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Thread: Catastrophic inflation (death of the dollar)

  1. #1
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    Default Catastrophic inflation (death of the dollar)

    OK; say inflation finally takes off (the pressure is there)...The fed would have to raise rates to combat it.(could go double digits)
    HERE'S THE RUB............How do you significantly raise interest rates with national debt in the multiple trillions & growing?
    The interest rates government would have to pay on treasuries would overwhelm the tax base, leaving nothing in the government coffers to run the country.
    The only way left out of the mess is to devalue the dollar & print trillions in monopoly money to pay off the debt.
    RESULT; death of the dollar and an eventual reset. really.......no other way out!

    Ag guy
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  2. #2

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    Sovereign / national debt is a tricky beast. At the end of the day no one really knows the limit of the upper bound, but we can look to other advanced economies for indicators. US Debt to GDP was 104.1% at the end of Q3 2018, whereas Japan's is 250%+. Yet, despite Japan's considerably higher leverage profile relative to the US, borrowing costs are still extremely low -- in fact yields on the Japanese 10 year notes are currently negative.

    This suggests that the upper bound of how leveraged a large, stable western economy can reach is quite high as even Japan is issuing still more debt today and their ratio is only getting worse, yet investors are still lining up for more at paltry yields. So government debt of today in the US isn't really a problem. Whether it becomes a problem later is still TBD.

    The second variable to be aware of is that long-term treasuries (10yr, 30yr, etc) are less influenced by the Fed Funds rates due to their longer tenor. Rates on the longer end of the curve are more heavily influenced and largely determined by the market, not the Fed. During the 80s longer term treasuries did see their primary yields increase significantly, so your point isn't completely far-fetched if we had another Volcker style series of hikes, but that doesn't really seem in the cards in today's economy. Inflation is still quite low, albeit showing some signs of intermittent strength here and there. The Fed has plenty of flexibility to fight inflation with further rate hikes given rates today are considered to be slightly below or just at the lower bound of neutral, so it shouldn't take a dramatic hike in rates vis-a-vis Volcker for monetary policy to shift from slightly accommodating / neutral to restrictive. With that context, I don't see inflation as a major issue for today's Fed, thus by extension I don't really see the scenario you've outlined above to be highly probable. But that's just my opinion.
    Last edited by Ryanferr; 02-04-2019 at 12:48 PM.
    The answers are in the data

  3. #3
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    Quote Originally Posted by Ryanferr View Post
    Sovereign / national debt is a tricky beast. At the end of the day no one really knows the limit of the upper bound, but we can look to other advanced economies for indicators. US Debt to GDP was 104.1% at the end of Q3 2018, whereas Japan's is 250%+. Yet, despite Japan's considerably higher leverage profile relative to the US, borrowing costs are still extremely low -- in fact yields on the Japanese 10 year notes are currently negative.

    This suggests that the upper bound of how leveraged a large, stable western economy can reach is quite high as even Japan is issuing still more debt today and their ratio is only getting worse, yet investors are still lining up for more at paltry yields. So government debt of today in the US isn't really a problem. Whether it becomes a problem later is still TBD.

    The second variable to be aware of is that long-term treasuries (10yr, 30yr, etc) are less influenced by the Fed Funds rates due to their longer tenor. Rates on the longer end of the curve are more heavily influenced and largely determined by the market, not the Fed. During the 80s longer term treasuries did see their primary yields increase significantly, so your point isn't completely far-fetched if we had another Volcker style series of hikes, but that doesn't really seem in the cards in today's economy. Inflation is still quite low, albeit showing some signs of intermittent strength here and there. The Fed has plenty of flexibility to fight inflation with further rate hikes given rates today are considered to be slightly below or just at the lower bound of neutral, so it shouldn't take a dramatic hike in rates vis-a-vis Volcker for monetary policy to shift from slightly accommodating / neutral to restrictive. With that context, I don't see inflation as a major issue for today's Fed, thus by extension I don't really see the scenario you've outlined above to be highly probable. But that's just my opinion.
    Inflation would be the initial catalyst, and that goes for Japan also. Sure debt at low interest is manageable. but a scenario where the choice is either...let inflation rage, or raise rates and go broke (where dilution of currency is the only other alternative) could be on the horizon. Once inflation gets out front, the choices get really tough. (wouldn't be so bad without the debt....just raise rates without such dire consequences)

    Ag guy
    Last edited by Ag guy; 02-04-2019 at 01:17 PM.
    live for today, admit your faults, do the right thing (even if you don't want to) & trust God!
    This life is the training of the soul for the life to come. (accept that we live in a fallen world)
    Whether you know it or not, you are a spiritual eternal being! Ag guy

  4. #4

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    Or the Fed could just print out 21 trillion dollars and go pay off the debt. BOOM! Debt free!!

  5. #5

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    Quote Originally Posted by Ag guy View Post
    Inflation would be the initial catalyst, and that goes for Japan also. Sure debt at low interest is manageable. but a scenario where the choice is either...let inflation rage, or raise rates and go broke (where dilution of currency is the only other alternative) could be on the horizon. Once inflation gets out front, the choices get really tough. (wouldn't be so bad without the debt....just raise rates without such dire consequences)

    Ag guy
    Understood. My latter point discussed that I view such a scenario as rather low, at least right now as the Fed is in a comfortable place relative to inflation. Inflation today remains low and the Fed has signaled it plans to largely suspend rate hikes until the data motivates them to alter course (in either direction). What this means is that the moment inflation perks up, the Fed will respond and raise rates and mute said inflation. Beyond that, the increasing fear is that the economy slows down and we slip into our next recession -- after all, it's been almost 10 years from the onset of the Great Financial Recession and the global economic picture is dimming as a result of trade battles. In that scenario, aggregate demand would fall which would put downward pressure on inflation prompting the Fed to cut. The recession would also likely lead to the usual flight to safety and push down yields on new government debt. So baring a major political screw up, in the near term I see it unlikely. What occurs over the hypothetical long term is anyone's guess, but generally the US has had fairly responsible institutions in the Post War era that generally don't do gimmicky things that result in crazy inflation...the 1970s being the obvious exception.

    Another item to keep in mind is the US is asset rich. While tax receipts relative to interest expense could worsen, when you include the amount of assets the US government has it dwarfs the national debt. While obviously an extreme scenario, in a hypothetical where we were in dire straights we could always sell land like national parks (or outright slabs of it like back in the old days such as Hawaii), offshore mineral rights, etc. These asset sales could easily reduce the national debt.
    Last edited by Ryanferr; 02-04-2019 at 01:36 PM.
    The answers are in the data

  6. #6

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    Ag guy,
    In the past, I thought as you did, but after seeing the amount of QE that has occurred & not seeing the inflation that I expected would follow, I am now trying to listen more than I speak, so that I might come to understand how inflation has been held down.

    One possible explanation is that we did not yet see the inflation because the big money has been holding on the sidelines & therefore has not yet flooded the economy. A partial explanation might be that a portion of it is tied up in the markets & that currency will not affect inflation until profits are realized & the money gets spent. A sudden crash of the markets might take that liquidity off the table before it gets a chance to be taken out & used for purchases that would then boost inflation. If the powers that be decide that this kind of crash would be a desirable outcome, then I would expect nearly all the retail investors to get busted.

    Another (seemingly less likely) possibility is that we are in another situation like Weimar Germany after their first big round of printing press excess. In that case, it is widely believed that the people in the general populace of the Weimar Republic were strongly adverse to getting caught short on cash in the future, so the vast majority of them saved, rather than spend their sudden bonanza. This kept the money out of circulation & prevented prices from running away. A later printing frenzy finally tipped the point of public confidence, to where they believed that they had enough put away & they then started to spend more freely. This fueled price hikes, which then got people wanting to spend the rest of their savings before the buying power of that currency dropped any lower, which then amplified the effect & caused a catastrophe. I say that this scenario is less likely in the US today because the reported saving rate in the US is so low. If people are actually saving, then most of it is literally under-the-mattress money. Since so much of the US money supply is reported to be abroad, it is possible that people in foreign countries may be saving USD.

    Ryanferr, It's good to see you back again. I enjoy reading your posts & learning your perspective.
    Last edited by SilverPalm; 02-04-2019 at 01:59 PM.

  7. #7
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    Quote Originally Posted by Ryanferr View Post
    Understood. My latter point discussed that I view such a scenario as rather low, at least right now as the Fed is in a comfortable place relative to inflation. Inflation today remains low and the Fed has signaled it plans to largely suspend rate hikes until the data motivates them to alter course (in either direction). What this means is that the moment inflation perks up, the Fed will respond and raise rates and mute said inflation. Beyond that, the increasing fear is that the economy slows down and we slip into our next recession -- after all, it's been almost 10 years from the onset of the Great Financial Recession and the global economic picture is dimming as a result of trade battles. In that scenario, aggregate demand would fall which would put downward pressure on inflation prompting the Fed to cut. The recession would also likely lead to the usual flight to safety and push down yields on new government debt. So baring a major political screw up, in the near term I see it unlikely. What occurs over the hypothetical long term is anyone's guess, but generally the US has had fairly responsible institutions in the Post War era that generally don't do gimmicky things that result in crazy inflation...the 1970s being the obvious exception.

    Another item to keep in mind is the US is asset rich. While tax receipts relative to interest expense could worsen, when you include the amount of assets the US government has it dwarfs the national debt. While obviously an extreme scenario, in a hypothetical where we were in dire straights we could always sell land like national parks (or outright slabs of it like back in the old days such as Hawaii), offshore mineral rights, etc. These asset sales could easily reduce the national debt.


    those assets are in large part what stands behind the dollar since 1964. If liquidated, the outcome would be a diluted (less backed) dollar. the result would have similar consequences as what I outlined originally.

    Ag guy
    Last edited by Ag guy; 02-04-2019 at 01:56 PM.
    live for today, admit your faults, do the right thing (even if you don't want to) & trust God!
    This life is the training of the soul for the life to come. (accept that we live in a fallen world)
    Whether you know it or not, you are a spiritual eternal being! Ag guy

  8. #8
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    Quote Originally Posted by Hombre Plata View Post
    Or the Fed could just print out 21 trillion dollars and go pay off the debt. BOOM! Debt free!!
    I'm confused. The "debt" is not the Fed"s. It's the US Treasury's - or not? And, if the FED prints 21T for the UST, does not the UST have to issue new bonds to cover the new money(digits)? Now, I don't know who would buy those bonds, but if the FED had to buy them, would that just not mean the US Treasury would now hold 42T on it's balance sheet and the FED hold another 21 on it's balance sheet? I'm not sure how all this works. What say you?
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  9. #9
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    SilverPalm,
    High employment & competition for labor is the beginning.
    That is just materializing now.
    The lack of that part of the equation is what held inflation back in the last QE

    Ag guy
    live for today, admit your faults, do the right thing (even if you don't want to) & trust God!
    This life is the training of the soul for the life to come. (accept that we live in a fallen world)
    Whether you know it or not, you are a spiritual eternal being! Ag guy

  10. #10

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    Quote Originally Posted by SilverPalm View Post
    Ryanferr, It's good to see you back again. I enjoy reading your posts & learning your perspective.
    Thanks buddy. Good to be back.

    Quote Originally Posted by Ag guy View Post
    [/B]

    those assets are in large part what stands behind the dollar since 1964. If liquidated, the outcome would be a diluted (less backed) dollar. the result would have similar consequences as what I outlined originally.

    Ag guy
    Trust I'm responding to you in good faith and not trying to be a jerk, but I would respectfully disagree. IMO the dollar's value comes from the system that governs it. It is a fiat currency through and through, so there is nothing tangible backing it - not gold nor any physical assets. Beyond interest rate expectations, one holds the USD over other currencies due to fact it is maintained responsibly by the US government / Fed (thus will reasonably preserve its purchasing power) and gives you access to the US economy (can be used for purchases of valuable goods and assets). In this context it's easy to understand why one would want to hold USD over the Venezuelan bolívar (not responsibly maintained, won't hold its value / PP, doesn't provide access to an attractive underlying economy). In the case of the USD one doesn't find them attractive because in a default scenario one has a claim on the national assets of the US economy, but you don't. It's very much not backed by any assets.

    Lastly, in a scenario where we sold assets, these assets would likely be sold to the private sector of the US economy. Land, mineral rights, and oil drilling rights would be high value targets for US companies and investors. On the flip side, it's certainly possible we sell Hawaii off someone like the French much like they sold us Louisiana, but I don't think Hawaii dramatically impacts the value of the dollar, particularly if we sell Hawaii at a very attractive price and pay down a significant portion of debt. We'd lose some GDP, but again, it would depend on what the corresponding debt reduction would be.
    The answers are in the data

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