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Less than 90 days ago, the financial markets were melting down, with the world’s economies mired in a deflationary death spiral that threatened to usher in another 1930′s-like extended downturn.
To combat the demons of deflation, the U.S. government — through the many newly created stimulus packages — is on track to issue as much as $12 trillion in combined future debt to boost the ailing domestic economy.
The net effect of all this freshly minted money could be rampant inflation, where the dollar loses substantial value against other currencies and yields on Treasury bonds spike higher.
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During the past two weeks, that premise is taking a firm hold in the bond trading pits and rates are gapping higher with every Treasury auction. The inflation genie is now out of the proverbial bottle and it’s still early in the debt-issuance phase of this worrisome scenario.
The current deterioration in the value of the U.S. dollar was not a matter of if, but when. Now the recent blow-off in the greenback to six-month lows has fund managers all over the world closing out long bond positions and rotating into floating rate bonds at a dizzying pace.
