Thursday, July 28, 2011

Breakdown coming

I was in Florida in 2005 and saw the effects of Hurricane Wilma. Southern Florida was without power for 2-3 weeks. Breakdown starts to occur once a region is without power for even 24 hours. Gas stations shut down, because the pumps require power. The few that are open have mile-long lines and heavy police presence to prevent fights and robberies. Grocery stores quickly run out of food and don't get restocked because there is no gas for the delivery trucks. Burglar alarms don't work because they require electricity. Computers and the internet in the area shut down.

I don't foresee that kind of breakdown. But I think a different kind of breakdown could occur if there is no debt limit increase by midnight on August 2. It doesn't matter if the government actually runs out of cash by that time or not it is the perception that counts. Here is what could happen: The social security checks don't go out because the Treasury department wants to make a point and is conserving cash to pay the bondholders. A "silent revolt" starts to occur among the populace. People don't pay their mortgages and credit cards in order to conserve cash. (To a large degree this is already occurring). Businesses don't pay their taxes on time. Suddenly the government and banks have huge cash flow problems. A recession instantly starts, and everyone starts to shift into survival mode, and businesses lay off workers in order to survive. Even if the debt ceiling is quickly raised, the damage is already done. People discover the joy of not paying their mortgage. The government bails out the banks (again) which exacerbates the situation. The breakdown is of economic law-and-order.

How do you restore economic law-and-order again? Foreclose on every house in the country? Have everyone declare bankruptcy? I have no idea. But August 2 I think is only a symptom of a much larger problem. It's not a problem for everyone. It's not a problem for people who are debt-free. But it is a huge problem for the banks who have abused the system and put people into economic slavery.

That is why there is no panic over August 2. Some 40% of the population is cheering it on. Another 40% is totally oblivious to it. And the remaining 20% is in denial, saying that it can't possible happen. Believe it buddy. At 12:01 AM on August 3, this will be a different country.

Saturday, July 23, 2011

Gotthard Base Tunnel




A new modern day Wonder of the World is being built in Switzerland - the Gotthard Base Tunnel. It is 35 miles long and will open in 2016, vastly improving traffic flow. However, Germany may be reneging on plans for a much-needed feeder line to it.




I just like to point out good news when I see it.

Friday, July 22, 2011

Time to panic?

The Senate just killed "Cut, Cap and Balance". Because it takes at least a week to get legislation reviewed and passed, there is now no chance of getting the debt ceiling raised by August 2. Intrade now sees only 33% chance of a deal, but that is wishful thinking.

It may be possible to have a short-term extension of a few weeks, but Obama has previously rejected any short-term deal in his famous "Eat our peas" speech.

The good news is that Treasury has enough cash to pay bills through August 14. So Monday, August 15 is doomsday. Hey, that's still 3 weeks away, nothing to worry about mate.

Wednesday, July 20, 2011

Castle under construction in Missouri




There is a castle named "Pensmore" under construction in Missouri. It is made entirely from concrete and steel and is designed to be tornado-resistant. Very cool.

Tuesday, July 19, 2011

The US is holding the world hostage

From: http://www.spiegel.de/international/world/0,1518,774666,00.html

"Democrats and Republicans are so hopelessly embroiled in a religious war that compromise and pragmatism are just dreams from a far-off era of reason. … The influence of the Tea Party movement … can not be overestimated. … The movement sees traditional politics as corrupt and regards Washington as a den of iniquity. … They see the other side as their enemy. Negotiations with the Democrats, whether it's about appointing a judge or the insolvency of the United States, are only successful if the enemy is defeated. Compromise, they feel, is a sign of weakness and cowardice."

"Playing poker is part of politics, as is theatrical posturing. That's fair enough. But what America is currently exhibiting is the worst kind of absurd theatrics. And the whole world is being held hostage."

"Irrespective of what the correct fiscal and economic policy should be for the most powerful country on earth, it's simply not possible to stop taking on new debt overnight. Most importantly, the Republicans have turned a dispute over a technicality into a religious war, which no longer has any relation to a reasonable dispute between the elected government and the opposition."

"If it continues like this, the US will be bankrupt within a few days. It would cause a global shockwave like the one which followed the Lehman bankruptcy in 2008, which triggered the worst economic crisis since the war. Except it would be much worse than the Lehman bankruptcy. The political climate in the US has been poisoned to a degree that is hard for us (Germans) to imagine. But we should all fear the consequences."

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Is it time to panic yet? Nah, give it another week.

46% chance of default

There is a 46% chance that there will be no deal made by midnight July 31 according to InTrade. Interestingly enough, there is a 22% chance that there will be no deal even by Aug 31.

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Wow, this just jumped to a 60% chance of default, with a 29% chance of no deal by Aug 31. Of course because of low volume it doesn't take much to make this change, but still these are people who have bet a little money on it. If you are certain that there will be a deal in the next two weeks then you could easily double your money.

Wednesday, July 13, 2011

France - lender to the PIIGS

Read this: As Italy sinks, France is leaking.

France owns 511 bn of Italian debt, and another 400 bn of other PIIGS debt, probably mostly Spanish. Oh and by the way, tiny Belgium (population 11 million) has 119 bn of exposure and the Netherlands (population 16 million) has 244 bn of exposure. So most of the big banks in these countries are likely to go down with the PIIGS.

The McConnell plan

Mitch McConnell's backup plan is to allow the federal debt limit to be raised by another $2.5 trillion without any concession on either side. It doesn't deal at all with the skyrocketing national debt. So in other words, he caved to the Democrats. He blinked. How embarrassing.

"We’re certainly not going to send a signal to the markets and to the American people that default is an option.” Why is default not an option? Isn't it better than continuing to borrow an infinite amount of money? Doesn't the problem have to be dealt with at some point and why not now?

I understand the need for a backup plan, but it should be for a temporary increase. Two words, heck no. Go back to Kentucky you RINO.

Monday, July 11, 2011

Europe in trouble

The Greece 2 year bond yield is 31.11%.
The Portugal 2 year bond yield is 18.25%.
The Irish 2 year bond yield is 17.77%.
Meanwhile, the German 2 year yield is 1.26%.

The Spain 10 year bond yield is 6.03%.
The Italy 10 year bond yield is 5.68%.
The Belgium 10 year bond yield is 4.29%.
Meanwhile, the German 10 year bond yield is 2.67%.

The Euro dropped 2.1% today against the Japanese Yen, 1.7% against the Swiss Franc, and 1.5% against the US Dollar. The price of gold in Euros went up 1.9% in one day, to 1103.09.

The Belgium stock market dropped 2.61% today. The Portuguese market dropped 4.3%, Spain dropped 2.69%, Italy dropped 3.96%, Greece dropped 2.57%, and Ireland dropped 1.47%. Even Germany dropped 2.3%.

So what now? Maybe the markets will recover tomorrow. Or is this the start of something really bad?

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Update: Italy needs 630 bn euros over the next 3 years to finance its budget deficits and to rollover expiring debt, Spain needs 380 bn euros, and tiny Belgium needs 150 bn.

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The original post was July 11. This update is as of July 14. The Irish 2 year bonds now yield 20.87%. The Greek bonds improved slightly to 30.35%. Gold is now at 1119 euros.

Wednesday, July 6, 2011

Excellent news

Once a quarter, I update projections of the national debt based purely on recent trends. The latest trend, based on the quarter ended 6/30/2011 and the previous 6 quarters, is that the debt will rise 2.59% per quarter, or 10.7% annually. This is much better than the previous projection showing annualized increases of 12.9%.

With this, I can project out as follows:
9/30/11 14714
9/30/12 16289
9/30/13 18032
9/30/14 19961
9/30/15 22097
9/30/16 24462
9/30/17 27079
9/30/18 29976
9/30/19 33184
9/30/20 36734
9/30/21 40665

The numbers look much better than previous projections, and are certainly sustainable. I just want to see what happens once the debt ceiling is lifted before breathing a sigh of relief.