Look at the table of US treasury debt rates today, yesterday, last week, last month:
http://finance.yahoo.com/bonds
And we see US Treasury debt is going down, down, down in yield. As Southhack indicates, when bonds go down, you should usually expect deflation (absent panic buying of US Treasury debt as a ‘safe haven.’)
The reason why debt can be deflationary is that at some point, there is so much debt extant that there is NO way it can all be repaid. As that point, we know, a priori, that a whole bunch of ‘money’ that was brought into being by virtue of stupid lending is going to disappear out of the banking system and economy when the debt is defaulted upon, and “poof” - the ‘money’ disappears.
There are a few things I understand.
Americans are laden with public and private debt so vast that we can’t hope to pay it off.
I understand that we have massive over-capacity from both over-production and misallocation.
We are currently deleveraging and everything I see, like Southack sees, points toward deflation. I expect a deflationary depression. Since debt is the cause and deleveraging is the cure, the governments massive new debt spending will make the depression worse than if they had allowed our own austery program. The massive additional government spending and debt is actually hurting the economy by some multiplier.
I think you and Southack might agree with the substance of what I wrote above.
I know a deflationary depression is coming. I know Ben Bernanke wants to attempt to print his way out of deflation and into inflation to avoid a deflationary death spiral. I know this has never worked in history. And I know that Japan tried it and failed.
And this is where my question comes and where I cannot see as clearly as you and Southack.
Bear with me, I am a layman and I always get confused on the specific details of whether it is the Fed or Treasury who can print money, and how debt is monetized, etc... so I do get my terms wrong and mis-state technical details.
Cutting to the chase, where I am struggling is that I can imaging America printing so much money that Americans and the rest of the world flat lose faith in the dollar, causing a hyperinflation.
Southack knows I’m wrong, but I can’t get it in my head WHY I am wrong.
I even asked him to imagine printing an absurd flood of $75 trillion dollars, and I chose such an absurd value so that on the face of it, it is obvious the Chinese, Saudis and everyone on the planet would completely lose faith in the dollar. Southack did not take the bait. He treated my absurd number as if it was a real world possiblity saying that the $75 trillion would just cause more harm than good in causing more deflation. My gut tells me it would cause a complete loss of faith in the dollar, resulting in hyperinflation.
So while I agree with everything you and Southack have stated about existing conditions and where we are going (deflation), my dense stubborness can’t conceive why printing mass quantities of dollars would not cause a loss of faith in the dollar and resulting hyperinflation.
I guess my qustions to you would be:
1) Will the US choose to default outright on our debt (sorry, we can’t pay you so go away) or print (here is your $13 trillion in funny money we printed last night).
2) If the US chose to print $13 trillion, wouldn’t this collapse the value of the dollar against all assets and other currencies, and why would deflation still occur, as opposed to hyperinflation from loss of confidence in the dollar.
I am dense but not stupid, and I am really struggling to see why printing massive quantities of dollars would not result in loss of confidence and hyperinflation.
Frankly, I am poised better for even strong deflation than I am for hyperinflation, so I would prefer you and Southack being right. I would prefer to see my mother living on a fixed income in a deflationary depression, then being a destitute beggar with here life net worth wiped out by hyperinflation.
I’m not hoping for it - I am terrified of it. I would love to sleep at nights knowing this possibility can’t occur but I see it as the likely outcome over a long deflationary depression, because Bernanke has made it clear he will *attempt* to print our way out.
Southack is saying that Bernanke won’t succeed in reversing a deflationary spiral. I can’t see his point because I see there have been plenty of modern hyperinflations caused by unlimited printing by governments. Japan seems to be the exception to me, and not the rule.
WHAT AM I MISSING? I’m really struggling with this. Please help me out. Thanks. There are a dozen, really astute people here, you among them, and there is no way I disregard your viewpoints, so when we disagree, I always ask myself “WHAT AM I MISSING?”
I have a question regarding the table of US treasury debt.
I can see that the long end shows very low rates. What does that mean? Is this because people are locking up 30 year bonds because they expect 3 decades of deflation, or is this because what little 30 years are selling in a “flight to safety” is driving down their yields, or because the Fed is buying them?
Please teach me, but I was under the impression that sales of long bonds have fallen off a cliff and most investors are on the very short end due to the clear uncertainty of what rates will go to in the future?
I see the table but I don’t know how to analze the data. If the volume of 30 year bonds is huge, I would expect that to mean people are locking up their money at 4% because they think 30 years out that will be a good rate. If people are buying huge volumes of 2 year notes and shunning the 30 year, that tells me that people know rates will leap up and don’t want to lock up their money for any length of time.
Do you know which is happening?