patrick.net

OO,

The bagholder frog has no choice. Who is going to dump their foreign reserves which are almost solely in USD ? And convert to what ? In the crowd of fiat currencies the USD stands tall.

All fiat currencies will devalue. Against food, energy and eventually real estate. Gold is also a likely beneficiary.

The problem is - now it's going to be much harder to preserve the buying power of current savings and future earnings. It's not that easy to store wealth in form of food and water. Real estate is still deflating. Energy will always remain tied to supply-demand and political whims.

Gold is a logical bet. But that doesn't mean much. The world is inherently irrational. Gold may remain stuck in this range and actually devalue against food.

Gone are the easy days when one could simply invest in FXE or FXA. I enjoyed the ride up on MERKX, got out in time. And now dabbling in GLD. But not as sure now as I was while putting money in other currencies.

# OO Says:
for those who have a big wad of cash with no exposure to real estate at all, it may not be a bad time, especially if the government is really able to get the long-term fixed rate down. 5.25% is not good enough, 4.25% will be very enticing.

You forgot one thing - for those with a big enough wad of cash, the how-much-a-month means nothing - no mortgage means no interest payment, so a lower rate does no good. In fact, it is all the more reason to want higher interest rate (ergo lower prices), so the wad-o-cash goes even farther.

Even if you needed a mortgage on top of the wad-of-cash down-payment, the equation is the same. I see your point about getting your wad-of-cash caught in a hyperinflationary currency-collapse situation, which is a risk. But there are _other_ ways of mitigating that risk than buying a house in a low interest-rate environment. IMO.

OO said:
if you expect the inflation rate to be 30% a year for another say, 5 years, it will be a no brainer to buy a home now at 5% locked in rate. If I expect 100% inflation a year, I will max out my borrowing at every single bank to buy as many houses as possible at FIXED rate.

I see the point in theory, but there are two counterpoints to that:
1. Even in an inflationary environment, will _housing_ inflate? Inflation in house prices has already run well ahead of wages and other supports, so it is possible that houses will tread water while everything else inflates.

2. There are other ways to protect against hyperinflation, than to put all your eggs into immobile assets like houses.

Again, just IMO, and probably biased by my personal circumstances. YMMV. NIA.

The whole recession, stimulus and rescue situation really is only about ONE matter:

***WHO is going to be assigned the losses caused by the falling asset prices, and WHEN are the losses going to be recognized.***

All the actions being taken at the public/government, corporate and personal level really are about this one matter. My statement may seem overly simplified, but the effective assignment and timing of loss recognition will have profound effect on who will be the haves and who will be the have-mores for many tens of years to come.

I wonder if Obama and his economic team thinks of the situation in this way.

justme,

they have already clearly answered that question.

Let's put it this way... who has footed the bill for all the bailout/stimulus? Who is being foreclosed upon? Who are losing jobs?

Now, on the other side of the coin...
Who is having lavish parties and trying to hide them? Who has to make a huge public announcement that their CEO is only going to recieve a $1 salary for the next 2 years because they were about to get mobbed?

And as for when, they have already made that clear as well. NOT NOW.

Fuzzy,

I'm not going to disagree with you all that much, Clearly much if what is going on is the stalling of the loss recognition and also re-distribution of the losses.

For now, the redistribution has mostly been at the expense of the taxpayers, and there is more to come if the inflation scenario plays out.

Recessions and depressions are all about who is going to pay for the party. It appears that it rarely is the people who held the party in the first place. I think the Great Depression of the 1930s was no different.

I think the Great Depression of the 1930s was no different.

At least the Wall Street types had the decency to take a swan-dive out of their penthouse offices.

I guess golden parachutes hadn't been invented yet?

Wall street employs hundreds of thousands of workers on work visas and off-shores many other jobs. IMO, any company that is receiving a taxpayer bailout should be required to eliminate all off-shoring and work visas and instead provide jobs to the very people who are bailing them out.

Inflation is absolutely NOT a possibility for years to come. The financial system is broken and might not be repairable. When inflation does start to return, it will be gradual and we'll have plenty of time to act.

Personally, I think every company that is getting a bailout should have all the management fired and their jobs re-opened with a 150k salary cap. I bet those positions would get filled in no time.

And hey, the new hires can't do any worse, can they?

It's downright insulting, that's what it is. And they get more outrageous by the day recently it seems. Combine this with rising unemployment, further home depreciation and higher taxes and I see a revolution in our future.

We cannot possibly go on deflation for more than 2 years. Next year our deficit will be more than a $T, without printing, nobody can buy that many Ts from us.

We are just kidding ourselves thinking that we can ever repay this debt even if there is NO interest. We are looking at a debt burden of $200K per household, without taking into consideration SS and Medicare at all! In deflation, the whole economy is going to contract and the debt servicing capacity of any government or individual entity will seriously deteriorate, which means USD collapse, which also means hyperinflation in USD terms.

If we want to avoid hyperinflation, the only solution is high inflation.

I don't have problem with the government bailout, I have a problem with them not doing it correctly. I don't want to see all the business shutting down in massive scale abruptly and crime rate going through the roof.

They should just start to send every family $100K, ok, perhaps $10K to begin with, all retailer coupons that will expire within 6 months, and adjust upwards later. Inject liquidity from bottom up.

Not sure whether this has been seen here. Interesting read. Gotta love that photo.

http://tinyurl.com/5s5w2b

"The era that defined Wall Street is finally, officially over. Michael Lewis, who chronicled its excess in Liar’s Poker, returns to his old haunt to figure out what went wrong."

They are "printing" as fast and as much as they possibly can right now. Money supply is through the roof in the past 2 months. However there isn't much (or any) traction. Debt destruction is also much greater. Deleveraging is just beginning and every action they've taken so far has only succeeded in slowing it down.

It's not until the de-leveraging is near complete that things can tilt to an inflationary slant.

I'm not saying it can't be two years. I find that unlikely though. Japan fought against deflation for over a decade and they were a much stronger country (economically speaking) going in than we are today.

Japan faces deflation again in the near future...

http://www.iht.com/articles/2008/11/25/business/yen.php

"Japan is facing the biggest threat of deflation among industrialized nations next year, the Organization for Economic Cooperation and Development predicted Tuesday, warning that the global financial crisis could further damage an economy already in recession."

No, the problem is not because they are not printing fast enough, it is because they are not printing at the right place, and it seems like they are getting message.

They cannot print at the top of the pyramid. They have to print at the bottom. Sending rebate checks, buying down the mortgage rate, they are moving in the right direction.

If the Fed can (not that I think it can do so without causing collapse of the USD right away) buy down the mortgage rate to 1%, we are back to 2003 right away, and deleveraging will stop.

It has to be a combination of rebate checks, government projects, and entitlement programs that are ONLY paid in coupons that expire within a short period of time. It will be more powerful if they can buy down the mortgage rate, if not, the above combination will work much more effectively than the alphabet soup lending programs.

I meant to say "credit destruction" rather than "debt destruction" above but both apply.

deflation,

Japan had savings, trading surplus, budgetary surplus and the government was NOT in debt in 1990, it was in fact the world's largest creditor. We are exactly the OPPOSITE of everything that Japan was in 1990.

We don't have two years. We may even collapse within 12 months. we just committed $800B this week, on top of the $500B deficit we have for FY2009. Who the hell is going to give us $1.3T?

OO, I think there is a flaw to your 1% thinking. That would work to fix prices in place today. However, unless the government guaranteed that 1% interest rate forever, eventually the rate would rise, putting downwards pressure on home prices. They can prolong the painkillers, but they can't cure the disease.

deflation: I read the Michael Lewis article yesterday. Completely awesome. It's pretty apparent how unskilled many financial industry "insiders" truly are, and how much their irrational behavior can push the system out of equilibrium.

It also underscores how badly some people need to go to jail, or at least face public censure over their absolutely outrageous incompetence.

Brand,

of course not. I am just saying this will extend the pain to the next admin. It will buy us time. If they can buy down to 1%, they will have to keep 1% indefinitely until the total collapse.

But nevertheless, we have a finite lifetime. So we must assess what is most likely to happen during the time frame in which we are alive, or more precisely, we are productive, and position accordingly. You know the government is going to screw with your life, so you might as well figure out what it is going to do and align yourself with what big brother wants to do.

OO: Look, the only thing that can generate 1.21 gigawatts of electricity is a bolt of lightning!

:o

Actually, if we could postpone the consequences until after Generation X/Y is dead and gone, that would be awesome.

ONE POINT TWENTY-ONE GIGGAWATTS???

GREAT SCOTT!

Giving away money to pay down debt is not inflationary. It simply eliminates debt and decreases leverage. It also doesn't create jobs, and doesn't encourage people to borrow or banks to lend.

They can bring mortgage rates down to zero as they did in Japan. It had no effect there and will have no effect here because credit worthy people are unwilling to borrow and banks are unwilling to lend to the others.

The government would have us believe that real estate is worth what is being asked today, but few people are buying that fable nowadays and fewer people will going forward.

A dollar collapse would mean losing world dominance and is something they will actively try to avoid.

The dollar will not collapse any time soon. Currently, the rest of the world has worse problems than we and that is causing everyone to flee to the currency they see as most stable, the USD.

deflation,

wake up, who is going to buy the $1.3T debt? Nobody combined has that kind of money. Please refer to the Fed's Treasury holding by country, and tell me which countries combined can buy that much debt. Remember, China, Middle East are all NOT raking in that much USD any more under deflation.
http://www.treas.gov/tic/mfh.txt

Please, give me your estimation of which countries combined can buy that $1.3T (hint: what they add cannot exceed their entire foreign reserve), please specify and be exact. The current collective holdings of all countries in US Treasury is $1.8T, which is cumulative holding throughout all these years, and we are going to need $1.3T next year for ONE YEAR only. I don't need your "flight to safety" argument with no numbers to back up, please tell me exactly which country can buy how much of our $T. In the last 12 months, these foreign governments were only able to add $600B, how do they cough up the extra $1.3T? And since we are in deflation, most people are losing money , so where do you find that many private parties to come up with the shortfall?

In case you do not already notice, there are lots of countries that were already DUMPING the US Treasury in September, when USD was actually strengthening, flight to safety my ass.

We are losing world dominance already, it is a matter of losing it the more stealthy way, or losing it the utterly ugly way. I am fine with either way, the result is the same, USD is game over.

OO, I'm not sure I follow your argument. If you believe that the dollar will crash next year because foreigners cannot or do not want to refinance our maturing debt, please consider the following.

Interest on national debt for 2005, 2006 and 2007 was $352B, $405B and $425B respectively. Estimates for 2008 and 2009 are closer to $500B. Note that this is interest payments on total national debt (not just treasuries held by foreigners) that stood at about $9.2T at the beginning of this year.

I would argue that consumer debt is far more relevant to this discussion (and infinitely more difficult deal with) than government debt, but since you seem to be dwelling on it, let's discuss the national debt.

First, I think we can agree that unfunded liability costs and interest on the national debt do not stay constant and tax receipts will not rise enough to cover rising interest given skyrocketing unemployment and plummeting consumer spending.

You imply that the likely scenario is to inflate away this debt. Yet at the same time you point out that the viability of US debt obligation is in jeopardy. Think about what an inflationary environment would do to interest on the national debt. We won't even delve into future costs on unfunded medical liabilities, social security payments, increasing mortgage rates and energy costs, all in the wake of one of the biggest recessionary periods in our history.

Inflating debt away is only possible when consumers and businesses are willing to take on more debt, asset prices rise and interest on debt is not prohibitive. None of these conditions exist today nor will it for years to come.

On the otherhand, the US government would find it far easier to deflate debt away. Let me explain.

Given the massive interest payments on national debt, refinancing that debt at a much lower rate would greatly alleviate that burden.

Deflation can drive long term interest rates down significantly and allow the US government to then refinance the entire national debt at those lower rates.

For example, interest on the national debt for fiscal year 2007 was $430B, about half of which went to foreigners.

Average interest rates of non-discount securities last year was almost 5%. Now imagine what would happen if interest rates fell close to zero and the government could refinance all that debt long term at significantly lower rates (like 2%). The long term benefits on interest payments would be enormous.

As for the flight to safety, just one look at the gains in US bonds lately should quickly settle that argument. There is no lack of demand for US treasuries anywhere in the near future as indicated by the market.

Finally, what evidence supports your claim about dominance? The China decoupling theory has recently been shown to be myth and there's a good chance we'll soon see their currency crashing. So I'm not looking at China to increase it's dominance anything soon. The EU? Let's not kid ourselves, please.

Please, give me your estimation of which countries combined can buy that $1.3T (hint: what they add cannot exceed their entire foreign reserve), please specify and be exact.

I know you didn't ask me; but how about the Cayman Islands?

"Inflation is absolutely NOT a possibility for years to come. The financial system is broken and might not be repairable. When inflation does start to return, it will be gradual and we’ll have plenty of time to act."

FALSE - When a currency collapses prices increase dramatically even with slow business conditions. Ask the Icelanders!

"The value of the Icelandic krona has been cut in half since January."

http://news.scotsman.com/world/A-nearriot-and--parliament.4722970.jp

Does anyone really believe that China will continue to buy US Treasuries at such a torrid pace given the resources needed to pacify the masses?

http://tinyurl.com/68fjya

"Today, around 500 protesters rioted at the Kai Da toy factory in Dongguan in the Pearl River delta, flipping over a police car and trashing computers in a dispute over payoffs to 80 fired workers. Tens of thousands of factories across the region have already shut their gates. "

kewp,

you are right, Cayman Islands and BVI, Channel Islands will have UNLIMITED ability to buy our debt, completely unlimited. They can buy $1T an hour, but by then, we will be running at hyperinflation, my loaf of bread will cost $1K.

Speaking of which, I'd better start stocking up more rice.

deflation,

I am talking about about inflation as RAW PRINT on a small scale. Nobody takes on any interest, Fed just print the extra money by devaluing the USD. We pay nothing, we just pay in the way of spill-over inflation. Just imagine adding a 0 to everyone's asset and pay, and cost of goods. Debt is denominated in USD and it stays fixed, if I print an extra 0, done.

RAW PRINTING is the ONLY OPTION left at this point. Either we default within 12 months and face hyperinflation right away as USD ceases to exist in its current form, or we raw print in smaller scale first, then ramp up the scale later, hoping that nobody notices enough to start dumping USD asset in a big way.

Nothing else works at this point. We will be lucky that we stop at $1.3T deficit next year, given what Obama promises, we are looking at $3T. The current total holding of foreign interest in T is only $2.8T, and you ask them to double in one year? Domestic Americans don't have that kind of money, period, and even if you confiscate the net worth of the richest Americans, you can't even come up with $3T.

Paul: Iceland is an unusual case. Most of their food and other goods come from imports. Hence when the krona lost value, their citizens really got hammered. It would be hard to exactly replicate that situation in the U.S., as our food and much of our goods are produced by people compensated in our own currency.

"Ask the Icelanders!"

If we were anything like the Icelanders, the game would be over. If you looking for comparisons, try Japan but keep in mind that they were in better shape than we are when they first started tackling deflation (i.e. they were in a better position to resist it).

"Does anyone really believe that China will continue to buy US Treasuries at such a torrid pace given the resources needed to pacify the masses?"

And the alternative? Invest in their own dubious currency? The USD is more attractive right now. It will remain so for years to come.

Gold is an alternative, and I'm long but the USD is the better play right now.

China does NOT have the money to buy $1.3T, or even half of that. NO USD to buy, ok? Understand, it is not like China has the printing press, they can only print RMB, they cannot print USD.

China's total foreign reserve is shy of $2T, and they just announced an internal stimulus plan of $600B, leaving them less than $1.4T. You ask them to buy $1.3T on top of that $1.4T, where does the money come from???

Please understand, China has NO MORE USD to buy our $T even if they have to.

Those are interesting points to consider, are we like Iceland or are we like Japan. We are not like either of them, so our collapse will unfold differently.

"Deflation" has a point that we can be self sufficient for nearly everything we need except some "strategic" metals. (Yes we can be self sufficient in energy because we waste so much of it).

But Japan had a balance of payments surplus the whole time of its problems. We will have some real hardships to make that adjustment.

Since probably everyone will devalue their currency in a race to the bottom, there will be no currency to devalue against. Except maybe bullion. In that case it is just as probably inevitable that the world will go onto a new gold standard.

OO, either you're misunderstanding how the economy operates or I'm simply not grasping what you're proposing.

I assume we're speaking about the real world and not some hypothetical world where the laws of economics don't apply.

So you think we might have a $3T budget deficit next year? That's quite a deficit indeed. But let's deal with facts for a moment.

The Fed IS printing money at an unprecedented rate, right now, and have been for some time now, as shown here:

http://research.stlouisfed.org/fred2/series/BASE

I'm not quite sure what you mean by "printing extra money by devaluing the USD". And while I can imagine instantly

adding a zero to everything denominated in USD (from a purely hypothetical perspective), except for debt (whose

debt, I'm not quite sure as someone's debt is another's asset), I can't imagine how this would be done. While we're

pretending, why don't we just say we'll discover how to do cold fusion? Then we would be sitting pretty.

I think I've explained why I think inflating debt away is not an option in my last post. No reason to repeat.

You believe the end of the dollar will occur (either through default or hyerinflation) in 12 months, so what are you

doing about it? Long gold? Long commodities? Short UST bonds? Those strategies haven't played out well recently. Expect more of the same for some time. But don't fret, because your day will eventually come (assuming you don't go broke in the meantime:).