Fed warns of possible market "disruption" due to record high short positions against US Treasuries.

Something I hear a lot in people that dismiss the need for sound money, is the assertion that "The US government can never go bankrupt".

That's technically true in a narrow sense, in that it can print all the money it wants to, but you also need a counterparty to accept that printed money, else it becomes worthless.

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The problem with fiat is the death cycle, where the currency loses its credibility, and people refuse to deal in it because they suspect it will be worth much less in the near future.

The Fed can offer whatever treasuries it wants to investors, but they cannot force the counterparty into a sale. Thus there's a hypothetical set of conditions where the US government cannot effectively shift sovereign debt, and the money printing ceases to function.

What we're seeing in the treasuries market could be the beginning of that credibility death cycle. If hedge funds see the writing on the wall about the deficit, the debt ceiling, QE etc it means they're assigning a low credibility to the belief that treasuries will be a store of value, and taking a short position against them.

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I don't tend to be a fiat doomer, I think a slow grinding inflation is more likely than a rapid collapse. But I do think this could be the start of a multi-year meltdown in sovereign debt, or possibly even rapid collapse and hyperinflation.