So, What's Going to Happen?

So, what's going to happen? It still feels to me like we are in the middle of a massive experiment in the US. A banking crisis that we export to the rest of the world. A housing market hanging from a cliff held up by government institutions (Fannie, Freddy, FHA) that are incompetent at best while also being fundamentally, structurally heading for failure and liquidation unless an endless supply of US Government funds continues to be provided. Over-leveraging by public and private sectors both before and after the crisis.

But instead of our currency crashing, giving us the chance to export some goods and even everything out, we are the least ugly dog at the dance and our debt become more popular than ever. But as some smart guy once said, "If something can't continue forever, it will stop." So this will stop too. But what happens then and in the meantime?

The knee-jerk reaction of many is that inflation is coming in a big way. Maybe that's true. But I have to think that the moment the Treasury even starts to think about flooding the market (by issuing to the Fed?) with massive amounts of Treasuries, the market will anticipate the carnage, sending rates up significantly. Both the Treasury and the Fed know that, and neither want that, in a really big way.

I bet they tiptoe around their offices not wanting to do ANYTHING that would spook the bond market and ruin their 3% interest rates on TRILLIONS of dollars. Isn't how you would feel in their spot? Adding to their fear, if that happened, consumer credit would collapse. People can't afford 5% mortgages, want to try 12% and see how that works out? No one could afford anything, and prices would collapse.

Also, a big difference with the US as compared to say Japan, is that so much of our interest on Treasuries is payable overseas. So as interest rates go up, more and more dollars leave the US. One more way the money supply falls.

So, I have to believe the government is much more likely to just try to wait this out and suffer through years of a low growth, deflationary environment while we try to pay down this debt. Only if the economy gets to a devastating point will the Government finally just start passing out money because that's the only option they have. Then I think you are talking about the end of currency and hyperinflation. But that couldn't happen in my view for at least another 5-10 years.

So, what's a girl to do? I think you hunker down and enjoy the low prices if you are in a position to do so. If you have a bunch of debt, you're not going to enjoy anything. If you have a bunch of debt and no job I think you are in for a lot of pain. Don't get suckered into levering up to buy a house or car at LOW LOW! interest rates; if you can't pay cash, you can't afford it.