@Alex Further
He IS a Nobel Prize in Economics.

The problem is that Step 1 is a false assumption. The US is not at an historic debt peak, and it is nowhere near the point where an analyst would get nervous about its ability or intent to pay its debt.

I suspect you will not publish this comment, so I will end it with a note with a suggestion that you should really read Paul Krugman’s blog. He even has nice charts and comparisons to other countries and other time frames. His predictions about deflation, the size of the stimulus, and the imaginary bond vigilantes have been right on the money. Somebody should give that guy a Nobel prize in Economics.

Two things that are being constantly overlooked are huge money sinks, driving deflation in the face of deficit spending. Until these two are paid off we’re actually dealing with a lower money supply than we were seeing before the crisis.

1)The massive destruction of money the bank crisis caused. Remember all those default swaps? Every one that was paid out, or dropped in mark to market value represents money taken out of the system. Gone, as in it can’t be spent, can’t be loaned. Nobody even seems to have an estimate on how much the losses on both CDOs and the swaps on them are even now, though any crisis like the foreclosure one currently going on will expose more of them, forcing admission of more losses and more money out of the system. And as home prices fall lower they also reduce the possible debt created, further driving down the actual money supply.

2) Output gap. Currently estimated at about 1 Trillion a year, you’re not seeing any inflation until actual jobs start filling this space.

The banks might be getting money from the fed, but they’re not loaning it (to anyone but the gov for a false profit). As they slowly recapitialize with it it doesn’t effect the economy in anyway. It’s phantom spending, and the gold bugs panicking about it are wasting their money IMHO.

I’m currently 50% in GLL myself.

Bonds are the bubble of a lifetime because the big institutions are more concerned with return OF principal than return ON principal. Inflation is inevitable, but their mandate is not inflation-adjusted returns…so the bond market is the place…for the safe return of devalued dollars, and liquidity

Yes, the answer is deflation. Just as inflation tends to result in higher interest rates and a weaker dollar, deflation tends toward lower interest rates and a stronger dollar. The Fed is fighting deflation by inflating the currency. The reason we have seen relative price stability is that the new money is mostly going to the banks and the banks are holding onto the the money rather than lending. The fractional reserve banking system, whereby a bank can lend $10 for every $1 it receives in deposits, is where the REAL inflation comes from, but if the banks don’t lend we don’t see that aspect of inflation. Because of the deflationary pressures the Fed is able to buy long term debt and depress interest rates more, without worrying about horrible price inflation. Essentially money is going to the banks which then write off bad debt at about the same rate as they receive it from the Fed, resulting in a more or less neutral effect on the overall money supply.

What nobody is talking about is just how massive a transfer of wealth to the banks this is. Whereas individuals used to own houses or other real estate, now the banks own it (through foreclosure); AND the Fed is giving them money to offset their losses; AND individuals are not even benefiting from lower prices or a stronger dollar because the money supply is not decreasing, but instead is being transferred to the banks. So in this economy the rich are getting richer at a MUCH faster pace than before. Right now the top 10% control 93% of the assets, but as there are more and more foreclosures we will see that number increasing even further over a short period of time.

maybe interest rates are low because the Treasury will always have a buyer in the Fed.

TBT will go through the roof….at some point…..the question is at which price-point are you buying in and how long can you stand to wait while likely losing?

Those who have gone long TBT (mea culpa) have gotten up close and personal with Keynes’ dictum that “Markets can remain irrational longer than you and I can remain solvent.” For now, all the money pumped into the system has all the velocity of a sleeping T-Rex. But when Mr. Rex wakes up, watch out! The larger problem with deflation’s fearsome debt destruction is that it doesn’t occur in a vacuum; it’s accompanied by an equally great destruction of productive capacity so at the end of the day you have the same amount of money and even fewer goods For an idea of how quickly the inflation worm can turn, see this chilling account of life after the flash point in the Wiemar Republic, the Death of Paper Money, by Ambrose Evans-Pritchard: http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7909432/The-Death-of-Paper-Money.html. Also, check out the Top 10 sovereign default probabilities as reflected in the CDS market over at CMA Markets: The state of Illinois is ranked just ahead of Iceland, Romania and Iraq. California periodically floats onto the list. If the U.S. ever creeps onto that list, it is game over for Fed-engineered low interest rates.

The ultimate problem with the long bet on TFT is that the consequences may be so dire, you almost hope it’s a bet you don’t win.

What happens to play like TBT if the Fed is long term debt? Could that be why TBT isn’t going through the roof and may never play out?

Love to hear someones take on that.