By Jeffrey Lewis
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.
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.
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