Aftershock: Protect Yourself and Profit In The Next Global Financial Meltdown, Second Edition

The Government Debt Bubble Pops

In the short term, massive money printing by the Fed (see Chapter 3) will likely continue to boost the stock market and help temporarily stimulate the economy. However, in the long term (likely in the 2013–2015 range), a heavy price for this temporary stimulus will have to be paid. Rising inflation will put downward pressure on the dollar, thus reducing investment from foreign investors in dollar-denominated assets, especially bonds, but also stocks and real estate. Eventually, especially after inflation passes 10 percent, foreign investors could actually take their money out of the United States, which would sharply reduce the available capital inside the United States.

To calm the markets, boost liquidity, and keep the outflow of investor capital from driving interest rates up even further, the Fed will be forced to print even more money to purchase the bonds that foreign investors, as well as domestic investors, are no longer purchasing. However, at that point, the Fed’s medicine will rapidly become poison, as more and more investors fear inflation from the Fed’s money printing operations. Sharp declines in stocks, bonds, real estate, and the value of the dollar, due to rising inflation, will create a greater sense of perceived risk among lenders, which will further reduce capital availability and further push up interest rates. Real interest rates—the difference between the inflation rate and the interest rate—will eventually soar, with the perceived ...