Hyperinflation is a dynamic process — much like a positive feedback loop that, once entered, is almost impossible to exit. The process can go on for years. In the feedback cycle, the more central banks print money and buy bonds, the less other entities want to hold bonds.
Simultaneously, the less others choose to hold bonds, the more the central bank is forced to buy so that the government has enough money to spend.
In Bernholz's "Monetary Regimes and Inflation," it was found that in a study of 29 cases of hyperinflation, the best predictor of hyperinflation in a country that prints its own money is government debt more than 80% of GNP and a deficit of more than 40% of government spending.
Note that 50% deficit spending would mean spending twice what was collected in taxes.
We are edging closer to this number but not quite there yet. A major war or natural disaster could potentially put us over this mark.
The U.S. is over the debt number and not far from the deficit number, so the danger of hyperinflation is real.
Interest Rates and the Bond Market
What causes bond yields to begin rising?
An unexpected bond market sell off could spark a collapse that would make the fear of lower housing prices look like a walk in the park. The triple threat of a simultaneous equity, housing, and bond sell off cannot be ruled out.
The global bond market is at least $100 trillion dollars. The great majority is being kept alive by a massive race to debase the currencies underlying.
The U.S. is more than 60% of the total. Nothing begets selling like the selling triggered from falling bond prices.
As short term debt matures, new buyers are not coming back. China was the buyer when the Fed began its Operation Twist program in September 2011. They bought debt far out into the long term portion of the curve. They needed to sell the short end. This was done in an attempt to stabilize the yields across the spectrum and signal to the markets that they had control over rates.
As China backs away (in essence, letting short-term bonds mature), they are not coming back. In addition, the official announcement from the PBOC came at the end of 2013 that they would not be buying anymore U.S. debt.
Obviously, this does not mean they are selling debt — it's just a signal.
Higher yields are not in complete control. Most major market participants have factored that interest rates are under control of the Fed into their risk models. They have also surmised that the bond vigilante is dead. The bond vigilante has been temporarily usurped by the same mechanism that has suffocated most every market.