I know, but if the US defaults on Treasuries, do you think that there will be any banks handling euros left standing? I don’t. It’s clear to me that people that are buying these instruments really aren’t betting that the US will default on Treasuries. I’m trying to figure out what people are buying this for.

piqued: Sloppy analysis, or cognitive dissonance that I have seen in many of my (very smart) friends who share exactly one common characteristic: they have debt which blinds them to what inflation is and does (mainly a mortgage).

Inflation is very bad. There are things that are worse. If there is any real sign of inflation, then we can just pull a Volcker and raise short term interest rates sky high. The reason for waiting to do that is 1) it may not be necessary and 2) it gives the banks time enough to develop capital cushions so that they don’t go under when interest rates spike.

Also, CNBC and Bloomberg are pretty awful sources of analysis about what is going on, since they focus on what happened in the last 24 hours rather than what’s been happening in the last 24 months, and they have a flare for trying to pump up drama where none really exists.

After Lehmann fell, things on Wall Street were really totally insane for a few months. There wasn’t anything particularly odd about last week. Bond rates went up….. So??????

One other factor, is that the moment GM goes bankrupt, rather massive amounts of cash are suddenly going to change hands, which I suspect makes buyers of Treasuries less willing to buy them than would normally be the case.

No. Real estate prices are going down and should continue to go down. The problem is that if real estate prices go down enough, people stop buying and selling real estate, because when they do, they will have to realize a massive loss, thereby going bankrupt. So you end up with real estate at unrealistic prices in the books of the banks, and dead capital as unpayable loans get rolled over.

What you need to do is to flush out the bad loans and get them sold off at fire sale prices, but that requires injecting large amounts of cash into the system. If bank figures that selling a property will force it to take a loss and kill the bank, they won’t do it.

Personally, I’m a firm believer in market mechanisms since they tend to work very nicely when they work. But there are lots of situations in which markets just break down. You have banks that are willing to sell real estate at a massive discount because that would mean they end up dead, and you have buyers that are unable to get credit to buy up houses at deep discounts.

FG: Instead of investing the same money into science, education, etc…

As long as you have bad loans on the books of the banks, you will end up freezing capital that could be used for other things. You need to take the bad loans off the books, take the hit, and once you’ve cleaned up the mess then you free up capital.

The most straight-forward way is to pump government money into the system to free up the markets. Then you step back and have a discussion as to who pays for the clean up.

Japan and US are different. They have different consumer spending and saving behaviours. They have different demographics. They have different export-import setup. They have different political systems and foreign policies. They have a different foreign exchange setup as well.

So they’re waiting before they step up to buy more Treasuries under QE. But you’ve got big over-supply problems, mounting worries about the U.S. fiscal position going forward, inordinate piling into short-dated Treasuries by global investors, mounting inflation fears, dollar declining, etc etc.

The one factor Fed officials seem to want to believe most is that the economy is getting better so investors aren’t so risk averse and thus demand for the longer-dated Treasuries is sagging, thus driving up yields. What’s wrong with this picture???

Demand for Treasuries ISN’T sagging. Only demand for the longer-dated assets is. DUH! So what does that mean? It means that just about the only thing that’s attractive about the dollar is that the Treasuries market is really deep and highly liquid – so investors are parking their wealth there for the short term ONLY. It seems like a slam dunk that the so-called ‘improving U.S. economic prospects’ factor is a minor one at best in judging the causes of the steepening yield curve.

Isn’t that what the US is doing by buying mortgages: Investing the heart of its financial power into non productive endeavors such as keeping real-estate prices high where people can’t afford them? Instead of investing the same money into science, education, etc…