The End of the U.S. As We Know It: Tracking the Dollar Downward 89 comments
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A few days ago, despite my conviction that the Treasury market is going to collapse in the near future, I said we may see some retracement in yields -- maybe even a retesting the lows -- for two reasons. First, the Fed may make good on its threat to buy the long end of the yield curve and second, the Japanese might defend the strengthening yen by buying Treasuries.
The economy is in tatters. Corporate earnings are dismal. Consumer confidence is at historic lows. And I believe the worst is yet to come -- massive credit card defaults and unemployment leading the way. The Fed has embarked on a path of quantitative easing, and while that path is typical of a fatuous monopolistic government with absolute power to dictate policy to its minions, I also believe it has no choice but to follow through with the policy -- regardless of the ferocity with which some of us condemn the decisions. No, the Fed has to keep rates low as long as it can, regardless of the consequences. But the consequences will surely come.
Unfortunately, despite my confidence that the Fed will buy Treasuries to keep rates low, there are still so many variables in this equation that I don't feel comfortable trying to time it. What if the Fed starts buying, but at the same time the Chinese suddenly stop buying? Or worse still, what if the Chinese start selling? Who would win that battle? And then there are the short-term psychological implications; with each subsequent media account of either side's actions, investors are likely to overreact accordingly.
Don't get me wrong -- as I've said so many times before, I can't wait to find a point to short Treasuries again. But the timing of this move is everything. With players like the Fed, the Chinese, and the Japanese able to move prices on a whim, I don't want to be caught on the wrong end. Yes, the ultimate direction for Treasuries is down -- along with the dollar. But in the interim the tides are going to be strong and swift, and I do not want to drown before all the fun starts.
With that in mind, I want to deviate from the short-term speculation and address a note I received from a reader:
I can see that at some point no one will buy our debt for zero interest, which will cause interest rates to rise, which will increase our payment burden, which will increase default risk, etc, but I can't visualize how it plays out the rest of the way. That would make a great article!
Let me begin by saying that my whole argument is predicated on several pretty glaring conditions.
1. The U.S. Federal Reserve has printed more money than ever before in history, and plans to print even more. The argument can be made that the actual amount of dollars printed doesn't even begin to approach the losses in all asset-classes over the last two years. Unfortunately, proponents of this argument fail to account for the fact that the dollars being printed will eventually find their way into the economy, triggering the effects of our fractional reserve banking system, exponentially increasing the amount of currency available. These same proponents also fail to give credence to the fact that the effect of these dollars in the system will be rising rates and prices -- partially or completely offsetting any previous losses.
Said another way? Record numbers of dollars will flood the system at the same time asset-prices will be moving toward (or beyond) previous highs. That is a recipe for hyperinflation.
2. The United States has never owed so much money to the rest of the world. We manufacture very little, we borrow heavily, and we consume at rates far greater than any other nation on earth. And yet there exists a preposterous and onerously persistent philosophical bent -- among the financial elite and the average citizen alike -- that the United States will be able to continue to issue debt indefinitely because there will always be lenders. No belief, however, could be more fallacious or dangerous to the future of our economy and our country.
3. The demand for housing will never come back with the same unbridled momentum we saw in the years leading up to the collapse -- nor do we want to see it return to such frothy levels. Indeed, foreclosures will continue and I feel very confident the contagion will bleed into commercial markets in coming months.
4. On a similar note, the default rate on (almost universally unsecured) credit card debt has begun to increase. The American consumer is dead, and if he knows he cannot get loans for the foreseeable future, he is much more likely to consider defaulting on that debt.
The demise of the dollar is imminent, and there aren't a whole lot of different scenarios that could play out. I've established that the amount of currency in the system -- especially once multiplied -- is going to result in rising prices and rates. Likewise, the massive amount of existing and future debt is going to demand higher and higher yields. So which one is going to to lead the downward charge? My guess is the Treasury bubble will continue to unwind and this will damage the dollar's integrity -- after which the imminent rise in prices and rates caused by inflationary printing will only be exacerbated. Of course the dollar could start to weaken in anticipation of these rising prices and rates, pushing Treasuries lower.
In the end, however, does it really matter which happens first? I don't believe the destruction of either the dollar or Treasuries is mutually exclusive -- that is to say, they are inextricably dependent on each other and whatever fate holds for one, so goes the other. In my mind it's far less important to consider how it will happen than it is to think about when it will happen -- and perhaps most importantly, what it will to mean to the average citizen.
What we're talking about here is a massive loss of faith. Since the average person isn't going to understand the concept of using leverage to short the dollar, the only real way to offset the effects of devaluation is to buy real commodities and goods -- in other words, getting rid of cash as quickly as possible. This will work if the pace of the dollar's slide is kept moderate but if the currency goes into free fall and we experience hyperinflation, it is going to be very difficult to mitigate the effects. That's when things can become dicey. The only possible bright spot -- if you can possibly call it that -- is that debtors would see the value of their loans collapsing, relative to the increase in general prices. I don't know about you, but that doesn't give me much solace.
In the 1970s and 1980s, Paul Volcker managed to stop hyperinflation, but he was barely successful. In fact I would say he and his fellow policy makers were downright lucky. Add the fact that the United States then was nowhere near as indebted as it is today -- at the governmental or consumer level -- you begin to understand how dangerous our current situation is. If the dollar begins to lose value at such a clip, I find it difficult to understand how the government will continue to service its debt.
In recent decades the U.S. has paid interest on Treasuries through increased borrowing, and by printing ever more money. But how will that work in an environment in which the currency is deteriorating at such a perilous rate? One could make the argument that inflation is actually helpful to the U.S. debt position; as the dollar becomes less valuable, so too does the debt it represents. But that doesn't eliminate the obligation to service debt, and since the government will almost certainly not be able to borrow its way out of insolvency -- nor to print more money without completely destroying the economy -- I am at a loss to understand how it will solve the problem.
As much as I admire people like Peter Schiff, they do not go far enough in their assaults on the enormous problem we face. When they are asked, on various news and financial networks, what can be done to stem the tide of the coming catastrophe, they cavalierly toss out the the same tired solutions: cut spending, cut taxes, raise interest rates, and back the dollar with gold.
I don't disagree that an immediate and simultaneous implementation of such policies would certainly save our economy. I also happen to believe that an infinite source of easily accessible energy would help a lot. For that matter, so would a loan from God. I guess you should know, at this point, that I'm also battling an irrational belief in Santa Clause and the tooth fairy -- both of whom, by the way, seem to be inflationary, due to the fact that they can apparently manufacture "toys" and "quarters" with reckless abandon.
Look, there is absolutely no way the gargantuan political machine in Washington will ever consider backing the dollar with gold -- much less (God forbid) cutting spending and taxes at the same time. The dollar is doomed.
So what will happen next? I keep coming to only one bleak conclusion: the United States will have to default. And that will be the final call for the dollar. Food shortages, rationing, and martial law could become the status quo.
It will undoubtedly seem farfetched to some of you, but I don't think the United States can survive the failure of its currency -- especially considering that the catastrophe will be the direct result of decades of governmental lies and manipulation. The states sent legislators to Washington who have systematically and purposely destroyed our currency. They manufactured an irresponsible Ponzi scheme that created false prosperity, over and over again. I simply don't think the states in the Union -- many of whom asserted their independence at another point in history -- will sit still for more of the same.
So why not be realistic? Why not consider the true consequences of the $8.5 trillion in stimulus coming down the pike?
According to the Bureau of Economic Analysis (2005), if Texas were an independent nation, its economy would be the 15th largest on earth -- ahead of Australia, Switzerland, Taiwan, Saudi Arabia, and Israel. The state is extremely business friendly; its constitution requires a referendum to implement an income tax -- an initiative which has never come close to becoming reality. Texas has the longest contiguous border with Mexico, along with some very large port cities. Beyond all that, Texas sports three of the ten largest cities in the United States.
If that isn't enough to make you raise your eyebrows, consider this: the economies of New York and California are both larger even than Texas's. Now, remind me again why these economic blocs would want to remain in a bankrupt union whose currency has failed?
I know you're staring at the flag on your wall, tears coming to your eyes. I know you think I'm a traitor and a iconoclast. But before you get too patriotic, remember that I am a classical liberal -- a Jeffersonian to the core. I am a student of the American Revolution, and I am passionately dedicated to the United States Constitution.
We do not live in the United States set forth by our Founding Fathers. The document has been violated, usurped, ignored, and bastardized countless times by U.S. Presidents, the Congress, and the Supreme Court alike. The imminent failure of our currency and our economy will not be a sickness, it will be a cure.
So how do I see it all playing out? I firmly believe that once the dollar dies, people will once again come to recognize the inefficiency and corruption that comes along with the Hamiltonian dream of centralized government. Never again will citizens of any state or country allow their governments to control empty currencies on which we depend for our pursuit of life, liberty, and property.
In the meantime, watch Treasuries, the dollar, and gold. Treasuries have already started to unwind, although the Fed will undoubtedly buy the long end of the curve to try to keep yields in check. Of course, it will have to print yet more money to do so, and that will obviously only exacerbate inflationary pressures. Equity and real estate markets continue to fall, the flight to Treasuries has evaporated, and people are flocking to time-tested stronghold of gold -- up dramatically in recent weeks.
Disclosures: None
Copyright 2009, Paco Ahlgren. All Rights Reserved.
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This article has 89 comments:
The effects of currency debasement remains to be seen. If excess money is chasing static supply we will have inflation. That is not a theory that is a fact. Historically, the Fed and Treasury are reluctant to aggravate Congress, who controls their budgets and wages, by decreasing money and slowing the economy. That leaves no one to take away the proverbial "punch bowl". That is a political decision and that is why reducing the money supply during a period where the country has powerful Socialists in the Administration and Congress appears very unlikely.
I'd love to hear what you think after you read those articles.
On Feb 01 03:13 PM Emerald wrote:
> Wow! What nonsense sprinkled in with a hanful of reasonable assessments.
> First, Peter Shiff has been wrong so many times that you would be
> destitute folowing his advice. Second, you assume that printing or
> borrowing money will automatically cause asset prices to rise above
> previous levels. I would suggest that the sheer volume of asset destruction
> (financial instruments,housing prices, etc.) far exceeds the "inflationary"
> impact of an increasing money supply. Falling realestateprices are
> deflationary. That is why we are in a deflationary period for another
> 12-18 months. Perhaps inflation will appear in the future but it
> is not a risk in 2009-2010. The value of long Treasuries will decline
> as interest rates increase. Gold is in a long term uptrend but will
> have significant quarterly corrections.
I guess since without the union, New York would be a province of Canada and California/Texas would be part of North Mexico, it's sort of a moot point. I suspect there's quite a few folks left who realize that there are ties and bonds that go deeper than even what looters and lobbyists can pillage.
I hear what you are saying.
As a matter of fact, what you are saying had been discussed, debated, and commented elsewhere in SA at length. To state it bluntly it almost sounded like tinnitus in my ears. Now what I would be interested in hearing about and learning from you, as with many other readers I presume, is your ideas for the concrete solutions of our problems and issues.
Otherwise, thank you for a well-articulated article.
Teutonic
I still like gold, and I'm going to like oil a whole lot if it gets below 30.
On Feb 01 05:01 PM Teutonic Knight wrote:
> Mr. Algren,
>
> I hear what you are saying.
>
> As a matter of fact, what you are saying had been discussed, debated,
> and commented elsewhere in SA at length. To state it bluntly it
> almost sounded like tinnitus in my ears. Now what I would be interested
> in hearing about and learning from you, as with many other readers
> I presume, is your ideas for the concrete solutions of our problems
> and issues.
>
> Otherwise, thank you for a well-articulated article.
>
> Teutonic
I don't see these stimulus dollars finding their way much into the real economy. The impact of the first stimulus was negligible and this one is little more than 2x the size of the first and half of it is probably waste,
I won't dispute that inflation may be out there somewhere and I am being practical in hedging my bets along those lines but I am basing most of my current decisions on the trends confronting us now. No one is smart enough to say when inflation will hit and when it finally does hopefully we will have plenty of time to react.
Incidentally, I do find your assertion that our current government is so corrupt compared to the pure, snow driven era of the Founding Fathers extremely naive.
always cracks me up when people make statements without backing them up with numbers...
again, lets look at the numbers.. total credit card debt outstanding is $1 trillion... compare with $15 trillion mortgage market... 7%...
Who is going to buy those Treasuries? If the Chinese only account for 15%, then I maintain that's even MORE frightening.
Again, who is going to buy the debt of a bankrupt government?
I guess I better start looking at the numbers a little more closely.
On Feb 01 10:21 PM Gtarras wrote:
> "the Chinese suddenly stop buying? Or worse still, what if the Chinese
> start selling?" stats show that Chinese accounted for only 15% of
> treasury purchases last year... more than 50% came from within the
> US... do you guys ever look at the numbers before drawing conclusions...?
Scenario: I'm a consumer. I've lost my job. I have a mortgage. I have $30,000 in unsecured credit card debt.
I can't get a loan, regardless of my credit score.
What debt will I abandon first?
On Feb 01 10:30 PM Gtarras wrote:
> "On a similar note, the default rate on (almost universally unsecured)
> credit card debt has begun to increase. The American consumer is
> dead, and if he knows he cannot get loans for the foreseeable future,
> he is much more likely to consider defaulting on that debt."
>
> again, lets look at the numbers.. total credit card debt outstanding
> is $1 trillion... compare with $15 trillion mortgage market... 7%...
If you think those are "tired solutions" for what ails the economy, I would like to hear your suggestions. People like Schiff are offering solutions and helping the average citizen understand what the government has done to our money and our republic. This education might just help us avoid going down the path of totalitarianism when things get really bad.
He's not dead, he's just restin'.
Sorry...the Monty Python Parrot Sketch came to mind when I read that line.
Thanks for another thought provoking article. I'm desperately trying to come up with an argument against your conclusions, which I don't like at all. I'm not having much luck with that, though.
The best case scenario I can come up with is this: The Fed finally applies the Defibulator to the economy by removing its unprecedented interest on Fed deposits. This, timed to coincide with the major Adrenaline of the stimulus package spending, sends an inflationary shock to the economy that jolts it into a new cycle of activity.
The resulting inflation may take some time to be felt in prices. In the meantime, the stock market starts to recover...
But then, can the patient survive the next stage: increase in interest rates will inevitably result. Inflation will begin to show in CPI. Debt burdens will increase (at least in nominal terms), and the government will have to ultimately remove the stimulus or surely risk hyper-inflation or default.
There is a slim chance that if inflation can be controlled to 8-20% per year for five years or so, while avoiding debt default, we can inflate away our debt (public and private) to sustainable levels and wean away the stimulus without falling back into another recession. Our economy will come out badly weakened, but viable.
If our govenment can do that, then they all deserve a Nobel prize, and we'll have to take back all the nasty things we've ever said about politicians!!! Oh how I hope to eat that humble pie!
More likely scenarios, unfortunately are:
- Inflation can't be controlled --> Hyper-Inflation and / or default.
- Patient starts to recover, but can't remove life-support --> Hyper-Inflation and / or default OR (depending on politics) early removal of life-support -> hopeless depression and collapse.
Have a nice day :-)
My reasons include Mr. Ahlgren's references to Texas, New York and California. Irrespective of the comparative sizes of their respective economies viewed in isolation, as Americans and an integrated part of the U.S. I can't fathom how anyone could believe (1) those states would either want to, or as a practical matter could, 'abandon ship', and (2) if somehow it is possible to see past point #1, and they did decide to 'abandon ship' that somehow they could simply do that without repercussion. Next, if they got by that, how they could do it without assuming their proportionate share of the U.S. National debt, contingent health care and social costs, etc. Under any such scenerio given the size of their individual state economies such proportionate sharing would sink them before they got started.
In the end I concluded that while I think Mr. Ahlgren includes a number of good and valid reference points in his article, that overall his views are too extreme and far-fetched for me, and that as a result I was best to smile and move on.
Paco started out long TBT and UGL but now no longer has positions in either.
This seems very strange considering the tone of the above article.
But given that you now believe oil will go down to $30. Do you now also believe that Gold will drop?
"The demise of the dollar is imminent..."
Like in the next 3 months,1-3 years or ?
You are going to wait for a better opportunity to short Treasuries and for Oil to get to $30 and you are no longer long UGL, so can I assume that the demise won't start for a while?
I think Peter Schiff is a genius. I just don't think it's productive to try to discuss saving the dollar, or the U.S. federal government in its current form.
On Feb 02 02:10 AM JohnL wrote:
> "As much as I admire people like Peter Schiff, they do not go far
> enough in their assaults on the enormous problem we face. When they
> are asked, on various news and financial networks, what can be done
> to stem the tide of the coming catastrophe, they cavalierly toss
> out the the same tired solutions: cut spending, cut taxes, raise
> interest rates, and back the dollar with gold."
>
> If you think those are "tired solutions" for what ails the economy,
> I would like to hear your suggestions. People like Schiff are offering
> solutions and helping the average citizen understand what the government
> has done to our money and our republic. This education might just
> help us avoid going down the path of totalitarianism when things
> get really bad.
1. Greece
2. Rome
3. Britain
4. The Soviet Union
There have obviously been many more. This is exactly the sort of complacency that inspires me to write about all the trouble we're about to face.
On Feb 02 08:52 AM Ian R. Campbell wrote:
> I read this article carefully this morning, and considered referencing
> and commenting on it on my blog, stockresearchportalblo....
> In the end I decided not to.
>
> My reasons include Mr. Ahlgren's references to Texas, New York and
> California. Irrespective of the comparative sizes of their respective
> economies viewed in isolation, as Americans and an integrated part
> of the U.S. I can't fathom how anyone could believe (1) those states
> would either want to, or as a practical matter could, 'abandon ship',
> and (2) if somehow it is possible to see past point #1, and they
> did decide to 'abandon ship' that somehow they could simply do that
> without repercussion. Next, if they got by that, how they could
> do it without assuming their proportionate share of the U.S. National
> debt, contingent health care and social costs, etc. Under any such
> scenerio given the size of their individual state economies such
> proportionate sharing would sink them before they got started.<br/>
>
> In the end I concluded that while I think Mr. Ahlgren includes a
> number of good and valid reference points in his article, that overall
> his views are too extreme and far-fetched for me, and that as a result
> I was best to smile and move on.
I suggest anyone shorting Treasuries consider carefully the Chinese, the Japanese, and the Fed's threat to buy the long end of the curve.
On Feb 02 09:18 AM paultaut wrote:
> The articles never change, the disclosures do.
>
> Paco started out long TBT and UGL but now no longer has positions
> in either.
>
> This seems very strange considering the tone of the above article.
>
>
> But given that you now believe oil will go down to $30. Do you now
> also believe that Gold will drop?
and say maybe it's time to get back into the markets and invest in america.
It's all about power. The dems. are in charge so we need to come together.
Stay away from the market!
On Feb 01 04:17 PM donzelion wrote:
> "Now, remind me again why these economic blocs [Texas, NY, and California]
> would want to remain in a bankrupt union whose currency has failed?"
>
>
> I guess since without the union, New York would be a province of
> Canada and California/Texas would be part of North Mexico, it's sort
> of a moot point. I suspect there's quite a few folks left who realize
> that there are ties and bonds that go deeper than even what looters
> and lobbyists can pillage.
We spent it, we're stuck with it!!
On Feb 02 11:23 AM MichaelJ007 wrote:
> Paco, I agree with many of your comments. Inflation WILL occur, hyper-inflation
> is very possible. I am in complete agreement that the US, like the
> fallen nations/currencies before, is in complete denial of it's ability
> to sustain itself. However, I think that if and when the US economy
> collapses the shift will be towards that of unity instead of division.
> As in the North American Union or something to that extent. We will
> need more citizens to share and repay our debt burden as well as
> more means of production and consumption so that the Gov can continue
> to grow(spend) and consume(tax). The Federal Government is NOT stepping
> off the throne anytime soon and an alliance of some sort is much
> more beneficial and therefore likely than an overthrow or dissolution.
www.bloomberg.com/apps...
Foreign participation was down as well. Yes, foreign entities own only a fraction of the debt but in any market prices move at the margins. You don't need all of the foreign owned treasuries to be sold to impact the market. Selling a small fraction or ratcheting back purchases would do the trick. Nations may well be forced to do that as they look to spend their reserves stimulating their own economies.
The debt auction last week was $78 billion or about 3% of the estimated $2.5 trillion that will be sold by the US this year which is a dramatic increase from the $892 billion last year. This is a single data point. We need to see a trend but the data point is consistent with what Mr. Ahlgren and others, including me, believe will come about.
Will the Fed intervene? Probably and it will cause a spike in rates and will damage whatever your trading position is at the moment. I do think that the levels we have seen lately are probably a floor. The Fed has shown no signs of intervening yet and will likely make some public statements about their "concerns over the market taking rates higher" before they actually go in. So there should be warning.
What I can guarantee is that there is no risk free entry point into this trade. Once the trend starts it will be violent in both directions as the Fed and the world wrestle with their dependence on US treasuries. There is probably a lot of money to be made but look at a chart and buy in on pull backs. Same with gold.
The dollar looks like it's going to counter trend somewhat until the remaining de-leveraging, repatriation of funds, and closure of carry trade positions completes. When will that happen? I am surprised it hasn't yet. The trend won't last forever but as lasted longer than expected.
I am long PST and (a less volatile play but with lower upside) and will enter TBT shortly on pullback. Long CEF and TGLDX. Also long UDN which is not working out yet.
On Feb 02 08:31 AM Tetrapod wrote:
> Paco,
>
> Thanks for another thought provoking article. I'm desperately trying
> to come up with an argument against your conclusions, which I don't
> like at all. I'm not having much luck with that, though.
>
> The best case scenario I can come up with is this: The Fed finally
> applies the Defibulator to the economy by removing its unprecedented
> interest on Fed deposits. This, timed to coincide with the major
> Adrenaline of the stimulus package spending, sends an inflationary
> shock to the economy that jolts it into a new cycle of activity.
>
>
> The resulting inflation may take some time to be felt in prices.
> In the meantime, the stock market starts to recover...
>
> But then, can the patient survive the next stage: increase in interest
> rates will inevitably result. Inflation will begin to show in CPI.
> Debt burdens will increase (at least in nominal terms), and the government
> will have to ultimately remove the stimulus or surely risk hyper-inflation
> or default.
>
> There is a slim chance that if inflation can be controlled to 8-20%
> per year for five years or so, while avoiding debt default, we can
> inflate away our debt (public and private) to sustainable levels
> and wean away the stimulus without falling back into another recession.
> Our economy will come out badly weakened, but viable.
>
> If our govenment can do that, then they all deserve a Nobel prize,
> and we'll have to take back all the nasty things we've ever said
> about politicians!!! Oh how I hope to eat that humble pie!
>
> More likely scenarios, unfortunately are:
> - Inflation can't be controlled --> Hyper-Inflation and / or default.
>
> - Patient starts to recover, but can't remove life-support --> Hyper-Inflation
> and / or default OR (depending on politics) early removal of life-support
> -> hopeless depression and collapse.
>
> Have a nice day :-)
Imminent defined: about to occur, close at hand.
I respect your stated reasons for not going short treasuries. You would be shorting them if the USD's demise was imminent.
Therefore, the USD's demise is Not imminent.
Be that as it may, I do believe the collapse is imminent, but I think the Fed is going to defend long-term Treasuries first.
So, no, I am not short Treasuries. But I will be soon if I am correct in my assessment of the situation (yet again).
With all 'advanced' countries in the middle of their credit crunches, some are more in the mire than others. The UK appears to be particularly badly hit because of its heavy reliance on employment within the financial sector but the country actually generates around 2/3rds of its earnings from investments from overseas, so it is unlikely that the pound will continue to fall in the long term, and could easily regain some strength.
On the other hand, the Euro is primarily supported by that exporting powerhouse, Germany. With people no longer buying capital goods right now, Germany is no longer in a position to provide that support. In addition, France, Portugal, Spain and Italy continue to believe in heavy social spending, all of which does not help the currency but it does seem to be doing its version of the Indian rope trick. For how long, ..is the question.
"I can't visualize how it plays out the rest of the way. That would make a great article!"
I don't claim this is a great article, but it does lay out the general pattern and aftermath of a hyperinflation cycle:
Discerning The Pattern
Hope that's helpful...
By the way, you didn't factor in energy. That will be a friction to be reckoned with in the years to come. I would even say, as far as economic frictions are concerned, it will be greater than the tax burden that is coming. So, try these factors to your scenario:
* Productive people eventually burn through their unemployment insurance checks after 2 years.
* These same productive, yet presently unemployed, people swallow their pride and take a lesser job.
* The people still need to drive to work, and they will burn gas to do it.
* The current halt in investment for oil wells will show up, with the result of a continuing spike in oil. The best guess for equilibrium is $300/bbl. That's when people will work from home more.
* The Obama administration will cause a spike in research, leading to disruptive technologies to appear, like super batteries, maybe even net-power-positive fusion.
* The disruptive technologies will give us a break, until...
* Social Security obligations cause another crash at the end of Obama's 8 year run.
* Immigration is allowed more, for a fee of $5000 per person. This is used to grow the economy to support the Social Security ponzi scheme.
* Another Keynesian stimulus occurs, and another, and another.
My point is that, no matter what scenario you look at, our previous generations straddled us with some really bad problems because they didn't want to deal with them.
Long: TBT
By the way, there is some anecdotal evidence on the website for the Federal Reserve bank of Dallas. It's for the ad for the position of Software Architect, and it says the applicant 'must be able to deliver bad news to high profile officials without undue tension'. nice.
On Feb 02 10:06 AM Paco Ahlgren (Bona Fide) wrote:
> Here's a short list of empires who also thought disintegration was
> impossible:
>
> 1. Greece
> 2. Rome
> 3. Britain
> 4. The Soviet Union
>
> There have obviously been many more. This is exactly the sort of
> complacency that inspires me to write about all the trouble we're
> about to face.
>
Your scenerio is half baked. However, if it did occur there would most definately be plenty of blood shed. Do you remember what happened last time states attempted succession? Americans are the most heavily armed people on the planet and becoming more so every day.
On Feb 02 11:48 AM Paco Ahlgren (Bona Fide) wrote:
> There won't be any bloodshed when states start leaving the Union
> -- mainly because the United States won't have the resources to fight
> a war. Also, CNN didn't exist in 1861.
The closest real analogy to what is happening is the Japanese real estate and equity crash of the '80s. They had lots of insolvent banks, ZIRP, quantitative easing, and so on. Yet they had no hyperinflation; all they got out of it was increased debt from trying to stimulate consumption and some economic stagnation. And their stock market and real estate loss percentages were far higher than ours have been.
Yes we could get some inflation out of this. Or stagflation. But anything worse is unlikely.
As for you so-called genius, Peter Schiff - the failures of his investment strategy are well documented. If he really knew what he was doing he'd be making money, not loosing 65% of his client's money.
The Empires you listed - Greece, Rome, Britain and the USSR - the first 3 were laid to waste due to the effects of external war. And the fourth - it is very debatable that the USSR was an empire at all.
We see so much alike that I could have almost written your piece. I was surprised and pleased to find my latest commentary (Obama begins jawboning campaign with Chinese president Hu) listed at the top of the choices for related articles. The only difference is that we see a solution that could still prevent the coming catastrophe: Warren Buffett's Import Certificates.
Howard Richman
tradeandtaxes.blogspot...
But to entertain the economic doomsday scenario, I think one has to look back at a broader history. Not just economic history. When economies destabilize, countries go to war. That’s what nations do. And then predicting the future is a lot more about a country’s war making capability than M1/GDP. And the US would have plenty of idle high tech industrial factories, idle trained factory workers, raw materials, energy and food. It also would have the technology advantage.
So forget the value of a dollar. The people, factories, wheat fields, coal fired plants, infrastructure, F-22s and aircraft carriers are actually there. And their real value in this scenario goes up tremendously, as would the ability of the US to make more.
To summarize, I’m saying there is a floor for the US dollar, and it isn’t zero. It also isn’t pretty.
Someone recently quoted Mark Twain. “History doesn’t repeat itself, but it rhymes.” Not sure why I threw that in. Just liked it.
Inflation will start small and accelerate when the scale of what has been going on since last September is realised. Printing of money of unprecedented levels, which would even make a banana republic proud. The people who believe in the deflation story are so wound up in the US of A being "different" from other countries and the USD being forever "special" that the are up for a rocky ride. Look at history - the US economy is only the biggest by 2008 measures. Same situation as the UK and the Sterling of a by-gone era.
Replacing funny money (derivatives) with Monopoly money (the "new " USD) is moving the bubble on. Eventually it will burst, as all bubbles always have.
Interesting theory of the US of A breaking up, although unlikely. Texas is the biggest benefactor from a break-up, so perhaps the Bush administration engineered this current situation? Why does "pro small government", "we hate Washington", Texas Republicans run a HUGE Federal deficit? Make it bust and stop being controlled by it!
As for gold - its been a precious metal for millenia. Our fallacy, as many-many times in history, is that things are "different" now. Gold is a commodity, yes, but it also a valuable commodity. There is nothing "safe" out there anymore - its like a world war situation. What (else) do you buy to protect you little wealth as an individual?
"This is imminent."
One of the ways under consideration to repay is the Devaluation of the Euro. I would hold this article in mind before embarking on your opinions.
The defaul of USA will be a horrible day, but it will come.
I'm not a gold bug, but backwardation in silver and gold hints at a coming catastrophe. I'm afraid that precious metals are one of the few answers. Although if the USA defaults, no amount of gold will buy peace of mind.
On Feb 02 04:21 PM paultaut wrote:
> Paco: This week's Barron's has an article you might want to read,
> it revolves around the Imminent Collapse of the European Banking
> system and Foreign Exchange Swaps. These Swaps are renewed every
> 6 months.
>
> "This is imminent."
>
> One of the ways under consideration to repay is the Devaluation of
> the Euro. I would hold this article in mind before embarking on your
> opinions.
Sorry 'bout that...
On Feb 02 01:40 PM ZenDraken wrote:
> Your reader said:
>
> "I can't visualize how it plays out the rest of the way. That would
> make a great article!"
>
> I don't claim this is a great article, but it does lay out the general
> pattern and aftermath of a hyperinflation cycle:
>
> Discerning The Pattern
>
> Hope that's helpful...
>
Also, when we refer to the GDP of recent years, how much of that has been bloated in the recent bubble economy that would be lost in ensuing years? Speaking of the Silicon Valley in California, can I be assured that at least the semiconductor equipment industry could be kept in this country? Does Intel need to stay American when so much competitive activity is based in Asia? In the face of a defaulting US, I propose that it would be private companies to jump ship before any state comes around to making such a decision. If and when they do, would they be opening jobs to immigrating Americans? What would the GDP of this country look like then? How about the debt figure and its percentage of GDP?
1. The money has not been spent, so the debt doesn't actually exist. Non-existent debt doesn't affect credit ratings. Or the economy as it is practiced today.
2. Since the debt doesn't exist interest payments on the non-existent debt are non-existent.
3. Since the debt doesn't exist there are no 'full faith and credit' obligations to pay it back, or even to incur it in the first place. Just some hot air floating around generated by politicians.
4. This debt will be issued in future dollars, less valuable than current dollars.
5. The future debt will be payable in even further future (aka neverland) dollars worth even less than future dollars. Interest will also be paid in neverland dollars. If indeed we are still using dollars at all by then.
6. Who knows by then maybe we won't even be using money. And if we still are I bet there will be a lot more of it.
So those neverland payments on future debt probably will take about 46 cents actual real old fashioned American money to pay off. What a good steak used to cost.
I wouldn't get my shorts in a knot over it.
Paco , Great article ! Brain , you are correct ! the USDX is absolute BS !
Add Iceland + Egypt + Argentina to you list of failed countries . Remember Economic collapse ALWAYS precludes major War , ie WW1 , WW2
They didn't even admit to a problem until it had been ongoing for twelve months!
On Feb 02 11:40 PM maxe wrote:
> To me the case that the dollars demise, and inflation are imminent,
> means they are not imminent at all. Everyone assumes that the fed
> policy will stay as is, therefore inflation "must" occur, and the
> dollar "must" weaken. What people do not consider is that fed policy
> will move to a different beat, therefore preventing such troubles
> occurring, when the time is right. Of course the fed may get it wrong,
> but make no mistake, a plan is in place.
I guess there is decoupling between asset price inflation and consumer goods inflation.
On Feb 02 04:32 PM Six wrote:
> How can we have inflation without the real estate market moving forward?
> The Fed can print until we run out of trees but without consumers
> spending there will NOT be inflation. Therefore NO price increases,
> NO collapse of the dollar, just more and more deflation. Your stocks
> are not going to worth as much as they were, your home is not going
> to be worth what it once was and you will make less money than you
> did in the past. China and Russia are going bust and will fall into
> civil strife within 3 years. Latin America and the rest of Asia
> (except Japan) will be OK but not great. Canada and Europe follows
> the US into a prolonged recession that makes every thing but the
> Great Depression look like boom times. But it still looks like the
> good life to the rest of the world. When the history of the Great
> Moderation is written it will all come down to one word- deflation.
> If you listen you can hear the air leaking out...
On Feb 02 02:03 PM User 316795 wrote:
>
>
> Your scenerio is half baked. However, if it did occur there would
> most definately be plenty of blood shed. Do you remember what happened
> last time states attempted succession? Americans are the most heavily
> armed people on the planet and becoming more so every day.
>
> On Feb 02 11:48 AM Paco Ahlgren (Bona Fide) wrote:
donzelion 152 Comments Feb 01 04:17 PM "Now, remind me again why these economic blocs [Texas, NY, and California] would want to remain in a bankrupt union whose currency has failed?"
I guess since without the union, New York would be a province of Canada and California/Texas would be part of North Mexico, it's sort of a moot point. I suspect there's quite a few folks left who realize that there are ties and bonds that go deeper than even what looters and lobbyists can pillage.
Seeking Alpha really needs some editors. This is so typical of the ludicrous arguments I read here.
As much as you would love to cry socialism in America and certainly we have large government but not RELATIVE to private enterprise. If Obama and his Fed embark upon this supposed promise to buy ALL the debt that would be over $50 trillion. That seems very unlikely as the mechanisms for debt creation are largely at the retail level (in store credit lines). These mechanisms are in the hands of private enterprise who are now running for the exits in case you' haven't noticed. Gold Bugs and dollar bears were caught with their pants down when it became apparent that the rest of the world is worse off than here and will continue to get worse in comparison. No, we are in an unstoppable deflationary credit collapse. The "stimulus" may slow it down some but unless the energy revolution comes to fruition very soon (energy does what telecommunication did, i.e. CHEAP and UNLIMITED energy) and other tangible innovations to productivity are enacted, then asset prices will continue to plummet for the IMMINENT FORESEEABLE FUTURE i.e. strengthening dollar.
You need to accomplish all previous needs at any point to achieve the next.
Starting from the base and upward:
1. Physiological (food, water, sex, sleep)
2. Safety (family, health, resources, economics)
3. Love (friendship, family, intimacy)
4. Esteem (confidence, achievement, respect)
5. Actualization (morality, ethics, creativity, growth)
My take on the average American re purposes Maslow's theory to:
1. Shelter (rent, own, occupy)
2. Sustenance (food, clothing, health)
3. Security (protection, insurance, community, trust)
4. Motivation (goals, beliefs, faiths, opportunities)
5. Wealth (owning things, increasing their value, protecting assets)
If we assume doom and gloom forecasts for next 2-3 years, then we are going back to stages 1 and 2; Wealth has vanished for now, our motivations are not so important, our security is shot. This leads to keeping shelter and food, and making sure we don't get sick since we can no longer afford it.
oh you silly kids and your games.
New Hampshire Legislature Takes On Federal Gov't
Posted February 3rd, 2009 by freeyourmind
halturnershow.blogspot...
February 2, 2009
New Hampshire talks Civil War against feds!
The New Hampshire state legislature took an unbelievably bold step
today by introducing a resolution to declare certain actions by the
federal government to completely totally void and warning that
certain future acts will be viewed as a "breach of peace" with the
states themselves that risks "nullifying the Constitution. "
This act by New Hampshire is a clear warning to the federal...
Today, the Fed extended them until October, 2009.
They were due in April.
But if you want a definition of Imminent: Tsunami Warning.
Maybe Imminent but what are you going to do: Super Volcano overdue for explosion, erupts every 600,000 years or so, 600,000 years are up run for your lives.
Do you even have a degree? What formal training do you have in Economics? Do you have any advanced degrees in anything?
en.wikipedia.org/wiki/...
Point 2: Every dollar borrowed will realistically have to be recouped or paid back before any REAL investment or economic gain can be claimed. I don't think that is going to happen. I saw a breakdown of where the lates money is actually being spent. Government borrowing and spending money is nothing special.
With 60 years of inflation, they owe us big time. We could just swap as far as the Europeans are concerned. But since we are keeping them afloat as well, we may as well forget about it.
Everything, much of what he speaks about are long term projections of gloom without long term projections of glory.
In the past 300 years we have seen at least 3 or 4 major energy revolutions, each of which has transformed economic potential far beyond what previous generations generally thought possible, the next revolution is within grasp and it will similarly revolutionize our societies. Economic gains resulting from investment is how we ensure that debt obligations will be met.
Invest in america, invest in the future, it's the best bet you can make. Or believe the world is coming to an end, in which case I'd forget about economics and contemplate my immortal soul, or something like it.
Interesting observations. Regarding the California/Texas situation there are people who feel that Obama wants to open up the borders to illegal immigrants to turn states like Texas and Arizona into "blue" states like California. I don't know about you but if TX and AZ become an oversized, bloated, indebted state like CA hemorrhaging population, then we are really screwed. As for the UK, what is truly frightening is the increasing likelihood of a total collapse in the Pound Sterling. Jim Rogers has commented recently that without North Sea oil production and an obliterated financial workforce, the UK is left with nothing of value to add to the global economy. Ireland going to the Euro several years ago was the "first shot" across the bow of the London bureacrats. After a recent visit to Wales and Scotland it was apparent to me that there is no "love lost" between each of them and the London Govt. As for the amazing strength of the US dollar (USD), I believe the Washington power brokers engineered this "commodities collapse" to send a message to the Arab world and Russia, that the USD is still the kingpin and Washington will not surrender its reserve currency status without a fight. Sadly, this game to intimidate Russia and the oil sheiks has brought the global economy to the verge of total collpase. Was it worth it Mr. Paulson? Personally, I think he should go to jail for this disaster.
Yank
On Feb 02 11:11 AM Jimbo wrote:
> This thread has certainly been a stimulating experience! A recent
> book: "The next 100 years", does predict a war between the U.S. and
> Mexico as Mexico seeks to take back the Southwest. Canada has been
> racked with threats of breakup several times.( I have no way of knowing
> how serious the Canadian situation is.) We are now witnessing a kind
> of devolution of the "United" Kingdom: Scotland has its' own parliament
> and Wales may. I have read that many Scots want to say goodbye to
> London completely. I have eight grandchildren. It certainly looks
> like they will live in "Interesting Times".
The UST is printing massive amounts of money and creating massive amounts of credit, for sure. However, this is counterbalanced by a drastic decline in credit creation by the private sector. Low inflation or deflation will be the result until private sector credit creation is resumed.
The other concern is the democratic party juggernaut pumping the economy with "spend, spend, spend" under the flag of Keynes. The democratic majority has at last found justification to fund their pet projects that have been sidelined all these years because they were too wasteful and too expensive. The programs wont get ramped up and the jobs wont get created until 2010 - after the recession is over. I agree with Keynes that massive spending will pull the economy out of a recession. This is a good policy and the right thing to do, for now. The problem with government spending is that once the spigot is turned on, it is incredibly hard to turn off.
When normal or nearer to normal credit creation is resumed by the private sector (that is the banks and shadow banks start lending again) then, yes, the result could be massive inflation. At this point, the Fed has said their game plan is to do some fancy footwork to drain the excess credit and liquidity from the system. Basically they will reverse what they have been doing as of late. If housing prices are low and unemployment is high they will do none of this "fancy footwork" and inflation will result.
So their is a ticking timebomb and we all have to rely on the fed to have the political will and tools to defuse it. 10, 12, 15% interest rates may very will be politically untenable.
To pay down the deficit, perhaps the government will say "to save the economy, we have no alternative but to raise taxes" They will go after the rich first (those making more than 250K/yr), then as that fails to raise revenue they will go after the middle class.
I feel that inflation will result but it will not be imminent. The dollar will fall, but not drastically. The train wreck will be in slow motion.
The alternative to the dollar - other currencies are just not that attractive. This leads us to gold, and I am an anti gold bug.
He helped engineer the Crisis, derivate creation and creativity came on his watch at Goldman. When the crisis became evident, he, as Treasury Secretary, apparently did not inform Bernanke of how highly leveraged the system was. His protege at Goldman is the current Treasury Secretary.
Somewhere in the not too distant future, the Blank will hit the fan. I will rest it at Paulson's feet.
check this article out:
www.gotoguy.com/?p=115
On Feb 02 05:45 PM Paco Ahlgren (Bona Fide) wrote:
> So "imminent" means six months. Got it. I'll bear that in mind next
> time.
Great article and your responses to comments. Of course, don't expect all SA readers are going to agree with all your opinions. I admit I also find it hard to see individual states break away, but can see all the other events possibly playing out.... Saying you want to short the dollar, but not right now due to surprises, and that demise of the dollar is imminent says to me that you are waiting for...a sign to short it. Well I would like to ask what you are going to do with all that money you make on shorting the dollar only to have your paper money worthless? Give us a better breakdown of your timing and what to buy with money we have on the sidelines. Lets face it, if you are willing to go out on a limb and list 3 states that will separate, you might as well go all out and give us a recommendation of what to do right now with our money? Buy physical gold or silver or gold stocks? (now or wait till when?), oil stocks (when it hits $30?) Buy commodity stocks now? If the market tanks further, likely it will take fertilizer stocks down too. Such dire doomsday predictions require some concrete specific suggestions. Should we spend all our money while it is still worth something? And if yes, buy what???
Will the stock market just take a huge fall? The government will default on debt? What does this mean for Average-Joe-Citizen who owns stock or owns real estate? (I'm a landlord for about 30 units.)
I'm wondering what to own. I don't know where to buy gold, but I do own a small amount of mining stock
I also think that if the dollar falls apart it will be difficult to make store purchases so we should stock up on some things (some food, toilet paper, etc...)
I'm really interested in ways people think this may all play out.
Lee
Yes give us more brilliant College Grads.
Pierre
On Feb 03 07:22 PM aragorn23232323 wrote:
> Paco,
> Do you even have a degree? What formal training do you have in > Economics?
> Do you have any advanced degrees in anything?
>
> en.wikipedia.org/wiki/...