A number of people making comments on this blog have agreed with Paul Krugman that the relatively low bond rates right now "prove" that new monetary creation and an explosion of government spending bring no inflationary pressure. Thus, they claim, the concerns of people that the current "stimulus" efforts will lead to inflation are unwarranted.
I have asked a number of friends who are economists to comment. As I receive them, I will include them in this post.
Professeur des Universités
Faculté de Droit, d'Économie et de Gestion
If I understand this point correctly, higher deficits need not be monetized (or not much) because of the current drop of T-bill rates. Therefore, the danger of inflation is limited. Well, this argument presupposes that it is always possible for political institutions such as the Fed to stabilize TB rates at the current low levels, or even decrease them. But this is wishful thinking. In the past 20 months, the US Treasury, along with the German treasury and a few others, have benefited from the fact that investors have been losing confidence in all other market participants. Therefore, their TB rates have declined while the rates of all others have increased, or are starting to increase. However, this group of beneficiaries shrinks by the day.
Pressure is mounting for rates to go up, for three reasons: (1) there are more and more countries that have to pay higher rates, which will create pressure on T-bills and bonds precisely if and when the general situation seems to stabilize; (2) the supply of T-bills and bonds could dramatically increase if and when the general situation deteriorates, because the US and the German governments have started to act as financial problem-solvers of last resort; and (3) the return on investments in the "natural monies" gold and silver is outpacing the meager return offered by T-bills, and this at much lower risk. These facts are so glaringly obvious that even mainstream banks such as the Landesbank of Baden-Württemberg in Germany, Société Générale in France, or UBS in Switzerland are now hammering this point, to the benefit of their clients. See the latest installment of this wave of financial enlightenment.
As soon as the rates of US T-bills and of bonds start increasing to a moderate crisis level of, say, 10 percent, all government budgets will be belly-up. Then the only remaining alternative will be between (I) US and German government default, entailing a deflationary meltdown of world financial markets, and (II) monetizing T-bills and bonds, which will very quickly bring us on the road of world hyperinflation.