Don't bet on hyperinflation!

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draper87's picture
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Don't bet on hyperinflation!

I just finished reading one of Mike Stathis' articles on financialsense.com

 http://www.financialsense.com/fsu/editorials/stathis/2009/0313.html

So I was just wondering whether anyone with a little bit more knowledge than a 22 year-old could share their views on this article.

Personally, I feel he makes a strong point but like I said I'm young and would just like a second or third opinion.

 

Mike 

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Re: Don't bet on hyperinflation!

Ok, I'm sorry but this article is rediculous. Everyone is totally entitle to their opinion. but his entire basis has no standing or merit for that matter. It seems to me it is just a guy that wants to believe in his country (which is fine)

Here is the first paragraph that tips me off...

"Sure, I know the federal debt is $11 trillion (the real debt is much higher). In fact, based on my forecasts, it could triple over the next decade. And yes, I understand the massive bailouts and the near 0% short-term interest rates. Based on my forecasts, America is going to have eye-popping annual budget deficits for years to come. Only off-balance accounting tricks can hide what will be an inescapable decade-long period of massive annual deficits. As well, I expect several trillions of dollars to go towards additional bailouts and stimulus packages over the next couple of years. Washington will keep throwing money into the fire pit until they see signs of improvement."

So, this guys is saying he expects all of this to happen, and doesnt even mention any of the other things coming down the pike we all know about. We can't even afford what w have now, how are we to afford "tripple in 10 years." Then to top it off here is his argument on why it wont happen...

"Now stop and take a step back. While America has many problems, it’s still America. It’s still the most powerful nation on earth. Don’t get me wrong. Things are a mess and have been for many years. The working class keeps getting squeezed. Job quality has been in decline for two decades, while incompetence and fraud in Washington and corporate America continue to reach new highs. America’s enormous debt is going to skyrocket….guaranteed. But that doesn’t necessarily translate into hyperinflation. In America’s case, it most certainly won’t; not in our life time anyway. "

I thought I would include this paragraph to show he seems to contiune to list problems with absolutly no reguard for what the future holds for them. How can the working class get squeezed, and job quality decline, yet we are m agicly going to pay off this massive debt? After all the government gets its income from taxes...and this is at the current debt, what happens when it is double, god help us if it tripples. now for he reasons,

"Now ask yourself the following questions. Does America still have the world’s leading economy? Does America still have the world’s leading military? Does America still lead the world in technology and innovation? The answer to all three questions is yes. However, the gap is closing. And at some point in the future America could find itself in a period of instability that ultimately leads to hyperinflation. But over our life time, it’s not going to happen. Nations just don’t jump from top to bottom over a couple of decades. It takes many decades of devastating financial mismanagement, societal, economic, and political demise"

Now lets ask these questions

Does ameria still have the worlds leading economy? I would argue No we do not, infact just the idea that China is looking at growth still says something (although I dont think I am a firm believer in perma growth)

Does America still have the worlds leading military? I'm not an expert, but being active duty USAF I would argue against this too. We are in no ways the weakest either, but not the leading. To throw one example up here; about 98% of our fleet is more than 40 years old. The tanker we use (the only one, not counting the KC10 which is older) is older that 50 years. It is costing more to try to keep them in the air than it would to buy new, but thats a whole other issue...

Does America still lead the world in technology and innovation?  I would argue this too with one word...Japan. We are not last here either, but we don't lead the pack

Then he goes on to say, "it takes decades of mismanagement." How many decades does he want? The way I see it we can go m back to the 30's. Every generation just pushed the problem out to the next until it could not be pushed out anymore which leads us into now.

I would quote  more of this article, but alll he says over and over is it won't happen. His only reasons are what I posted above and that America will start a war first. Although the war part could prove to come true (no way we can predict). I can tell you I don't think this time around america could handle. We are stretched to thin, with aging equipment, and no money just to name a few.

I hope this helps... I would highly recommend this guy take the crash course. I'm not saying hyperinflation is iminant, but the way I see it, inflation is coming. The more they spend and expand the money base the worse it will be. 

Inflation=the expansion of the money supply without expansion in the product base...EXACTLY what we are doing

 

Mike

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Re: Don't bet on hyperinflation!

I agree with the last post.

Wars are in fact one of the leading causes of hyperinflation, since they cost an enormous amount of money to wage, which the government doesn't have so it relies on the central bank to print the 'money', which devalues the 'money', which is inflation.........

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Re: Don't bet on hyperinflation!

And DONT FORGET there are no winners in War only losers and the objective is to loose the least.

Cambodia - Vietnam - Iraq and all the others that do not make the news or if they do not objectively reported.

The One to lose the least cries I won!

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Re: Don't bet on hyperinflation!

Cheers guys I totally agree, I was second guessing myself firstly because I'm pretty young and not that experienced in reading the economy/monetary systems, the other reason being that this guy seemed like he knew about the problems in the economy.

But at a second glance and with your insight it seems as though he is misinformed, I myself was a little confused when he said that USA would go to war before they let inflation kick in. Wouldn't that make the inflation problem worse, clearly every war the USA have been in is inflationary.

Anyway, thanks again people...lots of help in clearing that up for me!

First things first, let's see how high this dead cat (Dow) bounces before it comes crashing back down. Some interesting weeks/months lie ahead.

 

Mike

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Re: Don't bet on hyperinflation!

But at a second glance and with your insight it seems as though he is misinformed, I myself was a little confused when he said that USA would go to war before they let inflation kick in. Wouldn't that make the inflation problem worse, clearly every war the USA have been in is inflationary.

Iraq, Afghanistan, Pakistan. Aren't these wars? And isn't the U.S. spending a trillion or so on these wars each year? Most of the Western world is in the same boat and it is based on the fact that we are part of the NATO and the UN. NATO was meant to be a defense covenant and the UN was meant to bring peace to the world, but nobody seems to remember it. Today we are talking about bringing freedom to the people all over the world. We don't care about that fact that we haven't declared war. We just send our troops to foreign countries and we don't know what happens. Sure, you can watch TV and learn what you should know, but you don't know reality.

So besides the existing "conflicts", we are looking for additional wars? If you want to know how fast hyperinflation can happen, then look at German history:

By late 1923, the Weimar Republic of Germany was issuing two-trillon Mark banknotes and postage stamps with a face value of fifty billion Mark. The highest value banknote issued by the Weimar government's Reichsbank had a face value of 100 trillion Mark (100,000,000,000,000; 100 billion on the long scale). One of the firms printing these notes submitted an invoice for the work to the Reichsbank for 32,776,899,763,734,490,417.05 (3.28×10^19, or 33 quintillion) Marks. (Source: http://en.wikipedia.org/wiki/Hyperinflation)

You don't need a lifetime, you don't even need a decade. Of course it seems extraordinary, because we tell ourselves that hyperinflation can take place everywhere, but not in our country. 

The Germans once thought the same and unless mankind is willing to look at history, it will repeat, even in the U.S. It's all based on trust and I can tell you that the U.S. is losing trust rapidly. Because of this, there have to be measures very quickly, probably at the next G20 meeting. Otherwise it's only a matter of time unless countries are starting to actively sell their U.S. bonds and stop lending more money, which will be the beginning of massive inflation. Not necessarily hyperinflation, but high inflation. If as a result the U.S. Dollar is dropped as the world reserve currency, then there is a good chance for hyperinflation. Just look at the U.S. trade deficit. You can import goods as long as you can pay in Dollars. Once Dollars are not accepted anymore, you have a big problem.

China is sending clear signals that they are worried about the U.S. Dollar. And China does not belong to the countries the U.S. can occupy, like Iraq and Afghanistan, so a war isn't really an option, unless you are very destructive. If that happens, we certainly have different problems. The U.K. publically announced that they are now printing their way out of this mess. Maybe they are printing (creating) enough money to step in and buy U.S. Treasury Bonds, which eventually leads to the same situation you had more than 200 years ago, when the Bristish Empire controlled America.

History repeats.

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Re: Don't bet on hyperinflation!
jdownie wrote:

I agree with the last post.

Wars are in fact one of the leading causes of hyperinflation, since they cost an enormous amount of money to wage, which the government doesn't have so it relies on the central bank to print the 'money', which devalues the 'money', which is inflation.........

Over the course of a year, the US spends about $9B per month - for 72 months, ~$656B so far for the wars Iraq and Afghanistan.

Contrast that to $787B in a stimulus package that 'created' the money out of thin air.  That works out to a spending rate of $65B per month.

An observation - stimulus packages are seven times worse than war??  Anyone know what 7 X hyperinflation is?

Heptacontainflation?

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Re: Don't bet on hyperinflation!
Dogs_In_A_Pile wrote:

Heptacontainflation?

Thats awsome.....Im gonna use that one too, lol

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Re: Don't bet on hyperinflation!
Dogs_In_A_Pile wrote:
jdownie wrote:

I agree with the last post.

Wars are in fact one of the leading causes of hyperinflation, since they cost an enormous amount of money to wage, which the government doesn't have so it relies on the central bank to print the 'money', which devalues the 'money', which is inflation.........

Over the course of a year, the US spends about $9B per month - for 72 months, ~$656B so far for the wars Iraq and Afghanistan.

Contrast that to $787B in a stimulus package that 'created' the money out of thin air.  That works out to a spending rate of $65B per month.

An observation - stimulus packages are seven times worse than war??  Anyone know what 7 X hyperinflation is?

Heptacontainflation?

 

I don't know what you guys are going on about. Why just yesterday Obama assured the country that everything is going to be just fine after we get through this difficult period.

I believe it. Of course I do. Of course I do Of course I do Of course I do Of course I do

 

NOT

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Re: Don't bet on hyperinflation!

KenC,

Great post,
I think the majority of Americans want to believe that crap. I think Obama does too.

The sad fact is positive thinking is about as likely to change the outcome as Cheering loudly is to make your football team win.

Mike (That1guy), what do you do in the USAF? If you're not ok with posting, send me an email.
I'm USAF Alumni as well. Seems to be quite a few of us around... I think we've got the submariners well outnumbered :D

I'll be watching further discussion on this topic - Personally, I'm betting on hyperinflation... but I'm not as savvy as most on this topic!

Cheers!

Aaron

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Re: Don't bet on hyperinflation!

“What you’re doing is buying into the notion that if we just print some more money that we don’t have and send it to different states, we’ll create jobs,” he said. “If that’s the case, why isn’t Zimbabwe a rich place?”

 

http://www.cnn.com/2009/POLITICS/03/11/stimulus.sanford/

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Re: Don't bet on hyperinflation!

There is such a huge desire to believe in the hyperinflation scenario on this website I think this will be my last post attempting to explain why that's just not right at this point in time...though it might be right in a couple years...

We don't live in a currency-based system.  We live in a debt-based system, i.e. a system where auctioned credit determines "money supply."  The Fed isn't cranking out $1,000,000 bills like Weimar did.  They are engaging in loans/repos, attempting to create credit so banks create credit (aint working).  Global credit is completely deflating.  That's the "money supply"...the extra leverage the Fed is taking on in order to attempt to expand credit will do nothing to create inflation until credit/debt bubble is fully deflated. 

Chris M is right that the monetary system we have depends on inflation.  That was demonstrated over the last 80 years since the depression.  We experienced slow inflation over those years...though slow it was extremely destructive in cumulative terms.  So Chris was right.  But the inevitable end point has been reached where that 80 years of inflation is crumbling.  This is similar to Chris saying the system depends on ever-increasing energy supply.  We know the assumption of infinite energy is not possible and not true.  Likewise, the assumption of perpetual inflation is not possible and not true.

 

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Re: Don't bet on hyperinflation!

strabes -

Unless the Fed changes the requirements for excess reserve holding coming out the other end of this mess, you will have a currency based system when the credit bubble deflates.  And you will have so much money available to flood into the system, the shift from a debt-base to a currency base will be instantaneous and horrendous.

Managing the trip to the bottom and walking the knife edge out is the only possible way for the Fed to extricate themselves from their disastrous policies.  And given that the same goofballs are in place, walking that knife edge is probably not going to happen.

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Re: Don't bet on hyperinflation!

That's just not what's happening.  What they're doing is locking up buying power, taking it from the masses and the next several generations.  See this post and ask yourself how a system of propping up key elite rich people at Goldman, Citi, etc so they can park money in Swiss vaults creates excess currency for the masses to generate inflation?  

http://www.peakprosperity.com/comment/23794#comment-23794

The Fed is a cartel of private bankers who own bazillions in treasuries.  Excessive inflation is their biggest enemy...they won't let it happen at least for a while...they will jack up rates to necessary levels to squash it. 

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Re: Don't bet on hyperinflation!

I'll try and find the link - there was a chart somewhere in here that showed a historical trend of bank reserves.  If memory serves me well, the reserve requirement has been raised to almost 4 times what the previous requirement was.

And I'll need something besides anecdotal evidence that the money went directly from the Treasury Department's presses to a Swiss vault labelled "Rich Guy #1 from Goldman", "Rich Guy #7 from Citi"

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Re: Don't bet on hyperinflation!
dogs wrote:

And I'll need something besides anecdotal evidence that the money went directly from the Treasury Department's presses to a Swiss vault labelled "Rich Guy #1 from Goldman", "Rich Guy #7 from Citi"

You can't get that evidence on a macro level because the Fed won't tell us anything.  As congressmen ask Bernanke for details on where the money is going, he just says "screw you."  Then he goes off to non-public meetings with non-public people where they discuss what to do.

On a micro level, hasn't everybody heard of the absurd bonuses being paid out?  Where do you think Wall St big players put their multi-million $ bonus money?  The US banking system?  LOL.  We also know the key institutions being propped up from evidence like the article linked above.  Who are the primary debtholders and preferred shareholders of those institutions? 

We know they are getting the money and that we aren't getting it, even though the theory is that if they get it they will multiply it out to us.  Hmm...if it's going in but not coming out, where is it?  Saying it's going to swiss vaults is my weak editorial way of pointing this out.  It doesn't matter what they're doing with it...the point is that it's sitting somewhere, not being loaned out.  The point is that money velocity is near zero.

 

 

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Re: Don't bet on hyperinflation!

If the minimum wage drops, I'll believe we're deflating.  

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Re: Don't bet on hyperinflation!

I thought the definition of inflation is when excess money is
chasing a shortage of goods. We are nowhere near that.  Instead we have
a lack of money facing massive global excess capacity.  Deflation is a
much bigger bogie stalking the future!

However much money is
printed by nations, unless it gives consumers a huge and sustainable
boost in their disposable incomes over many years, fear of debt and
deflation is going to cause increased savings (thus, ironically,
increasing the chances of deflation).

Yes, the amount of money
being printed is huge and who knows if any of our leaders know what
they are doing (probably not!) but as a fraction of global GDP it is
still small.  In 2008 global GDP was over 78 trillion dollars with the
US, EU, Japan and China contributing 42.3 (54%) trillion of that GDP.

The
US dollar has already become the world's 'safe' currency in the last
few months and this will continue to happen.  Those countries that hold
huge levels of US Treasuries would have to find a better place for
their money before they would consider selling out, partially or wholly

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Re: Don't bet on hyperinflation!

plantguy, you're the first investor I've ever heard of that watches Congress for your technical indicators.  There are better ones...for example the bond market.   Wink

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Re: Don't bet on hyperinflation!

Barnside, welcome aboard!  I've been alone on this site fighting the hyperinflation argument.  It's good to have someone else who understands that, yes inflation will come eventually, but until then the global monetary system is built on US treasuries, the lowest risk haven at the top of the pyramid, and that market is screaming deflation to come for a while.

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Re: Don't bet on hyperinflation!

Strabes,

I understand and agree with your argument re: deflation.  However, what effect will the huge increase in debt-servicing/GDP ratio have on all this?  The US has the luxury of borring in it's own currency.  That also gives it the power to devalue it's own debt.    How soon and by how much will this be necessary, and won't this development be independent of whether or when the economy starts to heat up (if it ever does)?  That is, couldn't inflation get here much sooner than the economy would otherwise have us believe?

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Re: Don't bet on hyperinflation!

Japan has a 195% debt/GDP ratio and its market has been down 80% for 15 years, yet it's still quite solvent and people like the Yen.  It seems debt/GDP isn't an appropriate measure for risk of default when it comes to nations.  I think the key is ability to borrow and its ownership of liquid assets (hard-working taxpayers).  The US is king of both of those, and market prices reflect that view.  

I'm sure it's possible, but I just don't see how it could come soon.  If there's a run on treasuries, the Fed will jack up rates to defend itself...deflationary.  If the US govt starts literally printing currency, there'd be a run on treasuries, rates would skyrocket, deflationary.  

I think inflation coming from the economy hypothetically heating back up doesn't seem possible given all the deflationary forces in the economy...credit disappearing, more unemployment coming, commercial real estate collapse coming, insolvent banking industry, Moore's law, downward manufacturing wage pressure due to globalization.  

I could be all wrong.  I'm holding some gold in case (though not nearly as much as I would if we were going into inflation).  I just wish I could be back in my mommy's womb for the next few years.   

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Re: Don't bet on hyperinflation!

I read that article. I didn't post it in the DG, I think it was beyond the realm of possible thought I do like differing opinions. At a deficit of 2.5-3.5 trillion and with massive debt of 11 trillion and 5 times that in obligations I think it will be short time before Ben does QE and with that I totally expect hyperinflation. I think he wants to devalue the buck and it is why China has thier shorts in a knot. Take care

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Re: Don't bet on hyperinflation!

Strabes,

Is that 195% trailing 12 months or forward 12 months?  Because if it's TTM, wouldn't you agree it's about to almost double due to collapsing GDP?  Also, I'm not sure there is a clear parallel here.  Japan has had a positive trade surplus for years, allowing it to pay down its debt hasn't it?  The US has had a trade defecit for over two decades, has just committed near $2 trillion in bail outs and stimulus plans, and upcoming SS payments are due to put it in the red even more.  Total US debt, including SS, Medicare and Medicaid, as shown in the CC are near $60 trillion, which would be in the neighborhood of 400%, and that's using TTM GDP.  

I agree we're in a deflationary phase at the moment, but I'm afraid it's just the calm before the storm.  Japan was able to tread water by producing goods and generating a trade surplus.  I don't see the US being able to do that anytime soon, so sooner or later the government will be forced to print money just to pay down the debt.  Yes, the dollar may continue to be the world's reserve currency, if only because all the others are even worse off, but that does not mean it cannot or will not devalue significantly.  

By the way, I'd be interested in knowing what the debt-service/GDP, or interest-payments-on-the-debt/GDP ratio is.  Any idea what it is or where to find that info?

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Re: Don't bet on hyperinflation!

PS http://www.netcastdaily.com/broadcast/fsn2009-0314-2.asx

I'd HIGHLY recommend listening to the last 1/2 of this, the green investing I have yet to listen to might be good. BUT, the second part was an interview with ShadowStats John Williams, the guy is exceptionally smart, as is Puplava. It focuses on unemployment figures and GDP and deficits are touched upon.

IMHO these two have nailed it from everything I have come across I'd bet my last buck on their assessment.

Take care 

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Re: Don't bet on hyperinflation!

Strabes,

please don't stop arguing against hyperinflation here on this site, as long as you see continued evidence of deflation in the future. I, like many here, have bet on hyperinflation with PM purchases, and I don't want to hear that deflation may rule the game for years to come, but I'm not stupid enough to ignore reasoned arguments to the contrary. You haven't convinced me, but that may only because I haven't managed to grasp macroeconomics to the point where I can be convinced one way or the other. I want to keep reading both sides of the argument, and I appreciate your taking the time to engage in it, even though you feel like a lone voice. I hope you'll continue...

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Re: Don't bet on hyperinflation!

Davos, my opinion is they don't want to devalue.  I think the Fed will defend its portfolio of treasuries and raise rates if China runs.  The regional Feds are privately owned banks with huge treasury portfolios...they will defend treasuries and shoot rates to the moon if necessary despite the horrific effect (deflationary) on the US economy as it clamps down on any remaining credit.  

That Williams guy on your link talks a lot about depressionary forces, raising taxes, carbon fees, high unemployment, all of which are deflationary.  The Depression was also deflation.  Then at the end he says we're at risk of inflation.  I think that's a disconnect.  The Fed is not printing currency.  It is extending credit, i.e. loans/repos which get paid back eventually, trying to reflate the credit system.  Won't work.

Patrick, I don't know if it's forward or trailing.  I got the number from an analyst I'm in dialogue with in Switz.  But if you want to look up the details I would think the numbers you're asking about would be in the Economic Report of the President that you could google.

Yes there are big differences between us and Japan so it's really apples/oranges, but I was just throwing a stat out about their debt/GDP to say that it doesn't seem to be by itself a very important number (it is for companies, states, etc. but apparently not for nations with their own monetary system).  The US' biggest asset is its massive tax base.  On the other hand, it's a total debtor nation.  So I think in the longer run it's in real trouble.  The Swiss for example are way better off because their banking system owns trillions in liquid assets, whereas the US banking system is insolvent.  China is better off as well...it owns a good chunk of our $'s.  But for now the $ wins because it's on top of the world system.  

 

 

 

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Re: Don't bet on hyperinflation!

Strabes,

I don't get the impression that your comments are that far off the rest of the group's thinking. It appears that we all agree we are in a deflationary period right now. The questions are "when will it end" and "how much inflation will we encounter when we come back out of this mess?"

As noted in other threads, holding some amount of PM for the LT is probably a wise move. Although, if you don't already have some, I'm not sure that this is the time to start (but that's just me).

My gut feeling is that we will see significant inflation down the road when the smoke starts to clear (late 2009 or sometime in 2010?).

History repeats so, as sure as apples grow on trees, this country will work its way back into some kind of euphoria again and generate a new bubble of something (commodities, solar, ice cream?).

I just wish I could be back in my mommy's womb for the next few years.

I love this line - I think it reflects the feelings of a lot of us!

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Re: Don't bet on hyperinflation!

Inflation:

  • A nickel ain't worth a dime anymore.--Yogi Berra (1925--), U.S. baseball player
  • Invest in inflation. It's the only thing going up.--Will Rogers (1879--1935), U.S. humorist
  • One of the principle troubles about inflation is that the public likes it.--Lord Woolton, British politician
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Re: Don't bet on hyperinflation!

Strabes, you are missing a basic fact.

Interest rates are the yield on bonds. Bond values are the inverse of bond yields, another way to say it is that interest rates are determined by the bond market, interest rates falling is bond values rising.

The Fed shooting interest rates to the moon is not defending Treasuries (I assume you mean maintaining their value), it is destroying their value. Do you think bondholders would accept this?

 

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Re: Don't bet on hyperinflation!

No you're missing it...the bond market is more complex than 1 yield/price...it is laddered across time dimensions that operate differently.  

If the Chinese run from bonds, prices go down, long term rates go up.  Yes you're right.  And that by itself is inflationary.

I'm talking about how the Fed anticipates that and defends.  It raises short term rates by raising Fed Funds rate.   This attracts capital to the $ and keeps the yield curve from getting steep.  And it is also a serious austerity noose on the economy...deflationary brake against the inflationary run on bonds.  The big bond traders would simply ride the yield curve back to short term bills in that case because they know the Fed will raise ST rates faster than the market will raise LT rates.  

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