But Not Yet

A few things about the Most Hated Asset Class:

  • Mr Bernanke’s announced plans will have him buying essentially all of next year’s new issuance.
  • The primary dealers are accumulating Treasuries; their holdings are at an all-time record.
  • Pension funds and insurance companies still need long-duration securities, even though yields are low.

Of course, if you think the economy is going to surge into growth next year then you will probably want to own gold or Netflix or something, not Treasuries. Be my guest. Looks to me like good end user  (or abuser in the case of the Fed) demand for long Treasury paper.

By the way, I do expect this ends with hyperinflation and the collapse of the dollar (and Treasuries) in good time, “sed noli modo.” as St. Augustine said. For now, I think this piece – “The Main Deflationary Event Is Underway” – has it right.

What is unfolding in Europe is highly relevant to the future of the whole global financial system, and where Europe is leading – into debt deflation, liquidity crunch and depression – many other countries will follow over the next few years. We are in the process of crashing our global operating system, as we did on a smaller scale in the 1930s. Our global credit bubble has peaked, and the debt created in the expansion years – excess claims to underlying real wealth – will not be able to be repaid.

The gargantuan pile of interlocking human promises will become nothing more than dashed expectations. The resulting credit collapse will crash both the money supply and the velocity at which the remaining money circulates in the economy, leaving too little money in circulation to support much economic activity. Credit bubbles bring forward demand by artificially stimulating it, but when they burst, the demand borrowed from the future must be repaid.

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