U.S. Debt Default, Dollar Collapse Altogether Likely 189 comments
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The prospect of the United States defaulting on its debt is not just likely. It's inevitable, and imminent.
The regulatory black holes into which sanity and reason disappear on a daily basis are soon to collapse under the mass of their sheer size. The circle jerk going on among G7 governments has to end – the steady advance of gold, even in the face of a managed price, exposes the real value of the U.S. dollar, as opposed to its apparent value expressed in the dollar index.
Is 2009 the year that the United States formally defaults? And with that, will the dollar collapse be rolled back ten for one or more?
There are a lot of reasons to support that theory. To Wall Street economists, such an event is heresy and therefore unthinkable. Yet Wall Street is the very La-la-land that bred the idea of a perpetually indebted nation in the first place.
Number one among the indicators favoring this scenario is what is happening in the U.S. Treasuries auction market.
Last Thursday, an $30 billion auction in five-year notes failed to stir the interest of traditional primary dealers. The auction itself was saved by an anonymous “indirect” bid.
Buyers are discouraged by the prospect of what is expected to amount to $2 trillion total issuance for the full year of 2009. The further out the maturities on notes, the more bearish the sentiment towards them. The only way to entice buyers is through the increase in yields.
But with yields at 1.82 per cent, five-year notes were met with a demand for 1.98 times the amount offered - the lowest bid-to-cover ratio since September. A sell-off in treasuries began in earnest upon the conclusion of that auction.
The U.S. Federal Reserve suggested last week that it was going to step up its treasury-buying activity, and the mainstream media interprets this as a form of market support. What it actually is evidence of growing anxiety and desperation on the part of the Fed as the realization dawns that demand for treasuries is progressively evaporating.
The increased demand for gold as an investment witnessed throughout the last two weeks that has pushed gold to a 4 month high is further evidence that investors across the board are gravitating more towards gold and away from U.S. debt.
So what is the catalyzing event that will precipitate outright capitulation?
I think the spin-controlled version of events will make the collapse of the derivatives market the red herring that facilitates the aw-shucks-we-have-no-choice shoe-gazing moment possible, and that’s exactly the parachute the government needs to retain a veneer of credibility - at least in its own delusional mirror.
The announcement that the CFTC was about to become the target of a regulatory overhaul supports this theory. Consistent with his unfortunate proclivity to hiring foxes to guard chickens, Barack Obama’s choice for CFTC commissioner Gary Gensler was the undersecretary of the U.S. Treasury when the Commodity Futures Modernization Act of 2000 was passed, and is one of its architects. This was the piece of legislation that was put forth to appease the opposition to “dark market” trading in certain OTC derivatives first noisily derided by CFTC commissioner Brooksley Born in 1998.
Ignoring Born’s admonishments with this act, it exempted credit default swaps (CDO’s) from regulation, resulting in the somewhere between 58 and 300 trillion dollars in value presently under threat if the positions were to be unwound. Because of their unregulated status, counterparties in the largest transactions can simply “roll forward” contracts, instead of the losing party in the transaction covering their loss with a transfer of money. It is this massive “nominal” value that could be the Achilles heel of what’s left of the U.S. banking system, and by extension, the U.S. dollar.
I don’t arrive at this conclusion because I like making catastrophic outlandish predictions. Its merely the result of following certain logical paths to their most likely outcome based on what has happened in the past.
In discussions on this topic with editors of top tier financial publications, such speculation is dismissed out of hand, and the argument to refute the likelihood of such outcomes is never brought forward.
Gold exchange traded funds (ETFs) are now the largest holders of physical gold, and as a proxy for investors who don’t want to be encumbered with taking delivery of the physical, provide a simple way to participate in the gold market.
United States citizens should bear in mind, however, that should the banking system be brought down completely by the collapse of the futures market, proxies for gold such as ETF’s and bullion funds could theoretically be targeted by a government desperate for possession of value. The risk from security in holding physical bullion is matched by the risk of confiscation by government in these volatile times. Don’t forget, the government confiscated and outlawed private ownership of gold in 1933 in support of an ill-conceived gold standard, which to some extent, was that era’s spin to halt the flight of gold (and real value) from U.S. soil.
Don’t think for a minute such drastic events are outside the realm of possibility. If somebody had told you in 1998 that a bunch of angry crazy pseudo-Muslims were going to fly jetliners into the World Trade Center, what would you have said?
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This article has 189 comments:
There are no such prospects. US debt continued to rise in "good" times, but now, somehow, facing an epic economic slowdown, the US will be able to radically INCREASE borrowing and in this manner grow our way out of debt. In my opinion, taking and supporting such a position requires either an IQ of 70 or a suspension of disbelief. It does not matter if the US Dollar is the best of the turds in the sewer. If there are no prospects for debt repayment, the dollar is toast, and the Treasury market along with it.
I can never imagine making a timing call, and this article alludes to the reason: this government is liable to do anything, absolutely anything, to hold onto the reins of power. It has already demonstrated clearly its willingness to pick winners and losers and steal from taxpayers to enrich its partisans. In such an environment, anything is possible and nothing should surprise.
Just my opinion / not investment advice.
cyclingscholar
ps. Nice methapors
Remember me? You brought my attention to CSI.to even though I did not buy. But have you given some thoughts to precious metal palladium? You must read this:
stockology.blogspot.co...
Are you still sticking to your call on CSI.to?
Mr. West's points on gold and asset seizures are bang on as well. If you are playing in the gold market with a view to preserving your wealth you better have criteria in-place on when you convert from paper to something physical and how you ensure that physical thing isn't a confiscation target. Physical gold held in a vault in the US is problematic. Some outfits are offering off-shore purchase and storage in a transparent way. I don't have a good strategy for this yet.
I would like to see crisping-up of what "imminent" means. This year, next year,...?
Imminent keeps cropping up every month. Ever since Oil broke above $40, an Imminent collapse was in the wings.
Imminent=eventually. IMO
Fear beats greed in the current environment. I don't bet on a USD total collapse as the financial meldowm became a global issue but moving investments away from USD towards Gold, for example, does not mean the world abandoned the USD, it means USD at 1.50 and that is fine, oil price will rise atracting speculative investment, talks of defaltion will then fade overshadowed by rising prices, oil producers will get more money and reinvest in the USA as a result, and confidence will prudently but steadily get back to investors, consumers and therefore the industry, we will be 10 years back in history but still alive to write a new chapter about the history-making USA as long as we don't forget the lesson (always happens). The time frame may easily be 2 years. I do bet though in a EUR/USD at 1.50 and Gold at USD 1200 by mid May 2009 and it does not mean the USA has been abandoned by the world. That's what I think commentators mean.
Thanks,
Slow down of countires growing in the double digits-Accomplished
Bring Russia back to earth and Terrorist oil profits to zilch-Accomplished
Send the entire US bad loans to around the world-Accomplished
Lower the US dept by cushing the dollar-to be done
Reflation to increase home prices by factor of 3.-to be done
Control over the Gold supplies to redominate the world-to be done
Rich home owners to with over 70 percent equity to start refinincing-to be done......
To ensure your physical stockpile of precious metals do not become a confistication target, stick with something that less people have. Stick with silver, palladium and platinum. The total market value of these metals are much smaller than gold so there is no interest for government to come confisticate them. I hoard tellurium BTW:
stockology.blogspot.co...
Would the price of gold plunge to 100 $ or less ?
In the real world unlike other metalls gold has no use or value, nobody needs it it is nothing else but a CDO in yellow. Think about it and sell it as long as you get something for it.
Shhhhhhhhhh. You'll anger the gold bugs.
The politicians who make these decisions are mostly concerned with covering their asses during their own tenure. They are not going to be willing to take the heat for defaulting on their watch. Wont happen !
Unfortunately I have a suggestion. There is one asset class, though few people in their right mind would consider it such, that has shown remarkable year over year increases. Ammunition. Just for plinking purposes, I bought a few hundred rounds for my rifle about a year ago since the place had a decent sale at the time. I paid just under $200, as of yesterday when I saw the exact same product on the same advertiser's site: $900. 350% in one year. I realise it isn't exactly liquid, but it does allow one to hunt or defend if necessary - two qualities that gold does not offer. After seeing that, I checked around some other places and saw similar price moves. Maybe it's the gun freaks doing a little quiet price-gouging, maybe it's fear of the new administration's potential policy shifts in that segment. I dunno. I think I'll consider brass and lead in my precious metal portfolio, at least until all this apocalypse stuff blows over (or lands on my front door...).
On Feb 03 12:06 PM Jake Berzon wrote:
> I think most of us here are worried about these same things. I would
> like to hear from anyone who has already found a tangible way to
> capitalize on these trends, or at least preserve the purchasing power
> of capital, without using some offshore (or onshore) scammers.
Very easy, Have everyone else devalue their currencies at the same rate as we are doing.
The Canadian Dollar was at 1.10 now .82, Pound hit 2.1 now 1.4, Euro was 1.6 now 1.3, Aussie dallar was approaching 1 now .65...it goes on.
We will not be importing Inflation: Ruble, Rupee, Won...the list goes on, all down drastically against the dollar.
If we do not import inflation, we have to create it internally. In the present climate, I see no current hope for that either.
Hold off Fear by holding gold, but do not expect Hyperinflation in 2009.
"In the real world unlike other metalls gold has no use or value."
The utility of gold is as money. "Gold is money, and nothing else." --JP Morgan.
Gold is still money: That is why central banks, like our (privately held, BTW) Federal Reserve, still hoard it.
Gold is not money for the masses anymore, because the owners of the world's central banks convinced their respective governments to assign their gold hoards to the banks as collateral for issuing paper currency. Such issuance has been abused to the point that confidence is being lost in the value of that paper.
"Nobody needs it it is nothing else but a CDO in yellow."
The common people do need it, as a store of value that can't be corrupted by politicians and bankers, and as a way to limit abusive money printing by the well connected financial elite. The bailouts you see are those elites paying themselves first with money they are printing up, all at the expense of the common people.
Gold is not "a CDO in yellow." CDOs (Collateralized Debt Obligations) are promises to pay which can be defaulted on by the promiser. That is in fact the root of our problems in this crisis.
Gold, on the other hand, has no such "counterparty risk" of default. When someone puts a piece of gold (or silver) in your hand, you know you have well and truly been paid. The metal will not default on its promise to pay.
Thus it has been for thousands of years. Our modern delusion that pieces of paper are literally equal to gold and silver, is of a part with the other delusions that are falling away, such as the "value" of mortgages, real estate, Enron accounting, Social Security, and on and on. As lies multiply, trust in promises to pay, written on paper, evaporates like dry ice on a warm summer day.
Our current crisis will not see the beginning of its end, until trust is restored in payment transactions. This trust will only be restored, when gold and silver are once again the media of exchange, freely circulating amongst the people.
I sincerely think no central bank or country will allow another country to ever again set their exchange rates, You buy from mexico, you convert to pesos and buy from them. That is why i am holding stocks in various currencies and not just one. My favorite trade though is gold in India and china. 1.5 and 1.1 billion new middle classes anxiously awaiting to buy gold earrings and nick nacks. jejeje. I do not know what the phsycological atraction of gold is. I mean, why not plastic, or platinum or heck, chicken meat earrings. But i will go with the trade.
On Feb 03 05:42 PM dlaw wrote:
> The five-year auction was anything but tragic. A 1.98 bid-to-cover
> only barely connotes poor demand.
De-regulators have allowed the us financial system to become an incomplete system, by allowing the spread of credit derivatives which cannot be expressed in terms of other assets.
In mathematical terms, we have a n dimensional system, with n-1 actual equations to describe it, and therefore asset prices are left to a bounded vector of possibilities which cannot be agreed upon through logic, rational thought, or anything else, every possibility potentially comes into play, but not really.
What the US government says, goes, implicitly this is so. It is not rational, it may take a while to play out, but this is how the world will work. Get used to, and get on the train sooner than latter so we can all move forward.
They either devalue the debt through high inflation, many would say hyper-inflation or they default.
True the US has never done that before, but then the US has never been so badly managed before.
Some inflation could be a boon if there is discipline in wages. Devaluation of the dollar would make exports cheaper and imports more expensive. Inflation would also increase the Treasury's revenue, so they could start to balance the books. It could just make them solvent. And of course it would help to reduce wages to globally competitive rates across the board. But of course this will only happen if it is combined with wage increase restraint, which is unlikely, as the No Pain No Gain message is not out there yet, and it will take years for Americans to accept that message even if they find a politician that has the courage to run with it. Somebody has to explain to the people that this is going to a long hard rocky road.
On Feb 04 09:40 AM MikeLovesGold wrote:
> The Government will not confiscate gold. Since the dollar in 1933
> was backed by gold, the Government confiscated it so they could print
> as much money as needed to shore up both the banking system and the
> economy. 99% of the population owned gold in 1933, they carried
> it in their pockets, and they carried it in their purses. Now, in
> 2009, less than 1% of the U.S population own gold. Thus, it would
> not be worth the Government’s time to confiscate it.
Finally, to the extent that articles like yours are a self-fulfilling prophecy, by encouraging the unfounded degrees of pessimism that they have to take as granted to go through this kind of analysis in the first place, they're reprehensible, because they make the situation worse than it needs to be.
As far as confiscation of Gold is concerned, there is a rapidly growing market worldwide for physical gold as a store of value and on examination of U.S. Government actions so far in the economic crisis, it would not be surprising in the least if there was a 1933 redux.
I sure wish I was in a position to sell 30 year bonds at 3%. That is like stealing.
So where are the real harbingers of default in 2009 here?
The only reason for a story like this is that the writer is long GLD.
www.foxnews.com/story/...
On Feb 04 03:48 AM Dave Wrixon wrote:
> The options are simple and repayment in full is not one of them.
>
>
> They either devalue the debt through high inflation, many would say
> hyper-inflation or they default.
>
> True the US has never done that before, but then the US has never
> been so badly managed before.
>
> Some inflation could be a boon if there is discipline in wages. Devaluation
> of the dollar would make exports cheaper and imports more expensive.
> Inflation would also increase the Treasury's revenue, so they could
> start to balance the books. It could just make them solvent. And
> of course it would help to reduce wages to globally competitive rates
> across the board. But of course this will only happen if it is combined
> with wage increase restraint, which is unlikely, as the No Pain No
> Gain message is not out there yet, and it will take years for Americans
> to accept that message even if they find a politician that has the
> courage to run with it. Somebody has to explain to the people that
> this is going to a long hard rocky road.
My best bets...Canada, Australia and especially Brasil.
On Feb 03 12:06 PM Jake Berzon wrote:
> I think most of us here are worried about these same things. I would
> like to hear from anyone who has already found a tangible way to
> capitalize on these trends, or at least preserve the purchasing power
> of capital, without using some offshore (or onshore) scammers.
The more likely extreme scenario is for rates to increase to reflect the increase in the supply of US-debt. Higher rates will draw money from gold and other investments and restore equilibrium.
Is this good for the economy?. No. It will only increase rates for every other type of financing, which means fewer projects will be financed.
Downgrade?
A dead solid lock.
Remember Japan in 2001?
When debt/gross GDP hits 1 the downgrade happens, or the rating Agencies explain why it doesn't
Either way, it not a conversation the Gocernment wants to have.
Scholar,
Ah that it were so easy. Just raise the retirement age to 75 and everything will be fine. Wipe the unfunded liability slate clean! Make the buck a 12 pointer again!
Ummm. Where are all us boomers going to work for the extra nine years? I just turned 63 and have a twenty three year career in I/T with many successful systems in my resume, but people laugh when I apply for a job. Business knowledge and proven skills solving problems are no longer desired; nope, it's all Java all the time. As long as it looks pretty it doesn't matter if it chokes. "It was probably a Denial of Service attack that brought down the server", (not crappy SQL queries generated by the webtool used by the hipster who knows nothing about business except splashing Flash elements around an HTML screen). Who was hired by a bitter Gen-X'er who also knows nothing about business.
And if you don't hail from Bangalore or Mumbai don't even bother applying. You're too expensive. No, I don't care what you'll work for; you're too expensive. (Meaning of course, "Since I don't have the threat of revoking your H1B I'm afraid that you'll make me look stupid in front of my boss by speaking out". That would REALLY be "too expensive", wouldn't it?)
Remember that I work in an "in-demand" career classification. What about all those mortgage originators, salesreps at Ikea, BestBuy, and Macy's, truck drivers, framing carpenters and on and on? What will everyone do between 66 and 75? Very few people have enough in retirement savings to live entirely without an external income for nine years.
While your solution is good from the "macro" economy viewpoint, it's hell for the "micro" of peoples' lives. I'm not saying retired and retiring people are "entitled" to bankrupt the country. Rather I'm saying that we need to think long and hard about any amelioration, and not make misery and want more severe than they will be anyway.
On Feb 03 09:55 AM cyclingscholar wrote:
> With the financial markets desperate for gov't bonds, the US gov't
> wouldn't have to default..it could 'merely' ROLL over the debt as
> it comes due, to 100 year treasury bonds. Given the increase lifespan
> humans will have as medical breakthroughs proceed apace, this would
> make alot of sense. Raise the retirement/social security eligibility
> age in stages up to 70, 75, 80, as is appropriate; and most of the
> government's unfunded liabilities would disappear.
>
> cyclingscholar
In theory there could be a run on the dollar. This would mean that something other than the dollar would become the world's reserve currency.
What seems more likely than either of these alternatives is that rates on government debt would be pushed up to very high levels.
There's probably some slight chance of a return to the gold standard. If this were done today, it would mean pricing gold over $5000 an ounce.
One factor that should be considered is that the US has military assets that might be used in a crisis.
> True the US has never done that before, but then the US has never
> been so badly managed before.
April 5th 1933
August 15th 1971
The USA has defaulted several times.
But I don't "get it" about gold. It has only extrinsic value; people say it's worth something, so it is. If someone wants to pay me with an ounce of gold, I can't look at it and decide what its value is. I have to find out what value *other people* perceive it has, and that can fluctuate wildly. It also shares a characteristic of a fiat currency in that, instead of being loaned into existence, it's mined into existence.
Energy, on the other hand, has intrinsic value. The energy content of a gallon of oil is known, its value readily discerned, and it can be put to productive use in many ways. That makes sense to me.
(I have no position in gold or oil).
You would be getting the hell out and taking your gold with you, not writing endless blogs, websites, or internet infomercials about how EVERYONE can get rich buying gold. Does anyone really think these people are being charitable to all those internet strangers they care so much about?
If anyone still in Weimer Germany / Zimbabwe had hoarded gold, they would have spent it all within a decade trying to survive, had it stolen, or died from disease, starvation, or violence. A plane ticket, a passport, a work visa, and a citizenship application would be more valuable assets than gold in the case of hyperinflation.
It's rational to worry about the future - I have plans for multiple scenarios too. However buying gold coins in anticipation of hyperinflationary collapse is like buying marshmallows in anticipation of your house burning down. The more realistic plan is to get out, and get out early.
"Angry"? It seems so.
"Crazy"? Perhaps.one or two. But 19? In any case, there's no way to know.
"Pseudo"? Here you're claiming to be an arbiter of who is, and who isn't, a true Muslim. They called themselves Muslims and claimed to be acting in the name of their faith. Who are you to say otherwise?
The beauty of a fiat currency is that once you have the world believing that the paper is worth something, then everybody puts their faith in it. You can then create this additional paper on-demand using print manufacturing to enrich yourselves, but deflating the wealth of others. When push comes to shove, the U.S. will enrich themselves at the expense of screwing over China, Japan, Saudi Arabia and any other country with large hoards of our paper currency.
"In economics, hyperinflation is inflation that is "out of control", a condition in which prices increase rapidly as a currency loses its value. Definitions used by the media vary from a cumulative inflation rate over three years approaching 100% to "inflation exceeding 50% a month."[citation needed] In informal usage the term is often applied to much lower rates. As a rule of thumb, normal inflation is reported per year, but hyperinflation is often reported for much shorter intervals, often per month."
And
"Although there is a great deal of debate about the root causes of hyperinflation, it becomes visible when there is an unchecked increase in the money supply (or drastic debasement of coinage) usually accompanied by a widespread unwillingness to hold the money for more than the time needed to trade it for something tangible to avoid further loss. Hyperinflation is often associated with wars (or their aftermath), economic depressions, and political or social upheavals."
######################...
The stimulus packages worldwide and especially the US will result in serious inflation eventually and possibly hyperinflation its just a question of how long it takes to kick in.
The worlds geopolitical systems are restructuring as political and economic power drains away from the US to emerging economies like China, India, Russia and Brazil.
The US will remain the leader of the western world by having the single largest homogeneous economy for some considerable time. Learning to adjust to a global redistibution of power will not necessarily occur at the same time the adjustment is taking place.
Lets hope they have the wisdom to prepare the way in an amicable and harmonious way.
Default may happen, inflation will happen so prepare for it and think very carefully about paying high interest rates on 'cheap assets' you buy now.
On Feb 04 09:40 AM MikeLovesGold wrote:
> The Government will not confiscate gold. Since the dollar in 1933
> was backed by gold, the Government confiscated it so they could print
> as much money as needed to shore up both the banking system and the
> economy. 99% of the population owned gold in 1933, they carried it
> in their pockets, and they carried it in their purses. Now, in 2009,
> less than 1% of the U.S population own gold. Thus, it would not be
> worth the Government’s time to confiscate it.
And before that let's all spend time teaching each other about our money. How it is based on debt. That the available money in the system is made of up principal owed on debt. And that there isn't enough money in the system to pay interest. Let's start by asking, "Where's the Interest?"
WheresTheInterest.com
Divide that among six or seven billion people and there's very little for each of us. Because of that scarcity and the amazing difficulties associated with finding and mining it, it's valuable. And, because it's univerally recognized, it is exchangeable.
> First of all, if you REALLY believed a hyperinflationary economic
> collapse on the scale of Weimer Germany or Zimbabwe was about to
> occur, you would not be blogging about it from your home in the US.
>
>
> You would be getting the hell out and taking your gold with you,
> not writing endless blogs, websites, or internet infomercials about
> how EVERYONE can get rich buying gold. Does anyone really think
> these people are being charitable to all those internet strangers
> they care so much about?
>
> If anyone still in Weimer Germany / Zimbabwe had hoarded gold, they
> would have spent it all within a decade trying to survive, had it
> stolen, or died from disease, starvation, or violence. A plane ticket,
> a passport, a work visa, and a citizenship application would be more
> valuable assets than gold in the case of hyperinflation.
I for one have never said I am NOT planning a physical exit strategy; personally, I expect high inflation to preceed hyperinflation, and I expect that particular end game to play out over a period of years. It would be the height of insanity to jump before it was clear where the best landing place would be. There IS a possibility of an Iceland-like rapid collapse, in which case we're all stuck right where we are, and in that case one would be way "offside" to be caught without gold.
>
> It's rational to worry about the future - I have plans for multiple
> scenarios too. However buying gold coins in anticipation of hyperinflationary
> collapse is like buying marshmallows in anticipation of your house
> burning down. The more realistic plan is to get out, and get out
> early.
If you can tell me definitively where to go that will not be effected, or will be minimally effected, I am all ears. Jim Rogers has been recommending China for some time now.
Right now, given available information and my limited vantage point, I place the highest probability on this scenario: the Treasury market starts to stumble under the weight of the vastly increased supply (cracks beginning to show now). The Fed initiates QE in a large and noticeable manner and overtly monetizes the long end of the curve (they've already nibbled to show their resolve). At first, other CB's also announce QE programs (BoE already has, for example), and MSM outlets are used to calm the masses (hot "financial news" babes wear more revealing attire while spouting pro-government rhetoric); suspiciously and simultaneously the number of radical dollar bugs poo-pooing gold on SA triples. This proceeds for a few months, but at some point the idea of joint currency debasement hits home with the public and formerly floating turd currencies start to sink precipitously as their citizens realize the extent and true meaning of debasement. A period of currency panic ensues which lasts until Bernanke and that idiot Mervyn King are fired and a new Volcker is installed (Volcker 2, or maybe even Volcker 1.0). In the meantime, the Fed by now has expanded its balance sheet by a few $Trillion US (hopefully no more than $10 Trillion or so) and this, plus a plethora of "forced lending" measures from that master banker Barney Frank, initiates a wave of inflation. QE is finally halted and interest rates raised to try to quell inflation.
Nationalized banks are made whole via forced abrogation of a sufficient number of financial contracts, starting with underwater derivative instruments. Winners and losers are picked by government "experts" protected by "no legal recourse" clauses.
Just my opinion / Not investment advice.
If they are monetizing, it is because they prefer a hyperinflationary scenario and pay off foreign debtors with debased money.
That is the beauty of having a currency that is the worlds reserve currency...debts are in USD.
So I just don't see how a default is inevitable.
On Feb 03 01:59 PM David Roskoph wrote:
> User 261133,
>
> Shhhhhhhhhh. You'll anger the gold bugs.
I own GLD as well and have been pleased with the investment although it hasn't skyrocketed, at least it is holding its value. I would like to get physical gold but where to hide it? A safe deposit box would most likely be out of reach as the banks will probably be closed for a while once this crisis gets really out of hand.
I believe the CDS market is the turbo booster on this crisis, turning a severe recession into financial armageddon. It is what makes this crisis unique and history irrelevant. The size of this market dwarfs any government's ability to come to the rescue.
As far as a US default goes, I don't see that happening for some time. However, with a possible 3 trillion dollar deficit this year and trillion dollar deficits expected for many years, total indebtedness could rise to 30 trillion.
Default seems likely at some point but I believe that the catalyst for total meltdown will come from the bankruptcy of a large corporation that then ripples through the CDS market, and, with confidence totally gone, creates a massive run on the banks. A bank holiday will be declared and banks will close for several weeks.
A prudent investor should be diversified which means don't forget some canned peas, rice, beeferoni, and a few cans of spagettios to go along with the beans.
You are talking bunch of BS.
We took a trip to quite a few countries recently and all those
people only wants US Dollars if given a choice.
It the US Dollar failed, the whole world will be dead-meat.
Go home and study more please !!
I do agree that CDS had some part to play in the crisis but only with regards to AIG. Using CDS style contracts they had written too much credit insurance to the banks on sub-prime assets and when the sub-prime market tanked, the value of these CDS fell in value on AIGs books resulting in a massive collateral (margin) call which AIG did not have the cash to meet. The US government then stepped in with the cash to help out AIG (probably because Goldman were one of the main buyers of this insurance and we all know Paulson did not want Goldman to fail like Lehman).
Surely if this monetary explosion presages a default, bond investors would demand a higher premium to hold this 'risk-free' asset. Dollar doomsters have predicted 10 of the last dollar crashes in the last decade; alas there has been one minor correction.
In my humble opinion, the problem is: what is there to crash against. Gold? Too tiny to replace the greenback as the global store of value. Real estate or hard assets? Rather yours than mine. The Euro? Sure if we can find any constancy between increasingly divergent EU states, some on the verge of default themselves.
Tis a skewed world indeed, where apparently obvious conclusions merit much closer scrutiny.
Only one place: the printing press. 'Government,' said Ludwig von Mises, 'is the only agency that can take a useful commodity like paper, slap some ink on it, and make it totally worthless.'
On Feb 05 04:41 AM sunil shah wrote:
> A humble observation that refutes your admittedly plausible conclusion:
> In 2008, the year par excellance of quantitative easing, when Federal
> Reserve Bank Credit exploded from $1Tr to $2.2 Tr (ie issued more
> liabilities in one year than the cumulative total since time immemorial),
> why did the US 10 yr Treasury yield actually decline? (4% to 2.4%)
>
>
> Surely if this monetary explosion presages a default, bond investors
> would demand a higher premium to hold this 'risk-free' asset. Dollar
> doomsters have predicted 10 of the last dollar crashes in the last
> decade; alas there has been one minor correction.
>
I think the spin-controlled version of events will make the collapse of the derivatives market the red herring that facilitates the aw-shucks-we-have-no-c... shoe-gazing moment possible, and that’s exactly the parachute the government needs to retain a veneer of credibility - at least in its own delusional mirror.
On Feb 03 10:20 AM David Roskoph wrote:
> This storm has already passed and the dollar has necessarily survived.
> When the world was reassembled in Bretton Woods (1944) the dollar
> was linked to gold, now it will replace gold. American capitalism
> has won the world and contracts or not, America will not fall as
> its leader. The consequences of our failure would cast the world
> backward 20 years. The world IS supporting the US dollar even though
> we solemly swear our presses will run round the clock; it's the value
> of the franchise. Gold is supported by a public frightened into thinking
> this will result in a complete meltdown (again). Markets are ever-more
> a fleecing ground, just like the good old pre SEC days. My guess
> is central banks are selling as gold is moving away from being a
> monetary instrument.
>
> ps. Nice methapors
If it now already seems pretty hard to put humpty-dumpty back together again (now that all we face is a long and protracted economic depression at the very worse) think what it will feel like to try to put back together again the ecological and physical balances of the planetary system once they are irrevocably out of whack..... in roughly only 30 to 50 years? (enough for lots of us to still be able to "enjoy")
And how should one "hedge" or plan to make lots of money out of these impending catastrophes? (apart from building and sitting on a personal gigantic castle made out of pure gold surrounded by machine gun turrets and preferably with a few personal nuclear bombs in stock and ready to fire?) (in some direction or another)
Could this be done by perhaps finally using a bit more judiciously the only asset any one of us ever really has? The number of years, months, weeks, days, minutes and seconds we have left to live? Something which is without exception also ALWAYS a probabilistic proposition?
Said in a nicer and better way (by John Lennon many years ago): "Life is what is happening while you are busy making other plans".
And so with that great (and free) advice (I will not be sending out an invoice) duly taken on board may all self-respecting and authentic Alpha Seekers .....get plenty of authentic Alpha both now and in the future!
All the best to ALL from Max12345 (and maybe 6 and 7 too)
The scenario that goldbugs worry about is far more severe: a Weimer Germany or Zimbabwe hyperinflationary starvation-poverty situation.
Their plan is to make profitable trades at that point, using a few ounces of gold to buy the resources that it would have taken millions of dollars to buy in the past. Note that this is based on the assumption that people in the future would be eager to trade massive amounts of those resources (food, housing, energy, labor, etc.) for tiny bits of jewelry metal. The plan is to eat well and live in a mansion while society disintegrates into the poverty, starvation, disease, violence and desperation found in Sub-Sahara Africa, perhaps yelling from the balcony each morning "I told you so you fiat-money defenders! Gold at $1M per oz!"
Is this plan rational? Would your gold wealth have been safe in Zimbabwe or Weimer Germany? Would you personally be safe living the high life among desperate, starving people? Are you actually rich if you have to live poorly to avoid attracting attention? For how many years could you live by spending your gold (or canned goods) until it ran out or was stolen / seized? Can even the wealthiest people in Zimbabwe get decent medical care? Would you chose to cash in your savings now and move to sub-Sahara Africa (you'd be rich in that society)? These are the things I question about the plan.
People who had money in pre-crisis Zimbabwe wish they had physically gotten out when they could have, not that they had allocated their investments differently. Now they're trapped, impoverished, and perhaps dead from cholera, even those who correctly predicted everything and invested in gold.
On Feb 05 09:14 AM tylakewalker wrote:
> I have never understood goldbugs. If things get as bad as the author
> predicts what good is some shiny metal bricks going to do me. I can't
> eat or drink it. I can't build a shelter out of it. I am concerned
> about the future and the mistakes our federal government is making.
> I believe we will have substantial inflation in the medium and long
> term. I'm increasing the size of my vegetable garden, planting blueberries,
> enriching my soil to increase yields. I have extra canned food, water,
> hiking gear and ammunition. If the US currency becomes worthless
> we will revert to a barter system. I will be trading my extra food
> and gear, good luck with your shiny pile of metal. And for the record,
> I don't think it will get that bad. I am long on US and Brazilian
> stocks.
Great post. Very thought-provoking!
On Feb 05 10:21 AM Chris B wrote:
> Is this plan rational? Would your gold wealth have been safe in Zimbabwe
> or Weimer Germany? Would you personally be safe living the high life
> among desperate, starving people? Are you actually rich if you have
> to live poorly to avoid attracting attention? For how many years
> could you live by spending your gold (or canned goods) until it ran
> out or was stolen / seized? Can even the wealthiest people in Zimbabwe
> get decent medical care? Would you chose to cash in your savings
> now and move to sub-Sahara Africa (you'd be rich in that society)?
> These are the things I question about the plan.
You have to pick an economic theory AND be right to locate the best landing place. Then, the exchange rate for your currency and assets will make a big difference on what you can afford.
If you believe that national wealth comes from the extraction of natural resources, Kuwait, South Africa, Canada, Brazil, or Australia seem like good possibilities.
If you believe that wealth comes from manufacturing dominance, China and South Korea look good.
If you believe that the countries with the highest quality of life will be the ones with the least debt and most income, China and Kuwait win (and Europe and Japan lose).
If you believe that long-term prosperity is determined by a country's comittment to education, democracy, and a quality legal system, most of Europe and perhaps Japan win (the US would win too, except for education).
Then again, you could be a bargain hunter. You could move to Iceland now that their currency has already collapsed and use your USD to buy real estate and business assets at fire sale prices before your USD collapse in value, as predicted. They have democracy, rule of law, excellent education and healthcare, a stable culture, near-infinite sources of geothermal energy, and few external threats. Global warming is a plus.
On Feb 04 11:31 PM SW Richmond wrote:
It would be the height of insanity to jump before it was clear where the best landing place would be.
If you can tell me definitively where to go that will not be effected, or will be minimally effected, I am all ears.
1. We will have martial law before we have chaos. Guns and ammunition are more likely to be confiscated than gold.
2. JP Morgan knew more about money than you. He was exactly right that the ultimate utility of gold is as money. It has the correct physical and chemical properties: it is virtually indestructible, sufficiently rare, cannot be conterfeited, infinitely divisible. Gold is not about the end of the world. It is about imposing discipline on bank lending, soveriegn borrowing, money creation, and national consumption.Gold does not make a good circulating medium. Other materials may be used as money but none has stood the test of time. If you need to heat your house, anything that burns can be used as a fuel, but natural gas is superior to camel dung. It is the hobgoblin of practical minds that they only conceive of utility in terms of industry.
3. We sit on knife's edge between deflation and hyerinflation. Which way we go depends on how the government. If the government defaults on its debt - something that has happened several time in our history - we get deflation. If the government uses its ability to "print money" then we get hyperinflation. It is anathema for the Fed to buy newly minted bonds. Open market operations only bought existing bonds. When the Fed buys newly minted bonds this is exactly how we "print money". Recent events indicate this is the more likely scenario.
4. The government fiscal crisis is very long in the making. Observers have commented for decades that the system of deficit spending is unsustainable. They were not wrong. They underestimated the ability of the Fed, inertia, and luck to the delay the crisis. Note the similarity to ecological warnings which began in the fifties. The movie "Soylent Green" is about the effects of global warming. Our epitaph may read "Our warnings gave us too much time."
5. Almost all other countries are in worse shape than the U.S. Economic collapse will occur first in eastern Europe and travel west. All currencies will fail with the exception of the Swiss Franc and maybe a few others.
6. The misallocation of capital that is the result of fractional reserve banking and a fiat currency is visible everywhere. It is called suburban sprawl. This inefficient design of our cities keeps us addicted to the automobile by confounding mass transportation, Other onerous effects are too numerous to mention. This is what we bought with our gigantic debt. It is difficult to conceive how are cities might have grown and how our population would be distributed if we had maintained discipline with a gold standard.
7. An underestimated cause of our financial crisis is poor corporate governance. No member of management should be on the board of directors. Corporations should not be allowed to proxy unused shareholder votes to management. Mutual funds and institutions that hold shares in trust should be required to vote the shares.
Good digestion to all.
In a nutshell, this is why we are going to become a third world country...the citizens REFUSE to see reality and they hold on tight to their belief system that economies ten times LARGER than ours HAVE to play with us in the sandbox.
Fools. You all hold on to the "too big to fail" crap, meanwhile, I'm preparing my children to live off the land and under radar. You can stand in line waiting for the weekly cheese truck to feed your kids.
Things are this bad, actually they are worse. But what did we expect to happen when we stopped employing Americans and happily cashed the dividend checks that were written in the blood of our children.
This is the Real Great Depression, the other one was just a cakewalk.
If the US is so solvent, and the printing presses work so well, why is IRS delaying refunds all over the place?
Hint: cash is low, low, low and only those that get free checks file early.
Just WAIT until the reduced revenues become apparent in a couple months, or did all of you financial geniuses forget that income tax is paid on PROFIT?
With respect to debt service payments, if the course is not changed drastically with respect to public finance, the only way to cover them will be to print cash. Once that happens, you are insolvent by definition.
How long can one go piling on long-term debt, when the debt service payment growth rate will rise faster than the tax base? I guess that depends on what the perception is of the those that buy it. Once the attitude shifts from "sure, I want your debt" to "no, you lack credibility", the government will no longer be able to sell the future.
The treasury auction was still oversubscribed. The lowest coverage since september! OMG default! Um, no. And what lever hasn't been used at auction? Hmm, it's a toughie. Raising rates.
The US isn't too big to fail, it's too big to fail and have it called failure. So it won't fail, because no one can afford that. Life will go on much as before, but credit will be tighter, and things will look more like the mid 70s for about 5-10 years. Sorry to spoil your post-apocalyptic fantasy.
But please, grab your chickens, and antibiotics and of course, guns and head for somewhere or other.
On Feb 03 10:31 AM kelm wrote:
> The fundamental trends I believe point to a failing bond market and
> an attendant loss of faith in the dollar. I have been laying out
> these arguments for some time for my readers. All of this could lead
> to the default scenario mentioned above. The difficulty has always
> been - "who's currency becomes the new reserve of choice?" We cannot
> consider a dollar collapse and US debt default and assume that all
> other currencies remain fiat currencies. Imagine what would happen
> if another nation, say China, converted to a gold standard as the
> US dollar begins to slide. I am not saying that will happen rather
> that some unimagined event could occur that changes the dynamic radically.
>
>
> Mr. West's points on gold and asset seizures are bang on as well.
> If you are playing in the gold market with a view to preserving your
> wealth you better have criteria in-place on when you convert from
> paper to something physical and how you ensure that physical thing
> isn't a confiscation target. Physical gold held in a vault in the
> US is problematic. Some outfits are offering off-shore purchase and
> storage in a transparent way. I don't have a good strategy for this
> yet.
>
> I would like to see crisping-up of what "imminent" means. This year,
> next year,...?
>
The US is very reliant on short term rates for its prodigious national debt. It gives us great flexibility, but always assumes the risk of no-takers in this time of short-credit. T-bills are taken by many to be an extremely liquid short-term instrument to get FDIC-class deposit insurance on amounts >$500,000. Given that sooo much cash is on the sidelines, proper management of the rates should generate sufficient interest in buying T-bills over the near term.
I'd tell them to learn some history.
Some "crazy pseudo-Muslims" already bombed the WTC waaaaaaaay back in 1993:
en.wikipedia.org/wiki/...
Of course, back then, the President's family wasn't doing "bid'ness" with the bin Laden family and thus, they perps were caught, convicted and are currently serving time in prison.
Unlike the perps of 9.11.01, who are walking around scott-free over in Paki...
On Feb 03 09:55 AM cyclingscholar wrote:
> With the financial markets desperate for gov't bonds, the US gov't
> wouldn't have to default..it could 'merely' ROLL over the debt as
> it comes due, to 100 year treasury bonds. Given the increase lifespan
> humans will have as medical breakthroughs proceed apace, this would
> make alot of sense. Raise the retirement/social security eligibility
> age in stages up to 70, 75, 80, as is appropriate; and most of the
> government's unfunded liabilities would disappear.
>
> cyclingscholar ; When CNBC (communist News Broadcasting ) starts bragging about how many octagenarians are roaming the fruited plains of America we can be sure your predictions are true.Attention Wal-Mart greeters.
On Feb 03 05:58 AM yellowhoard wrote:
> Interesting. Did the government nationalize any mines in the 30's?
> How did Newmont and other mines sell at market prices? Or did they?
Anyone notice the Baltic Dry Index has more than doubled off its bottom?
And i love the references in the news to worst this or that since 19__.
Like worst jobless claims numbers since 1982? That is, since the first eyar of a 17 year stock market boom?
Or worst hours worked drop since q1 1975? Gee, you mean 6 months into the bounce off the dreadful 2 year market bust of 1973-74?
We're spoiled alright. So spoiled we flip out when times are even a little tough. Go read Studs Terkel's Hard Times or something. Buck up, folks.
Here's something to make you even more humble: you obviously have no idea how the bond market works or what QE means. When the Fed buys Treasuries it does so specifically to cause long rates to fall, and prices to rise, by increasing demand for them. It does this by printing money and using it to buy Treasuries. And while 2008 may have been the first year when this was done in such a scale, it will not be the last; the US federal budget deficit is projected to be $1.3 Trillion in fiscal '09, and that doesn't include any 'stimulus' bill, so tack on another $800 Billion. Over $2Trillion will need to be borrowed by the US alone; China just went into deficit, BOJ just announced it is going to start buying securities, and with oil at $40 the ME doesn't have much surplus to 'invest'; practically all nations now need to borrow for deficit spending. There just isn't enough money to go around. So where will all this new 'capital' come from?
My Response:
A little less rich air and more humility would serve you well. You make a cardinal error of confusing Govt budget deficits with Current Account deficits. China is still generating a huge CA surplus, as are Japan and indeed the Middle East (where the marginal cost of producing oil is about $15), and whether it appeals to your sensitivities or not, these surpluses are being recycled back into $ assets.
Whether it is direct buying by Govts or the private sector or sovereign wealth funds, they are buying $ assets, including US Treasuries. This symbiotic relationship has prevailed and grown over the last few years and there is still no practical alternative. So next time you visit any emerging country, ask them what their preferred asset as a store of value might be, and ask them where they would like to store their current account surpluses. I suggest you do it soon, before markets oblige you to drop the prefix "Rich" from your poor name.
As an aside, have you considered the velocity of money along with the quantity. You do know they both drive inflation, and relative currency strength should reflect the combination. The paralysis of credit markets has caused a (yet) unquantifiable drop in US money velocity and it will be a while before they thaw. So even if there has been an exponential increase in US money supply, currency markets are telling you overall quantitative money is not an issue with the $.
Your humble poor teacher
They took all the gold, from banks, the federal reserve and private citizens and melted it down into bars. Where is it? In a bank vault(s) somewhere, though there has not been a physical audit I am aware of.
On Feb 03 08:32 PM svosavvy wrote:
> Hey what did the gov do with the gold confiscated in the 1930's?
> They pegged an outrageously higher price for it after they were majority
> stakeholder in it. So you could thank the gov for value creation
> in that era if you had some squirreled away. BTW All you doomsdayers
> keep buying gold in the near term, because it will make a nice short
> in a deflationary environment. I can feel the thumbsdown coming
> in already, bring it on.
On Feb 05 02:28 PM trader1138 wrote:
> people are self-interested. the saudi arabians, chinese and japanese
> (hereafter called SCJ) are people. the SCJ are self-interested. the
> SCJ are the largest holders of U.S. treasuries. Those treasuries
> hold down the SCJ's currencies to help their export driven economies.
> Were SCJ to sell (or cease buying) U.S. treasuries, their currencies
> would rise, their exports would fall and their domestic economies
> would deflate like a mf. this would lead to the leadership of SCJ
> dealing with, shall we say, bad-tempered citizens. Bad-tempered citizens
> kick people out of power, by hook or by crook. SCJ leaders know this
> and will keep buying our slightly tarnished gilts.
jokerstocks.blogspot.c...
Obama needs to get out of the box and condition Americans that we must sacrifice as our forefathers did. That means re instituting the Eisenhower era marginal tax rates on the high end earners. It means cutting government pay in exchange for 5 years of job security. It means extending unemployment for several years to provide security of baseline income. It means cutting government pensions and social security and freezing COLAS. Those receiving unemployment should be required to do public service for 20 hours a week. We need a new recovery savings bond that will encourage Americans to buy our debt in exchange for reasonable return.
Concerning the financial markets I went heavy short in Dec 1999 and covered in late 2000 (but too early) then short again in 2007 and covered again too early and have been out of the equities market totally except for some gold derivatives since this spring. I invested in gold when it was selling somewhat under 300 when everyone was hedging the wrong way and remembering Bre-X. I hold 7.5% UST bonds that were up 50%. While I feel somewhat secure if my decisions, I no longer trust the institutions and their ethics.
>
> My Response:
>
> A little less rich air and more humility would serve you well. You
> make a cardinal error of confusing Govt budget deficits with Current
> Account deficits. China is still generating a huge CA surplus, as
> are Japan and indeed the Middle East (where the marginal cost of
> producing oil is about $15), and whether it appeals to your sensitivities
> or not, these surpluses are being recycled back into $ assets.
I am not confused. Your statement is interesting but unsupportable. The US budget deficit was officially $160 Billion in 2007, and $455 Billion in 2008. It is projected to be $2.1 Trillion in 2009 after a likely stimulus plan is passed.
Do you mean to say that China, Japan and the ME will be ready, willing and able to absorb this quadrupled new US debt at a time when nearly all other nations are also starving for new 'capital' and the exporting nations themselves are suffering slowdowns? Please explain that because I'd like to hear how it will work.
Everyone anticipates trouble for the US 's new borrowing, and that is why the Federal Reserve has promised to step in with QE by printing and buying US Treasuries.
www.forbes.com/2009/01...
'China Not A Limitless Sponge For U.S. Debt
Tina Wang, 01.19.09, 12:52 AM EST
Growth of Chinese foreign exchange reserves slows at a time when Washington needs Beijing to buy Treasuries more than ever.'
zawya.com/story.cfm/si...
'Tuesday, Dec 23, 2008
RIYADH (Zawya Dow Jones)--Saudi Arabia, the world's largest crude exporter, is looking to increase budgetary spending by 10% in 2009 that could result in a deficit if oil prices don't average around $50 next year.'
The countries that were formerly our 'symbiotic' partners are finding that genuine needs are arising at home. They also see quantitative easing for what it is, and they do not share your monetarist views on the harmlessness of printing vast sums of new money. Gulf states, for example, are pursuing their own Gulf Coast Currency, in which they will denominate and sell their petroleum reserves. They seems to believe they already hold enough US Dollars and dollar-denominated assets.
>
>
> Whether it is direct buying by Govts or the private sector or sovereign
> wealth funds, they are buying $ assets, including US Treasuries.
> This symbiotic relationship has prevailed and grown over the last
> few years and there is still no practical alternative. So next time
> you visit any emerging country, ask them what their preferred asset
> as a store of value might be, and ask them where they would like
> to store their current account surpluses. I suggest you do it soon,
> before markets oblige you to drop the prefix "Rich" from your poor
> name.
> As an aside, have you considered the velocity of money along with
> the quantity. You do know they both drive inflation, and relative
> currency strength should reflect the combination. The paralysis of
> credit markets has caused a (yet) unquantifiable drop in US money
> velocity and it will be a while before they thaw. So even if there
> has been an exponential increase in US money supply, currency markets
> are telling you overall quantitative money is not an issue with the
> $.
>
> Your humble poor teacher
Currency markets are starting to catch on. Two generations of investors were weaned on the concept of the so-called 'risk free rate of return' in US Treasuries. This paradigm will die slowly, but die it shall. QE is the death of the US dollar. The US will borrow all your remaining capital and pay you back with the output of a printing press. Buying a long-term Treasury bond at a time when the Fed is monetizing is the ultimate act of faith. This faith has never in history been rewarded.
In my opinion, printing money devalues all existing money regardless of whether it is being spent, saved, or invested, velocity be damned.
Richmond is a city in Virginia, USA.
"don't see the world abandoning their belief in the greenback in the near term"
This is how all revolutions take place. Nobody expect them to happen. But sometimes, events are going out of control in a hurry and take life on its own.
Just 6 months ago, we were told by the FED and our government that everything was "under control". Well, lots of things happened since then...
These gangsters really did a job on us.
It is my hope the the good ole US of A can live up to the role of prodigal son and be great once again. This near term interference does not bother me near as much as the intermediate future. That future in my eyes brings a competition to see who is the greatest consumer of all. It is my concern in the intermediate (10-15yrs) the US will be usurped in consumption by the ever progressive chinese fealty. The title of king consumer brings with it the spoils of setting the terms for repayment of things consumed. Try to think of it like the drug dealer who has a junkie on his revolving credit window. The dealer starts off accepting cash from the junkie, but, over time the junkie gets so into the junk and the astute dealer realizes this and will soon start accepting other items other than cash (like tv's and jewelry) to keep the product rolling, because g-d forbid the supply consumption chain get interrupted. As long as the role of the U.S. people as king consumer is not supplanted we will continue to be the sphere everyone else revolves around. The true thing we all should be afraid of is being pushed to the periphery by a larger consumer. To the largest consumer go the credit spoils. Because without a hardcore junkie the dealer goes out of business.