The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, July 22nd, 2008.

But, you can't stiff all the people all of the time. To what do we refer? Answer: The likelihood that once the Beijing Olympics are over, because increasing defaults of US corporate paper / agency debt leave a worsening bad taste on foreigner's palates, demand for domestic sovereign debt is expected to wane at an accelerating rate, which would send bond yields (market rates) higher - possibly much higher. Up until this point, Wall Street bankers think they can flog trillions of worthless CDO's and other toxic junk around the world with no ramifications. They think the world will just adsorb trillions in losses on fraudulent junk paper and keep coming back for more. But I can assure you this is not the case. The seeds of destruction of the Western banking model (globalization) have now been planted, and it's just a matter of time before this next card falls in the destruction of our fraudulent and corrupt monetary system.

Naturally then, this would mean that US borrowers (along with everybody else) are likely to face steadily increasing costs with an accelerating reduction of flows into domestic debt securities, especially with skyrocketing defaults reducing foreigner's appetites for all forms of American debt securities. The most recent TIC data shows no problem today the US's large trading partners, with steadily increasing flows into Treasuries - Japan being the exception. But again, once the need to 'save face' for the Chinese is passed with the Olympics this summer, one does need wonder if they will join Japan and cut back on Treasury purchases, especially if the economy continues to weaken, meaning they simply have fewer dollars to buy anything. In this regard you should know the economy is expected to continue weakening, with slower trade being the result.

So as the title above suggests, whether it be due a natural slowing of the economy, or in retaliation for a bunch of paper gone bad, expect foreign support for US Treasuries to increasingly wane in coming months, especially if the inflation monster is well fed by monetary authorities in an attempt to fight this condition. Here, one should realize any talk of addressing the inflation problem in the States is just that - talk - a smokescreen to plicate increasingly jumpy bond market participants while they monetize every problem that crops up. That's what it's all about you know, keeping the bond market happy so that credit keeps flowing. Credit is the milk blood of the global fiat currency economy. So when it stops - everything stops - and hyperinflation will be the result - which is why authorities are working so hard to keep people believing the credit cycle is alive and well.

Of course it could be argued we will make the turn into hyperinflation with the bailout of Fannie Mae and Freddie Mac (GSE's), estimated to potentially double public debt with one stroke of a pen. Up until this point the populace has remained quite complacent about the goings on in the credit markets and so on because it has not affected them in meaningful fashion yet, along with the belief that authorities will fix the problem(s). The only problem is this time the paper-over job might be too big to handle, with enough people finally realizing they are on the hook for all these bailouts. The bailout for Fannie and Freddie will be somewhere between $3 and $5 trillion, qualifying it as the single largest monetization in history. If this doesn't cause gold and silver to go up substantially, then perhaps it will take more bailouts, with a worsening economy guaranteeing this trend.

That's the thing you must realize - unlike your bank account and the economy - gold's future as the alternative of choice is guaranteed. It's just a waiting game now - waiting and watching for events to unfold in process. Of course the suppression of gold continues, well evidenced this week with a big jump in paper gold open interest matched by negligible price gains due to cartel related short selling. And as discussed a few weeks back, suppression efforts don't stop there (i.e. extend to the currency / debt / stock / commodity markets), and are being intensified as well. Of note this past week, technical indications suggest a short to intermediate-term bottom has been put in the stock market centered around the GSE's bailout and a turn higher in financials as a group. Who needs gold when you can buy safe bank stocks - right? And if bank stocks are rising, this must mean credit is expanding again - right? (See Figure 1)

Figure 1

Sure enough, just when it appeared poised to take off to the upside, the Yen reversed lower to help paint this picture - one that credit growth is alive and well as evidenced in a buoyant Yen Carry Trade. You see the current batch of price managers assume the public is stupid, and will believe everything they are told. Like gold and silver however, I don't know how successful this ploy will be, with surprise reversals higher possible at anytime. It's the growing uncertainty you see. People are getting increasingly jumpy about future prospects in the economy, markets, etc. So all the price fixing / manipulations in the world will not work at some point, and that point should be relatively soon considering how fast things are coming unhinged these days. (See Figure 2)

Figure 2

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Good investing all.