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How Hyperinflation Will Happen
• Seeking Alpha / Gonzalo LiraBoth the Federal government and the Federal Reserve are
hell-bent on using the same old tired tools to “fix the
economy”—stimulus on the one hand, liquidity injections on the other.
(See my discussion of the deficit here.)
It’s those very fixes that are pulling us closer to the edge. Why? Because the economy is in no better shape than it was in September 2008, and both the Federal Reserve and the Federal government have shot their wad. They got nothing left, after trillions in stimulus and trillions more in balance sheet expansion, but they have accomplished one thing: they have undermined Treasuries. These policies have turned Treasuries into the spit-and-baling wire of the U.S. financial system—they are literally the only things holding the whole economy together.
In other words, Treasuries are now the New and Improved Toxic Asset. Everyone knows that they are overvalued, everyone knows their yields are absurd—yet everyone tiptoes around that truth as delicately as if it were a bomb. Which is actually what it is.
It’s those very fixes that are pulling us closer to the edge. Why? Because the economy is in no better shape than it was in September 2008, and both the Federal Reserve and the Federal government have shot their wad. They got nothing left, after trillions in stimulus and trillions more in balance sheet expansion, but they have accomplished one thing: they have undermined Treasuries. These policies have turned Treasuries into the spit-and-baling wire of the U.S. financial system—they are literally the only things holding the whole economy together.
In other words, Treasuries are now the New and Improved Toxic Asset. Everyone knows that they are overvalued, everyone knows their yields are absurd—yet everyone tiptoes around that truth as delicately as if it were a bomb. Which is actually what it is.
So this is how hyperinflation will happen:
One
day, when nothing much is going on in the markets, but general
nervousness is running like a low-grade fever (as has been the case for
a while now), there will be a commodities burp: A slight but sudden
rise in the price of a necessary commodity, such as oil.
This will jiggle Treasury yields, as asset managers will reduce their Treasury allocations, and go into the pressured commodity, in order to catch a profit. (Actually it won’t even be the asset managers—it will be their programmed trades.) These asset managers will sell Treasuries because, effectively, it’s become the principal asset they have to sell.
This will jiggle Treasury yields, as asset managers will reduce their Treasury allocations, and go into the pressured commodity, in order to catch a profit. (Actually it won’t even be the asset managers—it will be their programmed trades.) These asset managers will sell Treasuries because, effectively, it’s become the principal asset they have to sell.
It
won’t be the volume of the sell-off that will pique Bernanke and the
drones at the Fed—it will be the timing. It’ll happen right before a
largish Treasury auction. So Bernanke and the Fed will buy Treasuries,
in an effort to counteract the sell-off and maintain low yields. They
want to maintain low yields in order to discourage deflation. But
they’ll also want to keep the Treasury cheaply funded. QE-lite has
already set the stage for direct Fed buys of Treasuries. The world
didn’t end. So the Fed will feel confident as it moves forward and nips
this Treasury yield jiggle in the bud.
The
Fed’s buying of Treasuries will occur in such a way that it will
encourage asset managers to dump even more Treasuries into the Fed’s
waiting arms. This dumping of Treasuries won’t be out of fear, at least
not initially. Most likely, in the first 15 minutes or so of this
event, the sell-off in Treasuries will be orderly, and carried out with
the idea (at the time) of picking up those selfsame Treasuries a bit
cheaper down the line.
However,
the Fed will interpret this sell-off as a run on Treasuries. The Fed is
already attuned to the bond market's fear that there’s a “Treasury
bubble”. So the Fed will open its liquidity windows, and buy up every
Treasury in sight, precisely so as to maintain “asset price stability”
and “calm the markets”.
The Too Big To Fail
banks will play a crucial part in this game. See, the problem with the
American Zombies is, they weren’t nationalized. They got the best bits
of nationalization—total liquidity, suspension of accounting
and regulatory rules—but they still act under their own volition, and
in their own best interest. Hence their obscene bonuses, paid out in
the teeth of their practical bankruptcy. Hence their lack of lending
into the weakened economy. Hence their hoarding of bailout monies, and
predatory business practices. They’ve understood that, to get that
sweet bailout money (and those yummy bonuses), they have had to play
the Fed’s game and buy up Treasuries, and thereby help disguise the
monetization of the fiscal debt that has been going on since the Fed
began purchasing the toxic assets from their balance sheets in 2008.
But
they don’t have to do what the Fed tells them, much less what the
Treasury tells them. Since they weren’t really nationalized, they’re
not under anyone’s thumb. They can do as they please, and they have
boatloads of Treasuries on their balance sheets.
So
the TBTF banks, on seeing this run on Treasuries, will add to the panic
by acting in their own best interests: They will be among the first to
step off Treasuries. They will be the bleeding edge of the wave.
Here the panic phase of the event begins:
[more...]
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