Barron's: US Will See Run on Treasurys, Hyperinflation
Wednesday, 05 Jan 2011 10:44 AM
By Greg Brown Investors in U.S. debt around the world are
worryingly near a "psychological breaking point" that
could force a "run on the bank" against Treasurys.
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"Unfortunately, markets know that even the U.S. government will print money to meet expenses when necessary." The key is the gap between the rate paid investors to own Treasury debt vs. the inflation rate. If that narrows by too much, there is no longer any compelling reason to hold the debt. Foreign investors then dump U.S. bonds in a rush not to be left holding the bag. Right now, Sperandeo points out, 30-year Treasury bonds pay 4.21 percent. Inflation might be low, but it has averaged 4.12 percent over nearly a half-century. Foreign holders of U.S. debt know perfectly well how tiny that return gap is and how fast it can turn into a loss. "This leads to the question, being asked from Beijing to Brussels: Does the risk match the reward? A negative response to that question could lead to hyperinflation," writes Sperandeo. "Potentially, investors in U.S. debt will begin something similar to a run on the bank, selling Treasurys, even at severe losses." If hyperinflation takes hold, expect gold to run quickly higher, Sperandeo writes. In hyperinflation, the metal can gain between 2,000 percent and 50,000 percent in value against a hyperinflated, collapsing currency. Meanwhile, a retiring member of the policy committee of China's central bank has reiterated his call for China to cut its holdings of U.S. Treasurys in order to minimize losses on its foreign-denominated exchange reserves. According to press reports, Yu Yongding made the renewed call to dump U.S. debt and move the yuan toward market-driven exchange rates in an opinion piece in Caijing magazine. Allowing the yuan to float would help China wind down its massive dollar-asset holdings, Yu argued. "China should strive to reduce instead of further increasing (its holdings of) dollar assets," he said. "Specifically, China should reduce the growth of its foreign-exchange reserves as soon as possible." As recently as July, Yu had called for Beijing to sell off U.S. Treasurys. He believes that continued U.S. fiscal measures to stave off recession will ultimately weaken the dollar, causing China's estimated $2.65 trillion in dollar holdings to quickly lose value.
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