10% chance of total meltdown now

From: http://www.minyanville.com/businessmarkets/articles/todd-harrison-todd-harrison-minyanville-todd/11/4/2011/id/37761

“There’s a real danger of a disorderly default,” billionaire investor George Soros said in a speech in Budapest. Without support for Greek lenders, “you’re liable to have a run on the banks in other countries as well. That’s the danger of a meltdown.” 
-- Bloomberg, November 4

"What's yet unclear is what happens between now and the back half of this decade. ... The most intuitive answer is a whole lot of debt destruction and/or reorganization—that, in my eyes, is the only true medicine—but that can arrive in many ways, shapes and forms.  It can be orderly or disorderly; it can be done in concert, or it may lead to war.

Let's look at it this way—let's say that we assume calmer heads prevail, as a total meltdown is in nobody's best interest. Let's say, in the spirit of handicapping, we put a 20% probability that this thing unraveling. Even 15%. OK, maybe 10%.

That assumes a 1 in 10 chance that self-serving agendas emerge, political will evaporates or social mood erupts—or worse. A 1-in-10 chance.  Now, factor that (or whatever your odds you choose to use) into your forward risk profile, and allow for a margin for error."

Should bonds owned by the Fed be subtracted from the national debt?

This is an interesting question I have discussed before, although I stated it differently - that Fed assets should be subtracted from the national debt.  Wouldn't this possibly lead to hyperinflation?  Yes, but the original question was is there a point when the national debt becomes so big it reaches a crisis point.

Just to be clear, here are the numbers:
1. Debt held by the public (from the Treasury Dept) is currently $10.261 trillion.
2.  U.S. Treasury securities - Notes and bonds, nominal held by the Federal Reserve, is currently $1.570 trillion.
3.  The US GDP is currently $14.582 trillion (per the World Bank).

Using these number, the debt ratio is 59.6%.

If my latest theory is correct, then the maximum sustainable ratio is 165%.  When will the US reach this point?  That is a question for later, but it will be later than my previous projection of 2025, so I will say 2026.

Update 6/19/2011: This is model H-2.  Model H is the theory that debt held by the public, less debt held by the Federal Reserve, cannot exceed 165% of GDP.

A modest proposal

How about a bailout of the people?

Here is my proposal: have the Treasury issue $2 trillion in a special series of bonds that pay 0.25% interest. Have the Fed buy this with newly created dollars. And then give everyone over 18 a check for $10,000 (assuming there are 200 million people). The recession would be over.

Railguns

"Navy scientists with the Office of Naval Research (ONR) hit a new milestone, successfully firing their electromagnetic railgun for the 1,000th time as the state-of-the-art weapon edges closer to real world deployment.
A theoretical dream for decades, the railgun is unlike any other weapon used in warfare. And though still in testing, it's quite real, as the U.S. Navy proved in a record-setting test Monday, Oct. 31, in Dahlgren, Va.
Rather than relying on a explosion to fire a projectile, it uses an electomagnetic current to accelerate a non-explosive bullet at several times the speed of sound. The conductive projectile zips along a set of electrically charged parallel rails and out of the barrel at speeds up to Mach 7."

Read more: http://www.foxnews.com/scitech/2011/11/02/us-navys-futuristic-railgun-passes-projectile-milestone/?intcmp=obnetwork#ixzz1crKNUJgQ

Is a systemic collapse starting to happen now?

I started this blog because I was worried about the national debt skyrocketing into hyperspace.  My current thought is that we have until about 2025 before that will happen.

What I am worried about now is independent of that, which is that the world economy, based on debt, is starting to collapse.  That we are entering a depression.  This started to happen in September 2008 with the collapse of Lehman Brothers. But the problems that led up to September 2008, namely too much debt, still exist.  The whole world is entering a liquidity/insolvency crisis and it will be cash & carry from here on out.

=====================
Read this comment from http://www.zerohedge.com/news/cme-goes-margin-defcon-1-makes-maintenance-margin-equal-initial-everything:
"Every dollar owed relies on another borrower to borrow.  This is the problem in the face of aggregate contraction. The issue we face as plebes is that the BANKS are the sole conduit of money into the economy.  So, when the economy grew, the banks prospered.  As the Bernank prints, the banks prosper. This is the point of the deflationists, credit becomes artificially scarce not because of individual borrowers' inability to repay but the fact that there don't exist the MORE borrowers in the future who will have to borrow the interest owed.  It's a systemic problem.  It's that proverbial someone else, the lack of growth, that prevents the system from functioning.

So, everyone has to repay, everyone has to put everything up front, everything real and in existence now trades at a premium.  The system can't grow to pay today's interest, so nobody will lend even if the individual interest or venture lent to would be viable.  The system in a state of contraction makes the credit growth necessary for a compounding interest system untenable, therefore lending ceases.

Today's principal P becomes tomorrow's principal P + interest I.  The system necessarily requires someone to borrow (request the creation of money) more at every future point time T+1.  It always has to grow.  There always must be more credit created.  A loan today can't be created, exist, be viable, be repaid, without that."
 =================

To paraphrase the anonymous commenter, our economic system requires continuous growth in order to pay the compounding interest. When this growth stops, lending stops, and the whole system locks up, like an engine without oil. 

The only way to temporarily stop this is another bailout of the banks and/or more quantitative easing.  The only permanent solution is to allow a depression and widespread repudiation and default.

India's new cities

"India sets out to build 24 new, industrial cities along a planned dedicated freight corridor from the political capital, New Delhi, to the financial capital, Mumbai priced at a cool $90 billion." (From: http://blogs.reuters.com/india/2011/10/31/navigating-the-obstacle-course-of-india%e2%80%99s-simcities/).

A sudden fiscal crisis

"Growing debt also would increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government's ability to manage its budget and the government would thereby lose its ability to borrow at affordable rates. Such a crisis would confront policymakers with extremely difficult choices. To restore investors' confidence, policymakers would probably need to enact spending cuts or tax increases more drastic and painful than those that would have been necessary had the adjustments come sooner."

This didn't come from some alarmist website it came from the CBO.

Public debt is not debt - it is an asset

I just ran across a post from another confused individual who believes that government debt is a good thing.

"Isn’t it true that in actuality, the US doesn’t, in fact “borrow’? It spends or trades? And if that is the case, doesn’t that just blow the deficit hawks out of the water?

Technically, the US borrows because it issues “debt instruments,” which are bought at auctions in return for already issued US Dollars. It issues debt instruments, not because it “needs” money in an objective sense; but because Congress requires that the Treasury issue debt instruments whenever the Government deficit spends. Since that national debt is just the value of the outstanding debt instruments. It’s clear that the operative cause of our national debt is this Congressional requirement, which is a hangover from gold standard days.

Those who bother to try to justify debt issuance (most just accept it as the way things are), do so by saying that if we didn’t issue debt in order to withdraw USD from circulation, the result would be inflation, because the new money created by debt-free Government spending would then flood the economy creating inflation according to the dictates of the Quantity Theory of Money. However, Keynes showed in the 30s that the Quantity Theory of Money doesn’t apply to situations where 1) there is less than full employment and 2) the velocity of money is varying through time — both conditions which apply right now.

--http://my.firedoglake.com/letsgetitdone/2011/03/27/is-the-debt-held-by-the-public-really-debt/

I'm not even going to bother commenting on this right now, it makes the head hurt. 

Guessing the Trigger Point for a US Debt Crisis

See:  Guessing the Trigger Point for a US Debt Crisis

The author looks at 3 numbers in determining whether a debt crisis is likely. 

First, the projected debt/GDP ratio.   Using only the debt held by the public, this ratio is currently about 67%

Second, the Low-Confidence Target. This is the maximum ratio of debt to GDP that a government can incur and still have reasonable interest rates.  I think that the US is in a different category than most countries because of its reserve currency status, but there still are limits.  For most countries, a 90% ratio would be the limit, but for the US, it should be higher, say 125%.  (This is the ratio of debt held by the public to GDP).

Third is the Pain Threshold.  This is the maximum amount of budget adjustments that a country can incur over the next 5 years, as a percent of GDP.  40% seems a reasonable number.

So if these assumptions are reasonable, a debt crisis is likely to occur if the debt held by the public exceeds 165% of GDP.  This point is likely to occur somewhere around 2025, which is now my latest prediction for a crisis.

Conclusion: "Scanning the tables in the previous section, it would appear to be quite likely that the United States will experience a debt crisis within the next two decades, unless the path for fiscal policy changes from what is projected by the Congressional Budget Office."

Update 6/19/2012:  Yet another theory.  Call it model H-1.

The debt trap timebomb

"It is the scandal of which we no longer speak. Like a mad aunt in the attic, the problem is not going away, indeed it can only get worse, yet we’re encouraged to pretend that the embarrassment doesn’t exist. ... I’m referring, of course, to the obscenity that is the United Kingdom’s ballooning personal debt. It stands at £1.5 trillion, a little more than the country’s annual GDP, our national output. ...  £1,500,000,000,000 is the amount owed by individuals in the form of mortgages, overdrafts, loans and on credit cards. ... . It is perilously high, but indicates only where we are, not the direction of travel. The full horror of what is happening to household borrowing can be found tucked away on the Office for Budget Responsibility’s website. The numbers are shocking – they point to another looming crisis – which, perhaps, explains why no one at Westminster is willing to highlight them.


According to the OBR, UK personal debt will grow by nearly 50 per cent between now and the end of this parliament. Come 2015, it is forecast to reach £2.12 trillion pounds. How can this be right? The average British adult already owes £29,500, about 123 per cent of average earnings. I thought we were meant to be getting a grip, not letting rip."

From http://www.telegraph.co.uk/finance/comment/jeffrandall/8859082/The-debt-trap-time-bomb.html

Monopoly Money, Series Three

This is a more creative series, especially with the hundred million bill. The ten million bill is modified from Zimbabwe.

Monopoly Money, Series Two

As an art project, I used Paint to create higher currency bills. Each of these is flawed, and the size isn't consistent with the previous series. But enjoy

Monopoly Money, Series One

I am fascinated with the game of Monopoly.  It could use some tweaks to make it more realistic. One of the things that make it interesting is the money.  So in tribute, sort of as an art project is a scan of the money. Here is Series One, a scan of the money from the game. (I converted this to make is smaller, and somehow the sizes changed slightly. But it should fit on a 8.5 x 11 sheet of paper and be roughly the same size as the original).

Are US taxpayers on the hook for European bank failures?

First read this story: http://dailybail.com/home/holy-bailout-federal-reserve-now-backstopping-75-trillion-of.html
Now read this: http://dailybail.com/home/william-black-not-with-a-bang-but-a-whimper-bank-of-americas.html

We are about to watch dominoes fall down in slow motion.  First will be defaults by Greece.  Then other countries will default, probably including Italy. Then the French, German, British, Dutch and Belgian banks that bought these bonds will fail. 

But it doesn't end there.  These banks bought credit default swaps from Bank of America and JPMorganChase.  These two banks have more than $150 trillion of derivatives outstanding. These banks are insured by the the FDIC.   Of course, the $150 trillion is notional value and the American banks probably are really only at risk of a fraction of that amount.  But what if they are on the hook for 10%, or $15 trillion.  They can't afford to pay that, so the FDIC and Fed will have to step in.  When AIG was nationalized in 2008, the government took over more than $100 billion in liabilities.  This is like AIG on steroids.

World power swings back to America

From:  http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8844646/World-power-swings-back-to-America.html

"The US was the single largest contributor to global oil supply growth last year, with a net 395,000 barrels per day (b/d)," said Francisco Blanch from Bank of America, comparing the Dakota fields to a new North Sea.
Total US shale output is "set to expand dramatically" as fresh sources come on stream, possibly reaching 5.5m b/d by mid-decade. This is a tenfold rise since 2009.  The US already meets 72pc of its own oil needs, up from around 50pc a decade ago.
...

Meanwhile, the China-US seesaw is about to swing the other way. Offshoring is out, 're-inshoring' is the new fashion.
"Made in America, Again" - a report this month by Boston Consulting Group - said Chinese wage inflation running at 16pc a year for a decade has closed much of the cost gap. China is no longer the "default location" for cheap plants supplying the US.
...
As Philadelphia Fed chief Sandra Pianalto said last week, US manufacturing is "very competitive" at the current dollar exchange rate. Whether intended or not, the Fed's zero rates and $2.3 trillion printing blitz have brought matters to an abrupt head for China.

Fed actions confronted Beijing with a Morton's Fork of ugly choices: revalue the yuan, or hang onto the mercantilist dollar peg and import a US monetary policy that is far too loose for a red-hot economy at the top of the cycle. Either choice erodes China's wage advantage. The Communist Party chose inflation.
...
Yet America retains a pack of trump cards, and not just in sixteen of the world’s top twenty universities.
It is almost the only economic power with a fertility rate above 2.0 - and therefore the ability to outgrow debt - in sharp contrast to the demographic decay awaiting Japan, China, Korea, Germany, Italy, and Russia.
Europe's EMU soap opera has shown why it matters that America is a genuine nation, forged by shared language and the ancestral chords of memory over two centuries, with institutions that ultimately work and a real central bank able to back-stop the system.

The 21st Century may be American after all, just like the last.

Don't ignore the Quadrillion dollar elephant in the room

This is an old post I originally posted somewhere else:

I don't understand the post below but the word "Quadrillion" sounds like a big number: "they are all missing the Quadrillion Playing Submerged Elephant in the Room! This elephant has spawned Eight Bubbles that are collapsing simultaneously as another Giant Bubble -- Government Debt -- is inflated to take away the full buffetting of their simultaneous burst! It is worth noting that the trans-national play of derivatives has grown from USD 1.144 Quadrillion to USD 1.405 Quadrillion, ie, +22% worldwide." http://www.intent.com/blog/2009/04/24/quadrillion-playing-submerged-elephant-room

Update: Here is another post that uses the word quadrillion: "Last year DTCC settled $1.88 quadrillion in securities transactions across multiple asset classes. We essentially turnover the equivalent of the U.S. GDP every three days." http://zerohedge.blogspot.com/2009/06/biggest-financial-company-you-have.html

The Japanese national debt is almost 1 quadrillion yen:
http://www.yomiuri.co.jp/dy/national/T111021004576.htm

The Economic Confidence Model

The Economic Confidence Model is a theory by Martin Armstrong, that uses a 8.6 year business cycle, that is divided into 4.3 waves.

According to this theory, the last high point was on 2/24/07, and the last low was on 6/14/2011, with the next high on 10/1/2015.

The stock market hit a high on 10/9/2007 when the Dow hit 14164.

The stock market does seem to have hit a low on 10/3/2011, when the Dow closed at 10655, so this model is forecasting a boom.

Maybe the model is about 6 months off. Anyways, interesting theory, just don't use it to predict exact market timing.

Long-term interest rate projections

Here are the only numbers I can find for long-term interest rates, from the OMB.

10-year Treasury notes:
2011 3.0%
2012 3.6%
2013 4.2%
2014 4.6%
2015 5.0%
2016 5.2%
2017 5.3%
2018 5.3%
2019 5.3%
2020 5.3%
2021 5.3%

If the debt is 30 trillion in 2021, then 5.3% interest would be 1.59 trillion per year.

China will own the moon

From: http://www.space.com/13331-china-space-race-moon-ownership-bigelow-ispcs.html

"Americans are still basking in the lunar glory from 40 years ago," [Robert] Bigelow said. "But we don’t own one square foot of the damn place. NASA is a shadow of the space agency it once was in the 1960s and 1970s."

In contrast, he argued, China has the motivation and ability to win the next space race and claim ownership of much of the moon. Bigelow argued that international law would allow a nation to make such a claim, especially if it were able to enforce it through continuous human lunar presence.

Owning the moon would be a windfall both financially and for international prestige, he said. Not only does it offer a jumping off point for further exploration of the solar system, but it also contains vast stores of valuable resources such as water and helium-3, a possible fuel for nuclear fusion.

Moreover, the symbolic and global psychological impact would be huge, Bigelow said. "I think nothing else China could possibly do in the next 15 years would cause as great a benefit for China."

In addition to China's growing technological prowess, the country has the cash, the lack of debt and the national will to become the owner of the moon, Bigelow argued. He predicted China could claim ownership of vast swaths of lunar territory by 2022 to 2026.

Update: Here is a quote from another article about his speech.
http://cosmiclog.msnbc.msn.com/_news/2011/10/19/8402070-will-china-take-over-the-moon

Bigelow characterized China as "the new gunslinger in Dodge" when it came to space exploration.

The way he sees it, China is progressing along a slow, steady path toward space proficiency. The steps in that path include follow-ups to the Shenzhou 8 spacewalk mission in 2008, the unmanned Chang'e lunar missions and last month's Tiangong 1 space lab launch. In the coming years, China will have plenty of cash for great leaps forward in space, while the United States will be hamstrung by higher debt and tighter budgets.

Budget blowout

So the CBO projects that the deficit in FY2012 will be 973 billion, dropping to 510 billion in FY2013, and 265 billion in FY2014. We are not off to a promising start so far.

The national debt on 9/30 was 14.790 trillion and has increased to 14.942 trillion by 10/18. So it has increased by 152 billion in only 18 days. This means the deficit for the rest of the fiscal year will be only 821 billion. Unless the CBO has vastly miscalculated.