The bubble to end all bubbles?

January 5, 2009 4:29 PM

The cover of a major financial publication warns: If you're holding U.S. Treasuries, GET OUT NOW!

As has been noted previously, investors have headed for the financial equivalent of a bomb shelter -- U.S. Treasury bills and notes -- triggering an epic rise in prices and pushing yields (which move inversely to prices) to zero. Now, with a weakening dollar and gold prices holding steady, some see Treasuries as a bubble that's about to pop. Who will apply the pinprick?

Will it be Japan, which holds half a trillion of our debt? The president of a Japanese credit rating agency says the land of the rising sun should write off its holdings of U.S. Treasuries or start building U.S. roads and bridges in what he sees as Marshall Plan II.

Japan's holdings of U.S. debt is second only to China's, which has announced plans to build its way out of economic collapse. Analysts worry that it may dump its massive stockpile of U.S. debt to pay for it.

Another ominous sign: the price of an index funds that shorts (bets against) long-term Treasuries is on the way up.

If the bears are right and this bubble pops, it could be really bad:

Because foreign holdings represent a significant proportion of the stock of Treasuries outstanding, a collapse in Treasuries prices might soon be reflected in a collapse of the US dollar, with the accompanying threat of hyper-inflation in the USA and depression elsewhere. At that point, many investors might wish they still enjoyed the comparative calm of the ‘credit crunch’.

Via the FT's excellent Alphaville blog.

posted by up in the old hotel (74 comments total)

You know what always makes things better? Panic.
posted by regicide is good for you at 4:31 PM on January 5 [6 favorites has favorites]

THE CALL IS COMING FROM INSIDE THE HOUSE!
posted by potsmokinghippieoverlord at 4:33 PM on January 5 [29 favorites has favorites]

Oh please.
posted by fourcheesemac at 4:33 PM on January 5

I'm still looking forward to paying off my college debt with a $20,000 bill (likely to be called a 'Dubya') that I find laying on the ground sometime in the near future.
posted by mullingitover at 4:39 PM on January 5 [14 favorites has favorites]

You know who else dealt with hyperinflation?
posted by Joe Beese at 4:40 PM on January 5 [1 favorite has favorites]

Barron's cover story, July 14, 2008:
Bottom's Up: This Real-Estate Rout May Be Short-Lived

This real-estate rout has been more painful than prior ones, but it may be shorter-lived. Indeed, there are early signs of recovery.

Just sayin'.
posted by mediareport at 4:46 PM on January 5 [7 favorites has favorites]

This guy is saying the yield on treasuries is likely to go down, which is certainly possible, I guess. But it doesn't mean that treasuries you've already bought will go down in absolute value. The government will still pay full price for them when they, uh, end or whatever.
posted by delmoi at 4:49 PM on January 5

You know who else dealt with hyperinflation?

Israel?
posted by armage at 4:53 PM on January 5 [1 favorite has favorites]

If Japan decides to dump a bunch of US Treasury Bonds on the market, won't they essentially crash the price, thus producing a bunch of bonds that once again yield positive interest, and people will snap them up? It doesn't seem like it'd be a huge problem.
posted by explosion at 4:55 PM on January 5

Wake up sheeple, China!
posted by parallax7d at 4:57 PM on January 5

Don't buy T-Bills, buy politicians! The prices aren't going to get much lower!
posted by blue_beetle at 4:58 PM on January 5 [1 favorite has favorites]

delmoi, they'll go down in absolute, present market value if there's an expectation of inflation. I can still get $100 for my $100 t-bill in 2020, but right now, a $100 2020 t-bill is only worth what people think $100 will be worth in 2020. If I expect 2020 money to be worth ten times less than today, the market value of my t-bill will likely reflect that (and be 10% of face-value).
posted by qvantamon at 5:05 PM on January 5

OK, they totally missed the commodities and real-estate bubbles, and now they're overcompensating in the other direction by screaming "BUBBLE!" at every little market irregularity.

Yes, it's a bad time to buy T-Bills. You know it's a bad time to buy T-Bills, because everyone is buying T-Bills. Everyone is buying T-Bills because it's a worse time to buy anything else. It's a short term shelter, and some of the shorter term bonds have negative yeilds. People are paying the government to hold onto their money until the market straightens out. Hyperinflation is about as realistic as $200/bbl oil - a nightmare, doomsday scenario that is pretty much science fiction. It seems plausible only to the gibbering idiots who totally missed the commodities and real-estate bubbles.
posted by Slap*Happy at 5:12 PM on January 5

You know who else dealt with hyperinflation?

Hungary?
posted by vac2003 at 5:20 PM on January 5

Hyperinflation is about as realistic as $200/bbl oil - a nightmare, doomsday scenario that is pretty much science fiction.

Unlikely as those lofty heights may be in the near- to medium-term, that seems an odd thing to say, given that we were up around $150 a barrel mere months ago. Granted, that might have been characterized as a bit of a perfect storm, but hair-on-fire hyperbolizing like that doesn't really help measured discussion.
posted by stavrosthewonderchicken at 5:21 PM on January 5

Someone needs to put down the crack-pipe.
posted by hellojed at 5:30 PM on January 5

You know who else dealt with hyperinflation?

Zimbabwe!
posted by spinifex23 at 5:36 PM on January 5

If US Treasuries collapse, the entire world economy goes with them. "Get out now" is pointless, because there won't be anywhere to run.
posted by Chocolate Pickle at 5:43 PM on January 5 [3 favorites has favorites]

PAGING MUTANT
posted by ZenMasterThis at 5:48 PM on January 5 [5 favorites has favorites]

MUTING PAGEANT

Beautiful ... but quiet
posted by fantabulous timewaster at 5:59 PM on January 5 [18 favorites has favorites]

Will it be Japan, which holds half a trillion of our debt?

Ha! Of all countries that should be talking about excessive amounts of government debt...

In Japan, one result was the creation of the world’s biggest debt market, with government bonds and bills totaling 787.2 trillion yen ($8.48 trillion), or more than 1.5 times gross domestic product. The U.S. comes next at $5.3 trillion, based on records of 35 countries compiled by the Bank for International Settlements in Basel, Switzerland.

posted by smackfu at 6:03 PM on January 5

I can hardly read any buy/sell recommendation without thinking: who is going to benefit from this call?
posted by elpapacito at 6:15 PM on January 5

Mutant posted in the other finance thread earlier that he felt the Treasuries bubble was next to burst.
posted by spicynuts at 6:20 PM on January 5

Solid gold, to make you feel old!
posted by crapmatic at 6:22 PM on January 5

Here is the comment from the Michael Lewis thread:

He touches a couple of times on bubbles, but ignores the elephant in the room - the enormous bubble in US Treasuries. We know significant amounts - if not 100% - of funds governments provided to banks flowed into US Treasuries.

In fact, on the long end of the yield curve we've seen an eye popping 35% return! At the same time yields across the entire curve are at record lows, Treasury is issuing eye popping amounts of product - some $2T in 2009 alone.

The collapse of this bubble will be another one for the textbooks (just what we need after all the other collapses), and even though its anyones guess when it's gonna pop the warning signs are there.
posted by spicynuts at 6:22 PM on January 5

What the fuck people. This is exactly the same response people got when they posted warning about the housing bubble three years ago. I bet none of you smart asses with the "LOL APOCALYPSE" snarky responses even read the articles did you.

Cognitive dissonance is so nice.
posted by tkchrist at 6:27 PM on January 5 [4 favorites has favorites]

Heh, maybe The Huffington Post will be worth $200 million.
posted by moonshine at 6:38 PM on January 5 [3 favorites has favorites]

Cognitive dissonance is so nice.

Yes it is. Because even if you 100% believe this will come to pass, what's your solution to "the collapse of the US dollar" and hyperinflation? To buy gold and hide in a shack?
posted by smackfu at 6:42 PM on January 5

It is interesting. A massive sell-off of treasuries by Japan and China and others was one of the many things many people mentioned as foreseeable if unlikely fallout in the lead-up to the then-coming collapse years ago, on this very site and elsewhere, years ago, and rightly characterized then as something that would be a killing stroke for the American economy.

ALL-CAPS chicken-littling aside, I wonder, as always, how likely such a singular event might be, and what the smoking wreckage might look like if it happens. These days it's hard to discount any level of doom-prognostication as totally out of the realm of possibility.
posted by stavrosthewonderchicken at 6:43 PM on January 5

You know who else dealt with hyperinflation?

Germany!

And that means we get our own Christopher Isherwood! Hooray! Then, years later, a new Cabaret based on New Isherwood's Delaware Stories! Oh, glorious day!

Nothing else happened in Germany after the Weimar Republic, right?
posted by ford and the prefects at 6:48 PM on January 5

Take every dime you have, and invest it in yourself. Start your own business. Why in the fuck should anyone believe THIS source?
posted by vito90 at 6:58 PM on January 5

Nothing else happened in Germany after the Weimar Republic, right?

Yep. Totally.
posted by Hitler at 6:59 PM on January 5 [24 favorites has favorites]

From what I've read in the past, Japan essentially would be shooting itself in the foot if it were to call in the US debt it owns. If the US economy crashes, who will buy Japan's stuff, or something to that extent. The same thing worked with China, though to a lesser degree (everybody buys China's stuff).

And yeah, Japan is a master of assuming debt that has no forseable way of being paid off. After all, there's a massively underused bridge that becomes a tunnel halfway through I'd like to sell you.
posted by Ghidorah at 7:03 PM on January 5

You know who else dealt with hyperinflation?

Argentina!
posted by seawallrunner at 7:24 PM on January 5 [1 favorite has favorites]

...and here are some other countries that also dealt with hyperinflation!

That list is *long*
posted by seawallrunner at 7:26 PM on January 5

Cognitive dissonance is so nice.

Being skeptical of the market-driven "we're up! we're down!" headlines in a mag like Barron's - whose track record, like that of most mainstream business mags, is far from admirable on big market-trend stories when bubbles are involved - is hardly an exercise in "cognitive dissonance."
posted by mediareport at 7:30 PM on January 5

I'm talking my book, but think the article is pretty much right.
posted by H. Roark at 7:52 PM on January 5 [1 favorite has favorites]

Since no one else apparently noticed, I should mention that Mutant posted that Barron's link in his comment in the earlier thread. (It's the link with the text "the warning signs are there".)

I'm beginning to think I should develop a weekly habit of posting some topical economic news link and then waiting for the inevitable Mutant comment. It'd be like a Mutant honeypot. I'd spend the rest of the day reading his comment(s) and links, and he'd get a couple dozen favorites.
posted by A dead Quaker at 7:58 PM on January 5 [2 favorites has favorites]

What the fuck people. This is exactly the same response people got when they posted warning about the housing bubble three years ago. I bet none of you smart asses with the "LOL APOCALYPSE" snarky responses even read the articles did you.

And what happened there is what people are saying here -- bad things, sure, but not an apocalypse. There are still houses being built, bought, and sold. Mortgage rates just got better. The situation got bad, but most people still have their homes/mortagages. Same thing will happen here. I don't see anyone here saying everything is fine, nothing bad whatsoever will happen to bonds, but they're saying it's not going to be The End of The World. It won't be, and neither was the housing bubble bursting the end of housing.
posted by wildcrdj at 8:10 PM on January 5

One potential way to capitalize on this, if true.
posted by knave at 8:16 PM on January 5

I believe this is how we mute pageants around here.
posted by goodnewsfortheinsane at 8:20 PM on January 5 [3 favorites has favorites]

You know who else dealt with hyperinflation?

My pants! Which is also where I keep my money these days.

This is not a recommendation to buy, sell or hold any financial instrument.
posted by ryoshu at 8:21 PM on January 5 [2 favorites has favorites]

You know who else dealt with hyperinflation?

Most of the time this is just a poor joke. For once, it's actually pertinent.

Seems like a good place to link to the cartoon version of Hayek's Road to Serfdom.

-----

Because even if you 100% believe this will come to pass, what's your solution to "the collapse of the US dollar" and hyperinflation? To buy gold and hide in a shack?

Hiding in a shack won't help, but buying some gold is a good idea. Denial is a lock for the weakest response possible.

What can you do? This is extreme, even by my standards, but there is plenty you can do:

FerFAL on living in Argentina after the economic crisis.

FerFAL's blog: Surviving in Argentina

And don't miss this post, reprinting an article from 2002.
posted by BigSky at 8:28 PM on January 5 [5 favorites has favorites]

A very naive (and rather lazy) question here; during times of hyperinflation, what happens to actual wages? Do the workers' wages also hyperinflate (if it did, I'd assume that it lagged [far] behind the actual hyperinflation)?

As a graduate student on a fixed scholarship (and already paying a greatly inflating tuition/fee), if the price of everything doubles, that means I either actually start living in the forest next to campus or I starve.

Is it time for me to start building a barter network?
posted by porpoise at 8:36 PM on January 5

(reads Argentina posts) What keeps me from going the survivalist route is skepticism that it would work; it's appealing to think of storing water and food, but if I lose my home, or am thrown out by a gang, it's all for nought anyway. If anarchy in the US happens on an Argentinan scale, what future will I be able to see if I do survive? I could learn to hunt or grow food, but again, doing so successfully requires the existence of some sort of law and order so that others don't simply take what I have. It's not an answer, I'm not convinced it's even a valid survival tactic. If we lose our society and government, we're already dead or doomed. We have to work in whatever way we can not to let that happen. We sink or swim together, because if the US goes, there won't really be anywhere to flee to.

And panic isn't helpful, either. Argentina's woes are horrifying, but the US is not a direct analogue to Argentina. Possibly we're not any less doomed, but as I said, survivalist schemes are not a cure for that.
posted by emjaybee at 9:04 PM on January 5 [2 favorites has favorites]

Porpoise, you-know-who described how wages might work during hyperinflation here.
posted by ceribus peribus at 9:07 PM on January 5

You know who else dealt with hyperinflation?
posted by terranova at 9:21 PM on January 5 [1 favorite has favorites]

If anarchy in the US happens on an Argentinan scale, what future will I be able to see if I do survive?

OMG, there might not be a Metafilter! (Serious.)
posted by smackfu at 9:22 PM on January 5

I hope the US comes out of this sooner rather than later, but IMO the story of Obama's first term will be the story of the unravelling of the American economy.

Now, in purely selfish terms, since I'm currently being paid in a foreign currency, I wouldn't mind seeing the USD collapse for at least as long as it takes me to get to the bank and exchange currency. But my understanding is that the dollar is actually increasing in value right now, which counter-intuitively hurts the US economy since American "stuff" becomes more expensive for export.

But c'mon USA, just like, a 24-hour currency collapse, so that when or if I move back I'll have the capital to start up my very own Bartertown.
posted by bardic at 9:39 PM on January 5 [1 favorite has favorites]

So cerbibus peribus you're saying that all graduate students (and everyone else on non-negotiable fixed incomes) are out of fucking goddamned luck.

/fondles hoard of 12-gauge buck fondly

No, really, I'm *really* interested in how hyperinflation affects those who are in school and in upper-level "schooling." Technological advances and innovations have, in the last decade at *least*, arisen from the researcher class (albeit, the people benefiting are a step or few beyond the basic sciences class).

Crashing the input of people who want to "figure out stuff" - this can't be a good idea.

So - who should I suck up to to keep "basic" science funding up?
posted by porpoise at 9:43 PM on January 5

You know who else dealt with hyperinflation?

My mom!
posted by uncanny hengeman at 9:46 PM on January 5

One word.
Tulips.
posted by Iron Rat at 10:19 PM on January 5

I remember reading threads in early jan about the fed doing crazy things, and even earlier, asparagirl was right on with her evaluation about the shit that was going to happen. I don't think any of this is fear mongering any more than I thought Roubini or Mr. Taleb thought it all was. We're in for the shit, and seeing this makes me more apprehensive than I've been since I started to think it was all falling apart.

Despite god blessings to Mr. Obama (and I love him to tears) this will with little doubt turn more ugly for the good old United States. I'm really, capital R now, Really, beginning to fear what will become of this little project I've been born into.
posted by localhuman at 10:31 PM on January 5

T-Bills are a sort-of-smarter way to stuff money in a mattress. We probably don't want hyperinflation, but before we can get to hyperinflation, we would have to go through inflation. The smart response to inflation is to buy stuff today. This is the opposite of a recession and what we kinda sorta want.

With respect to graduate students, mullingitover's joke reveals the truth that inflation is great when you're living on loans. Rack up big student debt now and pay it back with money worth a lot less than what you borrowed. Yay!
posted by Bokononist at 10:49 PM on January 5

Anyway : This post has all the same dishonest flaws as the poster's earlier gem, my response to which can be read here.
posted by Bokononist at 10:56 PM on January 5

THE CALL IS COMING FROM INSIDE THE HOUSE!

THE PUT IS COMING FROM INSIDE THE HOUSE!
posted by dhartung at 11:03 PM on January 5 [5 favorites has favorites]

Economumbojumbo!

This makes the science of psychohistory sound like...well...non-fiction.
posted by Salvor Hardin at 11:13 PM on January 5

I'd just like to say that I called all this shit—the housing crash, the reasons for said crash, the deflationary interest rates, the fall of t-bills… all this shit back in 2003.
posted by Civil_Disobedient at 11:26 PM on January 5

A very naive (and rather lazy) question here; during times of hyperinflation, what happens to actual wages? Do the workers' wages also hyperinflate (if it did, I'd assume that it lagged [far] behind the actual hyperinflation)?

In Zimbabwe, as I understand it fom somebody who had to do it, when you get paid in the local currency, and you have the connections to do it, you get your ass to the bank and convert that currency to something non-hyperinflating (in the case of the person who passed this story on to me, USD or comparable) and you hustle, because the moment of your transaction has a material impact on your conversion rate. Minutes matter.

If you don't have the connections you need, you become poor very quickly, and your corner of the economy then depends on barter and bare subsistence living.

To provide a bit of anecdotal flavour to you, the young man relating this story to me was a guest at my family's house, just starting his first year at university in Canada; he had a 10-million Zimbabwe dollar bill in his wallet, but he'd never seen a dishwasher before.
posted by mhoye at 11:51 PM on January 5

From the post:
Another ominous sign: the price of an index funds that shorts (bets against) long-term Treasuries is on the way up.

Minor nit-pick, the double-inverse etf, TBT was linked to, and that's not forward looking, it is the double negative daily returns of TLT (had to bold/underline/italicize the daily because those ETFs are friggin weird when it comes to returns). TLT itself is an index of the returns of the 20-year treasury bills.

This means that TBT are not direct bets on the future value of treasuries any more so than treasury prices in the present-day. More specifically, TBT improving in price does not directly imply that treasury yields will increase in the future, merely that they yields are currently increasing.
posted by amuseDetachment at 12:26 AM on January 6

I'm still looking forward to paying off my college debt with a $20,000 bill (likely to be called a 'Dubya') that I find laying on the ground sometime in the near future.

We call it Operation Change for the Better.
posted by Blazecock Pileon at 1:04 AM on January 6 [1 favorite has favorites]

Who run Bartertown?

BARDIC RUN BARTERTOWN!
posted by Ghidorah at 1:22 AM on January 6

A boy can dream, can't he?
posted by bardic at 1:50 AM on January 6

Can someone explain exactly how the hyperinflation scenario would come to pass? My understanding is that you must have a very loose monetary policy to get sustained hyperinflation. Are we assuming that monetary policy will continue to be loose once inflation begins rising? And what is the role of government debt here?
posted by thrako at 5:38 AM on January 6

Honestly I think people just jump straight from inflation to high inflation to hyperinflation because it sounds worse, not because they understand the differences.
posted by smackfu at 5:49 AM on January 6

> Rack up big student debt now and pay it back with money worth a lot less than what you borrowed. Yay!
> posted by Bokononist at 1:49 AM on January 6 [+] [!]

No student debt but I will gladly pay you Tuesday for a hamburger today.
posted by jfuller at 5:54 AM on January 6

Let's say hyperinflation hits, and (the royal) we are paranoid or smart enough to put our holdings in a variety of currencies prior to things getting seriously weird (i.e. Zimbabwe). What happens to real holdings (i.e. your house) in that situation? If the mortgage says "$250,000" but that only buys you a cup of coffee in hyperinflated dollars, would you be able to walk to the bank and say "we're done here"?
posted by lowlife at 6:27 AM on January 6

If the mortgage says "$250,000" but that only buys you a cup of coffee in hyperinflated dollars, would you be able to walk to the bank and say "we're done here"?


As I understand things, yeah, pretty much.

But good luck paying for utilities, property taxes, or anything to put in the kitchen cupboards, all of which would be valued in hyper-inflated dollars.
posted by spirit72 at 6:54 AM on January 6

Bokonomist: Anyway : This post has all the same dishonest flaws as the poster's earlier gem, my response to which can be read here.

I'm all for constructive criticism, but this isn't fair. I deleted my previous post you mentioned after you (correctly) pointed it out as flawed. But now you claim this post has "all the same dishonest flaws" as my earlier "gem" without pointing out a single one. That's the same laziness and lack of candor you accuse me of. Since you've never posted anything here, I can't infer what what you think an "honest" post looks like.

I don't claim to be an economist (as you apparently are) but if MetaFilter only allowed "experts" to post on a subject, this site simply wouldn't exist. I post these things to learn from people like you and others. So if you have something constructive to say, let's hear it.
posted by up in the old hotel at 7:39 AM on January 6

Can someone explain exactly how the hyperinflation scenario would come to pass?

See here. While the entire report is a good read, probably the last eight pages are of most interest to you.
posted by BigSky at 9:04 AM on January 6

I lived in Russia during the whole horrible bout of hyperinflation there after the collapse of communism. I get really amused when people say "it can't happen here!" or talk about it as if the very idea of hyperinflation is like a light-green bust of Napolean suddenly manifesting itself in a completely sterile universe. It's happened in many places and may well happen here.

And what should we do about it? Buy grape hubba bubba, for one thing. In Moscow stores gave out gum for change instead of money. At least gum was tasty. See the meta projects page for more concrete survival tips.
posted by staggering termagant at 9:20 AM on January 6 [1 favorite has favorites]

I'm getting depressed and overwhelmed.
posted by Catrissa at 11:26 AM on January 6 [1 favorite has favorites]

Well then, our work here is done.
posted by staggering termagant at 11:31 AM on January 6

> Someone needs to put down the crack-pipe.

But who? Someone's clearly crazy here, but which side? I'm just glad I don't own any of that money stuff....
posted by fcummins at 12:26 PM on January 6