Monetizing the debt in order to repudiate the debt

[Philip T]

Originally Posted by Tightwad

Then how does one account for the loss of buying power is to the point where the U.S. dollar is now nothing but a fiat currency? Millions lost trillions in savings and investment in the recent deflationary period that almost collapsed the worlds economies. Where is all that money today?

You have a couple of concepts mixed up on each other, there?

"loss of buying power" (inflation) and "deflationary" are mutually exclusive.

The "buying power" of cash money is now huge. Check with anyone in the housing market. Cash is now so valuable that we joke -- "still having a job is the new raise."

In practice there is No Loss of Buying Power (nor any real inflation) -- and that is what is flawed in the premise of what you are presenting. It does not match the Observable Ground Truth in the Real World.

As far as the money that is not anywhere (and never was) it was make believe in credit accounts and fantasy values of housing and other assets. All of which are merely finding their own (diminished) true value, now. All that evaporated credit was the inflation part of the story you are trying to make up -- it was destroyed and deflation followed.

The cash now being placed into the market by the .gov does not even begin to make up for the loss and evaporation of all that credit and fantasy asset values. Hence, the deflation which is still going on despite the .gov attempt to re-inflate the overall economy.

[mcredux]

Originally Posted by hskrfan2187

To your argument about bond yields...you're assuming the bond market is efficient, much likes professors were pushing the "efficient market theory" in the 1980's. Meaning you think that whatever is happening today, is where things are SUPPOSED to be priced at. .

Nope, no one is assuming the bond market or any other market follows the Efficient Market Hypothesis: that is, where all knowable information is incorporated into bond prices.

I said the bond market is one of the most efficient markets in the world, which it is. In this case, the bond market is efficient enough to incorporate perfectly obvious information into bond prices. A tidal wave of inflation would be one example of perfectly obvious information.

There are arbitrage opportunities in the bond market where an investor can make money. This would violate the Efficient Market Hypothesis.

Originally Posted by hskrfan2187

You aren't accounting for the irrationalities in the market place (bond and stock).

I just wrote four paragraphs on this. By any chance did you actually read my post?

Originally Posted by hskrfan2187

The average person is swarming to US treasuries because they think it's "safe," in relation to the stock market and countries around the world know that the U.S. is the world reserve currency.

The average person is swarming to US treasuries not because they’re “safe”, but because they’re a “safer” than most other investment opportunities at this point—particularly, if you’re looking for a way to store a lot of money that you cannot afford to lose.

In fact, the average person “swarming” into US treasuries is not average at all. US Treasuries used overwhelmingly by institutional investors, foreign banks, and the rich who would be way over FDIC coverage limits. Not the average investor.

Well as far as it being "safe," it doesn't mean much if you get $1.03 back for every dollar you put in if that $1.03 only has the purchasing power of $.90 in relation to when you bought the bond. Just because you end up with more money doesn't mean you increase your purchasing power (which is a mistake the average person doesn't understand, and is why a lot of people that lost money in the stock market are swarming to treasuries).

Your numbers $1.03 and 0.90 imply an annual inflation rate of 14.4%. If your implying you lost this amount over two years, then the annual inflation rate would be 7.2%. Over 3 years, the annual inflation rate would be 4.8%. The last time the annual inflation rate broke 4% was two decades ago. Your example is really unrealistic.

Secondly, this ignores the fact that treasuries do produce a return, albeit a small return. In order for your numbers to hold, the annual inflation rate would have to be even higher, making your example even more unrealistic.

You also fail to mention that in 2009, by most measures, we experienced deflation. In 2010, the inflation rate is on track to be something like 1%.

The little guy is not having his net-worth whittled away by inflation.

But anyway, from a financial standpoint we are the LARGEST debtor nation IN THE WORLD. What on God's green Earth would give anybody, of any rational thought, the idea to flood into treasury bonds?

Because US debt is backed by the full faith and credit clause of the constitution.

There are two ways the US government doesn’t pay back it’s debt:
1) It basically inflates the debt away, which I’ve discussed it’s unrealistic.
2) The US government basically collapses and revolutionaries render the debt void.

There are no other ways of avoiding payment.

As I’ve discussed, many of the investors buying treasuries are institutions, who can't dump a few billion in a local Bank of America.

Second, what happens if we are no longer the worlds reserve currency (looking into the future 5+ years)?

It’s a possibility. But people demand US dollars (in reality, US debt) because:
1)It tends to be safe
2)It tends to produce returns

For the foreseeable future, there will be a demand for US dollars.

the only reason treasury yields are so low is because people are foolishly believing that the U.S. can't have a financial collapse.

Again, inaccurate. Treasury yields are low because:

1) They tend to be more secure than the debt of other governments
2) Few businesses are borrowing money right now. This keeps interest rates low.
3) Inflation is very low right now. Less than 1.5%.

Combine all these—particularly the last 2—and you get negligible rates on treasuries.

for the U.S. it was increased GDP numbers (or economic growth). When 70% of your GDP number is consumer consumption then it looks good on paper when somebody borrows money and buys a brand new car (tada! Increased GDP). What that number doesn't tell you is now that person must pay off that car PLUS interest, resulting in much smaller GDP numbers in the future until the debt is paid off, or at least down to a reasonable level in which the consumer can borrow to purchase more (or actually use savings to purchase).

I already said this: ” People lost money because they unknowingly bought financial instruments and assets that were over-priced and risky. That and they used debt to finance consumption goods (nice cars, vacations, etc.) as well as assets that would only decrease in value…We now know that much of the “economic growth” from 2004-2008 was basically fictitious and financed by debt.”

So you are trying to tell us that because people are buying treasury bonds NOW, that there won't be a problem in the future? You sound just like the financial analysts that said there was no stock market bubble because demand was there and profits were high, failing to look at the fundamental structure beneath the surface.

Again, you’re missing the point of the yield curve. The yield curve gives you a good idea of what inflation will be 2-10 years out. Right now, bond investors are betting that inflation will basically be less than 3% ten years from now. If they thought it would be higher, then the nominal interest rate on US Treasuries would be higher.

They may be wrong, but so far, that is the best predictor of inflation we have.

But I would bet my entire net worth on the fact that interest and inflation rates will be substantially higher 5-10 yrs from now than they are today.

Then why don’t you do it? Put your money where your mouth is. Show bond investors just how wrong they are.

There are various ways you can hedge against inflation, and make a fortune—assuming, of course, you’re right. If you’re so confident of your abilities to read the future, then mortgage your house—if you have one—and invest away.

In fact I would say they will probably be close (if not higher) to the levels of the 1970's.

Unlikely, inflation was high in the 1970’s for two reasons.

1) Arthur Burns was the FED chairman, and for various reasons, he pursued a lax money policy. Some people said it was to help Richard Nixon get elected.
2) Arab Oil embargos drove up the inflation rate.

Currently, there is little reason to suspect either of these two things will happen. They may happen, but again, unlikely.

[Grandpa Pipes]

I wonder is this topic to complex for discussion here?

[Philip T]

Originally Posted by Tightwad

I wonder is this topic to complex for discussion here?

Naw, I do not think so -- it is just there is so much marketing nonsense for gold, Gold, GOLD! I Tells Ya! (As someone noted by folks with 5 teef and a straw hat).

The folks selling the Gold have to promote the fear of inflation at a sales pitch effort worthy of selling Ice Cubes to Eskimos. (btw, if it is So Valuable, why are they advertising so much to sell it?)

Have to filter all that noise out.

What is going on is just a Deep Cycle Deflationary (Depression/Great Recession/whatever you want to call it) response to all the Totally irresponsible behavior of the last 10 years, and the generally irresponsible behavior of the last 30 years.

The combination of business morons and .gov morons have put US back into the Boom-Bust cycles of history. Not that big of deal -- This Too Shall Pass.