Identifying a Treasury Crash

Readers have asked my opinion on whether or not China and Russia’s recent treasury offloading spree amounts to the first phase of a potential Great Treasury Crash.

Here’s a reminder:

There are two very strong pieces of evidence here for dollar and treasury weakness and instability: firstly, the very real phenomenon of negative real interest rates (i.e. interest rates minus inflation) making treasury bonds a losing investment in terms of purchasing power, and secondly the fact that China (the largest real holder of Treasuries) is committed to dumping them and acquiring harder assets (and bailing out their real estate bubble). So the question is when these perceptions will be shattered.

A large sovereign treasury dumper like China with its $1+ trillion of treasury holdings throwing a significant portion of these onto the open market would very quickly outpace the institutional buyers, and force a small spike in rates (i.e. a drop in price). The small recent spike corresponds to this kind of activity. The difference between a small spike in yields and one large enough to make the market panic enough to cause a treasury crash is the pace and scope of liquidation.

Now, no sovereign seller in their right mind would fail to pace their liquidation just slowly enough to keep the market warm. After all, they want to get the most for their assets as they can, and panicking the market would mean a lower price.

But there are two (or three) foreseeable scenarios that would raise the pace to a level sufficient to panic the markets:

  1. China desperately needs to raise dollars to bail out its real estate market and paper over the cracks of its credit bubbles, and so goes into full-on liquidation mode.
  2. China retaliates to an increasingly-hostile American trade policy and — alongside other hostile foreign creditors (Russia in particular) — organise a mass bond liquidation to “teach America a lesson”.
  3. Both of the above.

Now the pace and scope of any coming treasury liquidation is still uncertain and I expect it to very much be dictated by how the Chinese real estate picture plays out — the worse the real estate crash, the more likely Chinese central-planners are to panic and liquidate faster.

So here’s the relevant data:

Clearly, what we would expect to see in the nascent phases of a crash is that blue line to spike while the other lines all decline significantly.

Does this look like that to you? Well, frankly, no. China’s holdings have merely declined to 2010 levels — hardly a nosedive, but certainly signifying China’s lukewarmness toward the Obama-Bernanke administrations. Right now they are just testing the water.

Significantly, rates have risen in the past few days, signalling that even in spite of all the QE and Twisting, Bernanke’s task remains volatile.

So — while it is all very easy and attention-grabbing to spew fear-mongering projections of an imminent crash — I have to be realistic. 2013 or 2014 or even later seems a much likelier timeframe for this momentous and historic eventuality. And of course, black swans can derail any projection. Humans will always be fallible, no matter how much processing power we put behind our prognostications.

So there is really no timeframe to my prediction. Certainly, Bernanke has proven himself to be a proficient can-kicker. Too many economists have scuppered their reputations by making timed predictions which fail to play out.

And my prediction is not an economic prediction, so much as a geopolitical one, and political science is an oxymoron; politics (like any other market — yes, it’s a market to be bought and sold) can swerve and tilt in any direction in the time-being, even while its broader historical trends are clear and evident. (In this case, the rise of China, the end of American primacy, and the death of the dollar as a reserve currency).

62 thoughts on “Identifying a Treasury Crash

  1. Seriously, good work, my man. Of course I think the same way, but shoot, we can’t be wrong all the time!

    It was always going to come down to this. In a world with ever increasing fiat markers, each country was going to have to choose between keeping up with the status quo and sink with the ship or hop off and take a chance with the sharks.

    From the beginning of time, humans have always prefered to take their chances with the sharks. (Humans are friends, not food!)

  2. The mainstream claim is that yields are up because the European problem has been/is being solved so there’s no reason for risk-averse investors to cling to quite so many Treasuries.

    Of course, I agree with your explanation, which makes far more sense.

    • Greece defaults, CDS are triggered an suddenly it is risk OFF in global markets.

      I think all readers of this blog kow better.

      • CDS = zero. I’ll never forget when I asked my buddy, the insurance broker, “What would happen if a Hurricane Katrina like incident would hit your shop.

        His answer, “We wouldn’t pay it.”

        And there you go. Writing policies your ass can’t cover. It’s, the American way.

  3. Foreigners need to buy, it’s not enough for them to simply not sell. If they don’t buy then the fed will have to monetize. The monetization will cause a moderate amount of inflation with potentially a disastrous amount from the money multiplier effect / a big fall in demand.

    The fact that china isnt increasing its holdings means the titanic has hit the iceberg. It isn’t sinking yet and the passengers think everything is still fine, but it’s inevitable she is going to sink. Japan can only continue to buy for so long. Other small countries have really ramped up which will be a very temporary effect. The fed will monetize despite bernanke saying he won’t, unless of course they want Greece.

    • Foreigners need to buy, it’s not enough for them to simply not sell. If they don’t buy then the fed will have to monetize.

      This is true, though I’d expect the real problems to begin after a lot rather than a little monetisation.

      The monetization will cause a moderate amount of inflation with potentially a disastrous amount from the money multiplier effect / a big fall in demand.

      Why? We (and Japan) have had massive increases in the monetary base before without that kind of thing. The money doesn’t get lent out in a depressed economy, it just sits.

      I think the money supply could triple again from here without in itself causing significant inflation.The money won’t be used unless there’s a big shock.

      Inflation is not really something I worry about much at all. What I worry about are dangers to the real world economy; the pattern and flow of goods and services across and around the world.

      So long as the oil and goods keep flowing Bernanke’s hopium den will stay open for business.

      The trouble is the rest of the world is sick of subsidising our consumption.

      • And the danger from that is that we in the West have ripped up our history. Most of our people live in cities, dependent on food and oil shipped in from abroad. We have created these hyper-fragile global trade networks in the place of robust local trade networks.

        Global trade today reminds me of derivatives in the 90s and 00s, a big fragile network where one large failure can break the entire system.

        • If you have read Adam Smith’s “Wealth of Nations” you will know that money was once the humble nail. Gold and nails have more in common (Fixing a roof, or used as jewelry) Paper is only good for writing on or burning, when the Government decree is worthless, and may I add the taxation base backing it.

          I think Russia and China have given enough warnings, and will be quietly liquidating, as you have elluded to above.

          I am watching the Coal, Iron Ore, and the BDI to ship these goods, as this is a crucial bellweather for strategic stockpiling. If I was to go to war I would make sure I could

          1. Produce Electricity to smelt, drive machines.
          2. Build Tanks, Ships, Rifles etc on mass (Soviet Strategy that defeated Hitler)
          3. Stockpile Diesel (The USA (Alaska) and Russia gets Cold)
          4. Feed an Army

          Humans are selfish, and in the end gullible to jingoistic nationalism. Lets hope a financial meltdown does not produce a global land grab.

          Unless the USA utilises its massive Nat. Gas supplies for transportation and reducing Food (Fertiliser and Transport) Costs, it will have a difficult time trading out of this debt.

      • It’s not the increase % in the monetary base that will have an immediate effect, it’s the % of the additional monetary base / money supply. If the fed has to buy treasuries or buys bank assets who buy treasuries that money flows through the economy. True, the past injections have little effect simply because the fed bought assets directly from banks who then did nothing with the money. But if the fed buys treasuries that money flows through the economy via government employees etc… That money deposited in banks is not bank equity, hence depositors have control over how fast it moves, not just fearful banks.

        You put too much weight on the demand for money. Yes lending will slow and has but people still buy things like food gas etc… Although I can’t prove it a priori that a tripling of the money supply would cause price increases lets just say I’d bet the farm on it.

        • If the fed has to buy treasuries or buys bank assets who buy treasuries that money flows through the economy.

          Not exactly. Fed buys treasuries solely from primary dealers, who have since just mostly sat on the money.

          Pushing the excess reserves out into the financial system would require the primary dealers who are currently sitting on reserves to act in disobedience of the Fed and the Treasury.

          The primary dealers are part of the Fed cartel. They get first dibs on new treasury debt, which they can then just trade onto the Fed for reserves they can just sit on, earning a risk free 0.25%. They are doing as they are told now, and they will do as they are told later, because their power base is locked up in the Fed, in K-Street, in the establishment, in the military-industrial complex.

          They can keep a lid on money supply inflation (beyond the amount they want) so long as Wall Street stays obedient. They can’t keep a lid on cost-push inflation (oil price, etc), or money velocity.

          With oil price inflation there is a small (and growing) danger Wall Street may start disobeying their masters, and pushing out reserves in order to buy tangibles. We shall see, but I think the Wall Street banks have been briefed on the risks, and told explicitly they are not to do this, and that doing so will hurt banks’ credibility with each other and with the cartel. We shall see.

          Most importantly they can’t keep a lid on foreign reserves and foreign treasuries. China dumping dollars and treasuries back on the U.S. market would surely hurt the purchasing power of both….

        • “Most importantly they can’t keep a lid on foreign reserves and foreign treasuries.”

          Maybe dumping treasuries is not even required. Maybe (creditor countries) just NOT buying them anymore would suffice, and the Fed could keep recycling their money back and forth with the primary dealers would not be of any use because as Andrew Fruth said, an excess of money not supported by real productivity will drip in the economy.

        • PS: I could really use an edit function 😦

          I find my comments today being uncharacteristically ungrammatical.

          “the Fed could keep recycling their money back and forth with the primary dealers would not be of any use because” -> “the Fed could keep recycling their money back and forth with the primary dealers, but that would not be of any use because”

        • This is possible, but where’s the money gonna come from Andrei?

          Securitisation? Nope, M3 is still painfully deleveraging

          Fractional lending? Nope, the primary dealers are under strict orders to not push to anywhere near the reserve requirement. Caveat: as I showed a couple weeks back there does appear to be an equity bubble right now, but at the same time, I expect a bursting equity bubble to be a deflationary rather than inflationary pressure on the wider economy.

          The return of dollars to the United States from overseas? This is the likeliest option , but there’s a reason why the U.S. won’t let the Chinese government take positions in American equities.

          There’s lots of inflationary firewood around, but for now there aren’t many sparks.

          PS. edit function would require WordPress plugins, which would require me to move azizonomics to my own server, which is time consuming and costly. I planned on doing this last year, but never got round to it.

        • You can make a timing argument but you cannot make the argument that the fed can simply buy up treasuries endlessly and have it not cause at least a moderate amount of price increases. Demand for the dollar can only go so high and the system can only deleverage so much. When those have met their limits, which in practice, they already have, additional money added to the system will cause price increases. Bank lending and a run on the dollar would make the problem extreme. My guess is the us is looking at 7.5 or 10 % inflation in the coming yrs being the most optimistic scenario. The fed cannot flood dealers with that much money and not expect it to flow through the economy. If the dealers just hold all that fed money they will eventually run out of money they can use to buy treasuries. Logic alone tells me the system will collapse the only question is when.

        • As of now, deleveraging is over. Both m3 and m2 have positive growth rates. I just read a zero hedge article too that shows credit has turned around. I’m on my IPad so it’s too annoying to get the link.

        • You can make a timing argument but you cannot make the argument that the fed can simply buy up treasuries endlessly and have it not cause at least a moderate amount of price increases.

          “Endlessly” is a long time.

          Japan has a similar corporatist compact (i.e. writing it into law to force domestic banks to buy treasuries) and is 20 years down the road, and where’s the currency crisis? Kyle Bass says it’s nearly here, and even the Japanese treasury themselves have recently admitted that yes their debt is effectively unrepayable, but they’re just kicking the can on and on for twenty years, and still experiencing CPI deflation.

          My view is that America is quite different to Japan (and that Japan, in turn, is exactly the example we do not want to follow) and will not last anywhere near 20 years before the problems come home to roost through geopolitical shocks. That would be 2028, or 2030.

          But yes, the point is that central banks can manipulatively monetise debt for a long time without triggering inflation in the real economy, and Japan proves that that can be the case.

          Ludwig von Mises grasped this better than other Austrians. He knew that nobody can accurately predict when the inflation will eventually hit.

          But yes, of course, the effects will eventually be felt. It’s just a matter of when, where, and how.

        • And M3/ securitisation is another possibility for inflation, yes, but certainly not as good a possibility as foreign dollar dumping. There has been a little credit growth in some measures of M3 (though not all), but we’re certainly still a long way off the 2008 peak, which let us not forget was supported by a much smaller M2 and a much, much, much smaller M0.

        • I’ve looked at Japan. Their monetary base increases do not compare to the u.s. or to what the u,s is going to have to do each year to avoid default/austerity. Yes, Japan has 0 rates or at least did. But the japanese are also savers meaning that 0% is not that far way from what their rate would be without intervention. Compare that to the u.s. more printing is needed to keep a bigger distortion of market prices.

          As I wrote in my ebook, countries can increase monetary base amounts a ton without serious inflationary consequences. However, if the fundamental problem is fiscal, even the fed writer who wrote my sourced paper admits it lead to bad inflation in the past.

        • I agree with all of these differences. One I would add is that America is a much more combustible society, and that Americans would riot far quicker than their Japanese counterparts.

          I think to some degree we are describing the same problem with different language. You are encapsulating it as “inflation”. I am encapsulating it as a trade shock, arising from unrepayable debt, excessive increases in the money supply without a commensurate increase in productivity, and America’s current account balance. Of course, this coming trade shock would never happen without America’s dependency on foreign goods and resources, which has of course come out of America’s use/abuse of its reserve currency status. So, it is a problem arising out of credit inflation, and of course there is more coming down the road. Inflated currency is America’s number one export.

          Down the road, even if we assume your case is true and CPI goes to ten or fifteen per cent purely on money supply increase things will be smudged over as they have been for the last four years as long as the oil and goods keep flowing. The real problems (i.e. full-blown currency crisis) — as was the case with Weimar Germany and Zimbabwe — will start when a physical shock occurs, and my point of course is that your case would make a physical shock almost inevitable.

          You seem to believe that the inflation itself is the thing we need to be afraid of; my corollary is that actually the real problems are much worse and much bigger than high inflation or hyperinflation.

          Look at the global trade system — which we here in the West rely upon for goods, resources, consumption, etc — and I see something akin to the problem with the financial system in 2006. We abandoned robust and aged local systems, local knowledge, artisanship, etc, in favour of a huge interconnected mesh of trade where all counter-parties are interdependent, and where one failure can break the entire system.

  4. Now watching that video I don’t really see how he scuppered his reputation. He said clearly that “It’s not coming in 2010, but it might come in 2012, 2013, 2014 IF we don’t take the correct measures today”. The only thing implying he said hyperinflation is coming in 2010 is the incorrect title under which the video was posted on YouTube. But even if he did say it was coming in 2010 and eventually it came in 2014, I’d still think of him as a great economist because at least his predictions had a resemblance to reality (as opposed to Krugman, Roubini, Bernanke and other bamboozlers).

    • There are many other examples: Gonzalo Lira, Gerald Celente, etc. All these guys fell into the trap of underestimating Bernanke’s ability to kick cans, and failing to consider that the real problem in hyperinflation is a breakdown in the real economy and not money printing.

      • History does show there are plenty of examples where hyperinflation is the result of money printing and not a breakdown in the real economy: Weimar hyperinflation for example which looks exactly like stimulative printing gone out of control.

        • The Weimar hyperinflation was a result of strikes, the deindustrialisation of the Ruhr and war reparations. The money printing “stimulation” was a response to these physical shocks that just made the situation worse.

        • There’s room for disagreement and I certainly disagree if you imply a directional deterministic process whereby a breakdown in the economy always precedes and causes the hyperinflation. Even the elements you mentioned did not play out in that order necessarily. By the time of the Ruhr occupation and strikes the hyperinflation was almost “done” (actually this is why they occupied the Ruhr, because the currency was worthless). And Germany was one of the healthiest economies in Europe after the end of the war.

          All I’m saying myself is that hyperinflation is a complex phenomenon and those Austrians are right for saying (like Taleb) that Bernanke is playing with hyperinflation.

        • The blowout hyperinflationary period came after the Ruhr.

          Now, of course the inflation existed before the Ruhr, and of course France invaded because they were getting paid in devalued currency. But they were getting paid in devalued currency because of pre-existing problems in the German economy, which the authorities decided to “address” with money printing . The physical problems always seem to come first. The money printing is always (unless you can show me a counter-example?) a response to an already-existent problem, which then goes and makes all the problems worse.

          Yes, Bernanke is playing with fire. But we do not really know when it will catch alight. I support Austrian economists in making the case about the dangers of hyperinflation. I do not support them giving time frames, because as far as I am aware no such methodology really exists, and it is mostly just guesswork. Ron Paul — unlike Schiff, Lira, etc, — does not give timeframes, and I think he is right not to do so.

        • “because of pre-existing problems in the German economy”

          Can you name an economy that does not have problems? The fact remains that Germany had one of the healthiest economies in the aftermath of the war. And isn’t this what Bernanke is doing: printing to address problems, as a remedy?

          I can’t give you an example, because you’re totally right: no one in their right mind would start printing if there were no problems. You don’t try to fix something that isn’t broken.

        • My notion of a treasury crash is essentially a retooled version of the Austrian hyperinflation hypothesis:

          Bernanke has addressed problems in the U.S. economy using money printing, leading to a growing lack of confidence in users of the currency (i.e. treasuries), leading to a dumping of the currency (i.e. treasuries), leading to the purchasing power of that currency being severely diminished.

          I look at things a little differently (my hypothesis is based mostly on data and history rather than Austrian-style praxeological reasoning), but there is no doubting it.

          Bernanke’s policies are extraordinarily dangerous. But they wouldn’t be if the USA wasn’t so dependent on foreign goods and energy.

  5. “The strongest position is one that will thrive under all eventualities”

    I’ve tackled this subject in another comment thread and suggested that “freegold” might be such a position in the future but otherwise I don’t currently see how such a position might look like (i.e. there is none). Perhaps this is appropriate; perhaps anyone who wishes to have more money than the average person should by necessity become an investor (otherwise he becomes a “hoarder” – something you thought of as an insight some time ago). An investor – as opposed to a person holding a mythical position that will always came on top – is one that must constantly look after his wealth, switching from one asset class to another.

    PS: Nassim Taleb recently went live on CNBC in support of Ron Paul; among other things, he said he went into equities because he’s scared of hyperinflation. Not sure if this is the “antifragile” position to take 😛 I have strong doubts w.r.t. his antifragility concept (but I’ll wait until I read his book). I found many of his analogies flawed (the immune system will not become stronger against any kind of future threat but only stronger against the same type of pathogen). But as I said, I’ll wait for his book to arrive.

    • Equities tend to crash upward (nominally) during hyperinflation. Of course, they are more tangible than treasuries or other such nonsense paper. Certainly not a very robust or antifragile position, though. Perhaps I should send Taleb some of my priced in gold charts (e.g. DJIA), because in absolute (i.e. gold) terms we are not by any means bottomed out in comparison to history.

      I am not sure we really understand the human immune system. It is an extremely complex nonlinear system, and certainly it exhibits some antifragile characteristics, i.e. it is generally strengthened by exposure. Certainly not against novel threats (e.g. ebola or HIV) but against new strains of old diseases. Of course, some humans have inborn resistance to novel diseases, and when once in a while a pandemic occurs the ones left over are set free to repopulate the Earth. Evolution is a textbook antifragile system.

      • “Evolution is a textbook antifragile system.”

        Not sure I agree with this, especially if you by any chance, understand evolution literally as evolution. Most scientists today would say the term “evolution” is not appropriate as evolution has no purpose and can’t “improve” on anything (the way people understand “improvement” – a process whereby certain fixed characteristics are improved when measured using other predefined fixed scales): humans are not at the pinnacle of a pyramid, they are merely an accident of evolution exploring a certain niche (most scientists point explicitly to the mistaken textbook image of humans at the top of the evolutionary pyramid which was in vogue until not so long ago).

        I’m saying you might believe this because I remember you responded some time ago to a comment with “he thinks he knows better than nature”. Well, if knowing better than nature means preventing the destruction of the human species, then I’m all for frontrunning Mother Nature: because she doesn’t care one bit about the human species – evolution has no purpose or direction.

        • Improvement is a subjective concept. “Fittest” does not mean best, it means the creature that fits the best under the present circumstances.

          Well, if knowing better than nature means preventing the destruction of the human species, then I’m all for frontrunning Mother Nature

          The point is that you can’t “frontrun” nature, because we never fully understand the consequences of our actions. What might at one stage seem like saving humanity, could in fact be dooming humanity.

          I don’t know what to really think about the hierarchy (I prefer the term”directionality”) of evolution. It seems to rest on the question of whether I really believe in entropy. If entropy is true then why would a homogeneous isotropic substance like the pre-big bang universe constellate into stars, galaxies, people, black holes, etc? Seems like the opposite of entropy. Evolution may have some kind of directionality, but I would never claim to be able to understand it. Certainly, I think that as humans we should try our fullest to perpetuate our species on this planet and throughout the cosmos, but if nature has an unavoidable black swan around the corner to wipe us out then that is that.

          In any case, “humans” are not just what we think we are. We are a vessel for our genes (most of which are found in other species), and a vessel for bacteria, viruses, fungi, etc. The directionality of life on this planet may be to spread itself off the planet, and it seems like we are just a tool for nature in this respect.

        • “Improvement is a subjective concept. “Fittest” does not mean best, it means the creature that fits the best under the present circumstances.”

          Exactly, but this is why I see nothing antifragile about evolution. It’s just a process that selects the fittest for the current circumstances. Which means frontrunning nature is just as valid an idea as hoping nature will not wipe us out (I mean equally valid).

        • “Evolution may have some kind of directionality, but I would never claim to be able to understand it.”

          Yes, IMO the antifragile argument rests on this (and requires it). But there’s no scientific evidence for such directionality – the idea of this is viewed kind of like “intelligent design” in the scientific community (there’s no proof for directionality and hierarchies are purely poetic constructions).

        • The antifragile argument doesn’t really seem to rest on directionality. Antifragility is not some kind of religious creed. It is just a word to describe anything that benefits from volatility. Directionality is a different argument, although one that both Taleb and I seem to subscribe to to varying degrees.

        • I was talking about the idea of evolution being antifragile IMO resting on the mistaken and scientifically unsubstantiated belief of evolution having a direction.

        • Well then I suppose the problem you are having is accepting the notion that evolution “benefits”. I see the view that evolution is an essentially amoral and directionless process. But certainly, the fact that life has become more complex, to the extent that we have now with our own technologies can travel off the planet that birthed us tends to suggest that evolution has had some kind of directionality, although not one that we can fully understand or express in a scientific manner.

        • “Well then I suppose the problem you are having is accepting the notion that evolution ‘benefits'”

          I don’t see what that means actually. Evolution stumbled upon us and here we are. If by “benefits” you mean that we’re the lucky ones that evolution stumbled upon while exploring some niche, then lucky us that we have benefited from evolution (and that we’re still alive)! (I wouldn’t conflate biological evolution with technological innovation for the sake of keeping the conversation on topic). There’s no scientific proof of things being otherwise (certainly, I’m not exploring my own ideas here, I’m merely saying what cutting edge science is saying – critics will say the same about Taleb if he has the same opinions but first I need to read his book) and there’s no scientific proof of it having a direction (actually this statement does not even have a meaning in scientific terms so it cannot even be attacked).

        • There’s no scientific proof of it having a direction.

          It depends how you define direction. As I said, evolution is just the survival of the fittest. The “benefit” is that the most fit perpetuate their characteristics. And of course, the definition of “fittest” is constantly changing. But yes, I would say that the directionality is toward “whatever fits nature best”, which is not in terms of its implications a concept I claim to fully comprehend, but is nonetheless conceptually clear

          By the way, Taleb’s opinions get stronger and stronger. Here’s his view today:

          A strange fact: regular people get the idea of antifragility right away. Academics don’t (unless they are libertarian economists, complexity physicists, etc.). They can’t grasp the idea that systems can operate on their own without some known theory driving them. I just realized that it is precisely because they don’t understand antifragility that they became academics.

          People don’t become academics because of intelligence, but rather because of a mental defect.

          He just declared war on almost the entirety of mainstream academia. It’s beautiful to watch, and I mostly stand behind him.

        • I’m just waiting for his book to appear. I’m not one of those “not getting antifragility” in the sense “I don’t know what this guy is talking about”. Actually, ever since I’ve heard of the concept (more than one year ago I think) I understood what he meant by it, but thought of it as an unsubstantiated sort of mysticism (based on some of his analogies – though I didn’t have the time to follow all of his updates). (I’m not against a spiritual understanding of the world, but I’m all for separating speculations from facts and science). But I’ll hold my judgments until I actually read his book. But the history of literature and science is littered with many a quaint and discarded theories.

        • While Taleb and I may be wrong in some of our applications of antifragility, certainly it is a real thing (i.e. some things benefit from volatility), and certainly there was no single word or phrase in the English language for such a thing before Taleb (same as “black swan”) for describing such phenomena.

        • To clarify:

          I can easily understand the idea of a system that becomes stronger w.r.t. certain variables defining the system when some stress is applied to the system. This is perfectly understandable and scientifically clear. I can imagine all sorts of systems. It would be more useful if he could actually say how this could be applied in our lives (financial system comes to mind).

          The problem I had was with some of his analogies: 1.) The immune system merely learns what it was taught, it doesn’t magically become stronger against newer and different threats; 2.) Evolution as antifragile, conceptually implies that evolution actually means “evolution” which is a scientifically discarded notion. 3.) Wine becoming better with age defines a purely subjective measure 4.) etc.

        • I look forward to your reaction to the book. If nothing else this book will lead to more people really engaging with the concept of evolution, which is actually I think quite a poorly understood idea.

      • Only buy commodity miners/explorers before Hyperinflation. They can sack the workers, but the mineral rights are valued in real terms.

        I am long BHP as the Australian Government set a precedent of locking out striking workers when they locked out the port workers in the 90’s. They can strike all they want, they wont be paid in a collapse.

  6. PS:

    “Wine becoming better with age defines a purely subjective measure” this actually fits the scientific interpretation “system that becomes stronger w.r.t. certain variables defining the system when some stress is applied to the system” (but then again, I could interpret wine aging in an entirely different framework where ideas like “stress” and “stronger” are not required). The second problem analogy listed by me (evolution) is merely unsubstantiated scientifically; the first analogy (immune system) was implying in my view that there could be a system that could become “universally” more robust when exposed to a small sample of stressors.

    Otherwise, the idea is pretty clear scientifically, but we need to see applications of it for it to become useful.

    Sorry for having caused the hijacking of this thread to an entirely off-topic discussion.

  7. @ Abdrew Fruth ” But if the fed buys treasuries that money flows through the economy via government employees etc… That money deposited in banks is not bank equity, hence depositors have control over how fast it moves, not just fearful banks. ”

    Andrew this is they key. I agree with you. The Soviet Union had breadlines, but the Government workers got the goods on the black market, at a price out of reach to ordinary folk. Government Inflation and Black market inflation are two different beasts.

    Paper shuffling government employees can only be paid with paper, as they produce nothing more. Therefore inflation is a certainty. Especially imported inflation when the currency collapses.

  8. So much for increased equity prices (Wealth effect) via QE (Light, Heavy, Sterilised, Unsterilised).

    “Households are balking at higher gasoline prices,” said Paul Dales, senior U.S. economist at Capital Economics, a London-based research firm. “The continued rally in equity prices is now being more than offset by the jump in gasoline prices.”

    Bernanke must be so smart to manage this juggling act. I promise that I will read all his published pages (twice!) if he pulls this off.

  9. By the way, guys, a point of history:

    One of the things holding up Paul Krugman’s credibility with his fans is Austrian economists screaming about imminent hyperinflation and that threat not materialising.

    They laugh at us, and every time we scream about imminent high inflation, and we are wrong, they have a right to laugh at us.

    In 2009 and 2010, before I started writing this blog, when I was merely a 22-year old Zero Hedge reader I used to read Gonzalo Lira’s work on hyperinflation. It was fascinating and ingeniously put-together stuff. The problem is, I thought it was wrong at the time, because I had studied Japan, and I knew the guy who inspired Japan’s response in the ’90s was now in charge at the Fed. I knew then that the real problem was zombification, and not imminent hyperinflation, and it turns out I was right and Gonzalo Lira was wrong.

    To be honest, I didn’t expect to be right. I was full of doom and gloom, and I hoped after 2008 that we would be on a short road to Mad Max. I’m a romantic like that. I didn’t like agreeing with Mish, and I definitely did not like (at least superficially) agreeing with Joe Wiesenthal or Paul Krugman. But I had to be honest to the evidence.

  10. Taleb’s comment “People don’t become academics because of intelligence, but rather because of a mental defect.”

    Love it! This is why people say Academics are wonks. It is called emotional intelligence or common sense!

    I had a Financial Maths Professor. Brilliant mind/switched on, and had pracical insight, so I sometimes dispute the fact that academics are stupid.

    Using Japan as a precedent is dangerous, as the people of Japan are hard working and save. This saving funds their deficit, so it is a different kettle of fish to compare to the USA.

    Bernanke may use the same policy he promoted for Japan, but it will blow up in his face. Wealthy US citizens will invest their money in offshore regions. Perhaps the Global Dow is a better benchmark.

    I have searched every financial blog there is and most are negative. If I was a newbie or unsophisticated investor, I would be very risk averse. If I chased risk, which Sovereign Bond would I invest in to get yield? Global Dow equities are not posting stellar returns.

    I certainly would not be buying US treasuries!

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  14. I would still conclude that bond investments as well as stock investments are somewhat dangerous right now. In fact at any given time, there is some level of risk associated with any investment. It’s the nature of investing. Risk is a funny thing. When the stock market is rip roaring, most everyone is willing to take a little more risk than they really should, and when the market is depressed, most are so fearful that little to no level of risk can be tolerated. Neither of these extremes makes for good investing. Thanks for the post.

  15. Pingback: Treasuries Still Not Cracking | azizonomics

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