Shrp: What will happen to the three trillion dollars held in reserve by China, Japan and oil producing nations?

Sly: I think that the large private and public debt does complicate things. With states unable to float bonds, and pensions full of rotten instruments you will likely see lots of private pensions disappear, and even state pensions could be scaled back. If federal ss checks are cut, with the large % of population on the dole no longer spending as much, lots more jobs disappear, cycle back into less local govt funding, bigger burden placed on homeownwers (gotta get $ from somewhere) raise property taxes, more defaults... thats why these people are calling it the VERY great depression. Great read; they have been calling this since 2006.
http://www.leap2020.eu/GEAB-in-English_r....

Genesis wrote..

Creating money requires that someone be able and willing to take on more debt.

This isn't always the case. If you are talking about 'creating more money' by lowering the fed funds rate or lowering reserve requirements then yes.. but the Fed can always inject money into the economy through asset purchases. Bernanke outlined some of the ways the the Fed would expand the scale of its asset purchases in his famous 'helicopter' speech on Novemember 21, 2002 (officially entitled: "Deflation: Making Sure 'It' Doesn't Happen Here").

One example from the Bernanke speech: "The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt, as well as domestic government debt. Potentially, this class of assets offers huge scope for Fed operations, as the quantity of foeign assets eligible for purchase by the Fed is several times the stock of U.S. government debt."

After re-reading that speech tonight I'm more convinced than ever that high inflation is in our future.

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One example from the Bernanke speech: "The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt, as well as domestic government debt. Potentially, this class of assets offers huge scope for Fed operations, as the quantity of foeign assets eligible for purchase by the Fed is several times the stock of U.S. government debt."

After re-reading that speech tonight I'm more convinced than ever that high inflation is in our future.

Uh, with what will The Fed buy those bonds?

Good looks?

What's it matter? How does buying foreign bonds help the US economy? Plus, the Fed has to buy our own bonds to fund our budget deficit...no point in funding other people's debt when we have a $9 trillion deficit.

They're inflating asset prices currently. Why wouldn't they print money to buy T-Bills ?

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They're inflating asset prices currently. Why wouldn't they print money to buy T-Bills ?

Sigh... we've been over this - it doesn't work like that.

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Uh, with what will The Fed buy those bonds?

Earlier this year, before I knew of this site, and before I had soured on the hyper-inflation thesis, I had always assumed that the bankers and the govt would come up with some complex and opaque scheme (Resolution Trust Corportation Part 2 or something) that would subsidize/monetize the losses on these bonds and do it in such a complicated way to obscure the truth from the general public.

I still think they'll certainly try it. We've been issuing IOUs for future generations to worry about for so long now that it almost seems like people don't care or are numb to it.

So, if they did do this, and let's say it soaked up all the fictional "home-equity" appreciation from the bubble. Maybe it doubles or triples the national debt...but it takes a while for everyone to figure out that this is what's really going on. Can this scenario actually play out? I think this is one of the pillars of the "DX to 40" (or lower) trade.

Why would this be an unlikely outcome? I'm not arguing against ultimate deflation, I think that's a given. How about an argument for just a bit more inflation before the final deflation?

Genesis wrote..

Uh, with what will The Fed buy those bonds?

With dollars that it produces at no cost through its electronic equivalent of the printing press.

TmyHappy wrote..

What's it matter?

It matters because the 'deflationists' seem to be saying that the only way to get more dollars into circulation is to find someone willing to take on additional debt. I'm just pointing out that there are other ways for the Fed to inject dollars into the system (and potentially avoid the deflationary scenario).

author wrote..

no point in funding other people's debt when we have a $9 trillion deficit.

Actually the deficit is less than $1 trillion. (not sure of the exact # this year)

Shrp,

I just wanted to say that you're explanation was the simplest and most powerfull explanation I've heard yet on why we'll get deflation.

Great job, amazing really that it's that simple.

I'm done trying to convince inflationists myself, I wish them luck, the same luck you wish any opponent right before you do what you gotta do.

May the best theory win.

Mateo, it doesn't work like that.

I know, I know, there are a lot of folks who think it does.

Sorry, nope.

The US Government issues debt which is then purchased (with interest due) and that issuance, since they back it with nothing more than 6,000 nuclear weapons (is that not enough backing?), is the root of inflationary pressures and monetary supply growth. Fractional reserve banking (along with those who privately create money and have no meaningful reserve requirements!) do the rest.

Now the US Government could indeed try to monetize the bad bets, however, doing so would almost certainly be picked up on by the bond market nearly instantly, and the result would be skyrocketing yields as bonds sold off hard.

So far there is no indication that is what they're going to do - but at some point they may try it.

The problem with trying it is that this will simply sink us further into the abyss, as the cost of financing the government's operation will do a moonshot. Were we not in debt to the tune of $9 trillion or so this would not be a big deal, but we are - and that debt rolls over, which means that the higher cost ends up hitting harder and harder as time goes on.

Genesis wrote..

Mateo, it doesn't work like that. I know, I know, there are a lot of folks who think it does. Sorry, nope.

And Bernanke is one of those folks. From one of the most famous lines from his speech: "But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost."

Fiat banks only know how to print. Debt can be forgiven. Money won't be forgiven but the wealth it represents sure is in question.

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“Banking was conceived in iniquity and was born in sin. The bankers own the earth. Take it away from them, but leave them the power to create money, and with the flick of the pen they will create enough deposits to buy it back again. However, take it away from them, and all the great fortunes like mine will disappear and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of bankers and pay the cost of your own slavery, let them continue to create money."

Sir Josiah Stamp - Director of the Bank of England (appointed 1928)
Reputed to be the 2nd wealthiest man in England at that time

You might try reading for content:

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"But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost."

The Fed is not the US Government.

The Government does not produce "dollars" per-se. It produces US Treasury bonds which it then sells. Money = debt = credit, you know, what I've been trying to get through some thick skulls around here!

If Treasury was to actually up and print dollars without selling bonds ("direct" monetary inflation) the consequence would be an immediate reaction in the bond market. Since the US Treasury needs the bond market to be well-behaved (to be able to finance the US National Debt) any such attempt would be contrary to the government's own interest in a very serious fashion.

Are the bonds being suppressed or decoupled by speculative buying ? There is no reason at all, flight to safety included, for anyone to buy T-bills at 4% when real inflation is running 10%.

I don't trust the bonds and most traders down there have been complaining about how maniupulated the game is. No one in the pits are making money. Bond vigilanties are now currency traders.

Thanks Gen. I'm still not selling my GLD or SLV. what can I say.. I'm just another inflationist with a thick skull. :)

Have a good night... looking forward to the next ticker as usual.

The Fed can buy the bad assets directly. The govt wouldn't need to be involved. What then? Is it not practical because it's too big of a hit to the Fed's balance sheet? Could they just change their own rules, or whatever it takes, to avoid the destruction of the very system that they created in the first place?

I really think we need to think outside the box here just to make sure we're not missing something important.

I figure after they hyperinflate, we'll just default. Get a new currency and every American Citizen (hey, finally a benefit to being an actual citizen) gets 100,000 New Dollars. All the old dollars are instantly worthless. That ain't whistling Dixie. Hey! I made a funny.

Or you could carve up some worthless state like say, Alabama, and give the old Treasury Bond holders land. Just like the land we gave the Indians. No one's going to miss it.

Oh yeah, the default is also backed by 6000 nuclear warheads and would be much better than a war. America gets a complete new start with only 49 states!

LOL! Boz - now that's thinking outside the box, for sure.

Unless they create a bomb that doesn't destroy resources or infrastructure, nukes only get foreigners to buy US debt. Business must be conducted until morale improves.

Wealth is what they set out to destroy so that it is centralized into less hands. All cash, anuities, bond coupons clippers and any other holders of wealth will be destroyed. They'll have plenty of cash though.

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Unless they create a bomb that doesn't destroy resources or infrastructure

Ever hear of a neutron bomb?

Sheesh.