)
    The Big Banks have no extra cash to lend

    The UST gets the cash from the Big Banks
    The UST provides the cash for Govt Spending

    What effect does the recycling of the Gove Spending cash have on GDP, interest rates, and inflation? Can this spending lead to “hyper-inflation?”

    The Fed holds the TA on its books
    The Big Banks hold TS on which they earn interest
    The UST owes interest on the TS and principal at maturity to the Big Banks
    The UST can rollover the TS at maturity with the Big Banks

    There are two separate issues here:

    First, if the Fed allowed the Big Banks to go under, some other entities would take their place and obtain the TA at the marked-to-the-market value and conduct their operations from that starting point. What would be the difference in the economy between letting the Big Banks operate with their TA replaced with TS versus some new entities starting fresh with no losses?

    Second, the Fed could purchase the TS directly from the UST and hold the TS on its book and receive interest from the UST. What difference would this process make in the economy compared to the process above?

  13. When we look at it from another planet - this is a 100 year bubble in the making that is about to go bust. This bubble was born on December 1913 and its conception a few years before on Jekyll Island...

  14. The bubble did not start in 1913. You can go back into the 1600s even in the US with the Massachusetts colony printing to pay troops to raid Canada. Then the Continental dollar. Then in about 1800 banks proliferated, printing voraciously for the Mississippi territory land boom. The one era when we started to verr back towards hard money (only partially) was from the panic of 1819 through the Civil War. From then on natinoal banks supplanted state banks and grew their loan book (and the money supply) by the same rate as they did post 1913. Hence we we concluded a 50+ year bubble that spilled over with World War I inflation, stimulus, and commodity shortages. Only by the 1930s did we start to reduce leverage. The process of debt and asset inflation resumed from 1940 on until 2008-2009. The detials are laid out in Endless Money for you. While it is possible we would have a shazaam moment, and you are right there are many historically, they would not necessarily result in the adoption of 100% metal money. Once we bit into the fiat banking apple around the time of the Bank of North America in the 1780s, we never have gone back.

  15. If the Fed owns all these CDOs that own hundreds of thousands of foreclosed houses and commercial properties do they pay property taxes? What's to keep the Fed from sitting on these properties forever in order to prop up the market? Why are we still even saying the words "free market?" without hoots of derision?

  16. What is the best way to bet against the bond market.....I know how people are predicting another stock market crash but if the dollar also crashes then will that not compensate for deflation in asset prices.......which assets people stick with is another question...

  17. You wrote:
    "I’ve never liked the term “asset”, when discussing bonds...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."

    One can see you have never worked in nor understand distressed debt or how leveraged buyouts work - or even basic corporate structure.

    These essays are thoughtful and creative but they lack rigor, concreteness.

  18. Que bueno hermano...por fin la verdad esta cerca...quien saben cuando per ya mero...viva la revolucion de bonos!!!

    saludos mate!


  19. Absolutely brilliant! Thanks for making it so simple and clear! I can see the whole pocture now. You explain things that in many articles sound maeningless but then I guess that's the whole idea with modern media! Some INTERESTING times ahead,better prepare NOW! Keep up the good work! Cheers!

  20. As for the Fed holding these TA's forever, go to your local mayor and ask him what is happening in homes or buildings that have no occupants or squatters. They become what TA really means TRASHED ASSETS. Next go to Google and bring up INFLATION AND ARGINTINA. Here you will find articles that discuss HOW GOVERNMENT ACTION WITH A PRINTING PRESS DESTROYED THE CURRENCY. What saved this country? New regime, bond default, and a underground trade economy until the bad debt was settled or bought by US bankers. The only problem here is who will bail out the US? Finally why will the treasury game end badly? Just drive down any major city and look at the malls. Lack of consumers and empty spaces say SCARED. Scared for their jobs, Scared for their health costs, Scared for the corruption in government at all levels, Scared for the rising costs of everyday food and oil related products, and Scared of the taxes that are comming from every level from local to national. Japan type muddle along at low levels? No I do not think so the Japanese saved and had money when the bad times hit. We face a aging society payout problem and have no funds to fall back on other than the government printing press and handouts. People are pissed and the lies are comming home. The next two to five years will be a trolly to hell for the average American. The commentator does not have an expat229 e-mail for laughs.

  21. Caroline says: Bravo, Fantastic--so glad that you
    are responding to a lot of the muddle headed, wrong-headed Keynesian ideas that have been posted since your "How Hyper-Inflation Will Happen" was written.

    The G'Man and the University system Keynesians and the vicious, despicable, loathsome
    Federal Reserve have done a brilliant job of dumbing down the people such that they have no idea what money is. And now after 9 years and a 500% increase in the price of gold, 99.5% of the population is utterly clueless about why this happened or what it means for them. Keep up the good-no GREAT--work!!

  22. Well said! I think the main argument between you and Mish is one argues that a left upper-cut knocks us out, and one argues that a right upper-cut knocks us out. Either way, we're going to be knocked out. And like a fight, we won't see it coming until it's too late. The only way to win the fight is not to play. Convert your cash to chips (gold and silver) and leave the casino. The radical dollar bugs will hate you for it.

  23. Caroline says : here are some thoughts about what gold and silver are:

    1. Greenspan in 1966 said: "... In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold...The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themsevles. This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the "hidden confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights". (Alan Greenspan, "Gold and Economic Freedom," in "Capitalism: The Unknown Idea", ed Ann Rand, p. 101)

    2. From the book "The Creature From Jekyll Island:
    A Second Look at the Federal Reserve" by Edward Griffin, page 161-162: " In 1775, paper Continentals were traded for one dollar in gold. In 1777, they were exchanged for twenty-five cents. By 1779, just four years from their issue, they were worth less than a penny. The phrase "Not worth a Continental " has its origin in this dismal period. Shoes sold for $5,000 a pair. A suit of clothes cost a million"... Fiat money is the means by which governments obtain instant purchasing power without taxation. But where does that purchasing power come from? Since fiat money has nothing of tangible value to offset it, government's fiat purchasing power can be obtained only by subtracting it from somewhere else. It is, in fact, "collected" from us all through a decline in OUR purchasing power. It is, therefore, exactly the same as a tax, but one that is hidden from view, silently in operation, and little understood by the taxpayer and as Thomas Jefferson said: ' a mode of taxation the most oppressive of all because the most unequal of all' ".

    And as Mr. Griffin goes on to say: "When the state delegates assembled to draft the Constitution
    (of the United States), the effects of fiat money were so fresh in their minds they decided to put an end to it once and for all" . Basically the Constitution said that the only money shall be gold and silver but of course the creation of the despicable, loathsome Federal Reserve in 1913 destroyed that sound fiscal footing set up for us by our Founding Fathers.

    In 2001 you could trade $250 fiat dollars for an ounce of gold and today, September 2, 2010 you have to have $1252 fiat dollars to buy an ounce of gold.

  24. There are a lot of intelligent comments about your article. Only one thing matters and that is you have told the sheeple why, what is going to happen and that is the certain thing! We are on the cliff edge and are about to take the big fall! There is no stopping so a person can only protect his assets by buying all the gold, silver or productive land while there is still time! If you are going to need a fixed asset in the near future you better buy it NOW before the worthless dollar and hyper inflation are a reality! KYPD cul jlg

  25. Sam's total debt unfunded libabilit etc
    $201T... Kotlikoff et al
    debt = two hundred T.E.A. (trillion, tom)

  26. Let's not forget a potentially important debt related hyperinflationary catalyst... The Greenspan/ Guidotti Rule"...We have only about 25% of hard liquid assets on hand to pay off foreign debts...In my opinion we are facing a modern day Weimar(huge unpayable debt) with an Argentinian fuse of 72 hours.


  27. Gold is a sapling, silver is an acorn.

  28. Caroline said: Just on the radio: Author of the book Obama Nation, Jerome Corsi says that US Treasury Geithner and Labor are meeting Sept 14th and 15th to discuss forcing IRA/401K holders to buy
    "R Bonds" which are basically treasuries. There
    is $4.7 trillion in IRA accounts and $2.5 trillion in 401K's in the US and now the US Govt wants that money and is planning to CONFISCATE it forcing IRA/401K account holders to buy " R Bonds" . So how does $7.2 trillion stolen from US citizens effect the treasury market? Time to consider cashing out. "We're from the government and we're help you" as the old saying goes. I hope I wrote these figures down correctly but it can all be googled. Argentina also confiscated
    the savings accounts of workers.

  29. "I’ve never liked the term “asset”, when discussing bonds...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."

    One can see you have never worked in nor understand distressed debt or how leveraged buyouts work - or even basic corporate structure.

    These essays are thoughtful and creative but they lack rigor, concreteness..."

    And how, precisely, does a lack of understanding about 'distressed debt' and 'leveraged buyouts' and 'basic corporate structure' change anything?

    We still have cumulative ~800% debt-to-GDP, unfunded liabilities included.


    For anyone who might be interested in a comparison of U.S. debt, compared to Japan and/or Greece, listen to the interview on Kingworldnews, May 08 of this year (2010) from Rob Arnott (Research Affiliates)

    Or for that matter, his (2) subsequent interviews since then.

    Rob is definitely 'worthy'.

  30. An earlier case of creating money to worthlessness.
    During the Revolutionary War the money supply in 1775 was estimated to be $12million in June of that year and in just five years from 1775 to the end of 1779, the total money supply expanded by 5000%.

    "In 1775, paper Continentals were traded for one dollar in gold. In 1777, they were exchanged for twenty-five cents. By 1779, just four years from their issue, they were worth less than a penny. The phrase "Not worth a Continental" has its origin in this dismal period. Shoes sold for $5,000 a pair. A suit of clothes cost a million. George Washington wrote 'A wagon load of money will scarcely purchase a wagon load of provisions' ". (The Creature from Jekyll Island:A Second Look at the Federal Reserve by Edward Griffin, page 161)

    Since the purchasing power of the Dollar has collapsed by over 95% since the despicable, loathsome Federal Reserve was created in 1913, I
    guess the phrase "Not worth a Dollar" can't be too
    far away.

    And gold is telling the tale: $250 Dollars bought an ounce of gold in 2001 but today it would take
    $1250 Dollars to buy an ounce of gold.

  31. Caroline adds: Another example of the road to ruin of fiat money --Again from the book The Creature From Jekyll Island:

    The ravages of war were a harsh burden for the colonies to bear, the havoc of fiat money was equally so. After the war, inflation was followed by
    deflation as reality returned to the marketplace. Prices fell drastically, which was wonderful for those who were buying. But for the merchants who were selling or the farmers who had borrowed heavily to acquire property at inflated wartime prices, it was a disaster. The new, lower prices were not adequate to sustain their fixed, inflated mortgages, and many hard-working families were ruined by foreclosure. And yet there were many who continued to advocate the "paper money cure" and several of the states were receptive to the pressure and their printing presses continued to roll. Rhode Island was one of those states.

    A visiting Frenchman witnessed a typical scene in Rhode Island: "A French traveler who passed through Newport about this time gives a dismal picture of the place: idle men standing with folded arms at the corners of the streets; houses
    falling to ruins;miserable shops offering for sale nothing but a few coarse stuffs;...grass growing in the streets; windows stuffed with rags;everywhere announcing misery,the triumph of paper money and the influence of bad government.
    The merchants had closed their stores rather than take payment in paper;farmers from neighboring states did not care to bring their produce. (pages 163-164).

  32. Help me out here ...

    The Fed bought all these toxic assets from the TBTF.
    The TBTF used that money to buy government bonds.

    If the TBTF finally fail, doesn't that mean problem solved?

    The government doesn't have to pay off a debt to an entity which doesn't exists anymore?

  33. How can you compare US GDP:debt levels with European countries GDP:debt levels? The US doesn't include State debts in its official numbers (same for Canada with provincial debts), while European countries do tally them up.

  34. If the gov't is using the proceeds from the banks collective purchase of treasuries to fund useless investments in everything imaginable to goose the economy, that would mean the cash is being introduced to circulation now. If so much cash has been distributed why is inflation low?

  35. Second sentence should read "your." I'm nitpicking of course, but if you can't get that right it's supremely difficult to absorb your predictions regarding the U.S. economy and trillions of dollars. Perhaps English is not your primary language? My father would have untied me and applied the Crisco for much less.

  36. Lovely article, as ever.
    wasn't the 'housing bubble' brought down by a "Moment of Clarity"....;-0
    Mish, love ya, but you need to remove those rose colored glasses, they prevent you seeing red my man...

    The Piper

  37. We know China is sitting on a trillion dollars. What about Japan, South Korea, India, Saudi Arabia, Russia, etc. This is the inflation threat correct? When the rest of the world feels the effects of QE and has their moment of "clarity". They are going to try and get something for their dollars while they can. If all that money comes flooding back... There is your hyperinflation. When the US loses its reserve currency status. Funny thing is I think China already had their moment of clarity. They just don't know how to get out without setting off a panic. I'd love to hear the discussions between their technocrats and our Napoleons in DC. There must be some coordination between the two to keep this titanic floating.

  38. Btw... Great out house at the top of the article. Too bad it couldn't be saved... Of course I guess that is kind of the point. We are so doomed.

  39. anonymous 9-2-10 @ 6:49 said "The Fed bought all these toxic assets from the TBTF. The TBTF used that money to buy government bonds. If the TBTF finally fail, doesn't that mean problem solved? The government doesn't have to pay off a debt to an entity which doesn't exists anymore?"

    A bond is a note that represents an income stream. The borrower is always the same - the govt - but the "lender", the entity to whom the payments are due, can change. This is because a bond is a special kind of note. A market has been created for the income stream - it can be bought and sold.

    Even after a TBTF goes bust, the income stream represented by the bond continues to be due and payable. So even if an entity owning a bond ceases to exist, the bond will be sold off as an income stream, and the payments on the bond are still due.

    And if the govt did decide to not meet its obligation to a defunct bondholder, it would create panic in the bond market. It would call into question the ability or willingness to pay any bond holder - this is called default.

    Everybody will head for the exits and dump US govt bonds. "The govt defaulted on bonds held by Insolvent National Bank - it must not be able to pay! My bonds may be next! I'd better unload them on some other poor chump before the govt decides to not pay me back, too!"

  40. I fail to see how you reach the logical conclusion that the Treasurys and the dollar will both collapse. I agree that any of them can collapse any time now - but why both?

    Let us assume that for some reason, a major sell-off in Treasurys happens. There are two alternatives:

    1) The Fed does nothing. Since Treasurys are priced in US dollars, the sell-off of them will create a great demand for dollars. Therefore, the dollar will go up, not down. Furthermore, the collapse in price of the Treasurys will cause their yields to rocket up. This by itself will make the US currency an attractive investment. So, we have collapsed Treasurys and a strong dollar.

    2) The Fed acts as a buyer of last resort, creates an infinite amount of money and buys all the Treasurys that are being sold. This will, of course, collapse the US dollar and cause hyper-inflation. But it *will* maintain the price of Treasurys stable at whatever level the Fed decides to keep it. So, we have a collapsed dollar but stable Treasurys' prices and low yield.

    Of course, both alternatives will collapse the US economy (in the first case because of the high yields and strong currency and in the second case because of the hiperinflation). So, in a sense, the Fed is between a rock and a hard place. But I fail to see how both alternatives can happen simultaneously. In the worst case, they can happen one after the other, if the Fed is too slow to act or if they give up after seeing the negative consequences of their actions.

  41. Although the article focuses on Treasury Bonds, I think a valid related topic that can also be addressed is "digital account entries". Since no one officially oversees or monitors the financial operations of the Federal Reserve, why couldn't a Fed accounting clerk just make a digital entry in a bank's account, and say "Okay, check your new account balance, it now says you have 50 million in new funds deposited". In this way, no new Treasury Bonds, Notes, or Bills (or for that matter, pallets of 100 dollar bills) would need to be printed and transferred about from place to place to reconcile accounts.

    If a legitimate, bonafide major accounting firm ever thoroughly examined the Fed's books, all hell would break loose as massive criminal financial fraud would be exposed.

    Digital dollar amounts in the millions, electronically entered into the accounts of Fed Reserve approved banks, will eventually save "the system". Forget the outmoded, old fashioned, pre-historic money printing presses at the Bureau of Engraving and Printing. They are no longer relevant in a high-tech international banking system.

  42. This was beautifully written. I was looking for a facebook "like" button, and I'm barely functional on facebook.


  43. The problem, . . ., that NO INFLATIONIST EVER ANSWERS when I put it out there is this - hyperinflation will destroy the Fed AND the special powers of the US dollar to impose a $1.2-$1.8 TRILLION hidden tax on the entire world each year. Further, the Fed is independent of the government and does not act as the government wishes. So tell me again exactly why the Fed would take a path that will result in its own destruction?

    If you point to Argentina or Weimar Germany or Zimbabwe, I will point back and note that those central banks were controlled by the politicians directly. Here, the politicians are owned and controlled by the banks.

    Hyperinflation destroys the lender so why would the Fed and its member banks choose to hyperinflate?

    No one ever answers this question. No one ever explains why the Fed would commit suicide and destroy its most valuable tool, the dollar, when the Fed IS the most powerful financial entity on the planet. Everyone just says "Oh they'll print" and never examines the unique position of the US Fed. Well if they were going to print, why haven't they done it already? And don't point at money numbers because almost all money indexes like M1 and M2 fail to account for credit. Mish has covered this endlessly, credit IS money and therefore has to be counted as such and we've seen the Fed print maybe $3 trillion while the global economy has imploded by nearly $60 trillion from what I can count (and I haven't bothered to count in months).

    In other words, the Fed is not trying to inflate at all. And people who point at the money the Fed prints and gives to the big banks are missing the picture. The Fed is not trying to reflate the economy despite public noise to that same idea. What the Fed is really doing is printing just enough to ensure that its member banks, particularly the NY banks, have enough cash on hand to squelch any run on their banks.

    I've watched them playing this pattern for a while now. And why would they allow a deflationary collapse instead of a hyperinflationary collapse? Because the Fed believes that the politicians will take most of the blame for that AND that the Fed's member banks, again particularly the NY banks, will ultimately end up holding all the real assets via defaults.

    Normally if an asset defaults, the bank has lost that money and now is in the hole in terms of paying back depositors. But with the Fed printing just enough to ensure none of the banks can be destroyed by a run, that problem is eliminated, and the banks can foreclose on assets over time.

    Ben's not going to hyperinflate, ever. It ain't happenin', sir. He's going to try to tread water as he is now to ensure maximum value returned to the banks. I believe he will fail but nonetheless we are three years into an endless deflationary spiral and he hasn't printed yet. But the deflationists have been correct for 3 years now.

    Tell me again when the hyperinflationists are going to be correct? I'll tell you when - when the politicians take the Fed back into the government and out of the hands of the NY banks, and not one minute before.

  44. I agree that Treasuries are on their way to a collapse. But when a debtor nation the size of the US becomes so over-extended that it cannot possibly meet its obligations, there is a detour sign on the road to collapse.

    Default won't happen because it would collapse the entire worldwide financial system. The Banksters won't allow this because this causes their wealth to go up in smoke. And the massive inflation necessary to pay off the $200 trillion in on-the-books and off-the-books US debt is politically and economically untenable.

    The detour sign, the only solution that prevents both default and massive inflation is the Bankster solution - war. I believe plans to stage the false flag hostilities necessary for a big war are being put into place as I type this.

    War - a really, really big one - causes real wealth to come out of the woodwork to fund a war effort, which finances the build-up of a huge manufacturing base. Wage earners who think their way of life is threatened are willing to work for peanuts, live very frugally, and even spend their own savings to fund the war effort. The side that controls the manufacturing base that survives the war gets to make money rebuilding what has been destroyed.

    I prefer default or hyperinflation - I am willing to live in squalor to prevent my sons from going off to die in some trumped up war. It remains to be seen if enough people will see the truth as it unfolds and refuse to particulate in the Bankster solution.

  45. Thanks for the great insight! Found you on lewrockwell.com

  46. Anonymous 9-3-20 @ 10:35 said, "Hyperinflation destroys the lender so why would the Fed and its member banks choose to hyperinflate? No one ever answers this question."

    Anonymous is correct. The Fed would never willingly choose to hyperinflate. But when it's time for Treasury to pay the piper, something's got to give. You can't get blood out of a turnip.

    Treasury keeps floating more and more debt to fund our overbloated train-wreck federal obligations - plus all the interest we owe. Our economy does not have the capacity to pay back all the debt extended by Treasury. When governments owe more money than they can tax from the citizens, they have two choices - either default or massive inflation.

    But the US is no ordinary country. Its dollar is the linchpin for the world financial system. The Banksters have been making a killing borrowing money from the Fed at 0% and buying treasuries that pay 4%. As Anonymous points out, hyperinflation - and default - would be suicide for the Fed. It would kill the goose that keeps laying golden eggs.

    The only way to avoid both these outcomes is to come up with a way to pay back all the debt. The only way to do this is to get people to give government their wealth.

    Wealth is created thru work, or thru massive increases in productivity made possible by something like cold fusion. Since cold fusion is highly unlikely, the only way to get people to give their wealth to government, and to work hard enough to create new wealth and give it to government, too, is to convince them that their very lives are threatened. And the only way to do this is thru war.

    That is why I believe we will see circumstances unfold that lead in the direction of a really big war. It is the only option that will convince people to create and give away the wealth necessary to pay off the debt and avoid both a dollar default and hyperinflation.

    The decision faced by the Banksters is not whether or not to inflate. The decision they face is timing the war.

    War must happen before the bond market looses confidence in the dollar, and after the Banksters line up all the allies they want on their side. If they don't get their timing right, both default or hyperinflation are still possible.

    I'm praying for cold fusion.

  47. The faulty thinking on Anon. Is that he believes the Fed is God. That they are so smart they can't make a mistake. I actually disagree with the blog poster on what will set this off. Actually Anon and expat229 make the same mistake. They think the US is all powerful and other actors don't matter. Take a close look at the timeline of events....when did the Chinese (the great producers of wealth on Earth) stop buying Treasuries? Sure... China doesn't want to see their trillion dollars of reserves go to zero... But the Fed ain't the only game in town anymore. It isn't a matter of Benny boy pulling lever A and watching the world snap to attention. America is know to be a hollow shell by Asia these days. Anon is too blinded by an American-centric view to see that financial power only trumps Industrial power for a brief moment in time. Just ask the sun set on Brits. Lmao....this pathetic country is soooo done. Just a manner of what lights the fuse.

  48. Your logic is impeccable, Captain.
    We are in grave danger.

  49. HEAR MISH's comments, direct from "the Horse's mouth" so to speak:
    Podcast: http://tinyurl.com/GER-Hyper10

  50. Agreeing with your article in general, but there is one factor more to consider. The initial hyperinflation may contain a period where cash actually grows in value since there may be a shutdown of the electronic payment network in an effort to cut the hyperinflation. Since most people have most of their money in the banks that will make it inaccessible.

    That is why, in addition to putting most of my spare funds into gold and silver, I do have a stock of $1 and $5 bills to spend if the network shuts down. I may be the only person in my neighborhood (who isn't a drug dealer) capable of buying groceries and gas.

  51. Gonzalo,

    I have been reading Mish Shedlock’s blog as well since at least the fall of 2007 and I too had subscribed to his deflation hypothesis. However, your hyperinflation scenario appears to make more sense given that the Federal debt will eventually consume an increasing percentage of every tax dollar unless something is done in the near future. Given the fractured nature of this country’s politics, I can’t see politicians acting in a meaningful way to resolve this issue until it becomes an absolute emergency. That is the way it went down in the fall of 2008. The looming presidential elections kept both parties from cooperating to do what needed to be done (cut spending and raise taxes to cover the government’s expenses). I have read many of your articles in the last few days (through a link on Naked Capitalism) and your conclusions make more sense, even though I still hold Mish in very high regard. Your predictions will come to pass because I just can’t see the clowns in DC cooperating until such time when they see that the problem affects them as well. By then it will be too late.

  52. I wouldn't agree more with an article more than if I wrote it myself. I to do not agree with the current spending spree and started investing in gold and other "hard assets" as far back as 2003. There is one thing I might advise you look into however (if you haven't already) and the correlation to the debt/asset ratio is astounding. If you look at our current national debt after this year it is close to 14 trillion. If you look at the asset value as of 2008 low for IRA/401K/etc plans it is 14 trillion. If you research a bill up before Congress Ways and Means Committee (sponsored by Kerry and others) you will notice a mandatory 401k contribution of not less than 3% of earnings go to buying secured investments (or debt as you say, and I agree with). Now, as always, the dems start saying this isn't mandatory but Isn't that how everything in our past nations history started with when creating these programs? It is my belief the reason behind the banks buying these investment firms is to help with an easy transition for implementing this so called "volunteer" program. This little program will then turn into a social program and everyone will get paid an equal share or very close to it. In the meantime, taxes will still be pushed back up in order to fund the social programs now in place but the debt will be wiped out through the confiscation of private funds. Research Argentina and the BS that went on there. Just another reason why I have pulled my money out of these accounts this past decade (or since 2003 on) and placed it in my vault and hard assets. I took a little penalty but far outweighs them confiscating my funds to place in a general fund and pay me 25% of the actual amount I contributed. In the meantime, I've paid everything off with these funds and invested elsewhere. Crooks are crooks and if you show them your cash they will take it. Its best to hide for now!

  53. Great article, thanks. just 1 comment

    Interest payments on govt debt
    "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? "

    No problem. Don't raise taxes. Just print the money (=create a $ amount electronically out of nothing) to pay the interest.

  54. I think Mish's anti "Shazzam" argument boils down to 'the fat cats have performed this monetary magic purely and simply for their own benefit and their worst nightmare is a "Shazzam" moment which causes them to lose everything, therefore it will never be allowed to happen.' In other words, the average American is not only totally screwed, he's totally screwed forever.

  55. I surely agree an overabundance of Treasury securities is coming into the market and the result is going to be catastrophic. I believe the manner in which they originate does not begin with an auction by the Treasury Department.

    Such a method cannot conceivably create new money for Congress to spend. Selling securities merely transfers money from the seller to the buyer; it does not create money.

    I submit when Congress granted $700 billion for TARP, they transmitted that value of securities to the Fed and the Fed increased the line of credit of the U.S. government/Treasury Department by $700 B. Bingo!! Congress had $700B to spend (for stimulus, wars, SS payments, etc.) and the Fed had $700 in securities. The Fed then exchanged the securities with TBTF banks and Primary Dealers including foreign banks who had bought fraudulently represented MBS. There was no cash involved. This is the same method used to create all fiat money generated by the national debt.

    Many more details are suggested in a writing titled RIP-OFF BY THE FEDERAL RESERVE posted at http://forum.webofdebt.com/viewtopic.php?f=8&t=242 The article concludes the Fed operates a Ponzi scheme.

  56. That is a good article. Unfortunately you do not offer any cure. There is one, and it is straight forward, presented by Antal Fekete. You do make the mistake of confusing real money and fiat currency. Paper currency is NOT money, it lacks the store of value function that characterizes money in addition to the medium of exchange function.

  57. What the...??? Look at that, it really looks horrible! Maybe you should get an efficient solution to eradicate a termite in your house. i'd really say woooow!!

  58. Absolutely brilliant! Thanks for making it so simple and clear! I can see the whole pocture now. You explain things that in many articles sound maeningless but then I guess that's the whole idea with modern media! western exterminators los angeles termite infestation cases have dramatically increased. Damages and repairs brought about by these little “white ants” could reach billions of dollars each year.

  59. Sometimes homeowners are able to deal with small to medium pest infestations on their own but if the infection is very severe then they need Termite Control professionals to fix them.


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