Chris wrote, "If not, then we could face the mother of all catastrophes, the
failure of a US government debt auction, which also goes by the very
unpleasant name of "sovereign default."
This will not happen, though, because the Fed would almost certainly step in and buy those bonds."
US government debt auctions are never 100% successful. The Treasury attempts to strike a balance between yield and volume sold. If they come up short (need to refinance more), they raise the stated interest rate on the next round of instruments for sale. That’s why you get daily fluctuations in rates: http://www.federalreserve.gov/releases/h15/update/
The reason T-bill rates are so low at this time is the capital flight from the stock market into US governments as a "safe haven." When these dynamics change, and the flow of capital reverses, the Treasury will be forced to raise the stated interest rates on their debt to attract/maintain capital or as Chris points out, the Fed will have to buy it up (direct monetization). However, the financial world closely monitors these actions AND when the Fed directly monitized US debt, the value of the dollar declines (generally speaking) relative to other currencies and commodities.
Cheer up, chap. You’ve got great soil and climate to grow a big garden, great meat at the local market, and great scenery for taking holidays on you bike.
According to Bloomberg, Morgan Stanley chief economist David Greenlaw projects that Usgov’s 2009 cash-basis fiscal deficit could be $2.0 trillion, with a ‘T.’ That would be 12.5% of GDP, or twice the 1983 record of 6.0% of GDP.
But the "deficit" is the difference between income and spending. In February, the OMB projected $2.7 trillion in 2009 receipts. I’m going to guess that the revenue picture has darkened, such that 2009 receipts may be only $2.5 trillion … about the same as 2008.
So a $2.0 trillion deficit means that Usgov takes in $2.5 trillion, but spends $4.5 trillion – 80% more than its income.
Wow … does anyone think that interest rates might go up, if they hit the debt market that hard? They sure did in 1983, with T-notes topping out at 14% yield in 1984. That happened to be a period of dollar strength as well. But Paul Volcker was chairing the Fed, and he didn’t monetize much of that prodigious output of government paper. The private sector and foreigners had to eat it.
This time round, Weimar Ben is at the helm. He’s padded his balance sheet by $0.6 trillion since this summer. Only $2.0 trillion to go, Ben! As Burger King used to plaintively ask … "Aren’t you hungry?"
"There is a point where the banksters are going to be forced to go on a precious metal standard."
Not if they (G7 to G20) devise an collective electronic system of exchange, out of the ashes of the current system(s).
Hide and watch.
"He also forced everyone, small and great, rich and poor, free and slave, to receive a mark on his right hand or on his forehead, so that no one could buy or sell unless he had the mark…" Rev. 13:16,17
Now, in a world of declining prospects, the US finds itself in need of 200% to 300% more than that.
While I recognize that people tend to save more during downturns, there
are also fewer profits to save, so we might expect that the "plan" at
this point is for the US to assume it can borrow more than 200% of next
year’s savings. The entire world’s savings.
I flat out do not think this is a workable plan.
I remember a similar analyses early last year regarding the 2008 budget deficit from an excellent newsletter, The Privateer. Well as we all know now, the other central banks made the money to finance the American deficit. This is not to say they can do it again, but it’s something to watch for.
2.5 trillion from 2.7 trillion is .2 trillion, not 2 trillion. IOW, $200 billion. Not an inconsequential amount, but not as catastrophic as $2 trillion. Unless I’m missing something.
Thanks DanS - you may be right - I’ve got used to them. What I have that I think I don’t want is 50 thousand other people within walking distance.
Somewhere in the northern hemisphere is someone because of money pumping oil into a tanker that gets turned in to food on my supermarket shelves. If that stops I starve. Do you?
We are all at different stages in this at the moment and consequently will have varstly different perspectives.
I find black humour is holding me as steady as I can be.
The consumers are becoming the consumed
I can’t touch, see, hear, taste or smell any of you out here. No wonder we talk past each other.
We have to worry about deflation and not inflation right now. We are in the midst of a massive deflationary cycle. The fed for all it’s trying cannot print money fast enough to replace falling home and asset prices. Yes, it’s hard to see deflation when your food prices are skyrocketing, but what is more deflationary - homes that lost 16% last year (80k on a modest 500k home here in DC) or your food bill increasing by $30 a week?
If you watch Chris’ bubble section you see we have until 2012-2015 for housing prices to deflate. So that’s another 4-7 years of deflation that we haven’t seen on this magnitude since the 1930’s. In fact it could be a lot worse then the great depression due to all the derivatives blowing up in the bank’s faces.
In deflationary cycles, dollars become more valuable. The entire world is clamoring for them and there is no way this trade can be unwound while this is happening. It would be suicide for any country or group of countries.
Investors that buy silver for 60% over spot on ebay (I’ve actually seen it much worse then that) are in for a world of hurt here. Silver has done nothing but continue to collapse in value along with the rest of the commodities (gold excluded). In deflationary times, silver will do horribly as it is more of an industrial resource then a store of money.
Gold is a risky bet in the short term. It could soar in value, but it could also crash. It is far above where it was in the middle of the decade ($400). Too many small investors are rushing into it the same way they rushed into technology stocks in the late 90’s and we know how that turned out. This panic buying small investors is creating artificial demand and won’t have much steam. While long term it’s a sure bet, you could get crushed and lose your appetite for risk in the short term.
This sort of panic buying is going to get a lot of small investors hurt. It doesn’t work in stocks, it doesn’t work in housing, and it doesn’t work in commodities. While the long term trend line of commodities is up, investors could be in for a world of hurt in the short term as we go through a painful deflationary period.
Good question. I am afraid only for those individuals prepared and able to act. Get as far away from large numbers of other people as possible. The coast may be very good. Hold food, fuel and cash. I too am greiving for us all. Thanks for asking such a real question.
This sort of panic buying is going to get a lot of small investors hurt.
You do not buy and take possession of precious metals with the intention of playing price movements; that’s suicidal. You buy and hold while gold and silver are cheap for the day when the dollar is worthless.
UNLESS Chris is wrong (which I personally don’t think he is), and UNLESS there really is a concerted move by ‘the powers that be’ to keep the Gold price down so that IF there is a move back to the Gold standard, having forced the Gold price to a lower level (which, given the $100 drop from its high on Friday from the $920-$930 level where the recent moves up have been ‘stamped on’ is at least a possibility) THEN at some point the Gold price is going to pop and rise through the roof.
[quote]Investors that buy silver for 60% over spot on ebay (I’ve actually seen it much worse then that) are in for a world of hurt here. Silver has done nothing but continue to collapse in value along with the rest of the commodities (gold excluded). In deflationary times, silver will do horribly as it is more of an industrial resource then a store of money.[/quote]
This is only true if silver continues to be seen as strictly a commodity. If people continue to lose faith in fiat currencies and central banks around the world, silver may re-assume a role as money along with its role as a commodity. For this reason, some analysts are bullish on silver even in a deflationary period. The supply of silver is even more limited than gold, so silver could see a larger appreciation.
I am 2/3 in gold and 1/3 in silver as Chris and others I respect have recommended.
Silver may drop during deflation, or it may rise if it comes to be seen as money. But when inflation begins, as it almost certainly will, silver will go up right along with gold.
I was fortunate to get my 90% junk silver at a very reasonable premium before all of this craziness of 60% over spot started happening, though. I probably wouldn’t buy it now.
[quote=jgreco]We have to worry about deflation and not inflation right now. We are in the midst of a massive deflationary cycle. The fed for all it’s trying cannot print money fast enough to replace falling home and asset prices. Yes, it’s hard to see deflation when your food prices are skyrocketing, but what is more deflationary - homes that lost 16% last year (80k on a modest 500k home here in DC) or your food bill increasing by $30 a week?
If you watch Chris’ bubble section you see we have until 2012-2015 for housing prices to deflate. So that’s another 4-7 years of deflation that we haven’t seen on this magnitude since the 1930’s. In fact it could be a lot worse then the great depression due to all the derivatives blowing up in the bank’s faces.
In deflationary cycles, dollars become more valuable. The entire world is clamoring for them and there is no way this trade can be unwound while this is happening. It would be suicide for any country or group of countries.
[/quote]
I certainly don’t have a crystal ball, and there’s massive disagreement amongst people who’ve been studying economics and markets their entire lives about this. But it seems to me that if financial markets really tank and the Dow goes to 6,000 or lower, it may not take another 4-7 years for the housing market to hit bottom and the credit bubble to unwind.
As pointed out elsewhere, the Monetary Base grew an astonishing 17% in the last four weeks, which will translate into almost $7 trillion in new money by next September at the current growth rate. That is a powerful inflationary force.
I tend to think deflation will not last for five years, but of course I’m just guessing like everyone else.
