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.