$16 trillion at the end of 2011

As we have said before, and pro forma for the Obama tax deal, we expect total debt issuance in 2011 to accelerate once again, and to hit just under $2 trillion, putting total US debt at the end of next year at around $16 trillion.

--http://www.zerohedge.com/article/us-end-2010-139-trillion-debt-total-debt-incurred-great-financial-crash-44-trillion

Yea, that's my prediction too. I think there will be a huge Euro and Yen crisis in 2012 with the dollar being seen as a safe haven, and then the dollar will collapse and hyperinflate about 2017.

Mary's Bar

Mary is the proprietor of a bar in Dublin. She realises that virtually all of her customers are unemployed drunks and alcoholics and consequently they can no longer afford to patronise her establishment. To solve this problem she comes up with a new marketing plan that allows her customers to drink now but pay later. She keeps track of the drinks consumed in a ledger thereby granting loans to her customers.

Word quickly gets around about Mary’s 'drink now and pay later' marketing strategy and as a result increasing numbers of customers flood into her bar. Soon she has the largest sales volume of any bar in Dublin.

By providing her customers with drinks without asking for immediate payment, Mary gets no resistance at all when at regular intervals she substantially increases her prices for wine and beer and also for her gastronomic table which is of wide renown.

Mary's sales volumes increase massively. A young and dynamic manager at the local bank recognises that these customer debts constitute valuable future assets and increases Mary's borrowing limit. He sees no reason for any undue concern, since he has the debts of the unemployed drunks and alcoholics as collateral and through Mary's success he believes that he''ll be promoted to vice president of the bank.

At the bank's corporate headquarters expert traders work out a way to make huge commissions and transform these customer loans into Drinkbonds, Alkibonds and Sickbonds. These securities are then bundled and traded on international security markets. Naive investors don't really understand that the securities being sold to them as AAA secured bonds are really the debts of unemployed drunks and alcoholics.

Nevertheless the bond prices continuously climb and these securities soon become the hottest selling items for some of the nation's leading brokerage houses.

One day, even though the bond prices are still climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers and diners which by now are becoming enormous. He therefore informs Mary that they must pay up or be banned from the establishment.

Mary then demands payment from her drunk and alcoholic patrons but being unemployed alcoholics she quickly finds that they cannot meet their drinking debts. As the suddenly very unhappy and disconsolate Mary cannot fulfil her loan obligations, she is sadly forced into bankruptcy and the bar closes with eleven employees losing their jobs.

Overnight Drinkbonds, Alcibonds and Sickbonds drop in price by 99%. These collapsed bond asset values destroy the bank's liquidity and prevent it from issuing new loans, thus freezing all credit and economic activity not only in Dublin but throughout Ireland.

The suppliers of Mary’s bar had granted her generous payment terms and had invested their firms' pension funds in the various Drinkbond securities. They find that they are now faced with having to write off her bad debts and with losing over 99% of the presumed value of the bonds. Her wine supplier also claims bankruptcy, closing the doors on a family business that had existed for three generations and her beer supplier is taken over by a competitor who immediately closes the local brewery and lays off 150 workers.

Fortunately however the bank, the brokerage houses and their respective executives are saved and bailed out by a multi billion euro no strings attached cash injection from their friends and cronies in government. The funds required for this bailout are obtained by high new taxes levied on employed middle class non drinkers who have never been to Mary’s bar and who have never even heard of it.

--From: http://www.telegraph.co.uk/finance/economics/8207710/European-Central-Bank-arms-itself-for-Spanish-crisis.html

Confidence In U.S. Treasuries Is Dying

Confidence is U.S. Treasuries is dying, and if confidence in U.S. government debt completely collapses at some point we could literally be looking at financial Armageddon. Why is that so? Well, when the world totally loses faith in U.S. Treasuries, interest rates on U.S. Treasuries will have to keep going up until enough investors are found to buy them. But much higher interest rates will mean much higher interest on the national debt and thus much higher federal budget deficits. That will erode confidence in U.S. Treasuries even further. In the end, a vicious cycle of eroding confidence and higher interest rates could ultimately lead to hyperinflation as the U.S. government and the Federal Reserve flood the system with endless amounts of paper money to try to keep the system solvent.
--http://theeconomiccollapseblog.com/archives/10-signs-that-confidence-in-u-s-treasuries-is-dying-and-that-financial-armageddon-may-be-approaching

China's army of graduates is struggling

But the supply of those trained in accounting, finance and computer programming now seems limitless, and their value has plunged. Between 2003 and 2009, the average starting salary for migrant laborers grew by nearly 80 percent; during the same period, starting pay for college graduates stayed the same, although their wages actually decreased if inflation is taken into account.

Chinese sociologists have come up with a new term for educated young people who move in search of work like Ms. Liu: the ant tribe. It is a reference to their immense numbers — at least 100,000 in Beijing alone — and to the fact that they often settle into crowded neighborhoods, toiling for wages that would give even low-paid factory workers pause.
--http://www.msnbc.msn.com/id/40626200/ns/world_news-the_new_york_times/

The debt went up $400 billion in only 2 months

On 9/29/2010, the total national debt was $13,466 bn. On 11/30/2010, the total was $13,861 bn. Ok, that isn't $400 billion, it is only $395 bn, and it is one day more than 2 months, but still this is shocking. It isn't a stretch to think that the deficit might be $2 trillion this fiscal year. If the GOP-controlled house doesn't like that then the alternatively is to shut down the government, which would be a good thing if it could happen.

California will default

See "California will default on its debt" and "This is the Horrifying Budget Report".
When? Probably 2012

The average trigger for default is 22%

In an article about the Irish bailout is the following paragraph:

There is bitterness over the EU-IMF loan rate of 5.8pc, which may be too high to allow Ireland to claw its way out of a debt trap. Interest payments will reach a quarter of total revenues by 2014. Moody's says the average trigger for default in recent history worldwide has been 22pc. "The interest bill is enormous. The whole process lacks feasibility," said Stephen Lewis, from Monument Securities.

Hmm. What is the current ratio of interest to revenue in the US? 8.5% (188/2213). When will the US ratio exceed 22%? Maybe 2022. According to the official projections, the ratio will be 20.7% in 2020 (912/4400), assuming a 4.1% interest rate on 91-day t-bills. If interest rates exceed this then the 22% will be reached much sooner.

The Euro game is up!

The day the dollar died

December 19, 2012. This very well could happen.

Japan will default in 2012

JJapan is in much worse shape than the US in terms of its national debt, but this is offset by the facts that most of its debts are internally held, they have huge reserves, and they are a net exporter country. Nonetheless, it is certain that they will default and this will happen before the US does.

According to Kyle Bass, (see also this) this will occur within 1-2 years, so I will call it 2012. Japan has already entered the Keynesian endpoint: their debt service costs exceed their income. They are already more than 1 quadrillion yen in debt and the revenue is only 40 trillion yen, with expenses at 97 trillion. Their national savings rate is now zero percent. Their system has been like a Ponzi scheme that works as long as there are new buyers. Well now there are no new buyers as their demographics have changed.

The only good news about this is that Japan has been relatively isolated from the rest of the world so the default won't cause a chain reaction. And maybe it will cause the US to wake up and realize how severe our problems are.

Another Debt Projection

In the 7 quarters since 12/31/2008, the national debt has increased by an average of 3.44%/quarter. This is an increase of 14.5%/year. If this were to continue, the numbers quickly become very frightening. If inflation comes back, which seems very likely with the huge quantitative easing going on, the numbers will increase much more quickly, because the entitlement costs will soar and the interest costs will skyrocket. The numbers are in billions.

9/30/2008 10025
9/30/2009 11910
9/30/2010 13561
9/30/2011 15528
9/30/2012 17780
9/30/2013 20358
9/30/2014 23310
9/30/2015 26689
9/30/2016 30559
9/30/2017 34990
9/30/2018 40064
9/30/2019 45873
9/30/2020 52525
9/30/2021 60141
9/30/2022 68861
9/30/2023 78847
9/30/2024 90279
9/30/2025 103370

So what does this mean? At some point relatively soon, the whole system will skyrocket out of control. What is my best guess for when this will happen? Well, if my theory about 10 times revenue being the breaking point is correct, I see this happening sometime in 2017. Revenue in FY 2017 is projected at $3.477 trillion, with national debt at $34.990 trillion.

I've been wrong before and I hope I am wrong here, but this is scary. When I first started this blog, I was projected the endpoint as being in 2022, thus the name of the blog. Then I bumped it to 2028, then I lowered it to 2025. Now I think the end will occur much sooner. Maybe I am being paranoid, but check out the slope on this graph from official federal reserve data:



Update 6/19/2012: This is model D-1 and is discredited, because the debt isn't increasing that fast.

Quantitative Easing explained

Bankruptcy of the US is a mathematical certainty

“If you run the numbers, on all those numbers that you just talked about, which I think are accurate, very accurate, in 20 or 25 years, the United States goes bankrupt,” said Allison. “It’s a mathematical certainty. ... “Now, countries don’t go bankrupt the way companies do,” said Allison. “They don’t file bankruptcy. They usually hyper-inflate.
--http://www.cnsnews.com/news/article/former-bbt-ceo-bankruptcy-us-mathematica

2010 Final Numbers

Here are the final numbers, per the CBO, along with my projection for 2011 and 2012

	2008	2009	2010	My 2011 Estimate	My 2012 Estimate
Receipts	2524	2104	2162	2460	2728
Outlays	2983	3520	3456	3801	3832
Deficit	-459	-1416	-1294	-1341	-1104

Planned Economic Collapse coming soon

Hyperinflation by 2012?

Gonzalo Lira thinks we could see hyperinflation by 2012:

Therefore, I am confident in predicting the following sequence of events:
• By March of 2011, once higher commodity prices reach the marketplace, monthly CPI will be at an annualized rate of not less than 5%.
• By July of 2011, annualized CPI will be no less than 8% annualized.
• By October of 2011, annualized CPI will have crossed 10%.
• By March of 2012, annualized CPI will cross the hyperinflationary tipping point of 15%.
After that, CPI will rapidly increase, much like it did in 1980.
--http://gonzalolira.blogspot.com/2010/10/signs-hyperinflation-is-arriving.html

I think he is spot on. This isn't going to directly cause the debt collapse that I have been warning about in the blog - countries can survive for years with hyperinflation - but it will make life very different. I think a temporary solution would be to use some other currency for savings and for day to day purchases, maybe the Canadian dollar.

Why Keynesianism is doomed to failure

Massive inflation coming?

I don't feel like posting the links, but combine: 1) news that foreclosures have been halted in most states, and 2) news that there may be $2 trillion+ of quantitative easing coming soon. I think there is a plan to flood the system with cheap dollars in hopes that the real estate market may recover and also to help the jobless. And to prevent a stock market collapse.

It isn't going to work. While the sentiment may be good, it doesn't justify the actions taken. Is stealing ok if I give the money to a homeless shelter? No. The flood of cheap money will go into the pockets of just a few well-connected people who will just dump it in the stock market and won't buy real estate. It won't help the homeless and jobless at all.

And it will cause a little inflation, but will increase the deficit even more because of the automatic cost-of-living increases and higher interest rates and higher oil prices. And once inflation starts, it takes on a life of its own.

While this action alone won't cause the type of collapse that I have been warning about on this blog, I think it will speed up the process.

US Debt increased 65% in just 2 years!

On 9/1/2008, the US debt held by the public was $5,479 billion.
On 9/30/2010, the US debt held by the public was $9,023 billion.
That's an increase of 65%!

Does anybody see a problem?

How long does it take to spend $500 billion?

The total government debt as of 9/30/10 was $13,561 billion. As of 5/28/10, it was $12,992 billion. So the answer is: only 4 months.

This is actually an improvement, since the last time I asked a similar question, I determined that it took only 6 months to spend 1 trillion dollars.

The next crisis is coming

After what happened since October 2008, I mean, elementally, you would think what? That now they’re going to change. I mean, they see that the model is not working. The model is even poisonous, you know? Dramatically poisonous. And what is the result, and what happened in the last meeting of the European Union? They are more fundamentalist now than before. So, the only thing you know that you can be sure of, that the next crisis is coming, and it will be twice as much as this one. And for that one, there won’t be enough money anymore. So that will be it. And that is the consequence of systematical human stupidity.
--Manfield Max-Neef at http://www.democracynow.org/2010/9/22/chilean_economist_manfred_max_neef_us

Stock Market mini-crash about October 20?

I have a theory that the dates October 20 and April 20 (six months later) are very unlucky. I don't mean on the precise date, I mean about that date, plus or minus a couple of weeks. Financial collapses usually happen in October and physical disasters happen in April. Here are some bearish events that took place in September or October:

October 29, 1929 great stock market crash
October 19, 1987 The stock market crashed for no apparent reason, and the Dow was down 22%.
October 13, 1989 ("Friday the 13th mini-crash") - The stock market drops 12% over 2 days, blaming a failed buyout. "Many investors were left stunned".
October 11, 1990 Dow Jones at 2365
September 10, 1998 - Dow hits a short term low of 7,615
September 23, 1998 - LTCM crash. LTCM was providing returns of 40% annually when suddenly their economic theories quit working. The Fed bailed them out, fearing a systemic collapse.
September 11, 2001 - The stock market closed for a week and when it opens, drops 14%.
September 21, 2001 - dow closes at 8,235
October 9, 2002, dow closed at 7,286, a 37.8% decline.
September 15, 2008 - Lehman Bros collapsed, the stock market quickly drops 5%, the Fed takes over AIG, and Congress rushes through a $700 billion bailout.
October 27, 2008 - Dow Jones hits a short-term low of 8,175. (It jumped by 900 points the next day, but dropped even further in Nov. 2008 and March 2009).

Update:
The Panic of 1873 started on September 18, 1873 with the failure of Jay Cook & Company.  This started a chain reaction of bank failures and the NYSE closed for ten days starting Sept. 20, 1873.
The Panic of 1907 started on October 22, 1907 with a bank run on the Knickerbocker Trust Company.

Update 2:
Montgomery recalls living through the October "massacres" of 1978 and 1979, the crash of 1987, the mini-crash of 1989, the 1997 Asian collapse and the Long-Term Capital Markets plunges [in 1998], which started to cascade downward in late September. And while gold bullion topped in January 1980, gold stocks made their highs on Sept. 22 of that year, he adds. That date also saw the peak in many oil stocks.
Looking back farther, on Sept. 22, 1929, the Dow Jones Utility Index became the final major average to make its high before the Great Crash. And in 1873, a panic forced the New York Stock Exchange to shut down, Montgomery further details.
And who can forget 2008, when markets went into free fall in the days following the collapse of Lehman Brothers? What's remembered less well now is the market chaos in the subsequent days after the House of Representatives initially rejected legislation that created the Trouble Asset Relief Program
Currencies have seen historic changes around this date as well, he adds. The British pound was taken off the gold standard and was devalued a huge 28% on September 21, 1931. Exactly 54 years later, the Group of Five produced the Plaza Accord, which brought a sharp decline in the dollar and expansion of global liquidity. Black Wednesday, when Britain was forced to withdraw from the European Exchange Rate Mechanism, came a few days early on Sept. 16, 1992.
I also recollect that Treasury note and bond yields made their historic highs in late September, 1981, with shorter maturities hitting 17% and long bonds reaching 15%. That marked the end of a 35-year bear bond market from the end of World War II.
"If that's not enough, several of the astrological types claim their charts show [this] week is fertile ground for surprises – geo-political and otherwise."
http://www.zerohedge.com/news/2014-09-22/bofaml-repeats-art-cashins-concerns-september-seasonal-slump

Update 3: The Black Friday gold panic of September 24, 1869 was caused when two speculators attempted to corner the gold market. The price of gold briefly went as high as $162.50 per ounce before dropping to $133 after the Treasury sold some gold.

Hurrah the recession is over!

The "great recession" officially ended in June 2009, according to the NBER.

In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity. Rather, the committee determined only that the recession ended and a recovery began in that month. A recession is a period of falling economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. The trough marks the end of the declining phase and the start of the rising phase of the business cycle. Economic activity is typically below normal in the early stages of an expansion, and it sometimes remains so well into the expansion.

The committee decided that any future downturn of the economy would be a new recession and not a continuation of the recession that began in December 2007.--http://www.nber.org/cycles/sept2010.html

CBO: Don't worry, be happy!

Did you know that our current recession is scheduled to be completely over by October 1, 2011? The mighty Obama has commanded it and thus it will be so. Revenues will increase from 2143B in 2010 to 2953B in 2012, an increase of 810B/year or 37%, spending will increase only by 133B/year or 4%, and the deficits will drop from the trillion dollar range to a "sustainable" 500-600B/year amount.

Don't worry, be happy!

Year 2038 bug

Many of the older computer systems will crash on January 19, 2038. Is it time to panic yet?

Starting at GMT 03:14:07, Tuesday, January 19, 2038, I fully expect to see lots of systems around the world breaking magnificently: satellites falling out of orbit, massive power outages (like the 2003 North American blackout), hospital life support system failures, phone system interruptions (including 911 emergency services), banking system crashes, etc. One second after this critical second, many of these systems will have wildly inaccurate date settings, producing all kinds of unpredictable consequences. In short, many of the dire predictions for the year 2000 are much more likely to actually occur in the year 2038!
--http://maul.deepsky.com/~merovech/2038.html

Is ten times revenue the debt limit?

I just had a thought, which is that GDP is irrelevant when measuring the debt. The appropriate measurement is instead cash flow or tax revenue. And I think that 10 times that amount of revenue is some kind of limit or would signal an imminent debt crisis. If that point is reached and interest rates rise to only 5%, then half of all revenue will go towards paying interest. I also like measuring it on a scale of 1 to 10.

The last hard numbers I have are for 9/30/09 when revenue was at 2105 and total debt was 11,910 for a Debt Crisis Number or "Crip" of 5.7. The number at 9/30/10 should be about 6.4, with revenue of 2,100 and debt of 13,500.

So the question is, when will this reach the max of 10? Well there are lots of assumptions, but my best guesstimate is in 2025, when tax revenues will be $5,346B and debt will be $58,332B.

Update 6/19/2012:
This is model C-1.

Counterpoint: why hyperinflation in the US is impossible

See this article: http://globaleconomicanalysis.blogspot.com/2010/09/debating-flat-earth-society-about.html

In essence, what he is saying is that hyperinflation is always a political event, not a financial event." The commonality between Zimbabwe and Weimar is they are both political events. In Zimbabwe a political event triggered capital flight, in Weimar a political event started massive printing, triggering hyperinflation."

He says that it is impossible for the Federal Reserve on its own to cause hyperinflation. Congress can cause hyperinflation through massive spending; however, they won't.

I disagree with his conclusion. I believe that at some point people will lose faith in the ability of the government to pay back the massive debt and that lack of faith and the reaction to it will cause hyperinflation.

Doomsday warnings of US apocalypse gain ground

Economists peddling dire warnings that the world's number one economy is on the brink of collapse, amid high rates of unemployment and a spiraling public deficit, are flourishing here.

The guru of this doomsday line of thinking may be economist Nouriel Roubini, thrust into the forefront after predicting the chaos wrought by the subprime mortgage crisis and the collapse of the housing bubble.

"The US has run out of bullets," Roubini told an economic forum in Italy earlier this month. "Any shock at this point can tip you back into recession."

But other economists, who have so far stayed out of the media limelight, are also proselytizing nightmarish visions of the future.

Boston University professor Laurence Kotlikoff, who warned as far back as the 1980s of the dangers of a public deficit, lent credence to such dark predictions in an International Monetary Fund publication last week.
...
"In a short period of time, the Federal Reserve would have to print trillions of dollars to cover its explicit and implicit guarantees. All that new money could produce strong inflation, perhaps hyperinflation," he said.

"There are other less apocalyptic, perhaps more plausible, but still quite unpleasant, scenarios that could result from multiple equilibria."
--http://www.breitbart.com/article.php?id=CNG.a64b6fa820c23d9ef2058a22276ce3a1.2c1&show_article=1

I haven't heard of Mr. Kotlikoff before, but I will start following his blog: http://www.esplanner.com/view/blog

The future collapse of the EU

But no current issue better illustrates the bizarre nature of the system to which we have surrendered the power to run our country than the chaos inflicted on our hospitals by the enforced application of the EU’s working time directive. Led by John Black, head of the Royal College of Surgeons, medical professionals protest that this is threatening many patients’ lives.

Even the European Commission freely admits, in a recent “communication” to the European Parliament and sundry others, that its rules are, in practice, highly “unsatisfactory” and in need of urgent reform. But it adds that attempts to amend the directives have been going on since 2004 and that any chance of getting the reforms needed will involve so many consultations and negotiations that little is likely to happen for years.

Of course, if we still had the power to run our own country, this crisis in the NHS and much else besides could be sorted out within months, But since our Government seems quite happy to continue handing over even more powers to this crazy system, there is nothing we can do about it – until eventually the whole lumbering, labyrinthine, unaccountable, undemocratic mess implodes under the weight of its own contradictions.

--http://www.telegraph.co.uk/comment/columnists/christopherbooker/7996747/Brussels-has-broken-our-power-to-rule.html

The Keynesian Endpoint

On the whole, I expect the federal government to maintain deficit spending at roughly its current level, until market forces intervene and force it to make cuts in a hurried, unplanned manner.

That is the Keynesian endpoint, but it can come in different ways. One way, which I think is less likely, is through a substantial drop in the value of Treasuries, meaning a rise in their yields. ... A substantial rise in Treasury yields would force the government to cut spending, exacerbating the recession and spurring further yield rises, until the market was satisfied that public borrowing had been reduced to sustainable levels. But the government shouldn’t have to default, so I see this as the rosy scenario.

A second way to reach the Keynesian endpoint, and I think the more likely way, is through a rise in inflation. If the government continues its high deficit spending while the Fed tries to combat renewed recession with large-scale quantitative easing, the increasing volumes of dollars in the economy would eventually spur inflation, either through excess spending or through a loss of confidence in the dollar. An increase in inflation would send rates on private debt upward and bring the latent private debt burden down on the economy’s weak shoulders. Also, yields on Treasuries, suppressed by the Fed’s monetization of the deficit via QE, would turn substantially negative in real terms, prompting a sell-off by private holders. At that point, the Fed could choose to increase QE and also monetize the rolling-over of maturing federal debt, which would spur hyperinflation and fiscal collapse. Or, the Fed could call off QE, forcing the government to default and sharply cut spending.

Weighing those two options, I think a default would lead to a severe global depression, by shattering the global economy’s confidence in and dependence on the US government, US consumers and the US dollar. On the other hand, hyperinflation would grind all confidence and dependence on the US economy into dust, and lead to an even more severe global depression. When the time comes, I think it will be obvious to everybody that default is the lesser of the two evils.
--http://keynesianfailure.wordpress.com/2010/09/10/delayed-deleveraging-meets-the-keynesian-endpoint/

Comment: We have 2 options in front of us, option 1: to default on the US debt, which would lead to a severe global depression, and option 2: hyperinflation, which will destroy the value of the dollar and lead to an even more severe global depression.

With option 1, at least the dollar will still exist as a global reserve currency, and the global financial system will be intact and the depression, although severe, would be over in a few years and would be mostly limited to the US. Although the US government would lose much of its power because investors would not be willing to buy its bonds except for at a high interest rate.

Option 2 would be a disaster. The dollar would disappear, there would be a global depression from which the world might never recover, and the US would lose any influence on the world stage leaving a power vacuum to be filled by a totalitarian Chinese government and Islamic militants. It would lead to a new Dark Age.

We might be able to delay making a choice for as many as 20 years, but not forever.

The US will hit the debt wall by 2015

Here is an interesting video by Mike Pento. Some quotes:
"The maximum duration of having a quiescent market is around four years, but it could be much sooner than that when we hit the debt wall. ... The publicly traded debt just reached 8.5 trillion dollars. It was 7.5 trillion last year. By 2015, it's gonna reach 14 trillion dollars. It's basically going to almost double in 6 years. ... The interest payment on the debt by 2015 will be about 1 trillion dollars. Even if you grow revenue by 50%, 30% of all government revenue is going to pay interest on the debt. .. It leads to unfortunately a dollar crisis and a bond market crisis. ... We need to drastically cut spending and we are doing the exact opposite.

Won't cutting back on spending now lead us into a worse recession? It will on the short run, but what is your alternative? ... We've kicked the can down the road but the can has gotten much much bigger. So when we do have to address this situation, who is going to bail out the United States? It's not going to be the IMF we just have too much debt. It's going to be the Federal Reserve with their printing press."

The treasury bond bubble will burst

This excessive debt level of the U.S. Federal government insures that Treasury bonds will never be repaid in real terms. The market is aware of this situation—the bond market is aware that Treasuries are in a bubble, floating on nothing but air. Therefore, when—not if—the bubble in Treasury bonds finally bursts, there will be a run on comodities, most likely, which will start the hyperinflationary phase of the current Global Depression. From here, the endgame of the U.S. economy.
--http://www.zerohedge.com/article/guest-post-prosecution%E2%80%99s-case-against-alan-greenspan

Most people see US Treasury bonds as the ultimate safe haven, so this is kind of hard to imagine, but I will try to explain. There is an inverse relationship between bond prices and interest rates - when interest rates go down, bond prices go up and when interest rates go up, bond prices will go down. Guess what - interest rates will go up at some point, which may be years away. When this happens, investors will flee bonds. US bonds are a stupid investment.

National debt increased by $200 billion in August

On July 30, 2010 the numbers looked like this:
Debt held by Public $8.702T
Intragovernmental $4.535T
Total Public Debt $13.238T

On August 31, 2010 the numbers look like this
Debt held by Public $8.927T
Intragovernmental $4.523T
Total Public Debt $13.450T

That's an increase of $225B in the debt held by the public, and $212B increase in the total debt in just 31 days. I don't think the debt has ever increased more in a month, although Sept 2008 may be an exception. Despite the huge increase, this still can't be considered an emergency yet, since interest rates are so low. But the bridge is out ahead, so picking up speed is not a good thing.

A Moment of Clarity will occur

Will there come a day when the bond markets collectively realize that Treasuries will never ever be repaid—cannot be repaid? And when that day comes, when that Moment of Clarity falls on the markets, will it spark a panic?

In two previous posts, I essentially said “yes”: “Yes” to a collective Moment of Clarity, “yes” to a panic in Treasuries. I further argued that such a panic would lead—inexorably—to a flight to safety in actual, physical commodities, which would then result in a massive hyperinflation that would kill the dollar dead.

What is most important is, I do not know when such a Moment of Clarity will occur—but I have no doubt that it will occur. Inevitably, unavoidably: Treasury bonds are bound to collapse, triggering the sequence of events that I have described.

-- http://www.zerohedge.com/article/guest-post-termite-riddled-house-treasury-bonds

Update: Here is another article by the same author, Gonzalo Lira, explaining how the crash will occur - http://gonzalolira.blogspot.com/2010/08/how-hyperinflation-will-happen.html .

The first of the asset managers or TBTF banks who are out of Treasuries will look for a place to park their cash—obviously. Where will all this ready cash go?

Commodities.

By the end of that terrible day, commodites of all stripes—precious and industrial metals, oil, foodstuffs—will shoot the moon.

I think he has nailed it. The only thing I differ with him is on the timing. He thinks it will happen very soon: "I’m guessing if it doesn’t happen this fall, it’ll happen next fall, without question before the end of 2011." Whereas I think we have about 15 more years before it will happen.

Tony Robbins warns of economic troubles ahead

Vote to defend the US against flesh-eating space aliens

Another gloom and doom video

July 2010 Update

The CBO update for July 2010 recently came out and I am updating this. There is a mismatch between the discretionary and mandatory numbers.

Compare to: http://aftermath2022.blogspot.com/2010/07/2010-update.html

Category	2010 YTD	2010 extrap.	2010 Budget	My 2010 est.
Revenue	1753	2104	2381	2132
Mandatory	1192	1430	2020	2041
Discretionary	1543	1852	1368	1377
Interest	191	229	164	185
Total Spending	2926	3511	3552	3603
Deficit	-1173	-1408	-1171	-1471

Civil war brewing?

More than 50% of spending comes from deficit spending

I guess this has happened last year, but this is a horrible sign:

Wednesday's monthly Treasury statement said U.S. government revenues in July totaled $155.55 billion, compared with $151.48 billion in July 2009.

Spending was higher, totaling $320.59 billion. July 2009 spending amounted to $332.16 billion.
--WSJ.com

So taxes cover only 48.5% of spending, for July at least.

The Decline and Fall of Western Civilization

Martin Armstrong, a former hedge fund manager who is now in prison, has written a fascinating article entitled "The Decline of the West: Has Western Society Come to an End?" In this article, he discusses the ideas of Oswald Spengler, a German philosopher who lived from 1880-1936, and contrasts his ideas with those of Arnold Toynbee, Karl Marx, Robin Collingwood, and Edward Gibbon. Excerpt:

The Political State born of revolution, will always and without exception, adopt the various policies against which it had justified its taking of power by force. ... The United States was born on the core issue of a battle against tyranny. ... Here we are today, the wheel of fortune has completed here revolution and the United States has come full circle. ...There is no question that the seeds of our own destruction have been planted. No one in their right mind will every actually believe that as a people we will actually pay the national debt. ... There is a serious risk of revolution. For that is presented by the collapse in the rule of law.

How long does it take to rack up $1 trillion in debt?

Note: This is an article I wrote in May 2010.

The US debt is currently at $12.987 trillion and will surpass $13 trillion next week (to pick a date I will say 5/25/10). The $12 trillion mark was reached on 11/16/09. So that is only 6 months. The debt limit is $14.3 trillion, which should be reached in January 2011.

The Obama Administration claims that the budget deficit will be reduced to $912 billion in FY 2011 and $581 billion in FY 2012. This is due partially to the massive tax increases that will kick in on January 1, 2011 due to the expiring Bush tax cuts. However, I think that it is likely that the revenue raised will be less than they expect. Also, they project that spending will increase only 2% in 2011 over 2010, ignoring the massive costs of the Obama healthcare plan. So I think at best, the tax increases will only cover the increased costs.

Assuming the burn rate remains the same (which is very conservative since it is likely to increase), the government debt can be expected to reach the $20 trillion mark by the end of 2013, which is double what it was in 2008.

The real question is when does this become unsustainable. The US is still incredibly strong, and the dollar is still the global reserve currency. Europe will crack up before the US does. It may be able to manage a debt as high as 250% of GDP before reaching junk bond status. Right now the debt as a percentage of GDP is slightly below 100%, maybe 95% based on a GDP of about $14 trillion.

I am really making this up, but in 2020 the situation may look like: debt of $45 trillion, GDP of $20 trillion, debt/GDP ratio of 225%. It's not a pretty picture, but yes it is sustainable (as long as hyperinflation doesn't kick in) at least until 2020. But its hard to see how it could last much longer than that.

Edit: The real problem with this is interest rate jumps. Lets say the debt does reach $20 trillion. At 2.5% interest, this is only $500 billion/year, slightly more than 10% of the budget in 2014. But if the interest rate suddenly jumps, to say 12%, this would be $2.4 trillion/year in interest, making the deficit skyrocket from $2 trillion/year to $4 trillion/year. And when this changes it will happen very quickly.

New Social Security Trust Fund Report

The Social Security Trust Fund Report was released today.

The combined assets of the Old-Age and Survivors Insurance, and Disability Insurance (OASDI) Trust Funds will be exhausted in 2037, the same as projected last year. The Trustees also project that program costs will exceed tax revenues in 2010 and 2011, be less than tax revenues in 2012 through 2014, and then permanently exceed tax revenues beginning 2015, one year earlier than estimated in last year’s report.

The South Sea Bubble

The year 1720 was really the first "modern" economic collapse, featuring both the collapsing Mississippi Bubble in France and the South Sea Bubble in England. These bubbles involved the national debt, financing speculative growth, derivatives, and hyperinflation. John Law was ahead of his time with his economic theories. And financial regulation was the result. There was a proposal in Parliament that bankers should be tied up in sacks filled with snakes and dumped into the murky Thames River.

See also: HOW THE FRENCH INVENTED SUBPRIME IN 1719.

John Law and the Mississippi Bubble

A cute cartoon about the first bubble caused by issuing paper money.

Mary Poppins and the banking crisis

A wise 6-year old boy wants his tuppence back and causes a bank run.

The Aftershock Economy

As the authors of Aftershock point out, home prices in the U.S. appreciated about 80% between 2001-2006. According to the Bureau of Labor statistics, wages increased just 2% over the same period.

Then in 2006, the housing market collapsed. Homeowners who had lived on the increasing paper profits of their homes over the previous decade faced sudden and surprising destitution. By 2008, with the seizure of the financial system in the U.S., the stock market collapsed in turn, and millions of people — mostly men — lost their jobs in a panic of corporate layoffs.

One after another the bubbles burst in a predictable sequence of spectacular implosions: starting with real estate and reverberating in tectonic waves through stock values, private debt, and discretionary spending.
...
The collapse of the housing and stock markets forced consumers into a corner, clinging to their jobs and managing their personal debts by cutting back on discretionary spending. The Federal Reserve — fearing the worst — escaped the immediate catastrophe by printing money — $1.7 trillion in 2009 alone.

This sudden increase in the supply of money — and the inflationary pressure it portends — functions to decrease the overall value of the U.S. dollar, thus making it less attractive to foreign investors.

“One way to look at this is to think of the United States as a big mutual fund,” the authors write. “When our performance is good, foreign investors throw their money at us, but when performance is not so good, they throw less money at us. And when performance becomes bad enough, they are going to want to take their money and go home.

“Based on our analysis, we foresee foreign investors beginning to significantly lose confidence in their U.S. holdings sometime in 2010 to 2011, and increasing over time, with the likelihood of a mass exit by 2012 to 2014 becoming very high.”

The amount of debt held by investors, which include China and other countries as well as individuals and pension funds, will rise to an estimated $9.1 trillion this year from $7.5 trillion last year. When the dollar implodes, the U.S. government debt — now at a staggering $13 trillion and set to exceed GDP by 2012 — will surely be called-in by its owners.

--http://pajamasmedia.com/blog/the-aftershock-economy/

Wow. Just wow. When I started this blog, I thought there would be a collapse about 2022, thus the name of the blog, and then I started feeling like that was too pessimisstic, and my current projection is about 2029. But these guys think it could happen as early as 2012.

Life without electricity

Unbelievable Rockies game

I am not much of a baseball fan, as it is overpriced and boring, but something incredible happened on July 30th, Friday night at Coors Field. I think a verbal description expresses it more than watching a video clip would.

It was the bottom of the 8th, and the Rockies were leading 5-2.
Sean Marshall replaces Justin Berg as pitcher for the Cubs.
1. Clint Barmes doubles.
2. Melvin Mora singles, Barmes to third.
3. Dexter Fowler strikes out.
4. Ryan Spilborghs strikes out. There are two outs.
5. Carlos Gonzalez singles to right, Barmes scores, Mora to second.
6. Troy Tulowitzki doubles, Mora scores, Gonzalez to third.
7. Brad Hawpe doubles, Gonzalez scores, Tulowitzki scores.
8. Andrew Cashner relieves Marshall. Chris Iannetta triples, Hawpe scores.
9. Ian Stewart homers, Iannetta scores, Stewart scores.
10. Clint Barmes singles.
11. Mora doubles, Barmes scores.
12. Fowler homers, Mora scores, Fowler scores.
13. Spillborghs singles.
14. Brian Schlittler relieves Cashner. Gonzalez singles, Spilborghs to second.
15. Tulowitzki doubles, Spilborghs scores, Gonzalez scores.
16. Hawpe walks.
17. Inannetta walks, Tulowitzki to third, Hawpe to second. Bases are loaded.
18. Stewart finally flied out.

The score was now 17-2. The Rockies get 13 hits, including 11 straight hits and score 12 runs. Every single player was at-bat twice, and each player scored at least once. Gonzalez, Tulowitzki, Mora and Barmes had two hits apiece. Fantastic!

A crisis of confidence

We are in the late-phase of a multi-decade historic Credit Bubble. The greatest risk at this point is that massive issuance of non-productive governmental debt foments a crisis of confidence at the very heart of our monetary system. The top priority must be to ensure that such a devastating outcome is avoided – and at significant unavoidable cost. It is imperative that we as a nation come to the recognition that real financial and economic pain must be endured to protect the long-term viability of our monetary system. The inflation rate is not the key issue. And efforts to try to inflate our way out of structural debt problems are a lost cause. We must instead move forcefully to rein in our deficits and avoid further debt monetization in order to protect the soundness of our money and Credit – or else risk a financial crash.

Most regrettably, Washington policymaking (fiscal and monetary) is on a trajectory that will inevitably destroy the creditworthiness of our nation’s vast liabilities. With ominous parallels to the mortgage/Wall Street finance Bubble, Federal Reserve policies have fostered Bubble dynamics throughout our Treasury, agency and debt markets, more generally. Instead of market dynamics working to discipline Washington’s profligate debt expansion, Federal Reserve interventions ensure that a distorted marketplace again accommodates perilous Credit excess. Our central bankers should heed Mr. Trichet’s warning. Additional quantitative ease will only fuel the Bubble and risk calamity.
--http://dollarcollapse.com/articles/doug-noland-significant-unavoidable-cost/

Collapse like a thief in the night

Yet what if history is not cyclical and slow-moving but arhythmic, at times almost stationary, but also capable of accelerating suddenly, like a sports car? What if collapse does not arrive over a number of centuries but comes suddenly, like a thief in the night?

Great powers and empires are complex systems, which means their construction more resembles a termite hill than an Egyptian pyramid. They operate somewhere between order and disorder, on "the edge of chaos", in the phrase of the computer scientist Christopher Langton.

Such systems can appear to operate quite stably for some time; they seem to be in equilibrium but are, in fact, constantly adapting.

But there comes a moment when complex systems "go critical". A very small trigger can set off a phase transition from a benign equilibrium to a crisis.
--Niall Ferguson

The tipping point is unknown

From: http://cboblog.cbo.gov/?p=1249

With U.S. government debt already at a level that is high by historical standards, and the prospect that, under current policies, federal debt would continue to grow, it is possible that interest rates might rise gradually as investors’ confidence in the U.S. government’s finances declined, giving legislators sufficient time to make policy choices that could avert a crisis. It is also possible, however, that investors would lose confidence abruptly and interest rates on government debt would rise sharply, as evidenced by the experiences of other countries.

Unfortunately, there is no way to predict with any confidence whether and when such a crisis might occur in the United States. In a brief ("Federal Debt and the Risk of a Fiscal Crisis") released today, CBO notes that there is no identifiable “tipping point” of debt relative to the nation’s output (gross domestic product, or GDP) that would indicate that such a crisis is likely or imminent. However, in the United States, the ratio of federal debt to GDP is climbing into unfamiliar territory—and all else being equal, the higher the debt, the greater the risk of such a crisis.

If you are standing near the edge of a cliff, and you know there is a possibility that you could go over as well as the possibility that the ground could collapse near the edge but you don't know exactly where the danger point is, wouldn't it make sense to stay far away from that point, instead of tempting fate?

The only thing we have to fear is austerity

David Blanchflower, former economist with the Bank of England and now a professor at Dartmouth, wants more spending and cites Paul Krugman in support of his views.

Prepare for hyper-inflation

Comment: While hyper-inflation seems unimaginable now with the depression we are in, there is so much money out there, things can change very quickly once the economy starts to recover in a few years.

My revised budget projection

This basically takes the latest OMB numbers and combines them with a previous projection that I made which is based partly on CBO numbers.

The mighty Obama has commanded the recession to be over and for the budget deficit to be cut in half overnight, but cynic that I am, I doubt some of his powers and am projecting what I see as more realistic numbers. I don't think it makes sense to extrapolate this any further because of all the unknowns but I think it would reach the tipping point about 2028.

Category/Year	2009	2010	2011	2012	2013	2014	2015	2016
Revenue	2105	2132	2426	2728	2948	3160	3254	3383
Mandatory	2112	2041	2186	2112	2176	2371	2491	2649
Discretionary	1219	1377	1433	1443	1487	1532	1578	1625
Interest	187	185	221	294	385	480	554	617
Total Spending	3518	3603	3840	3849	4048	4383	4623	4891
Deficit	-1413	-1471	-1414	-1121	-1100	-1223	-1369	-1508
Debt held by public	7552	9023	10437	11558	12658	13881	15250	16758
GDP	14300	14600	14900	15500	16200	16900	17400	17900
Debt %	53%	62%	70%	75%	78%	82%	88%	94%

Update 6/19/2012:  I label this B-2.  This is eerily accurate so far, two years later.

New Budget

A new OMB budget just came out which I will present before analyzing it. I'm only going to show this through 2016.

Category/Year	2009	2010	2011	2012	2013	2014	2015	2016
Revenue	2105	2132	2426	2814	3102	3441	3597	3853
Mandatory	2112	2041	2186	2112	2175	2371	2491	2649
Discretionary	1219	1377	1433	1316	1274	1284	1309	1339
Interest	187	185	221	294	385	480	554	617
Total Spending	3518	3603	3842	3725	3838	4139	4359	4610
Deficit	-1413	-1471	-1416	-911	-736	-698	-762	-758
Debt held by public	7552	9023	10439	11350	12086	12784	13546	14304
GDP	14,256	14817	15516	16412	17383	18384	19369	20337
Debt %	53%	61%	67%	69%	69%	70%	70%	70%

Note: The debt held by public is calculated by adding the current year deficit to the previous year's total.

How the baby boomers ruined everything

Lunar landing anniversary

Yesterday was the 41st anniversary of Apollo 11. It is doubtful that we will return to the Moon within 41 years.

When Money Dies

Here is an interesting book called "When Money Dies: The Nightmare of the Weimar Collapse". Excerpt:

Undoubtedly, though, inflation aggravated every evil, ruined every chance of national revival or individual success, and eventually produced precisely the conditions in which extremists of Right and Left could raise the mob against the State, set class against class, race against race, family against family, husband against wife, trade against trade, town against country. It undermined national resolution when simple want or need might have bolstered it. Partly because of its unfairly discriminatory nature, it brought out the worst in everybody — industrialist and worker, farmer and peasant, banker and shopkeeper, politician and civil servant, housewife, soldier, merchant, tradesman, miner, moneylender, pensioner, doctor, trade union leader, student, tourist -especially the tourist. It caused fear and insecurity among those who had already known too much of both. It fostered xenophobia. It promoted contempt for government and the subversion of law and order. It corrupted even where corruption had been unknown, and too often where it should have been impossible. It was the worst possible prelude — although detached from it by several years — to the great depression; and thus to what followed.
...
if you wish to destroy a nation you must corrupt its currency. Thus must sound money be the first bastion of a society's defence.

Another explanation of the subprime crisis

The biggest national security threat is the National Debt

2011 Budget

Here is the 2011 Budget.

Category	2011 Baseline	2011 Proposed	My 2011 est.
Revenue	2583	2567	2460
Mandatory	2100	2165	2156
Discretionary	1379	1418	1401
Interest	250	251	244
Total Outlays	3728	3834	3801
Deficit	-1145	-1267	-1341

===========
Update 10/12/12.  Actual numbers for 2011 were:
Revenue: 2302
Interest: 266
Total Outlays: 3601
Deficit: -1299

So the forecasts overstated revenue and understated interest expense.

2010 Update

The CBO recently produced their Monthly Budget Review for 2010, so I decided to try to compare how close my estimates were. One thing that is evident is that the defition of Mandatory Spending v. Discretionary Spending isn't clear. It's still interesting to compare the actual v. estimates.

The 2010 extrap. column is the extrapolation from the first 9 months to the full 12 months. Spending is lower than the budgeted amount. I believe agencies have to spend the budgeted amount or they will lose out in future budgets, so spending is likely to increase in the last 3 months of FY 2010.

Category	2010 YTD	2010 extrap.	2010 Budget	My 2010 est.
Revenue	1597	2129	2381	2118
Mandatory	1051	1401	2020	2034
Discretionary	1379	1839	1368	1375
Interest	172	229	164	209
Total Spending	2602	3469	3552	3618
Deficit	-1005	-1340	-1171	-1500

Edit: Another source shows total spending for 2010 budgeted at $3,721B.

Projected budget deficits

Category / Year	2009	2010	2011	2012	2013	2014	2015	2016
Revenue	2105	2118	2460	2728	2948	3160	3254	3,383
Mandatory Spending	2094	2034	2156	2091	2176	2322	2409	2519
Discretionary Spending	1237	1375	1401	1443	1487	1532	1578	1625
Interest	187	209	244	298	365	406	470	519
Total Spending	3518	3618	3801	3832	4028	4260	4457	4663
Deficit	-1413	-1500	-1341	-1104	-1080	-1100	-1203	-1280
Debt held by public	7,552	9,052	10,393	11,497	12,577	13,677	14,880	16160
GDP	14,300	14,600	14,900	15,500	16,200	16,900	17,400	17,900
Debt %	53%	62%	70%	74%	78%	81%	86%	90%

Some of the numbers are based on CBO projections and some of them are my projections, so take with a grain of salt.

Prof. Glenn Beck teaches the Kondratieff wave theory

He gets the years wrong, but at least he illustrates the general idea.

Kondratieff wave theory

Nikolai Kondratieff was a Russian economist who predicted that the economy moves through 40-60 year waves. Looking back at history we can see these waves. They go back much further but this is enough for my purposes.

1. Railroad wave, from 1843 to 1897. (54 years). This was a boom caused by the growth of railroads and collapsing with their overbuilding.
a. beginning (spring), 1843 when the Panic of 1837 was over.
b. peak (summer), post-Civil War boom starting in 1864, peaking in 1873
c. start of decline (autumn), Panic of 1873, continuing into the Long Depression
d. trough (winter), Panic of 1893.

2. Electricity wave, from 1897 to 1938 (41 years). Growth during this period was caused by electrification of factories and by other technologies such as the telephone, motion pictures, automobile, skyscrapers, airplanes and the Panama Canal. The Great Depression was caused in part by overinvestment, underconsumption, and the breakdown of international trade.
a. beginning (spring), 1897, when the Panic of 1893 was over
b. peak (summer), 1920, the start of the Roaring 20's
c. start of decline (autumn), 1929 with the stock market crash on Black Tuesday, continuing into the Great Depression, which technically ended in 1933.
d. trough (winter), Recession of 1937 which ended in 1938.

3. War and Post-War, Automobile and Oil wave, from 1938-1982 (44 years). This era was characterized by the great growth in automobiles, road construction, oil exploration, and suburbanization and came to a crash with the quadrupling of oil prices and stagflation.
a. beginning (spring). In 1938, the economy began to recover, and WW2 brought full employment.
b. peak (summer), in 1958, the stock market gained 33%. The peak year was 1972 when the Dow reached 1000.
c. start of decline (autumn), 1973 oil crisis, leading to stagflation.
d. trough (winter), 1980 recession, followed closely by the 1981 recession.

4. Internet wave, from 1983 to present. This started with the optimism caused by the election of Reagan, and continued with the World Wide Web, which started about 1991.
a. beginning (spring). The early 1980's recession ended in November 1982. During this period, Black Monday occurred when the stock market dropped by 22% for no apparent reason.
b. peak (summer). The stock market began a rapid ascent in about 1990, growing from 2,800 on 1/2/90 to 11,700 on 1/14/2000. The dot-com bubble collapsed in 2000. The attacks on 9/11/2001 caused a mini-recession, but a housing bubble developed which peaked in 2006.
c. start of decline (autumn). On about Sept. 18, 2008, there was a near systemic collapse as investors started withdrawing funds from money markets in a panic, saved only by quick action by the Federal Reserve, so this is the best date for the start of the decline. The recession technically began earlier, in Dec. 2007.
d. trough (winter). This is just a wild guess, but based on prior trends there will probably be a recovery at some point about 2015 or so, followed by a final recession about 2020, with recovery starting about 2023, when the next cycle will begin. (Note that this is a prediction of an economic cycle, which is completely independent of the financial crisis caused by too much debt).

Berkeley grads can't find jobs

Steve Wynn v. Washington

Damm the deficit, full speed ahead!

From: http://mrzine.monthlyreview.org/2010/galbraith160710.html
Excerpts:

There Is No Economic Justification for Deficit Reduction

With high unemployment, high public deficits are inevitable. The only choice is between an active deficit, incurred by putting people to work or otherwise serving national needs -- such as providing a decent retirement and health care to the aged -- and a passive deficit, incurred because at high unemployment tax revenues necessarily fail to cover public spending. Cutting public spending or raising taxes, now or in the future, by any amount, cannot reduce a deficit due to high unemployment.
...
The only way to reduce a deficit caused by unemployment is to reduce unemployment.
...
One more time: without private credit, deficit reduction plans through fiscal austerity, now or in the future, will fail. They cannot succeed. If at the time the cuts take effect the economy is still relying on public expenditure to fund economic activity, then reducing expenditure (or increasing taxes) will simply reduce GDP and the deficits will not go away.

Further, if the finances of the private sector could be fixed, then an austerity program would be entirely unnecessary to reduce public debt.
...
Entitlement cuts, no matter how severe, cannot and will not achieve deficit reduction.
...
the mandate to reduce the primary deficit to zero by 2015 is unnecessary.
...

Insolvency, bankruptcy, or even higher real interest rates are not among the actual risks to this system. The actual risks in this system are (to a minor degree) inflation, and to a larger degree, depreciation of the dollar. However at the moment there is wide agreement that a lower dollar would be a good thing -- against the Chinese RMB and now also the euro. So it is difficult to believe that the goal of deficit reduction per se serves any coherent, or presently desirable, economic objective.

We can conclude that there is actually no economic justification for the target of reducing the primary deficit to zero by 2015 or any other date.

Comment: I don't follow his logic but I do understand his conclusion. Deficits are good! Higher deficits are better! Spend, spend, spend, spend!

New green jobs in California

Alex Jones says collapse is imminent

Of course, he says the same thing every day, so I would take this with a grain of salt.

Explanation of the subprime crisis

The dollar carry trade, Chimerica and de-zombification

This is an interesting video I ran across. It illustrates some of the dangers of low interest rates. While the Fed thinks that low interest rates help stimulate the economy, they instead encourage speculation. In this video Warren Pollock shows how investors can borrow US dollars at 1% and buy Australian bonds for 4% and make an arbitrage profit.

Here are some more thoughts it triggered in me. Borrowing money has another positive aspect to it as it allows you to short the dollar. If a lot of people either go long or go short on a given asset, it can become a self-fulfilling prophecy, e.g. people buying real estate drives the price up. So the huge debts, denominated in dollars, can actually drive the dollar lower, in a reverse bubble. And since investors profit on this and as other investors jump in, the dollar falls even more. Our government is in a sense, also a speculator in this market, because it is borrowing money now that it can repay in cheaper dollars in the future. The losers are those who are long the dollar, i.e the Chinese investors in US t-bonds. Anyways, to me, this illustrates some of the dangers of very low interest rates.

=========================
Another relative mini-topic has to do with the "false bull market". Instead of people buying Australian bonds, they might invest in the stock market. By borrowing money to do this they can short the dollar, so this is another example of the dollar carry trade. Keeping the rates artificially low benefits those who can borrow at low rates and do the dollar carry trade. It is form of fiscal stimulus, but only a few rich people benefit. They should call it a trickle-down stimulus.
======================

Another unrelated issue I have been thinking about has to do with Chimerica, which Niall Ferguson described. Chimerica is the dysfunctional marriage of Mr. China and Ms. America. America is a wild crazy unpredictable woman who likes to go shopping and max out her credit card. China is the boring hard-working man who is in love with America and keeps paying her bills in the hope that she will love him back. But she never will. And someday China is going to wake up and complain about being taken advantage of and will want a divorce. But not today. China is an enabler and encourages America in her self-destructive behavior.

=========================
Yet another topic I want to blog about but don't want to make a separate post has to do with de-zombification. A zombie bank is one that has a negative net worth but is still kept alive. Creditors of a zombie bank may value its debts at face value, whereas if the bank were to die, the debts would be worth much less. The suspension of mark-to-market allows banks to value assets at their 2006 peaks instead of current fair market value. This discourages them from trying to resell foreclosed houses because if they resell them they would have to recognize losses whereas if they keep them on the books they can pretend that they are worth much more. The banks are not crying over spilled milk because they are pretending that the milk never spilled. They are living in denial in a fantasy land.

Debtors can also be zombies if they pretend that they can someday pay their debts when it is clear that they can't. The reason for hanging on to toxic debts can be pride and refusal to face reality, but it doesn't do them or their creditors any good. Being a zombie prevents you from actually living and fulfilling your capacity. And it also stops those who are relying on your false promises from moving forward.

It is time for a break from the past, which is necessary to move forward to the future. It is time for de-zombification, for deleveraging, for debt destruction on a massive scale. Yes, this will cause many banks to fail, but that isn't such a bad thing. We can live without credit or debt and this would be very empowering. Yes this will cause deflation but that is a good thing because it will make the dollar stronger and encourage savings. Those who are against this are those who are benefiting from the destruction of the dollar, like the dollar trade speculators.

Chimerica

Empty Store Shelves Coming to America

Classic Niall Ferguson

Niall Ferguson talks so much that Glenn Beck can't get a word in edgewise.

Quotes: "If you look at the Congressional Budget Office data, the United States is never again going to run a balanced budget. Never. I mean, beyond our lifetimes, every year there's going to be a trillion dollars of new debt. Now that game can come to an end very quickly indeed when investors look at the math and they say, wait a second, a debt to GDP ratio of 100% in 2012? That can't be right. And we get the same treatment the PIIGS are getting now. So my message is: PIIGS R US. We're not that much better off than Portugal, Greece, Spain and Ireland.

Sure the Japanese got up to 200% before the markets took fright, but we're not going to get that far. I mean these numbers are in some ways rather arbitrary because what happens is all to do with the interest on your debt. If you are paying a 3.5% on the debt as the US is broadly speaking now, you can ratchet up quite a lot of debt. But if as happened to the Greeks, the markets say, now wait a minute, we would rather have 5.5 or 7.5% then very quickly your debt starts to kill you. And that's what I am most afraid of, Glenn. What worries me is that the cost of servicing this huge debt could suddenly spike upwards, and when that happens - it will! - it starts to consume a larger and larger share of the budget, it goes from maybe 9% of total revenue to 25%, and then you are in the kind of fiscal crisis that we are seeing in Europe right now. I think that could happen in the United States this year.

You either have to default on a large part of the debt or you have to inflate it away. There really aren't many other options open to a country that has debts this size. And neither of those processes is really much fun. So I don't think that we easily get to a, back to the ideal of a true free market republic.

I see a consensus in Congress between Republican tax cutters and Democratic spenders to run deficits for the rest of time. That is the political consensus that has emerged in Washington. And what is - it's doomed - completely lacking - it's doomed, right? - is a will to reform the US tax system, to cut income tax, to introduce some other tax on consumption that might actually help to balance the budget and simplify the whole system cause right now it is just a mass of poverty traps and distortions. And the other thing, the politicians just don't want to touch are the entitlements, which are bankrupting the country. Until those things are done, until there is a political leader that has the courage to spell out to Americans, "we need to do this, we need to reform our system root and branch", then I am afraid we are going to slide downhill in the direction not just of European economics, but of Latin American economics.

The lesson of the Russian experience I think is slightly different, Glenn. I think what it tells you is that a very well-intentioned leader who for some people appears to be the solution to the problems can completely wreck the system. Mikhail Gorbachev was the man who broke up the Soviet Union. And the collapse of the Soviet Union 20 years ago happened with incredible speed. Nobody was really expecting his reforms to completely destroy not only the Soviet empire in Eastern Europe but the Soviet Union itself. And I worry a little bit about our own situation today. I think we could collapse much more quickly than people assume. I hear debates all the time about the crisis of Social Security or the crisis of the national debt, but it all seems to play out decades away from now so we can kind of not worry about it now. But I think the lesson of what is going on in Europe today and what happened in Russia 20 years ago is that collapse can sneak up on you and strike very suddenly indeed, no matter how good your intentions are."

Fiscal cancer

The co-chairmen of President Obama's debt and deficit commission offered an ominous assessment of the nation's fiscal future here Sunday, calling current budgetary trends a cancer "that will destroy the country from within" unless checked by tough action in Washington.

[Erskine] Bowles said that unlike the current economic crisis, which was largely unforeseen before it hit in fall 2008, the coming fiscal calamity is staring the country in the face. "This one is as clear as a bell," he said. "This debt is like a cancer."

The commission leaders said that, at present, federal revenue is fully consumed by three programs: Social Security, Medicare and Medicaid. "The rest of the federal government, including fighting two wars, homeland security, education, art, culture, you name it, veterans -- the whole rest of the discretionary budget is being financed by China and other countries," Simpson said.

"We can't grow our way out of this," Bowles said. "We could have decades of double-digit growth and not grow our way out of this enormous debt problem. We can't tax our way out. . . . The reality is we've got to do exactly what you all do every day as governors. We've got to cut spending or increase revenues or do some combination of that."

--http://www.washingtonpost.com/wp-dyn/content/article/2010/07/11/AR2010071101956_pf.html

Comment: They can't cut spending or increase revenues or that will make our recession worse. There is no way out. We will have a depression AND end up gutting Social Security and Medicare AND probably end up facing a hyperinflationary collapse.

The Collapse Is Upon Us

The Second Great Depression has now begun

First, read this article as background.

if all sectors taken together aim to run a financial surplus, i.e. want to spend less than their expected income and use the difference to pay down debt - the economy will tend to operate below potential.

We can illustrate this point using some simple assumptions. First, we assume that the current account is fixed at a deficit of 3% of GDP. This is a big simplification, but it does capture the fact that at least some of the factors causing a retrenchment in the United States are also causing a retrenchment in other countries that experienced a credit bubble.

Second, we assume that the public is uncomfortable, or Congress believes that the public is uncomfortable, whenever the general government deficit is above 7% of GDP. While larger deficits are possible for short periods of time, Congress ultimately responds to them by cutting spending and/or raising taxes. The precise number is obviously arbitrary, but we do believe that there is a level of government deficits beyond which the political demands for retrenchment become difficult to resist.

These assumptions imply that the private sector cannot aim to run a financial surplus of more than 4% of GDP without sapping aggregate demand. This is a serious problem because our analysis a few weeks ago concluded that the private sector may target a financial surplus of significantly more than 4% of GDP for the next few years in order to reduce its debt burden at an acceptable pace.
--http://www.zerohedge.com/article/will-public-austerity-cause-private-sector-paralysis

What we have, ladies and gentlemen, is a Mexican standoff. There are three parties involved, and no one wants to back down. First, there is the private sector, which includes consumers and private companies, who for some reason insists on saving more than 4% of its income. (Saving in this context includes paying down or defaulting on debt). Second, there is China (and other foreign exporters to the US), who insists on exporting in excess of 3% of GDP in order to keep its own economy running. Third, there is the government, which refuses to run deficits in excess of 7% of GDP for any extended period of time.

We are going to remain in this paralyzed zombie-like state (which really is the essence of a Depression) indefinitely, until someone back down.

The solution here is Hayek. Cut taxes, or at least roll back the scheduled tax increase to give the consumer a break. Yes, this will increase the deficit, but it will break the standoff. Yes, it will increase the chance of a sovereign default, but that will hurt only the bankers, who need to take a haircut.

The blame, since we need to point figures at someone, fall squarely on Obama. If you are going to be a Keynes disciple, you have to follow him all the way through. You don't cut spending (e.g. massive cuts to Medicare) or raise taxes during the middle of a recession. A depression is guaranteed, and if it hasn't already begun, it will on January 1, 2011 when all the massive tax increases will kick in.