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[shajandr]

shajandr‘s Thoughts on the Coffin Corner of Fiat Currencies®

Executive Summary: This all ends in inflation/currency debasement. There is a point at which raising interest rates exacerbates inflation in countries with large sovereign debt burdens. As for example the UK, EU, and USA.

When a gubmint has issued so much debt that it can barely service that debt at near-zero interest rates (sub-zero real rates) and a booming economy, when inflation rises cause that central bank to raise the short term interest rates to combat inflation, the interest demanded by the market for the rollover of gubmint debt (short and long term) rises, significantly increasing the debt service required.

What happens when the market will no longer buy gubmint debt at interest rates that allow the gubmint to rollover the huge debt pile? They rely on the central bank to buy those notes and bonds - called quantitative easing or, more correctly money creation from thin air, as money is printed in order to buy those notes and bonds.

And the increase in interest rates may lead to a recession causing gubmint spending and deficits to grow even higher. More debt issuance in search of buyers.

So, while the central bank is raising interest rates to combat inflation, rising interest rates will eventually make it necessary for the central bank to buy gubmint (and other) debt in the market (or from the issuer), thus flooding the money supply causing more inflation.

Thus, the coffin corner. Where more central bank raising of interest rates requires central bank purchases of gubmint (and other) debt, and in doing so it must de facto create the new munny to do so which is inflationary per monetary theory. It is caught in a feed-forward cycle of simultaneously increasing interest rates AND inflation while the economic activity stagnates or declines.

I do nott claim to be a sheepskinned eCONomist, so please korreck the above if it contains errors, omissions, or just a tad to much bullshit for your taste.

I am trying to compare the crisis situation in the UK (and soon in the USA and EU) as I forecast it ,with the frankly puzzling situation of Japan which has been in a non-inflationary debt situation papered over by BOJ printing for many decades now.

I feel that the real worst case is NOT the debt/liquidity trap that most fear, butt the Zimbabwean/Brasilian/Argentinian/Venezuelan runaway inflation and sovereign currency ruination of the Coffin Corner© stated above. I call it the Coffin Corner© taken from aeronautics wherein a plane like the U2 at max altitude is in a situation where the airspeed must be kept in a tight range of just a few knots - fall below that and the airfoil stalls, go above that and you are above the critical Mach number.

https://en.wikipedia.org/wiki/Coffin_corner_%28aerodynamics%29

Comments and korreckshuns are welcome.

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