The senseless monetary madness continues

I said back in early November that the only thing that could prevent a dollar crash is if someone wrecked the euro. Well, they tried. And, it seems that Mr. Trichet stepped up to the plate and pulled out his monetizing bazooka, creating short-squeezes in the PIIGS bond markets. I've been wondering when they would start resorting to this. The thing is, you can do it with small European countries, because their markets are, well, relatively small. Bernanke, one could argue, is on his second try and it still doesn't work. Everytime "the Bernank" tries "the Quantative Easing", US Bonds seem to start rising.

I guess Trichet figured out much earlier that in order to destroy a working market you have to do hit and runs. His credibility in claiming that he will not be monetizing is quickly evaporating, however. He might have saved the eurozone for an additional year, since starting in May, but he cannot do it forever. And when the fear and fury of the bondtraders is released for real, he will have made it all that much worse. Bond-rates for the PIIGS won't go up - they will disappear. They will have no bond markets left. But I digress.

What I really wanted to bring your attention to is the following chart, which shows that unless we get a substantial bounce in the dollar index some time soon, the markets have decided that Europe is again not the bigger problem, rather the US is. And then we are back to the "oh-my-god-it's-going-to-break" mode again. Although in reality, I think that the classical dollar index will in the end not matter anymore, as the euro is more than 60% of it and they are both coming down.

I also wrote earlier about asset hyperinflation. You are watching it happen, if you look at any chart of commodities or stocks. Bonds are starting to decouple, since bond traders are finally starting to realize that the value of the USD is starting to look very uncertain. The problem is, bond traders seem to be treating bonds like US currency with the benefit of it paying interest.

This is a problem, because if enough people trade something like it will always be liquid, and never collapse in price - it is going to stop being liquid and collapse in price. I cannot fathom a guess at how fast a collapse of the US bond market would be - maybe we are watching it in slow motion, maybe it will accelerate, or maybe, just maybe, people will realize that the US is as much in the hole as the PIIGS and the market will simply disappear. The question remains - how much can you manipulate markets and currencies and still expect them to work? Who honestly thought they could do what they have done to the US economy and it still working to any extent at all?