The wildcard here is Bernanke’s promise to print money and buy treasuries if there is a broad sell-off. But then, choose your poison, a glut of treasuries no one wants, or a glut of greenbacks no one wants. Either way it is inflationary. In fact, it looks like a potential death spiral to me. I think Buffett is way understating this by saying it is on par with the internet and housing bubbles. This is much bigger. It likely will be the complete collapse of the dollar.
On the other hand, of course, if Helicopter Ben does not in fact fire up the helicopter, our government is on the wrong side of the “magic of compound interest”. They have the biggest neg-am adjustable rate loan of all time. Every bond that matures and is retired is replaced with a new issue (at today’s interest rate). Every penny of interest is being payed by auctioning new issues. AND, more is being borrowed beyond that by the $100’s of billions. Compound interest makes the principle grow exponentially. Rising interest rates makes the exponential growth accelerate exponentially. What was $10 trillion yesterday will double to $20 trillion before you know it, then in less time double again to $40 trillion, then 80, then 160… Well, at some point we’ll have to be in default. Not good, not good. Really hard to come up with a plausible way out of this….
