[KarlInOhio]

The problem with this theory is that the Fed only controls short term rates. Long term rates are set by the market. One of these days bond investors will reject 3%, 4% or even 5% rates on 10 year bonds and there is nothing the Fed can do about that. Maybe the government can keep the economy down to keep rates low, but a loose money Fed with a government trying to keep the economy stunned is the path to 1970s stagflation.

[pierrem15]

Then they will have to paper their walls with bonds: in that kind of market, no one will be capable of redeeming their T-Bills except with other T-Bills offering a low rate.

So if they force a default, they'll have eat probably 80%-100% losses on investment.

What they can do is slowly ease out of T-Bills. The Fed mainly has to pay only itself back, which they can simply do by rolling over T-Bills.

In essence, the debt held by the Fed will be rolled over eternally.

[PGR88]

The problem with this theory is that the Fed only controls short term rates.

Only partly true. Yes, the FOMC controls short-term rates, but with past QE practices and the period of 2011-2013, the Fed has attempted to drive down long-term interest rates buy buying long-dated bonds and selling medium terms ones. The Fed has absolutely become the "Central Planner" of the US economy. You can be assured they will try everything to keep long-term rates low as well.

It will be a currency crisis that lays this bare - the point when foreigners (and Americans) don't want to hold US Dollars any longer. Expect capital and travel controls as well as gold/silver confiscation as the US tries to prevent money from leaving the country.

[Hugin]

One of these days bond investors will reject 3%, 4% or even 5% rates on 10 year bonds and there is nothing the Fed can do about that.

The Fed is already doing it, by buying back those bonds with fiat money. That's why QE won't stop, and real inflation will continue.

[nascarnation]

Thanks for stating concisely what I was trying to put down in words.

[aMorePerfectUnion]

“the Fed only controls short term rates. Long term rates are set by the market.”

As long as the Fed can continue quantitative easing by buying bills, notes and bonds, there is not market to set rates. The Fed finances the debt by purchasing them privately.

How long can they pretend to create money, hand it to the gov’t to overspend and not have the system collapse? Only as long as people think the emperor has clothes.

Other nations are already circumventing the dollar as reserve currency.