Thomas, I work in Iraq currently. I work for contractors to the US, providing communication support for the military.
Every country has advantages and disadvantages, and there are a lot of pros and cons to weigh before working in any of them. Tax situations, local police and corruption, pay scales, cost of living and even the cost of going back and forth to the US are all considerations.
As far as inflation vs pricing goes, we don't have money inflation at this time. It's unlikely we'll have money inflation of any real degree any time before 2015 as far as I can estimate. That's assuming that for political reasons taxes will increase and spending will drop. Roosevelt did not continue massive stimulus over the long term and neither will Obama. The politics of the US simply don't allow for direct stimulus for the long haul, needed or not. The indirect stimulus policies followed for the last 30 years are very massive, but no longer yielding much in quantity (that's a LONG discussion) and are also likely to be modified or dropped, resulting in effective tax increases. This will result in further collapse of the propped up companies, which will in turn cause the final plunge of the market to its natural level and the correct (about 8 historically) PE ratios. (Bluntly, there's been so much cheating on those tax write off subsidies that any investigation will result in removal of the lot. There seem to be a large group of CEO's that would rather take the company down than see all the senior officers take a general pay cut, and that's going to be a stellar mess if its allowed to come to pass.)
This does not mean we'd automatically have lower prices, as production will also drop due to factory closings and so forth. Price of a single good is determined by the quantity of that good available vs the desire (money available) for that good. If the production of new 100 inch TV's was dropped as demand for such went down sharply, then the price would be indeterminate, as none would be available. The price on the last few in the store would be very apt to double or more, as the scarcity of the item increased.
One could imagine a scenario, say in war, where money supplies were rapidly decreasing due to no loans at all being made, all credit cards cancelled, etc., but where prices of goods were rapidly increasing due to massive shortages. Thus, rapid deflation plus rapid price increases. In such a case, you expect foreign or metal money to replace the local money, or barter.
We're all trying to read the future here, and that's a very murky business. In general, I think we are about right, this situation is like predicting the demise of an egg dropped from 15 feet above a concrete floor, and it's just passed the 10 foot mark. But that ruler is rubber, and the wind is blowing in an updraft, and a lot of people are throwing cushions to try to save the egg. It won't work, but guessing just where and when it will hit and exactly how hard is impossible. But it's dead certain that it WILL hit, barring a miracle.
Financial topics
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VinceP1974
- Posts: 87
- Joined: Sat Feb 27, 2010 11:41 am
- Location: Chicago
Re: Financial topics
Interesting that you piick 2015 as a turning point year. If you read the post I made titled something like Deminishing Utility of Debt , he marks 2015 as the year the currency blows up.
Re: Financial topics
I don't think the currency is going to blow up. It is quite likely the Fed will pay off the deposits and take the assets of the banking system, but they would just end uip picking it all back iup. 0ld1953 mentions an 8 PE, but he doesn't recognize what would happen to the E in such a situation. Minsky said that the deficits run by government flowed to the investor class, meaning the stock holding class, which means this is in essense a bailout of shareholders and some other rent owners, not the unemployed. I agree that 10% GDP deficits aren't going to go on for long and neither is 35% or so of GDP debt increases coming back, so the E will probably drop 50% or more and the PE will decline to 5 or so due to the negative growth of earnings. China will implode and the price of most things will deflate.
The idea of currency is very interesting. Whose currency does China draw its purchasing power out of, theirs or ours? They are on the dollar which in itself makes devaluation of the dollar against the yuan absurd. The real question is the availability of credit and the efforts of the US government to prop incomes in light of the need to decrease them instead. The public side of the US economy is sucking the private side down the hole. But, most dollars aren't currency at all and there is relatively very little currency in the US. While the idea is they are printing money, that is not the case at all, as the same liabilities are still in the system. The real fact is that the amount of MZM in the US has fallen nearly $1 trillion in the past 52 weeks. That is how much money market account balances have fallen and this money hasn't gone into the stock market, because money can only change accounts and stock are not a bank account. This is the strongest evidence we are having deflation and counters all ideas about what the Fed is doing or what any banks would be doing with liquidity put out by the Fed. Truth is the money put out by the Fed was already loaned out and the US banks had no reserves other than what they could manufacture between them. Seeing as the largest banks in the US were and probably still are defunct, that wasn't much.
The idea of currency is very interesting. Whose currency does China draw its purchasing power out of, theirs or ours? They are on the dollar which in itself makes devaluation of the dollar against the yuan absurd. The real question is the availability of credit and the efforts of the US government to prop incomes in light of the need to decrease them instead. The public side of the US economy is sucking the private side down the hole. But, most dollars aren't currency at all and there is relatively very little currency in the US. While the idea is they are printing money, that is not the case at all, as the same liabilities are still in the system. The real fact is that the amount of MZM in the US has fallen nearly $1 trillion in the past 52 weeks. That is how much money market account balances have fallen and this money hasn't gone into the stock market, because money can only change accounts and stock are not a bank account. This is the strongest evidence we are having deflation and counters all ideas about what the Fed is doing or what any banks would be doing with liquidity put out by the Fed. Truth is the money put out by the Fed was already loaned out and the US banks had no reserves other than what they could manufacture between them. Seeing as the largest banks in the US were and probably still are defunct, that wasn't much.
Re: Financial topics
Causation:
http://blog.aflcio.org/2010/02/24/break ... day-rally/
http://www.evolvingexcellence.com/blog/ ... ing_l.html
http://leanisgood.wordpress.com/2010/04 ... xperience/
I have a family member in Management at Whirlpool and for years we discussed cultural issues. Corporate may insist on working harder but fails to assert working smarter from the top down. Another Family member who experienced the Pfizer mentality and we seen how they fared from the top down.
http://www.businessweek.com/bwdaily/dnf ... 913433.htm
If he gets more time I can post his inside observation on issues he observed at his level. On a phone interview today he forwarded on top down failures on filtered informationals and thus the consequences he observed of the mindset to the failure in his unit to the logical conclusions to date.
Whirlpool had revenues of more than $4.8 billion in the past quarter alone. The company also recently received $19 million as part of the American Recovery and Reinvestment Act: Yet, the company is spending $110 million to build a new plant in Mexico.
April 4, 2010 by Bryan Zeigler,
Have no doubt that because of the lack of extending lean to people and outside their four walls to suppliers is a major reason they felt they had to move this factory to Mexico! To really get the waste out and succeed you need the entire supply chain and every person in the chain pulling together!
I saw two major items that I feel were hurting their success with Lean Manufacturing. The first was “respect for people”. I think you can see this in the above quote. Yes, Mr. Colburn is giving the Evansville plant accolades but at the same time each employee has to deal with the slow agonizing pain of slowly seeing their factory move piece by piece. Besides their own people, they also exhibited little respect for their suppliers (at least us).
I have seen this effect before in a different decade as described and left that market segment. I think another facet is missed in context to employee life cycle cost’s which is a aversion process to secure profit and as they are prone to do step off the ship to there lifeboat to there spreadsheet profit and there professed management skill to secure there looting which may or may not be to wit in this case. Many who read this who are old enough understand the mindset you owe then no gratitude but a defined quantity and quality of work. Labor and Capital do have defined responsibilities.
Business models do exist but as we are reminded there is nothing new under the Sun as we are reminded from older wisdom. Consequences are soon forgotten how the Community and thus the Government are gamed to logical conclusion’s again. I have a open conveyance paper from some research which reflects academics observation but I need to convey first on what we are to do on a local level in context to planning this wave I alluded to in a posting on the forums. As easy as it is to lose core focus I can convey I am still in fixed contracts to avert a loss of capital since we all see the next leg of process which appears eminent needless to say not included the service debt of the treasury department soon. All Politics are local and will ask in humility as what they are to do.
Aeden
===================================================================================================
maytagretired on 24.02.2010 at 20:52 Sounds like Maytag/Whirpool event in Local 997 Newton Iowa all over again. Tactic -use your money and high priced legal staff to take as much as you can no matter what the cost to your workers. We too received no advance notice of many special events. Such as a sixty dollar per month increase per member insurance cost to retired with Whirpool medical insurance. Our local is in your conner belive me. And have sent this article to many of my friends as possiable. Whirpool just received 6.5 million from the Iowa tax funds to improve their Iowa Amama plant in which I would guess they will pedal to the highest bidder in the near future
http://blog.aflcio.org/2010/02/24/break ... day-rally/
http://www.evolvingexcellence.com/blog/ ... ing_l.html
http://leanisgood.wordpress.com/2010/04 ... xperience/
I have a family member in Management at Whirlpool and for years we discussed cultural issues. Corporate may insist on working harder but fails to assert working smarter from the top down. Another Family member who experienced the Pfizer mentality and we seen how they fared from the top down.
http://www.businessweek.com/bwdaily/dnf ... 913433.htm
If he gets more time I can post his inside observation on issues he observed at his level. On a phone interview today he forwarded on top down failures on filtered informationals and thus the consequences he observed of the mindset to the failure in his unit to the logical conclusions to date.
Whirlpool had revenues of more than $4.8 billion in the past quarter alone. The company also recently received $19 million as part of the American Recovery and Reinvestment Act: Yet, the company is spending $110 million to build a new plant in Mexico.
April 4, 2010 by Bryan Zeigler,
Have no doubt that because of the lack of extending lean to people and outside their four walls to suppliers is a major reason they felt they had to move this factory to Mexico! To really get the waste out and succeed you need the entire supply chain and every person in the chain pulling together!
I saw two major items that I feel were hurting their success with Lean Manufacturing. The first was “respect for people”. I think you can see this in the above quote. Yes, Mr. Colburn is giving the Evansville plant accolades but at the same time each employee has to deal with the slow agonizing pain of slowly seeing their factory move piece by piece. Besides their own people, they also exhibited little respect for their suppliers (at least us).
I have seen this effect before in a different decade as described and left that market segment. I think another facet is missed in context to employee life cycle cost’s which is a aversion process to secure profit and as they are prone to do step off the ship to there lifeboat to there spreadsheet profit and there professed management skill to secure there looting which may or may not be to wit in this case. Many who read this who are old enough understand the mindset you owe then no gratitude but a defined quantity and quality of work. Labor and Capital do have defined responsibilities.
Business models do exist but as we are reminded there is nothing new under the Sun as we are reminded from older wisdom. Consequences are soon forgotten how the Community and thus the Government are gamed to logical conclusion’s again. I have a open conveyance paper from some research which reflects academics observation but I need to convey first on what we are to do on a local level in context to planning this wave I alluded to in a posting on the forums. As easy as it is to lose core focus I can convey I am still in fixed contracts to avert a loss of capital since we all see the next leg of process which appears eminent needless to say not included the service debt of the treasury department soon. All Politics are local and will ask in humility as what they are to do.
Aeden
===================================================================================================
maytagretired on 24.02.2010 at 20:52 Sounds like Maytag/Whirpool event in Local 997 Newton Iowa all over again. Tactic -use your money and high priced legal staff to take as much as you can no matter what the cost to your workers. We too received no advance notice of many special events. Such as a sixty dollar per month increase per member insurance cost to retired with Whirpool medical insurance. Our local is in your conner belive me. And have sent this article to many of my friends as possiable. Whirpool just received 6.5 million from the Iowa tax funds to improve their Iowa Amama plant in which I would guess they will pedal to the highest bidder in the near future
Re: Financial topics
John, your most recent on CDO's is quite revealing. I was in the mortgage business back in the good old days and went through the real estate depression here in DFW back in the late 1980's. Normal PMI on a 95% mortgage covers the top 25% of the loan, down a little over 70% of the sales price. The idea that in a risky mortgage that the top 7% would go into a pool and be deemed investment grade is quite insane, but not that unusual if one believes that real estate prices never go down. There is something interesting about that 7%. 5% is B and 2% is equity. Where the 2% most likely comes from is the discount paid on these products, meaning it was paid by the borrower or the seller of the house and was free money. This mean tha 28% of these CDO's were comprised of free money to start with. They probably couldn't price it because no one put it up. That is the first portion.
What causes loans to fail is property stops going up in price. In this case, these mortgages were being used by speculators in a lot of areas to flip properties. Once the property stopped going up, it was an immediate foreclosure. Risk in a normal market is down to 70% LTV, so if they were making 95% loans, a 25% foreclosure rate would wipe out the entire game because the nature of the beast is that the top had to pay the lower tranches in order to reap the higher reward. If my suspicions are correct, 28% of these products were pure profit for the manufacturer of the CDO. This is pure speculation. but the subprime mortgages I saw in the past had high rates and 2 points in fees.
Back to PMI. The way PMI works is as I pointed out, it insures the upper portion of the mortgage from loss. The last time I looked, the insurance on a 95% mortgage was 1% up and .35% renewal on the entire mortgage. So, theoretically if we had $100 billion in insured mortgages, the fee up would be $1 billion and the renewal would be $350 million. If the average mortgage was $200,000, the pool would encompass 500,000 mortgages. Figuring a default rate of 4% the first year and 1/2% thereafter, there would be $4 billion defaulted the first year with a $1 billion loss (25% of $4 billion) and $500 million defaulted afterwards with a loss of $125 million. These are probably figures for normal times and the 4% may be a little high. But, most of the risk is in 95% mortgages, but most people that default never make a payment and a seasoned loan rarely defaults in normal times. In the 1970's foreclosure on FNMA paper was unheard of.
It appears the tranche is different. The 7% mentioned would reap some of the return associated with this insurance, but take all the risk. The points up had already been paid, so the $1 billion I mentioned would have been a loss. But, then again, the PMI companies wouldn't insure these borrowers, which is why they were subprime in the first place (the terms on these loans is near loan shark rates, head I win tales you lose type terms). So, the loss rate might be 8% the first year in normal times. This would be a $2.4 billion loss on a $7 billion position. Question is, how much extra is the 7% getting in return? There would easily be at least 1% on the entire pool available for risk plus normal interest on this stuff, so they would get back maybe $1.35 billion for a loss of $1.05 billion. Of course, there is the equity there, the 2% above the B in the pool. If this was repeated for 5 years, the entire investment would be lost and maybe more because the lost portion of the pool would no longer be available to pay interest.
The point of this is the theory is really fairly solid if there was any real underwriting. Where it falls apart is not only was the underwriting not done (who would take the terms under any kind of stringent underwriting in the first place), but the price of the houses fell, triggering massive defaults. The other side of the equation is the products themselves created the bubble, just like the flawed model that you buy a portfolio of stocks and make X% forever created a bubble that wouldn't work.
The nonsense still prevails, as what made this stuff palatable in the first place was that all housing markets are different. Thus the theory was the good markets would pay a superior return and a lower default rate (Just like the fairly valued stocks and the ones that survived would ovecome the ones being sold that weren't worth anything or overvalued 100 times, which is nonsense) would over ride the losses in the bad markets. All this applies unless there arises a bubble.
There isn't any economic theory taught that covers bubbles. Greenspan played ignorant of them. Rubin told him there was no such thing. To these guys, a stock market paying a 1% dividend should continue to perform as one that was paying a 5% dividend, when in fact the 1% dividend market has to decline 80% to get back to the long term pre bubble valuation. Thus the monster created the bubble and the bubble destroyed the monster.
It is hard to know what these guys thought, but it is clear they were stuffing amazing amounts of money in their pockets, just as Franklin Raines at FNMA was. It appears Raines was collecting several dollars a year in pay for every mortgage FNMA bought.
If you have never read it, I recommend reading Hyman Minsky's book "Stabilizing an Unstable Economy". He appears to have lived 25 years ahead of himself from what I have read so far in the first 240 pages. Financial innovation is short for creating the next financial bubble and ponzi financing scheme. A lot of people saw this coming and literally anyone who read Minsky could have seen it.
What causes loans to fail is property stops going up in price. In this case, these mortgages were being used by speculators in a lot of areas to flip properties. Once the property stopped going up, it was an immediate foreclosure. Risk in a normal market is down to 70% LTV, so if they were making 95% loans, a 25% foreclosure rate would wipe out the entire game because the nature of the beast is that the top had to pay the lower tranches in order to reap the higher reward. If my suspicions are correct, 28% of these products were pure profit for the manufacturer of the CDO. This is pure speculation. but the subprime mortgages I saw in the past had high rates and 2 points in fees.
Back to PMI. The way PMI works is as I pointed out, it insures the upper portion of the mortgage from loss. The last time I looked, the insurance on a 95% mortgage was 1% up and .35% renewal on the entire mortgage. So, theoretically if we had $100 billion in insured mortgages, the fee up would be $1 billion and the renewal would be $350 million. If the average mortgage was $200,000, the pool would encompass 500,000 mortgages. Figuring a default rate of 4% the first year and 1/2% thereafter, there would be $4 billion defaulted the first year with a $1 billion loss (25% of $4 billion) and $500 million defaulted afterwards with a loss of $125 million. These are probably figures for normal times and the 4% may be a little high. But, most of the risk is in 95% mortgages, but most people that default never make a payment and a seasoned loan rarely defaults in normal times. In the 1970's foreclosure on FNMA paper was unheard of.
It appears the tranche is different. The 7% mentioned would reap some of the return associated with this insurance, but take all the risk. The points up had already been paid, so the $1 billion I mentioned would have been a loss. But, then again, the PMI companies wouldn't insure these borrowers, which is why they were subprime in the first place (the terms on these loans is near loan shark rates, head I win tales you lose type terms). So, the loss rate might be 8% the first year in normal times. This would be a $2.4 billion loss on a $7 billion position. Question is, how much extra is the 7% getting in return? There would easily be at least 1% on the entire pool available for risk plus normal interest on this stuff, so they would get back maybe $1.35 billion for a loss of $1.05 billion. Of course, there is the equity there, the 2% above the B in the pool. If this was repeated for 5 years, the entire investment would be lost and maybe more because the lost portion of the pool would no longer be available to pay interest.
The point of this is the theory is really fairly solid if there was any real underwriting. Where it falls apart is not only was the underwriting not done (who would take the terms under any kind of stringent underwriting in the first place), but the price of the houses fell, triggering massive defaults. The other side of the equation is the products themselves created the bubble, just like the flawed model that you buy a portfolio of stocks and make X% forever created a bubble that wouldn't work.
The nonsense still prevails, as what made this stuff palatable in the first place was that all housing markets are different. Thus the theory was the good markets would pay a superior return and a lower default rate (Just like the fairly valued stocks and the ones that survived would ovecome the ones being sold that weren't worth anything or overvalued 100 times, which is nonsense) would over ride the losses in the bad markets. All this applies unless there arises a bubble.
There isn't any economic theory taught that covers bubbles. Greenspan played ignorant of them. Rubin told him there was no such thing. To these guys, a stock market paying a 1% dividend should continue to perform as one that was paying a 5% dividend, when in fact the 1% dividend market has to decline 80% to get back to the long term pre bubble valuation. Thus the monster created the bubble and the bubble destroyed the monster.
It is hard to know what these guys thought, but it is clear they were stuffing amazing amounts of money in their pockets, just as Franklin Raines at FNMA was. It appears Raines was collecting several dollars a year in pay for every mortgage FNMA bought.
If you have never read it, I recommend reading Hyman Minsky's book "Stabilizing an Unstable Economy". He appears to have lived 25 years ahead of himself from what I have read so far in the first 240 pages. Financial innovation is short for creating the next financial bubble and ponzi financing scheme. A lot of people saw this coming and literally anyone who read Minsky could have seen it.
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The Grey Badger
- Posts: 176
- Joined: Sat Sep 20, 2008 11:50 pm
Re: Financial topics
The perfect investment deal dropped into my lap yesterday. That is --
I need to get my entire water system redone. (It's as old as I am, and the sewer line may be a WWII ersatz stuff called Orange Bird) and the Dow topped 11,000 for two days running.
Unload the bottom performers and/or risky-in-a-recession stocks and upgrade the infrastructure. Sounds like a perfect tradeoff to me!
I need to get my entire water system redone. (It's as old as I am, and the sewer line may be a WWII ersatz stuff called Orange Bird) and the Dow topped 11,000 for two days running.
Unload the bottom performers and/or risky-in-a-recession stocks and upgrade the infrastructure. Sounds like a perfect tradeoff to me!
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thomasglee
- Posts: 686
- Joined: Tue Feb 23, 2010 11:07 pm
- Location: Texas
Financial Crisis Inquiry
I totally agree but, while not suggesting anybody should be let off the hook, I have a question in regards to the "leaders" of this generation......They knew that the real estate bubble was bursting, and they knew that you can't use alchemy to create A rated securities out of B rated securities. They earned multi-million dollar salaries, and so should have know those things and a lot more, and they should have stopped the fraudulent activities from continuing.
I've noticed we have a LOT of unqualified leaders in place and I'm wondering if that is Generational too. For example, these bumbling fools claim to not known what was happening. Is it possible that's true? Recently I was flip'n channels and came across the show Celebrity Apprentice. I watched Rod" Blagojevich, the former governor of Illinois on the show and the man didn't know how to turn on a computer, much less type, he couldn't operate a mobile phone and he appeared to be nothing more than a bumbling fool. Either our leaders today are nothing but puppets of some group that flies black helicopters or their frat boys and girls who get into their positions based on their relationships to college buddies. In this case, is it possible Rubin and Prince are that ignorant but have been given the positions they have over the years just because of who they know and not what they know? Hell, look at our current president... that says enough right there.
Never mind... I've answered my own question!
Psalm 34:4 - “I sought the Lord, and he answered me and delivered me from all my fears.”
-
Higgenbotham
- Posts: 7487
- Joined: Wed Sep 24, 2008 11:28 pm
Re: Financial topics
I'm very surprised there have been no posts to date here on this matter, either in this thread or in the current events thread.John wrote:SEC accuses Goldman Sachs of fraud in subprime mortgage-backed securities
I believe that this case is a very big deal.
The significance of this case is that, I believe, it will be the first drip of water in an approaching torrent. I've been saying for years that bankers will be going to jail, because that's what happened in the 1930s. As time goes on, a lot more of these fraudulent deals will be discovered.
Opinions as to the significance of this are quite mixed. Most of the public seems to think this is for show and the government isn't really serious. Experienced observers I've read believe this is serious.
Above, John draws from the 1930's experience. My take on this is sort of unique in that a few months ago I mentioned that in the case of the Dutch Tulip Mania and the South Sea Bubble willful action was taken at a certain point to break the bubble, either by the government or the public. I had expected the government or the public to take action at just under Dow 10,000 to break this bubble, but they did not do so. At the same time, China did take action to break their stock market bubble and last August was the high for the Chinese stock market.
Looking back on it, I believe the US government delayed action because they were afraid to break the stock market bubble due to the economy being too weak. It seems as if Geithner and Obama had a plan as to how to tackle this thing. It amounted to being cowardly in my estimation. It's been known for a long time that fraud occurred and who committed it. By failing to prosecute, more fraud was allowed to occur and as John and others have said, the same people were allowed to be in place and have done it again. It's like a chronic sickness or a biting reflex that can't be stopped. It appears that with the economy improving slightly (stabilized might be a better description) and stock prices in a new bubble that is growing untenable, the decision has been made to finally go ahead and prosecute the fraud. The upcoming elections would also play a role in that decision, although I think Washington has lost Main Street forever and there will be retribution at the polls in November and, if not, revolution and breakup of the country.
As this wave of revolution inexorably approaches, the politicians will try to separate themselves from the banks in order to save themselves. The banks will become the whipping boys and there will be Promparty style show trials of the bankers. I barely remember Watergate but envision something like that. I expect the SEC, the FBI and the Justice Department to be involved and, as John stated, this drip will turn into a torrent.
Having said all that, I would doubt more than 0.5% of the public in general would agree with this assessment, which I think is why it will be so shocking should it come to pass.
While the periphery breaks down rather slowly at first, the capital cities of the hegemon should collapse suddenly and violently.
Re: Financial topics
Dear Higgie,
I've recently come across a couple of articles that may interest you,
given your interest in the history of bubbles:
I've recently come across a couple of articles that may interest you,
given your interest in the history of bubbles:
- Robert Shiller traces the the history of housing prices back to
the building of the Herengracht in Amsterdam in 1585.
http://www.nytimes.com/2005/08/21/busin ... 1real.html - Ambrose Evans-Pritchard blames the Panic of 1857 and the Civil War
on the Dred Scott decision, and says that a decision by Germany's
Verfassungsgericht (constitutional court), striking down the bailout
of Greece, would have a similar impact.
http://blogs.telegraph.co.uk/finance/am ... civil-war/
Re: Financial topics
John,
I'm still puzzled by your position on dollar deflation. Clearly the global trend will be 'secular' deflation, however you can define that, perhaps in terms of an imaginary commodity with zero elasticity of supply and demand and zero contango. Unfortunately the dollar does not meet this condition. Fortunately, nothing else does either, but some things certainly come closer.
However, Bernanke is finally admitting to two things which together describe a fatal condition:
1. The debt levels are unsustainable
2. The fed can't inflate out of the problem
Even if the credit market deflation dwarfs the debt, won't that turn the other direction as soon as the supply of dollars exceeds demand? The FOMC can easily multiply the monetary base with these deficits, not to mention private treasury sales and dollar repatriation. In fact, I'd almost say that they are being forced to!
If the FOMC doesn't buy the debt, the government will fail. If it does buy the debt, a vicious cycle leads to hyperinflation and government failure.
Historically, I think we can point to revolutionary coup as the most likely resolution of similar problems.
If the US government ceases to exist in current form, what happens to the US Dollar?
Will the fed exist? Who will it buy bonds from in open market operations?
Can the dollar maintain world reserve currency status without world military dominance?
Will credit contracts continue to be honored without legal tender nor a justice system to enforce them?
So even in a massive deflation, the strength of the dollar (the fed) will be tested against the US government. The fundamental question is whether the fed's dollar can stand against the government (stop buying debt), and without the government (after failure).
I'm personally holding dollars for lack of alternatives and in the belief that gold is pretty useless, but I can imagine a very rapid transition to commodity note reserves.
Other macroeconomic gurus (I hear 'ninja' is the new cool title word), please feel free to chime in.
I'm still puzzled by your position on dollar deflation. Clearly the global trend will be 'secular' deflation, however you can define that, perhaps in terms of an imaginary commodity with zero elasticity of supply and demand and zero contango. Unfortunately the dollar does not meet this condition. Fortunately, nothing else does either, but some things certainly come closer.
However, Bernanke is finally admitting to two things which together describe a fatal condition:
1. The debt levels are unsustainable
2. The fed can't inflate out of the problem
Even if the credit market deflation dwarfs the debt, won't that turn the other direction as soon as the supply of dollars exceeds demand? The FOMC can easily multiply the monetary base with these deficits, not to mention private treasury sales and dollar repatriation. In fact, I'd almost say that they are being forced to!
If the FOMC doesn't buy the debt, the government will fail. If it does buy the debt, a vicious cycle leads to hyperinflation and government failure.
Historically, I think we can point to revolutionary coup as the most likely resolution of similar problems.
If the US government ceases to exist in current form, what happens to the US Dollar?
Will the fed exist? Who will it buy bonds from in open market operations?
Can the dollar maintain world reserve currency status without world military dominance?
Will credit contracts continue to be honored without legal tender nor a justice system to enforce them?
So even in a massive deflation, the strength of the dollar (the fed) will be tested against the US government. The fundamental question is whether the fed's dollar can stand against the government (stop buying debt), and without the government (after failure).
I'm personally holding dollars for lack of alternatives and in the belief that gold is pretty useless, but I can imagine a very rapid transition to commodity note reserves.
Other macroeconomic gurus (I hear 'ninja' is the new cool title word), please feel free to chime in.
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