The bubble in government paper

The US budget proposes that by 2020, debt service on federal debt will be ten percent of GDP.  This is politically impossible.  The interest will be paid by borrowing more money. Anyone buying government paper assumes he will unload it before the bubble bursts.  Whosoever buys government debt, buys it on the bigger fool theory.

Bubbles can go on for a long time, and they always last longer than those calling the bubble expect.  Conversely, however, they always burst earlier than most people expect, and people do not realize the bubble is bursting until a considerable time after the bubble has in fact burst.  The bubble bursts when the smart money rushes to the exits, and the smart money rushes to the exits long before the vast majority realize that the smart money has upped and left.  You want to exit a bubble when the majority of the smart money, not the majority of the public, is exiting, which for the recent housing and triple A CDO  bubble was not 2008, but late 2005.

The cleanest and least destructive way out of this crisis will be to default on treasury bonds, but I fear the government may instead proceed with hyperinflation.

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