Karl Denninger is at it again: making me think too hard and wonder what Bernanke will do. I think he is right about the dilemma and potential consequences. Whether he is right in guessing which choice Bernanke will make, I'm not so sure:-
This week we will be treated to the US Government attempting to sell $100 billion in new Treasuries to finance its profligate spending habits.
Bernanke, for his part, is on the cusp of losing control of the long end of the bond curve. If it gets away from him he will have only two choices: pull liquidity and allow the curve to spike higher, repeating almost exactly what happened in the 1930s, or ramp up his "monetization campaign" to meet the issuance, risking an immediate tender of the entire outstanding float, resulting in an even worse outcome - a choice between collapse of the government or an Argentina-style currency implosion followed by that same collapse.
My bet is that is if push comes to shove Bernanke will back off and swallow The Depression that inevitably must follow, because the alternative is that he may literally swing from a lamppost - if not at the hands of angry citizens once the government and rule of law have fallen then from Congress, who, if he goes "all in" ramping up the monetization and loses, will find themselves unable to fund the government's operations.
