2-Nov-11 WV-Euro in crisis again, as Greece melts down

[John]

2-Nov-11 World View -- Euro in crisis again, as Greece melts down after referendum bombshell


Foreign central banks are no longer buying US Treasuries

** 2-Nov-11 World View -- Euro in crisis again, as Greece melts down after referendum bombshell
** http://www.generationaldynamics.com/cgi-bin/D.PL?xct=gd.e111102#e111102



Contents:
Universal fury at George Papandreou for referendum call
Papandreou's government in Greece may be near collapse
'Sighs of relief have been replaced with cries of horror!'
Foreign central banks are no longer buying US Treasuries
Speed of MF Global's collapse astounds and frightens investors
U.S. says that Allied Home Mortgages defrauded homeowners
Outflow of ethnic Russians from North Caucasus worsens
Kyrgyzstan demands that U.S. close its air force base

Keys:
Generational Dynamics, euro, Greece, George Papandreou,
Evangelos Venizelos, MF Global, Jon Corzine,
Allied Home Mortgages, Russia, North Caucasus, Kyrgyzstan,
Almazbek Atambayev, Manas air force base

[vincecate]

As I've said many times, my expectation is that the U.S. will default, but the dollar will remain strong in a spiraling deflationary environment.

Why do you expect they will default instead of having the Fed buy up the debt with new money? The trend so far is for the Fed to buy up lots of government debt with new money. I don't believe there is any historical precedent for a government defaulting on debts denominated in a currency that it could print. There are many many cases where a central bank used new money to buy up debt from a government who had no ability to pay it back.

If the US did default, then afterward do you think anyone besides the Fed would buy US government debt? If nobody buys US government debt except the Fed, who uses newly made money, and the government budget is still twice the taxes, don't you think we get hyperinflation anyway? If the US defaults on the bonds held by central banks all around the world doesn't it instantly cease to be the world reserve currency? If expenses are twice income, do you think anyone thinks the government would ever pay back the "debt" to the Fed? Really aren't they just printing and spending money? How would the Fed be different from the Zimbabwe Central Bank or any other central bank printing money for a government that was spending way beyond taxes and resulted in hyperinflation? It seems that on any given month they have a chance they may be able to kick the can down the road a bit, but as soon as they default I would expect hyperinflation to start right away. So how could defaulting even help things?

If there was a "deflationary spiral" I am just sure that Bernanke would be making money and buying up government debt like crazy. You read his work and there is no way he would stop his magic money machine if there was deflation.

Please explain your thinking on this.

[OLD1953]

The situation is getting worse by the week, we'll have to wait and see if they can prolong the agony in Europe much longer, or if it is going to go down the drain immediately.

Bonds and foreign holdings of US bonds are a terribly complex issue, I doubt this is the last word on the subject. I do wonder if they are selling bonds in Europe to buy junk from Greece to keep them propped up. Much will depend on how fast the situation goes bad. If banks and countries start to default at rapid rates, the US bond may well survive as the last place to store money without vault fees. This is very much a standoff situation where the first person to blink may lose.

It should be kept in mind that Europe wants the US to do all fighting for it, they don't even like peacekeeping missions. If you want that kind of service, you have to pay for it.

Don't forget that the people fleeing violence in the Caucasus will put further strains on the Russian social services network. Demands for compensation may result, and cause further government breakdown in the region.

[vincecate]

Please explain your thinking on this.

If John won't bite, is there anyone else who can explain why I am wrong or why John is right?

Do other people agree that if the US defaults, then central banks all around the world have worthless US Treasuries, which they toss in the trash, and the US dollar is no longer the world reserve currency? So the one thing that makes it harder for the US to get hyperinflation, that it is the world reserve currency, goes away the moment they default, right?

[jdcpapa]

Please explain your thinking on this.

If John won't bite, is there anyone else who can explain why I am wrong or why John is right?

Do other people agree with that if the US defaults, then central banks all around the world have worthless US Treasuries, which they toss in the trash, and the US dollar is no longer the world reserve currency? So the one thing that makes it harder for the US to get hyperinflation, that it is the world reserve currency, goes away the moment they default, right?

War.

[vincecate]

Do other people agree with that if the US defaults, then central banks all around the world have worthless US Treasuries, which they toss in the trash, and the US dollar is no longer the world reserve currency? So the one thing that makes it harder for the US to get hyperinflation, that it is the world reserve currency, goes away the moment they default, right?

War.

It seems a real possibility. But the dollar would no longer be the world reserve currency because the central banks would no longer have dollars because their treasuries became trash.

[OLD1953]

Myself, I don't think US bonds will become worthless, so I've not really considered the question. But bonds and money aren't the same thing, therefore it would be possible for one to lose value while the other retains value.

I'm seeing the world right now as in a game of chicken, with dozens of simeltaneous players. The first one to crash or flinch will lose. Right now, it appears that Greece is about to crash directly into Europe. China is in the process of crashing, but it's an early stage. The US had a wheel fall off, but got it patched (poorly) and is back in the game.

What happens if Greece defaults, France leaves the EURO and the Italians start yelling for help, which they will by next June? European bonds of all sorts become the kiss of death for an investment firm, and they already are as MF Global found out, so they'll be buying their own bonds or dissolve the EURO. In either case, assuming the US holds together through that period, we become the investment of last resort. Unless, of course, you assume people quit investing and just stuff mattresses.

We have a large population retiring now, and I'd bet their recent experiences in the market, coupled with a new market crash will cause a lot of money to run to US bonds. We really are going down the Japanese path.

[vincecate]

Myself, I don't think US bonds will become worthless, so I've not really considered the question. But bonds and money aren't the same thing, therefore it would be possible for one to lose value while the other retains value.

Theoretically true. But central banks around the world hold their dollars as Treasuries. If the US defaults on Treasuries then the central banks will suddenly no longer be holding dollars. So as soon as the US defaults, it stops being the world reserve currency. Right?

[Tom Acre]

How could current events make it any clearer to everyone that the Dollar is and will remain the world reserve currency, until ... as jdcpapa said, War. And not the GWOT type but the Crisis type, where everyone uses every offensive and defensive measure they have and starts inventing new ones.

At that point its useless to speculate over stocks, bonds, commodities and even inflation and deflation, as overnight we will return to 1950 if not 1850. Do you realize that it takes one, ONE well placed HEMP of the correct type to completely cripple ALL electronics AND the entire American electrical grid. At that point, if you can't get your hands on it, you don't own it, and if you can't keep your hands on it, you won't own it long. That is what the missile defense program that the liberals try to block at every turn is aimed at preventing.

We've seen what slowing mortgage loans did to the real estate market. Imagine what going back to cash and check supported by manual calculation will do to every market; and that's when you can physically get to the bank and when they have cash or will accept your checks. How do you prove you hold stocks and bonds? Then once you prove it, how do get reimbursed? Don't worry John Corzine and his buddies will take care of you and your money.

[Reality Check]

Deflation occurs when demand dries up.

Europe and the United States are driving demand world wide.

One of two events is likely to cause demand to dry up.

Wide spread austerity measures in Europe or the United States or both, which will reduce jobs, reduce business activity and massively reduce demand, or,

Wide spread bank failures, which will trigger wide spread business failures ( due to lack of loans for businesses), and wide spread job losses, and massively reduce demand.

It is also quite possible that one and then the other will occur.

These may be quite different events than the political decision to default, or to take actions which the bond rating agencies and the bond holders consider the same as default.

Default can be caused by internal political decisions within the United States, or by external investor decisions, or by a combination of the two.

Default just means the U.S. is universally perceived to not be doing what they promised to do when they borrowed the money.