M., the real problem the Fed is facing is the growing
mountain of debt, which is now higher than ever in history
relative to GDP, and keeps growing, thanks to the Fed.
There are only 2 ways out:
1) default
2) hyper-inflation
In both cases, bond holders get killed. Neither (1) nor (2)
have been on the horizon lately, although there has been
considerable amount of credit stress in late July, which
threatened to grow into something bigger - the self-
reinforcing credit bubble collapse. I think the next
wave (call it C) of bond collaps will be just that, and it
may have started already. With 10-year rates going above
4.62%, or the dollar heading into 80-s, there may be a
meltdown. Personally ,I would not want to be anywhere near
credit derivatives, or long any bonds, stocks, or anything
denominated in USD at that time.
Countries that
have a lot of external debt and trade deficit usually suffer
both (1) and (2), and it's most painful. The difference of US with the situation with Turkey, Argentina, Russia, Asia,
etc. is that international debt is priced in USD. So, as,
for example, Argentinian currency collapsed, their debt load
in local currency grew. US external debt is priced in USD.
However, folks are folks, and they are the same no matter
where - they don't like losing money on bonds. So, they will
sell 'em. BWDIK? |
