Why U.S. Treasury bond prices could collapse (Tom Dyson)

  Oct. 20, 2008 (MoneyWeek) -- "I can't stand to sell at these levels. But I don't have any choice. I need the cash now..."

  One of my cycling buddies has a huge house. He spends $30,000 on property taxes every year. He's retired. So to make these payments, he sells a few shares of stock whenever the bills arrive. He built his portfolio around financial companies. This year, they cratered.

  "I used to sell 500 shares to pay my tax bill. Now I sell 5,000 shares. It's devastating my holdings. Even if the stock market rises again, I'm still screwed."

  This story illustrates why the stock markets are falling so much. The world's financial system is founded on debt. Payments must be made every month to service this debt, like my friend must pay his property taxes. If cash runs out, the debtor must sell assets... or declare bankruptcy.

  Last week, the whole world rushed for the door. Everyone tried to make payments on their debt by selling assets. Corporations, states, hedge funds, governments, and millions of people like my friend. The stock market collapsed.