Quote from: TraderTimm on August 25, 2012, 06:55:57 PM

I have a sneaking suspicion that the entire bond curve is as false and rigged as LIBOR. Time will tell...

lol have you looked at the Fed's balance sheet recently? They are exposed to the tune of over 2/3 of their entire "asset" base in debt instruments with maturities 10 years or greater (including almost 1 trillion of long term mortgage securities, many of which are worth less than 50 cents on the dollar).

You are correct. It is false and rigged - the Fed IS the long bond market right now, but the law of diminishing returns has and is going to keep knocking them over the head, and eventually if they start booking losses it will be a massively humiliating thing for the backstop of the country's "money" to be bleeding monetary losses of its own. I will be laughing hysterically at them at this point, and I encourage all to join in. This is why there is actually huge internal division among the Fed chiefs right now, if you read through their releases. Many of them know this. It's only a matter of time.

To the point of hyperinflation, it's not going to happen in the US. The fed and treasury have hog-tied themselves. They cannot instantly pay back long bonds - they must pay back as scheduled. To pay back early means to default, and the market rejects any more debt issuance and very quickly the dollar itself. Hyperinflation generally only lasts a couple of years, sometimes less. It is impossible to hyperinflate and have the economy still using the same currency 30 years later, when a huge amount of debt needs to be paid off, including social security (20+ years out). And as soon as an attempt were made to "pay off" an existing long-bond with very-debased money, the market would drop like a stone and people would just stop using dollars because that would be a de facto default.

If you look at monetary history, it is inevitable that all fiat currencies die. This happened to the Nubians, the Romans, the British, all previous attempts in the US, and a good 15+ other instances in the 20th century alone (with cases occurring several thousand years ago, because human nature does not change, no matter how we would like to think it "evolves"). Hoever, there is a key difference between eras of true hyperinflation, and eras of high inflation of 20-50%. The instances of hyperinflation were all instances where the political class, the State, had full control over the issue of money and credit. Wiemer, Zimbabwe, Confederate Dollars, etc, were all instances where the government actually had control of the WHOLE money apparatus. This is because it is the nature of the state to promise/mortgage itself out dozens of times more than it could ever afford to, and to "save face" with debasement. The political class makes the farmers and anyone holding tangible assets win out, wipes out the banking system and eventually destroys the currency.

In instances of high inflation, it is always when a central bank or banking system is in control of the issue of what is always the largest portion of any currency in existence - promises to pay it: Debt. Central banks allow for high inflation to benefit the banking system at the expense of savers. Hyperinflation doesn't occur when the government must use the banks as a proxy for its promises, only when the government itself attempts to fund them and controls the entire mechanism for doing so. We don't have to worry about Weimer here, because the banks are beholden to the fed and the fed to the banks, with the state as a third-party benefactor (having its bonds as underlying collateral for all other credit). We just have to worry about 20-50% annual inflation for a few years, which is still gutwrenching for an economy and easily enough to destroy a generation's worth of productive advancement, if not more.

This all hangs on the caveat that the Fed's box of magic tricks could actually spur credit expansion with all those new, shiny reserves just sitting there waiting to explode out into the system and blow up the credit markets.

Considering that the velocity of money in USD terms has collapsed from over 25 to 5 in the past decade, I'm just not seeing it. Ergo, cash is a safe bet for a little while, because even if the economy goes to absolute crap and credit starts to expand, everything we currently do in the brick and mortar world is currently denominated and settled in legal tender, and people calling in debts will create tremendous demand for physical cash notes, for a little while. After that, it's look out below....