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|Subject: a SNIP on the inflation theme||Date: 9/27/2012 1:55 PM|
|Author: grier22||Number: 44574 of 44601|
This article 'Inflation and debt' is liberally quoted in the latest Grant's Interest Rate Observer. Like Pimco and GMO, the author is offering rationale to prepare for inflation. I keep wondering if the prospect of inflation, however distant, means we don't get the deep pullback Hussman is concerned about ('worst .5%' of all times to invest' according to his data). Inflation may be years away, or not.
But will institutions take advantage of any market weakness to gird themselves against the prospect?
The key reason is that our government is now funded mostly by rolling over relatively short-term debt, not by selling long-term bonds that will come due in some future time of projected budget surpluses. Half of all currently outstanding debt will mature in less than two and a half years, and a third will mature in under a year. Roughly speaking, the federal government each year must take on $6.5 trillion in new borrowing to pay off $5 trillion of maturing debt and $1.5 trillion or so in current deficits.
As the government pays off maturing debt, the holders of that debt receive a lot of money. Normally, that money would be used to buy new debt. But if investors start to fear inflation, which will erode the retur