A massive deficit, piled upon a mammoth debt, made possible by dollar debasement.

Extreme credit market intervention by the Federal Reserve is a prerequisite.  So, too, is the utter denial of price inflation by the Bureau of Labor Statistics.  This week's consumer price index (CPI) propaganda reported the all items index increased 0.4 percent in February and 1.7 percent over the last 12 months.

The combination of extreme credit market intervention and bogus inflation reporting is making a mockery of credit markets.  Where to begin?

When you purchase a Treasury note you are lending money to the government for a specified period of time (i.e. 30 days to 30 years) at a fixed rate of interest or yield.  The risk of default on Treasuries has generally been considered nonexistent.

The federal government, with assistance from the Federal Reserve, can always print money to pay its debts.  But this isn't without risks.  Because printing dollars to pay debts devalues the existing stock of dollar.  So while the nominal return is preserved…the inflation adjusted return goes negative.

In short, inflation destroys Treasury values for investors.  To account for expectations of rising inflation, yields rise.  But this presents another problem for long term Treasury investors.

When Treasury yields go up, Treasury prices go down.  Over the last eight months, the yield on the 10-Year Treasury note has increased from 0.5 percent to over 1.54 percent – or 104 basis points.

Treasury investors stand to face major losses.  Moreover, as interest rates rise, and borrowing costs become more expensive, several other things happen.

High priced stocks become less attractive.  In addition, higher borrowing costs make it harder for over leveraged zombie corporations, state governments, municipalities, and Washington to roll over their debts.