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On Hyperinflation (Dire predictions. Be forewarned.)
The Market Ticker - Commentary on the Capital Markets ^ | 1/12/09 | Karl Denninger

Posted on 01/12/2009 10:10:30 AM PST by randita

On "Hyperinflation"

The Market Ticker

Monday, January 12. 2009

at 09:44


On "Hyperinflation"

Let's put this to rest right here and now.

"Hyperinflation", or even "Serious Inflation" (similar to what we had in the 1970s) is impossible without a means to transmit the rise in prices into wages.

In today's United States that simply cannot happen for two reasons:

  • The union representation of workers has been eviscerated due to their own idiocy over the previous thirty years. In effect, they have no power to impact economic or labor policy - no matter what Gettlefinger thinks.
  • Outsourcing of work to China, India, Mexico and other nations makes wage demands impossible for American workers to enforce. Such demands simply result in the loss of the job to overseas workers.

As a consequence a hyper-inflationary or even seriously-inflationary spiral is impossible to sustain.

Think about your associates, people who you know in the middle class.

Now consider that a 10% inflation rate (moderately bad "serious inflation" ala 1970s) goes on for four years.

This raises the cost of living for everyone by 46%.

How many people who you know are saving 46% of their income? How many will survive a 46% increase in their cost of living?

Such an outcome will result in half or more of America becoming immediately homeless, hungry, and as a consequence out of work. It will as a consequence crash GDP by 50% or more immediately which in turn will crash income tax receipts by a like amount at both state and federal levels.

This will in turn crash prices, but at that point it's too late as now the price crash in turn destroys what remains of the business community and further crashes tax receipts, while at the same time foreign bond investors throw up their hands and say "screw you!", cutting off all foreign capital inflows to the government.

Down that road lies immediate insurrection - that is, the violent overthrow of the government. You are delusional if you think the military could stop such a thing - 150 million Americans, maybe even 200 million of the 300 million in our population? Not a prayer in hell, even if all the Americans had was pitchforks, torches and a gallon of gasoline, and they don't - they have firearms, and lots of them. Even the Chinese, who are (by demonstrated act) willing to roll tanks over their own people would have no chance against 100 million of their citizens if hunger ever trumps fear.

This didn't happen in the 1970s because we had vastly more union work representation and they were able to force wages to keep pace for the average working man. While the pinch was bad (I grew up in it and remember it vividly) society never degenerated because the self-reinforcing crash of production, jobs and tax income never happened, and as a consequence the sort of mass-unemployment, disenfranchisement and loss of essential human needs did not come about.

Today the average working man works for WalMart or some other non-union shop and has no wage pricing power; ergo, there is absolutely no way to prevent the implosion from initiating.

The government must not engage in any sort of policy that could lead to this outcome. Absolute protection at the top levels of government must be put in place to prevent it, because if this occurs then everything - absolutely everything - that we know and love about America disappears.

This is where the Peter Schiffs and McHughs are wrong in their hyperinflation thesis and their "defensive" measures to try to do something about it (or worse, McHugh's belief that not only is this inevitable but that the government should intentionally cause it through something like a "money drop" to households.)

They are wrong because if this outcome occurs there will be no United States of America, your gold will be confiscated and/or rendered worthless by executive fiat, and at approximately the same time an angry marauding mob consisting of half the population of the country will literally loot and burn everything to the ground.

Vengence inevitably follows when justice is denied for a long enough or in an egregious enough fashion. We have seen this with Rodney King and now with the apparent BART assasination of a suspect in Oakland, and that was one man who was abused at the hands of government. Make the abuse half the population and there is a zero chance that civil and political order is maintained.

Pray that our nation's leaders aren't stupid enough to set in motion such a course of action either by accident or under the foolish belief that they can "keep the outcome under control".

Time is running out to demand and obtain justice folks. America's clock is literally ticking towards zero.

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TOPICS: Business/Economy; Government; News/Current Events
KEYWORDS: banglist; cwii; economy; government; hyperinflation; moneylist
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If you think Obama has the magic bullet, keep whistling past the graveyard. If you think Obama will make things worse, are you prepared?
1 posted on 01/12/2009 10:10:33 AM PST by randita
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To: randita

If the feds keep printing dollars to prevent banks from going insolvent due and plans to borrow at 1 trillion dollar defecits, our currency will devalue and the world will drop it as a reserve currency. Devaluation means all our imports (oil, raw materials, food, etc) will inflate. Weak dollar played a role in increasing our oil price during the last energy crisis. The residential mortgage crisis is not the last threat to our banks, we have a commercial real estate mortgage crisis and credit card default crisis looming as retail sales dropped, and more people become unemployed. Peter Schiff is not crazy.


2 posted on 01/12/2009 10:22:30 AM PST by Fee
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To: randita

I agree with Denninger on this and would add that the collapse in mortgage securitizations and the bursting of the credit bubble, tightening of lending standards, etc is highly deflationary. Bernanke will try his quantitative easing/money printing to fight deflation, but Japan tried that starting in 2001 and the money just piled up in the reserve accounts of banks.

I don’t expect severe deflation, but the prevailing economic winds are clearly deflationary. All you need to do is look at the yields on long bonds and see that the bond market is not expecting inflation in the foreseeable future.


3 posted on 01/12/2009 10:24:02 AM PST by MittFan08
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To: Fee

This is no surprise. Why do you think the Fed stopped reporting M3 in 2006? The Bank of England just started doing the same thing this year. They don’t want the people to know how much money is actually in circulation.


4 posted on 01/12/2009 10:24:09 AM PST by kingpins9
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To: randita

I don’t agree because this can happen. Obama has already mentioned wanting the minimum wage to rise to $10 an hour so if infct the dems decide to do this then this will happen ala Jimmy Carter when he rasied the minimum wage 3 times in two years between 1977-1979.


5 posted on 01/12/2009 10:25:03 AM PST by chris_bdba
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To: randita
“This is where the Peter Schiffs and McHughs are wrong in their hyperinflation thesis ....”

Au contraire, M. Denninger.

6 posted on 01/12/2009 10:25:48 AM PST by USFRIENDINVICTORIA
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To: randita

This is nonsense. There are other ways to trigger inflation other than labor cost. For example, printing TONS of money reduces the value of each dollar therefore requiring more dollars per item.


7 posted on 01/12/2009 10:28:25 AM PST by Hacklehead (Liberalism is the art of taking what works, breaking it, and then blaming conservatives.)
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To: randita

This is not going to happen for some very good reasons.

The first is that the typical American is not going to revolt as long as he has a roof over his head, and food in his belly. This was the single reason that “Ol’ Frank” Roosevelt succeeded where Herbert Hoover failed.

But importantly, this doesn’t mean that if Obama provides these things, he gets to do anything else he wants to. Far from it. In fact, even though it is the exact opposite of what he wants to do, he will probably have no choice but to dismantle the socialism we already have.

The odds are that after just a few years, he will be helpless, hopeless, and prematurely aged by things beyond his power to control.

His internationalism is dead already, all international trade but oil and food drying up. The credit crunch still has some painful collapses to endure, such as the Alt-A and ARM mortgage collapses, 1.5 times larger than the subprime collapse. And the collapse of the US Treasury bill market is going to be awesome, and remembered in history books for hundreds of years.

In short, there is little the federal government can do other than house and feed homeless and hungry Americans, possible renounce its national debt, eliminate Social Security, Medicare and Medicaid; and finally to not tax those trying to rebuild all the industry we outsourced in the past 40 years.


8 posted on 01/12/2009 10:28:33 AM PST by yefragetuwrabrumuy
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To: USFRIENDINVICTORIA

“Au contraire, M. Denninger.”

If we’re facing hyperinflation in the next 10 years, why are people willing to buy treasury bonds yielding 2.33%? They would be crazy to do that if even significant inflation is in our future. The bond market could always be wrong, but it is entitled to considerable deference IMO- bond purchasers tend to be saavy folks.


9 posted on 01/12/2009 10:33:21 AM PST by MittFan08
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To: randita; Eaker; AK2KX; Ancesthntr; ApesForEvolution; aragorn; archy; backhoe; Badray; t_skoz; ...
CW2 Ping, due to talk of insurrection, revolution etc.


10 posted on 01/12/2009 10:33:38 AM PST by Travis McGee (www.EnemiesForeignAndDomestic.com)
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To: randita
RE :”This didn't happen in the 1970s because we had vastly more union work representation and they were able to force wages to keep pace for the average working man”

Employee free choice act forced unionization to demand protection from trade. Here in union Maryland food prices are going up, not down. That is also protectionism. Government intervention keeps natural gas prices high, used instead of cheap heating oil.

Schiff’s theory is that prices can go up independent of US demand , once the world economy figures out that can proceed without giving stuff to the USA, based on devaluation of the dollar. But I get your point SChiff did NOT predict the current (partial) deflation with crash and this is the question of the day.

Liberal Cramer on CNBC says Obama needs to create inflation to start another boom.

11 posted on 01/12/2009 10:35:47 AM PST by sickoflibs (Obama : " I will claim my 1B $ federal contracts to local gov (unions) is all private sector")
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To: Hacklehead

“For example, printing TONS of money reduces the value of each dollar therefore requiring more dollars per item.”

It depends on what happens to the money after the federal reserve or other central bank prints it. The Bank of Japan started printing money by the boatload in 2001 to combat their deflation, but it had very little effect because the Japanese commercial banks were unwilling to lend the money and it just piled up in their reserve accounts and didn’t enter the Japanese economy. Several years later, Japan is easing back into deflation again.

You can print all the money you want, but if just piles up in a vault somewhere and doesn’t enter the economy then it has little effect.


12 posted on 01/12/2009 10:36:56 AM PST by MittFan08
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To: MittFan08

What happens when the Chinese/Japanese, etc stop buying US bonds? That is the crux of the question. On the one hand they have incentive to prop up the USD as they already hold so much US debt. On the other hand, the maxim ‘throwing good money after bad’ comes to mind.

If the rest of the world refuses to fund our Trillion $ stimulus package, what then? Supply/demand dynamics can only be delayed for so long, if their is no external demand for the huge bond issuance to come this year from the Gov’t, the yeild must rise to attract buyers. Ben the hellicopter man is more like the Wizard of Oz right now, and soon the curtain will be pulled back and he will be exposed, as will the AAA credit rating the US Gov’t enjoys.

‘Gov’t is the only entity that can take a valuable commodity like paper and render it worthless emrely by applying ink’ Ludwig Von Mises


13 posted on 01/12/2009 10:38:46 AM PST by milwguy (........)
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To: randita

?


14 posted on 01/12/2009 10:39:19 AM PST by CPT Clay (Drill ANWR, Personal Accounts NOW ,)
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To: randita

RE “This is where the Peter Schiffs and McHughs are wrong in their hyperinflation thesis and their “defensive” measures to try to do something about it “

Schiff calls for personal savings, capital investment and creating an private industry that can compete, not a bunch of government employee consumers. He is not completely conservative(as recently defined), and has some ideas that conservatives don’t like.


15 posted on 01/12/2009 10:39:22 AM PST by sickoflibs (Obama : " I will claim my 1B $ federal contracts to local gov (unions) is all private sector")
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To: milwguy

“What happens when the Chinese/Japanese, etc stop buying US bonds? That is the crux of the question.”

I agree completely- then and only then will the house of cards come crashing down. But until that day- which may be decades away or may be much sooner- it will be impossible for the US economy to truly collapse because it’s being subsidized on a massive scale by the countries that actually produce things.

Early indications are that China still wants to keep buying our debt, but with their slowing economy and domestic stimulus spending they won’t have as much money to do so with.


16 posted on 01/12/2009 10:42:45 AM PST by MittFan08
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To: randita
This didn't happen in the 1970s because we had vastly more union work representation and they were able to force wages to keep pace for the average working man.

But this did happen in the 1930s, and it led to the rise of the unions in the first place.

A repeat would most likely represent a revival of unions.

17 posted on 01/12/2009 10:43:30 AM PST by Yo-Yo
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To: Travis McGee
I've been telling people something close to this lately. It's interesting to see their reactions. Back when I was screaming "recession", they laughed at me and told me to STFU. But when I tell the same people we're headed into a depression (unless something dramatic happens), they don't have the same reaction anymore. The reactions are anything from nervousness to abject terror. But they are past laughing at me and telling me to just shut up.

I'm really getting tired of telling people what I see happening. The vast majority can't do anything about it at this point anyway, and all it seems to do is frustrate them, and/or make them fearful.
18 posted on 01/12/2009 10:44:07 AM PST by hiredhand (Understand the CRA and why we're facing economic collapse - see my about page.)
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To: sickoflibs

“Schiff calls for personal savings, capital investment and creating an private industry that can compete, not a bunch of government employee consumers.”

I like Schiff, but his clients have lost a lot of money in this economic collapse. His whole thesis was that you could protect yourself from the coming economic collapse by buying Asian stocks, but those stocks have been hit even harder than US stocks. Schiff bought into the utterly false notion that the emerging Asian economies had decoupled from the US economy, and he appears intent on riding that lame horse until it dies. I suspect he knows he screwed up, but once you pick a basic investment strategy and write books about it it’s pretty hard to back down and admit you were wrong.


19 posted on 01/12/2009 10:46:18 AM PST by MittFan08
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To: randita
consider that a 10% inflation rate (moderately bad "serious inflation" ala 1970s) goes on for four years.  This raises the cost of living for everyone by 46%.   ...How many will survive a 46% increase in their cost of living?

Nobody --that would be horrible!!!!!! 

--assuming of course that during four years of 10% inflation, incomes stay  exactly as they are today.

Right.

20 posted on 01/12/2009 10:48:39 AM PST by expat_panama
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To: MittFan08
“If we’re facing hyperinflation in the next 10 years, why are people willing to buy treasury bonds yielding 2.33%?”

Why were people still buying real estate, even after the market started to turn south?

In the case of the bond market — it could be a case of “the greater fool” theory in action. IOW, it's just the latest Ponzi scheme. The test will come soon enough. Obama wants to borrow & spend $1 trillion for “economic stimulus” & he's been talking about trillion dollar deficits for years to come. If China (for one) ever stops buying U.S. Treasuries — what do you suppose will happen to the value of the U.S. dollar?

21 posted on 01/12/2009 10:49:09 AM PST by USFRIENDINVICTORIA
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To: yefragetuwrabrumuy

“there is little the federal government can do other than house and feed homeless and hungry Americans”

Where n the constitution does the government get the right to house and feed anyone.

Eliminate all welfare!


22 posted on 01/12/2009 10:50:43 AM PST by dalereed
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To: randita
"Hyperinflation", or even "Serious Inflation" (similar to what we had in the 1970s) is impossible without a means to transmit the rise in prices into wages.

How do wages in Zimbabwe compare with the inflation rate?

23 posted on 01/12/2009 10:51:00 AM PST by fso301
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To: MittFan08

It is a strange dichotomy where it is in the Chinese best interest to keep lending the USA money in order to sell their goods here. It is like a drug dealer extending credit to an addict in order that he be able to buy more drugs. The question is not one of IF we will overdose, but when.

The Chinese are quietly building their reserves of gold, as are oil rich arab countries. This massive Ponzi scheme will end badly and sooner, rather than later I fear. Global trade can only occur when their is trust in currency and in the counterparties ability to pay. The trust is rapidly disappearing in both areas, and the freezing of global trade may well be the catalyst that sets everything in motion.

We could be approaching a global depression, and with the advent of technology and computers, it may engulf us at a speed most can’t comprehend. Depression at the speed of the internet, rather than the slow motion 30’s style. That is what truly frightens me.


24 posted on 01/12/2009 10:52:03 AM PST by milwguy (........)
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To: randita

Who is this clown? Is this jist some dufus making a opersonal rant?


25 posted on 01/12/2009 10:52:03 AM PST by dalereed
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To: MittFan08

“bond purchasers tend to be saavy folks”

Yes they are, and I hope you are right. On the other hand, I am wondering if a lot of them actually do think there is a substantial risk of future inflation yet are buying bonds now anyway because they appear to be the least harmful alternative.


26 posted on 01/12/2009 10:52:23 AM PST by Texan Tory
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To: fso301

Not sure about wages, but they just started issuing their first 50 BILLION dollar notes. If you live in Zimbabwe, even the poor are billionaires now.


27 posted on 01/12/2009 10:53:11 AM PST by milwguy (........)
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To: randita

Inflation is not caused by a “spiral.” That metaphor was always just a dodge, so the government could blame others for inflation. I remember magazine ads in the mid-70s (under Ford) showing a worker, a housewife, and a storekeeper as PIGS, with copy saying, “We all need to be a little less piggy.”


28 posted on 01/12/2009 10:54:36 AM PST by Arthur McGowan
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To: USFRIENDINVICTORIA

“If China (for one) ever stops buying U.S. Treasuries — what do you suppose will happen to the value of the U.S. dollar?”

It will collapse, and Chinese products will suddenly be far more expensive for US consumers, and the Chinese economy will tank. China knows that, so they won’t stop buying our bonds unless they are forced to. In fact, right now they are pushing in the opposite direction, doubling down on their weak yuan policies. I expect that, instead of cutting bond purchases outright, China will likely try to prod us constructively into more responsible fiscal policies by making threats to do so.


29 posted on 01/12/2009 10:54:43 AM PST by MittFan08
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To: milwguy
If you live in Zimbabwe, even the poor are billionaires now.

I remember back in the late 1970's, whoever it was that did the Jimmy Carter impersonations on SNL had him saying "Inflation is your friend. Eventually, with inflation, everyone will be a millionaire".

30 posted on 01/12/2009 10:56:09 AM PST by DuncanWaring (The Lord uses the good ones; the bad ones use the Lord.)
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To: Texan Tory

“bond purchasers tend to be saavy folks”

Would they be the same folks who were smart enough to create CDO’s, MBS’s and other financial instruments which created this crisis? Would the ybe the same Wall ST, Wharton School grads who decided it was kosher to invent no doc, no money down ARM’s and give them out like candy to illegal immigrants and the unemployed? If they are the same folks, I would say they are making the same mistakes all over again.


31 posted on 01/12/2009 10:56:12 AM PST by milwguy (........)
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To: milwguy

“What happens when the Chinese/Japanese, etc stop buying US bonds? That is the crux of the question. On the one hand they have incentive to prop up the USD as they already hold so much US debt. On the other hand, the maxim ‘throwing good money after bad’ comes to mind.”

on the topic of debt, Donald Trump said something like: If I owe you a millions dollars I have a problem, if I owe you 100 million dollars, YOU have a problem. If the US goes bankrupt the Chinese will lose TRILLIONS. As much as they hate us they dont want that to happen.


32 posted on 01/12/2009 10:57:21 AM PST by Hacklehead (Liberalism is the art of taking what works, breaking it, and then blaming conservatives.)
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To: Fee

Yep! What’s the first thing people stop paying when they are in a survival mode, credit cards.


33 posted on 01/12/2009 10:57:55 AM PST by autumnraine
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To: randita

bfl.


34 posted on 01/12/2009 10:58:01 AM PST by blam
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To: USFRIENDINVICTORIA

and BTW China has already talked about pulling out of US debt.


35 posted on 01/12/2009 10:58:15 AM PST by Lilpug15 (Obama: "They Need More Arabic Translators in Afghanistan...")
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To: hiredhand
"... was screaming "recession", they laughed at me and told me to STFU. But when I tell the same people we're headed into a depression (unless something dramatic happens).."

Hmm, maybe more screaming would be dramatic enough...

36 posted on 01/12/2009 11:02:55 AM PST by expat_panama
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To: dalereed

Where in the Constitution does it say the government can yank money out of my earnings?


37 posted on 01/12/2009 11:04:10 AM PST by autumnraine
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To: Hacklehead

Like I said, “how long will they continue to subsidize our debt addiction?” Our economy is cratering and thus demand for their goods is drying up. The articles of factory closings and riots in China are much more common and growing. They will only continue to extend credit as long as it is in their best interest to do so. As our economy collapses, they may decide soon that is no longer the case. We will soon know as the US Gov’t is about to embark on a bond issuance orgy the likes of which the world has never seen. How their will be enough aggregate demand to purchase all those bonds is beyond me, but we will know within six months to one year the result.


38 posted on 01/12/2009 11:05:59 AM PST by milwguy (........)
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To: Hacklehead
If the US goes bankrupt the Chinese will lose TRILLIONS. As much as they hate us they dont want that to happen.

They'll take their vengeance in other ways, such as military adventures in Africa and Asia that we can no longer afford to counter.

39 posted on 01/12/2009 11:08:28 AM PST by Mr. Jeeves ("One man's 'magic' is another man's engineering. 'Supernatural' is a null word." -- Robert Heinlein)
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To: The Drowning Witch

Take a sip of brandy before this one ..............


40 posted on 01/12/2009 11:09:34 AM PST by Jackknife (Chuck Norris grinds his coffee with his teeth, and boils his water with his rage)
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To: MittFan08
It's hard to buy a billion dollars of mint Babe Ruth cards, or NIB Colt Pythons. Gold is a pain and you have to pay people to store it.

Buying US Treasuries is like becoming Saddams best friend for life. Not so great, but where else do you plop ten million, a hundred million, ten billion dollars and not only have it safe, but a little profit?

41 posted on 01/12/2009 11:11:19 AM PST by Leisler (It is always said it is for the children. (Not your children..others...somewhere))
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To: yefragetuwrabrumuy
The odds are that after just a few years, he will be helpless, hopeless, and prematurely aged by things beyond his power to control.

Photobucket

42 posted on 01/12/2009 11:12:27 AM PST by Jackknife (Chuck Norris grinds his coffee with his teeth, and boils his water with his rage)
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To: milwguy
If the rest of the world refuses to fund our Trillion $ stimulus package, what then? Supply/demand dynamics can only be delayed for so long, if their is no external demand for the huge bond issuance to come this year from the Gov’t, the yeild must rise to attract buyers.

That will be the tipping point...

43 posted on 01/12/2009 11:13:35 AM PST by GOPJ ("A consensus of 100 scientists is undone by one fact." - - Einstein (take that Al Gore))
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To: randita

I dunno, I see this all as being a GOOD thing. This is how we get our country back...


44 posted on 01/12/2009 11:17:32 AM PST by wastoute
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To: randita

I dunno, I see this all as being a GOOD thing. This is how we get our country back...


45 posted on 01/12/2009 11:17:39 AM PST by wastoute
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To: wastoute

Vista


46 posted on 01/12/2009 11:18:02 AM PST by wastoute
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To: kingpins9
Fed stopped reporting M3p

Using algebra, couldn't we get this figure ourselves?

We know they're printing at 100% capacity.

I've even heard outsourcing to the Swiss?

47 posted on 01/12/2009 11:18:21 AM PST by norraad ("What light!">Blues Brothers)
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To: MittFan08
"China will likely try to prod us constructively into more responsible fiscal policies by making threats to do so."

Good luck to them on that. Its never worked when conservatives tried it.

48 posted on 01/12/2009 11:19:23 AM PST by Leisler (It is always said it is for the children. (Not your children..others...somewhere))
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To: wastoute

“I dunno, I see this all as being a GOOD thing. This is how we get our country back...”

I think illegal immigrants are saying the same thing.


49 posted on 01/12/2009 11:21:38 AM PST by Hacklehead (Liberalism is the art of taking what works, breaking it, and then blaming conservatives.)
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To: hiredhand

same situation here!


50 posted on 01/12/2009 11:27:01 AM PST by woollyone ("When the tide is low, even a shrimp has its own puddle." - Vance Havner)
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