Here's one for all you economic philosophers and "bond market vigilante"-types. The question I'm currently turning over in my mind is this: can the U.S. experience hyperinflation, or will the possibility of such an extreme inflationary spiral be held in check by the bond markets?

The current thinking on the possibility of the United States experiencing hyperinflation seems to be split between those who say it can (and likely will at some point in the future), and those who feel it cannot, for precisely the reason stated above.

I spent part of the weekend reading some of Richard Russell's recent remarks, and part of his June 20 newsletter dealt with this very topic.

Russell is of the opinion that, as far as hyperinflation goes, "it can't happen here" because of the size and depth of our present-day bond market and money markets.

He also feels that if inflation were to really heat up, the bond market would "start to crumble" and things would generally start to fall apart. Interest rates would go higher, the stock market would collapse, and business would begin to fall apart. This in turn would cause inflation to disappear as all manner of assets begin to deflate, or so the story goes.

While I hold Richard Russell and his writing in the highest regard, I must say that I have to wonder about his reasoning on this issue. I am just not sure that I would agree with it.

I am still struggling with the answer to these issues, but something about this argument strikes me as rationalization. So we have a very powerful and well-developed bond market. Does that mean that it would survive the final stages of a rapidly escalating inflationary cycle or keep such a cycle at bay?

The theory of the bond market vigilantes holds that bond traders will sense inflation and mitigate its effects by pushing interest rates higher, thereby keeping central banks and governments relatively honest.

The main problem with the theory of the bond vigilantes these days is that no one can seem to find them. Whether they've been overrun by non-traditional forces or have simply disappeared has been a recurrent theme for discussion in recent years.

I've heard some very insightful arguments concerning the bond vigilantes and their eventual return, but I've yet to read of their ability to stop an impending hyperinflation in its tracks.

Also, if the government were to issue bonds in excess of the amount people were willing or able to lend, they could simply monetize the debt by selling their bonds to the central bank, who, in turn, would print the money needed to pay for them.

Creating money out of thin air is, of course, an inflationary exercise. Taking this method to its extreme would provide the impetus for a hyperinflationary episode.

So far I've seen nothing to suggest that bond investors, or anyone outside of governments or money-controlling agencies, have the power to overcome an over-issuance of money and credit, or an impending hyperinflation.

In the meantime, if anyone can tell me (in plain English) why the bond markets have the power to stop a U.S. hyperinflation in its tracks, I'd be interested to hear the explanation.