Daily Digest

Daily Digest - March 16

Tuesday, March 16, 2010, 9:52 AM
  • U.S, U.K. Move Closer To Losing Rating, Moody's Says
  • Monday Morning – Moody’s Makes More Negative Noises
  • History Suggests That The Winners From A Recession Tend To Win Big
  • China's Hidden Local Debt
  • Food Prices Push Indian Inflation Up To 9.9%
  • Misconceptions about Money and Velocity
  • Useless Regulation: Dodd Bill "Empowers" Fed To Do Nothing
  • Full Highlights From Dodd's Financial Reform Bill
  • Mortgage Delinquencies At Historic Highs
  • Matthew Simmons' Awesome Presentation On The Coming Oil & Water Shortage
  • Petrol To Hit 120p A Litre, As Motorists 'Mugged' By Oil Companies

Economy

U.S, U.K. Move Closer To Losing Rating, Moody's Says (Christian W.)

The governments of the two economies must balance bringing down their debt burdens without damaging growth by removing fiscal stimulus too quickly, Pierre Cailleteau, managing director of sovereign risk at Moody’s in London, said in a telephone interview.

Monday Morning – Moody’s Makes More Negative Noises (Ilene)

Under the ratings company’s so-called baseline scenario, the U.S. will spend more on debt service as a percentage of revenue this year than any other top-rated country except the U.K., and will be the biggest spender from 2011 to 2013, Moody’s said today in a report.

History Suggests That The Winners From A Recession Tend To Win Big (nncita)

If low, or even negative growth is the new reality, the implications are profound, both for the public finances (published plans for fiscal consolidation in Europe and America are heavily dependent on a return to robust growth) and the way companies are managed. Established business models need to be rethought and companies must adapt to survive. Recessions quickly sort businesses into winners and losers. Recessions can therefore produce seismic industrial and corporate change, and somewhat counter-intuitively, really serious ones can catalyse great leaps forward in innovation and productivity.

China's Hidden Local Debt (Christian W.)

The local-debt problem has been around for years. At the beginning of this decade, one report put the amount of indebtedness of provincial and lower-tier governments at $600 billion, but most assessments then endorsed far lower figures as almost nobody wanted to sound the alarm.

Food Prices Push Indian Inflation Up To 9.9% (Christian W.)

Since October, when the government began reporting monthly - instead of weekly - data, headline inflation has increased nearly seven-fold.

That's been driven by spiralling food prices due to drought and rising rural incomes, but it has begun to spill over into non-food areas as India's economy picks up and global commodities prices rise, putting pressure on margins of manufacturers.

Misconceptions about Money and Velocity (Brian C.)

Misconception #1: Money Supply Needs To Grow

"Now, there is no exact way to determine the right size of the money supply. It definitely needs to grow each year by at least the growth in the size of the economy, the population, and productivity, or deflation will appear. But if money supply grows too much then you have inflation."

Useless Regulation: Dodd Bill "Empowers" Fed To Do Nothing (Brian C.)

In what amounts to a dog and pony show without dogs and without ponies, Dodd Bill Empowers Regulators to Limit Size of Financial Firms.

Full Highlights From Dodd's Financial Reform Bill (Brian C.)

The newly created Financial Stability Oversight Council will focus on identifying, monitoring and addressing systemic risks posed by large, complex financial firms as well as products and activities that spread risk across firms. It will make recommendations to regulators for increasingly stringent rules on companies that grow large and complex enough to pose a threat to the financial stability of the United States.

Mortgage Delinquencies At Historic Highs (Ben Johnson)

And here's the latest report from Lender Processing Services out of Jacksonville, Fla.: Delinquency rates have hit historic highs. More than 7.4 million home loans nationwide are in some stage of delinquency or foreclosure, with another 1 million properties either bank-owned or sold out of foreclosure. An incredible 10% of all U.S. loans are delinquent.

Energy

Matthew Simmons' Awesome Presentation On The Coming Oil & Water Shortage (Christian W.)

There are few easy substitutes for oil, and there are no substitutes for potable water.

Petrol To Hit 120p A Litre, As Motorists 'Mugged' By Oil Companies (joemanc)

The average petrol price across the country is 115.9p for a litre of unleaded and 116.6p for a litre of diesel, according to Petrolprices.com. However, the Treasury is due to add a further 3p on April 1.

Even without this increase the price at forecourts is due to hit 120p very soon, according to the AA. This would overtake the previous high of 119.7p, which motorists suffered from in July 2008.

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39 Comments

saxplayer00o1's picture
saxplayer00o1
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Re: Daily Digest - March 16

"Education budget cuts have prompted school districts across the state to send out nearly 22,000 pink slips, notifying teachers and other certificated employees they may not have jobs next year.

"To date, 21,905 pink slips have been issued to teachers and other staff around the state this year," Jack O'Connell, state superintendent for public instruction, said in a news release today. "While I understand the governor and the Legislature have tough decisions to make, these budget cuts are devastating our schools and impacting our ability to do the most important job in our society, that is, to teach our children.""

...................1A) California Assembly speaker OKs $132,000 in staff pay hikes, promotions

"New Assembly Speaker John A. Pérez handed out pay increases or promotions totaling nearly $132,000 per year the day he was sworn in this month, including a $65,000 raise to his chief of staff.

Of eight staff members targeted, Sara I. Ramirez received by far the largest raise, jumping her pay from $125,256 to $190,008 for serving as Pérez's top assistant, according to documents obtained under state open-records law."

"If Rep. Phil Hart, R-Athol, has his way, Idahoans could soon be able to pay their taxes with silver medallions produced in the state of Idaho.

Hart said the bill serves several purposes, including creating jobs in Idaho, as well as giving citizens in the state a way to store wealth in what he believes is a more stable form of currency. Hart said that though the U.S. Constitution dictates that the government should use nothing but gold or silver for public currency, the federal government has essentially left that provision “in the rear view mirror.” The bill would give the state treasurer the ability to work with silver processing companies to develop a state medallion that the state would then be forced to accept as payment for taxes."

"The world's five biggest AAA-rated states are all at risk of soaring debt costs and will have to implement austerity plans that threaten "social cohnesion", according to a report on sovereign debt by Moody's.

 By Ambrose Evans-Pritchard

The US rating agency said the US, the UK, Germany, France, and Spain are walking a tightrope as they try to bring public finances under control without nipping recovery in the bud. It warned of "substantial execution risk" in withdrawal of stimulus. "

"March 16 (Bloomberg) -- The world shipping market is mired in its biggest slump since World War II, said James Fisher & Sons Plc, a U.K. hauler of oil products.

“This is the worst shipping recession since the war,” Chairman Tim Harris said today in a telephone interview. "

"March 15 (Bloomberg) -- Bank of America Corp., Wells Fargo & Co. and U.S. lenders may face as much as $64.8 billion in losses on delinquent mortgages that Fannie Mae and Freddie Mac can ask them to buy back because they are fraudulent loans, Compass Point Research & Trading LLC said."

"The state's teachers retirement fund had hoped four years ago that a flourishing bull market would help make up for a big projected shortfall. Now the fund is $43 billion behind as of June."

"The 97-year-old pension plan must ask the state Legislature, the governor and taxpayers for billions of dollars. Getting that money -- even with an expected massive lobbying campaign and a bruising political battle -- is no sure thing.

CalSTRS' board is "delusional if it expects the state to bail them out," said Marcia Fritz, president of the California Foundation for Fiscal Responsibility. The Sacramento group wants to reduce pension benefits for newly hired government workers, another way to reduce the shortfall.

"It will be difficult to attract support" from legislators, let alone the public, Ehnes acknowledged."

"New Jersey taxpayers face a decades-long

continuation of six-figure annual pension

payouts and other costly retirement benefits

promised to public employees.

The reason: State law guarantees that

pensions for existing workers can't be

altered. Even a package of pending legislation

— hailed as the remedy for a system that's

short $45.8 billion — would apply only to

new employees and not to the current

workforce of some 450,000.

The guarantee, in a 1997 law signed by

Republican Gov. Christie Whitman, has

served to insulate public workers from

wrenching economic realities that prevail in

the private sector."

 

 

 

 

 

 

 

 

 

 

 

 

 

"Strapped states, facing up to $180 billion in budget deficits in the next fiscal year, are going hat in hand to Washington.

California wants $6.9 billion in federal money for the next fiscal year, and Republican Gov. Arnold Schwarzenegger says he'll have to eliminate state health and welfare programs without it. Illinois, facing a $13 billion deficit that equals roughly half of the state's operating budget, has what it dubs a stimulus team and a group in Washington pressing for additional state aid.

Among other things, Illinois is hoping the federal government will keep paying a higher share of Medicaid costs. "That's $600 million we desperately need," said Kelly Kraft, a spokeswoman for Democratic Gov. Pat Quinn's budget office. Those funds already are counted in the governor's budget proposal."

"Anticipating a huge crash in state funding, municipal leaders urged legislators Monday to expand their ability to levy taxes and fees, particularly through a regional sales tax surcharge.

But while members of the Finance, Revenue and Bonding Committee agreed communities need new revenue sources, lawmakers from both parties expressed fears that Connecticut could be left with a patchwork tax system that helps one region while harming another.

"The next few years are going to look pretty bleak for all of us," East Hartford Mayor Melody Currey said, adding she has had to slash programs and lay off town workers for two years now, and fears things are about to get worse. "It's the most unpleasant part of the job.""

"The government’s plans to cut back the budget deficit are 'not sufficiently ambitious' and need to be 'significantly reinforced', a European Commission report is expected to warn this week. "

.................10A) Britain rejects EU calls for more fiscal cuts

"My feeling is, in terms of spending, my colleagues have gotten it," Paterson said. "They realize we can't spend now, which is a huge step.

"But now the problem is, how do you balance a budget when you owe $9.2 billion and you don't want to tax - because we don't - and you don't want to borrow because that will injure our credit rating," Paterson said. "It's going to have to be all cuts, and I think they are having a hard time grappling with it."

"Take Kangbashi, a huge new city near Erdos in Inner Mongolia.

"Build it and they will come" must be the motto of the city fathers, for Kangbashi's broad boulevards and plazas are all but deserted, visitors say. Media reports describe similar ghost towns dotted around China.

"Clearly a problem is brewing, but the timeframe in which it becomes an issue from an investment perspective is not clear," a manager at a large U.S. equity fund said as he scrolled through photographs he had taken in Kangbashi.

Monumental public buildings out of all proportion to the size of the local population are common across China."

"WASHINGTON — County Farm Bureau presidents from across Ohio traveled to Capitol Hill in an effort to tell elected officials farmers aren’t taking it any more and they want action."

"Historically, a debt-to-GDP of north of 90% and a deficit-as-a-percentage-of-GDP north of 10% have been the lines in the sand to watch. As governments cross these barriers, they enter the Pig Zone."

The Domestic Pigs
  Size of Budget Gap (1) Unemployment (2) Foreclosure rate (3) Supermajority
California 49.3% 12.5% 1 in 195 Yes
Arizona 41.1% 9.2% 1 in 163 Yes
Michigan 12.0% 14.3% 1 in 226 Yes
Nevada 37.8% 13.0% 1 in 102 Yes
Florida 22.8% 11.9% 1 in 163 Yes
Illinois 47.3% 11.3% 1 in 305 No
Source:
(1) Pew Center
(2) Realty Trac
(3) Bureau of Labor Statistics
  • Headlines:

Surplus All But Gone for Indiana

Junk bond maturity sparks financial fears or Junk Bond Avalanche Looms for Credit Markets

Jobless benefits put Wisconsin in hole

Bank sees risk of GDP fall in Britain

Toledo sends layoff notices to 125 officers (21% of their police force)

Bobb: Close 45 Detroit schools (Detroit..."would bring total school closures to 140 since 2005 -- more than half the district")

 District U-46 board approves layoffs for 1037 employees (Elgin, Illinois...25 percent of staff in the state's second largest school)

Nearly 1 in 5 Stanislaus County educators get layoff warnings (CA)

State Police Consider Massive Layoffs (Illinois...464 troopers)

Mayor Ditches Plan to Fire All City Employees (Las Vegas...instead lays off 141 employees)

State tax collections drop; Gov. Bobby Jindal plans for more budget cuts (Louisiana..creates up to $400 million deficit)

NC budget gap likely to require more spending cuts

About 1 in 4 in California lack health insurance, a UCLA study finds (Because of "soaring unemployment")

140000 in RI have no health insurance, the highest level ever

House may try to pass Senate health-care bill without voting on it (The tactic -- known as a "self-executing rule" or a "deem and pass""

KS House to debate tax hike on churches, utility bills

 San Diego faces another $25 million in cuts (half is pension costs)

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Re: Daily Digest - March 16

Along with the Feds, municipality's borrowing has been out of control for a decade.  The time to pay is drawing near.

http://dailyreckoning.com/municipal-deflation-consequences-of-the-greatest-speculation/

"With nothing learned, states and municipalities borrowed $23 billion in 2000 and $215 billion in 2007. One reason credit rained on bubbly school committees was the ever-rising revenue stream from real estate taxes: receipts increased from $254 billion in 2000 to $421 billion in 2008."

 

More proof that the leadership in Brokifornia is from another planet.

http://www.sacbee.com/2010/03/15/2608797/new-speaker-grants-assembly-pay.html

New Assembly Speaker John A. Perez gave his top aide an annual pay increase of nearly $65,000 - about $5,400 per month - upon becoming leader of the lower house, records show.

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Re: Daily Digest - March 16

I found this article interesting:

http://caps.fool.com/Blogs/ViewPost.aspx?bpid=354244&t=01009137708954838515

Not so much because it is novel, but because it literally restates one of the central themes of the CC: that infinite growth is not possible in a world of finite resources. The article further acknowledges the "growth is good" paradigm in which we still live.

It also provides the chart on this page, which looks very familiar as well: http://www.efn.org/~patrickb/grf.jpg

 

 

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Re: Daily Digest - March 16 - inflation vs deflation

Great inflation vs deflationary article on The Automatic Earth:  http://theautomaticearth.blogspot.com/2010/03/march-15-2010-inflation-go...

 

 

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Re: Daily Digest - March 16 - inflation vs deflation
rickets wrote:

Great inflation vs deflationary article on The Automatic Earth:  http://theautomaticearth.blogspot.com/2010/03/march-15-2010-inflation-go...

 

 

I didn't enjoy the read at all. John Williams did tie it together on how we will wind up in hyperinflation: A currency crisis. He even exposed that our deficit using GAAP is 9 trillion for F2009. That is why he moved it forward. IMO the author of that piece is pretty close to listening to the chart folks and not being able to wrap his little 122 cc mind (using his words) around what Williams laid out - laid out so a 4 year old could get it.

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Re: Daily Digest - March 16
Mike Pilat wrote:

I found this article interesting:

http://caps.fool.com/Blogs/ViewPost.aspx?bpid=354244&t=01009137708954838515

Not so much because it is novel, but because it literally restates one of the central themes of the CC: that infinite growth is not possible in a world of finite resources. The article further acknowledges the "growth is good" paradigm in which we still live.

It also provides the chart on this page, which looks very familiar as well: http://www.efn.org/~patrickb/grf.jpg

 

 

Mike,

The population chart says it all, doesn't it?  A perfect picture of unsustainability.  It is just a question of what will set the mechanism into motion that sends us cascading down the other side of the peak.

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Re: Daily Digest - March 16 - inflation vs deflation

Davos,

Much of the deficit/debt is money we owe ourselves (social security, medicade), and much is spent on things that can quickly be stopped (2 wars).  Evidence to this spending ending is in every state budget cuts that are growing (or should I say shrinking?) exponentially.  Budgets will come down, and come down hard, and credit will continue to contract faster than they can print the money.  Japan, here we come.  As deflation sets in, demand for treasuries will increase, and rates will stay super low.

Although Davos, there is nothing I could do or say to you to get you to move from your stance...this I know....so perhaps we should just agree to disagree!  While the core ideas on this site are at the core of what we both believe, the road ahead couldnt look more different in our eyes!  Ha....in any event, I learn from the disagreement.

Re Williams laying things out for a 4 year old to understand - perhaps, but Williams is like a 4 year old in that he doesnt acknowledge that we will adapt, and change policies - - - that will will not just drive over the cliff without every effort to turn the wheel or apply the breaks.  Unfortunately for his argument, economics and society dont exist in a vacuum.  I say this being a big fan of his work and intellect - just not of his forecasts.

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Re: Daily Digest - March 16

This is an interesting document released in Feb. 2010 by the US Joint Forces Command. It is the "Joint Operating Environment" report and guess what one of the major concerns / focuses of our military is right now? Resource wars and resource scarcity. Current events form future trends...?

http://www.jfcom.mil/newslink/storyarchive/2010/JOE_2010_o.pdf

 

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Re: Daily Digest - March 16 - inflation vs deflation
rickets wrote:

Davos,

Much of the deficit/debt is money we owe ourselves (social security, medicade), and much is spent on things that can quickly be stopped (2 wars).  Evidence to this spending ending is in every state budget cuts that are growing (or should I say shrinking?) exponentially.  Budgets will come down, and come down hard, and credit will continue to contract faster than they can print the money.  Japan, here we come.  As deflation sets in, demand for treasuries will increase, and rates will stay super low.

Although Davos, there is nothing I could do or say to you to get you to move from your stance...this I know....so perhaps we should just agree to disagree!  While the core ideas on this site are at the core of what we both believe, the road ahead couldnt look more different in our eyes!  Ha....in any event, I learn from the disagreement.

Re Williams laying things out for a 4 year old to understand - perhaps, but Williams is like a 4 year old in that he doesnt acknowledge that we will adapt, and change policies - - - that will will not just drive over the cliff without every effort to turn the wheel or apply the breaks.  Unfortunately for his argument, economics and society dont exist in a vacuum.  I say this being a big fan of his work and intellect - just not of his forecasts.

Oh, one trillion in health care reform is adapting and changing policies? Rickets: They already flew off the cliff.

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Re: Daily Digest - March 16

They have gone to far, for sure, but this arguement is the same as thinking the pensions are at the point of no return.  Sure, the headlines are fantastic and scary - but the pensions are still there - and the average public pension is over 80% funded.  What does this mean?  It means that people will get 80% of what they were promised.  Bad?  you bet, and it has huge impact on our economy (deflationary I might add) - however, I am quite sure that 90% of the population can live with "only" getting 80% of what they thought they would get at retirement.

What about social security benefits starting 5....and then 10 years later.  Hmmm, problem almost disappears.  Look, we are in serious financial trouble, but we have exits, there are options.  The options are whats happening all over the country - Budget cuts!!!  Kansas City closing 50% of their schools for example.  This is the quick way to buy lots and lots of time, and its the way to deflation, and the way out of any potential currency collapse.

Our leaders are idiots sure, but they are quickly losing the power to continue the stupidity - and the evidence is widespread.  These last few months, courts are giving the nod to breaking union contracts....again, deflationary - and helps budget issues.

If you were going bankrupt Davos, you wouldnt just go spend more like a maniac (well, most likely), you would first try everything to avoid it.  We are just starting that process. 

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Re: Daily Digest - March 16

Sign of the times:

http://www.thestar.com/news/world/article/777796--armed-robber-nets-6-from-11-people

"THERMAL-They say crime doesn’t pay. For one robber in California, it did — but not much.

Authorities in Riverside County say a woman with a gun robbed 11 customers at a market and got away with $6."

Laughing

Christian W.

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Re: Daily Digest - March 16
rickets wrote:

They have gone to far, for sure, but this arguement is the same as thinking the pensions are at the point of no return.  Sure, the headlines are fantastic and scary - but the pensions are still there - and the average public pension is over 80% funded.  What does this mean?  It means that people will get 80% of what they were promised.  Bad?  you bet, and it has huge impact on our economy (deflationary I might add) - however, I am quite sure that 90% of the population can live with "only" getting 80% of what they thought they would get at retirement.

What about social security benefits starting 5....and then 10 years later.  Hmmm, problem almost disappears.  Look, we are in serious financial trouble, but we have exits, there are options.  The options are whats happening all over the country - Budget cuts!!!  Kansas City closing 50% of their schools for example.  This is the quick way to buy lots and lots of time, and its the way to deflation, and the way out of any potential currency collapse.

Our leaders are idiots sure, but they are quickly losing the power to continue the stupidity - and the evidence is widespread.  These last few months, courts are giving the nod to breaking union contracts....again, deflationary - and helps budget issues.

If you were going bankrupt Davos, you wouldnt just go spend more like a maniac (well, most likely), you would first try everything to avoid it.  We are just starting that process. 

I knew one company and one individual that went BK. Both went on a spending spree before filing. I can't agree with your reasoning. While I hope you are correct and I am wrong I can't get the math or worse, the formula to work in my mind.

The more the states cut the more they lose in revenues and the more they spend in benefits. Now the Feds will a.) bail them out or b.) watch the credit rating go

In my mind it is a dog chasing it's tail circle of absurdity. Not arguing with you. Not going to. Time will tell. Take care. 

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Re: Daily Digest - March 16

I'm painting today and I hate painting so let me procrastinate and ask one more question. Let's assume I'm wrong, you are correct - then how does the Fed play into this?

We have allotted, vis a vis the insane FR system another 4 trillion to prop up insolvent banks. CRE and wave 2 of the subprimes (Alt-A's and Option Arms) are all rolling to shore.

So even if the states cut, and even if we shaft grandmother and father out of Social Security and Medi-everything else - we still have a berserk maniac propping up a 1.6 quadrillion shadow bank.  

How is that going to get bought under control?

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Re: Daily Digest - March 16
rickets wrote:

They have gone to far, for sure, but this arguement is the same as thinking the pensions are at the point of no return.  Sure, the headlines are fantastic and scary - but the pensions are still there - and the average public pension is over 80% funded.  What does this mean?  It means that people will get 80% of what they were promised.  Bad?  you bet, and it has huge impact on our economy (deflationary I might add) - however, I am quite sure that 90% of the population can live with "only" getting 80% of what they thought they would get at retirement.

What about social security benefits starting 5....and then 10 years later.  Hmmm, problem almost disappears.  Look, we are in serious financial trouble, but we have exits, there are options.  The options are whats happening all over the country - Budget cuts!!!  Kansas City closing 50% of their schools for example.  This is the quick way to buy lots and lots of time, and its the way to deflation, and the way out of any potential currency collapse.

Our leaders are idiots sure, but they are quickly losing the power to continue the stupidity - and the evidence is widespread.  These last few months, courts are giving the nod to breaking union contracts....again, deflationary - and helps budget issues.

If you were going bankrupt Davos, you wouldnt just go spend more like a maniac (well, most likely), you would first try everything to avoid it.  We are just starting that process. 

rickets,

How does one measure the "point of no return" when dealing with exponents.  Remember the stadium filling with water?  Seriously, how does one measure the point of no return when floating down the river toward the falls? Get out here?  Nah, I think we can float a little longer and still make it to shore.

I really feel that the coming fight at the local level over union's pay and benefits and local taxes is going to be very ugly.

Here in Texas we now use pension bonds to fund underfunded public pensions.  So let me get this straight, we don't have the money to fund the plan so we are going to borrow the money because later we will have enough money to fund the plan for that year as well as pay back the borrowed principle as well as interest accrued.  That is insanity.

http://www.chron.com/disp/story.mpl/editorial/outlook/6661829.html Here is a taste of what is going on in Houston.

Just my opinion, but I don't look at this as sensationalism to sell newspapers.  I look it as mathematic reality in exponential functions.

 

 

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Re: Daily Digest - March 16

Davos and Mark - I think we differ mostly in one belief:  I think bailouts are getting close to over, you guys dont.  I think unions will be thrown out of court for the greater good and contracts will be broken in order for municipalities to continue - you dont.  I think the masses have had it with overspending, with unions, with wall st and these entities will get no more - -- - you guys think we will continue accelerating toward the cliff (or at least thats my perception of your comments).  Other than that, we are seeing the same things.

Davos - the more states cut, the more they lose in revenue.  Thats partially true, but not a one to one ratio.  Remember that government has more waste and fat than anyone, so budget cuts often simply lead to an increase in efficiency - something they have not had to do in decades (in any serious manner anyway).  Lets say 50% of the budget reductions are cutting fat, and 50% is people....then the goverment will reduce in size until there is equilibrium between taxes and govt size. 

Regarding the Feds bailing the states out...maybe, maybe not.  The current trend in local/state government budgets is to cut - and not rely on the Fed.  So far, the feds have said no to bailing out the states (since the stimulous package).

Re where does the CREs, 4 trillion more here or there...how does it all add up?  I dont know that it does, and its totaly scary.   These are huge issues, but they are not 100% loss issues.  Similar to the pensions being underfunded, these indicate major losses ahead - but not full loss.  Again - this issue comes down to bailouts or not.  Without them, we have economic disasters and huge companies going bankrupt and thats deflation.  With them, we repeat the money printing and head for currency crisis.

Davos - you have  pointed out weimar several times...and Mark this also answers the how far can we go comment maybe - - - did you know in order for their currency to collapse they 1) had to lose a war  2) increase their debt 31 fold  3) high level govt officials were assasinated  4) The french invaded a key production valley further crippling their economy  5) the allies were charging them 10% of their GDP per year for the war.  Still, even with all these factors in place it took years before hyperinflation took hold.  The US is nowhere near these levels, is not being invaded, has the worlds reserve currency, the biggest military, largest citizen wealth in history...etc etc etc.    These are all reasons to give pause to the hyperinflationary story.   How about Japan, how about the UK?  Why dont you think we are like Japan?  Why isnt the Japanese decade going to repeat here?  They have a very similar story to ours.

Also, remember that US wealth is very very international, and dominates the world still.  We can defalt or partially default on what we owe ourselves and still be, by far, the wealthiest country in the world and further have debt levels that are very in control.

 

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Re: Daily Digest - March 16
rickets wrote:

Davos and Mark - I think we differ mostly in one belief:  I think bailouts are getting close to over, you guys dont.  I think unions will be thrown out of court for the greater good and contracts will be broken in order for municipalities to continue - you dont.  I think the masses have had it with overspending, with unions, with wall st and these entities will get no more - -- - you guys think we will continue accelerating toward the cliff (or at least thats my perception of your comments).  Other than that, we are seeing the same things.

Davos - the more states cut, the more they lose in revenue.  Thats partially true, but not a one to one ratio.  Remember that government has more waste and fat than anyone, so budget cuts often simply lead to an increase in efficiency - something they have not had to do in decades (in any serious manner anyway).  Lets say 50% of the budget reductions are cutting fat, and 50% is people....then the goverment will reduce in size until there is equilibrium between taxes and govt size. 

Regarding the Feds bailing the states out...maybe, maybe not.  The current trend in local/state government budgets is to cut - and not rely on the Fed.  So far, the feds have said no to bailing out the states (since the stimulous package).

Re where does the CREs, 4 trillion more here or there...how does it all add up?  I dont know that it does, and its totaly scary.   These are huge issues, but they are not 100% loss issues.  Similar to the pensions being underfunded, these indicate major losses ahead - but not full loss.  Again - this issue comes down to bailouts or not.  Without them, we have economic disasters and huge companies going bankrupt and thats deflation.  With them, we repeat the money printing and head for currency crisis.

Davos - you have  pointed out weimar several times...and Mark this also answers the how far can we go comment maybe - - - did you know in order for their currency to collapse they 1) had to lose a war  2) increase their debt 31 fold  3) high level govt officials were assasinated  4) The french invaded a key production valley further crippling their economy  5) the allies were charging them 10% of their GDP per year for the war.  Still, even with all these factors in place it took years before hyperinflation took hold.  The US is nowhere near these levels, is not being invaded, has the worlds reserve currency, the biggest military, largest citizen wealth in history...etc etc etc.    These are all reasons to give pause to the hyperinflationary story.   How about Japan, how about the UK?  Why dont you think we are like Japan?  Why isnt the Japanese decade going to repeat here?  They have a very similar story to ours.

Also, remember that US wealth is very very international, and dominates the world still.  We can defalt or partially default on what we owe ourselves and still be, by far, the wealthiest country in the world and further have debt levels that are very in control.

 

Sorry: 122 trillion in debt & off balance looted liabilities (Source Sprott). Or 2.2 trillion in a year and 9 trillion out a year (Source Shadow Stats GAAP). Both spell insolvent to me. To me, this is like arguing - as some of my friends who were in CRE and RRE did - that subprime and alike loans a.) wouldn't implode and b.) even if there were defaults there wouldn't be contagion. 

Time will tell.

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Inflation vs Deflation

I typically read and hear the deflationists make comparisons to Japan, and the 1st depression in the US, and of course the inflationists making comparisons to Zimbabwe, Argentina, Weimar etc... Both sides make very convincing arguments, however there is one thing that I think always gets left out in the macroeconomic view of the deflationists. They rarely if ever talk about the scarcity of natural resources. They tend to think that demand will come down with prices. I really believe this to be a flawed argument. They tend to ignore one of the big "E's". We do not have the abundance of easily recoverable resources that we did in the 30's. I am anticipating continuing deflation in the value of things you have (houses, dollars, cars etc..), but inflation in the things you need (energy, food, real money), culminating in a hyperinflationary blowout of all fiat currencies when people lose confidence in the con game. It's not about the economy as much as it's about that cheap energy the economy runs on. 

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Re: Daily Digest - March 16

Rickets & Davos

I have mentally moved between the inflation and deflation camps many times.  There are very bright people and excellent arguements on both sides of the issue. Is it Japan?  Or is it Germany?   A reasonable response is to place financial bets in both camps.  When peak oil hits in full force, the carrying capacity of this planet will drop like a rock most people won't care how this plays out. 

 

Nate

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Re: Daily Digest - March 16

Davos -when quoting debts and liability numbers  like 122 Trillion, those clearly include the present value of all projected payments we might owe to every person in the country right now - including the one year old baby and their social security payments in 2085.  This also likely projects healthcare rising at 20% FOREVER and the govts burden of paying for the increased cost in the same fashion as they do now.  Further, it doesnt take the net present value of all the tax receipts for the next 80 years either.  Of course, I am guessing, but because that number is so absurdly out of line I dont feel like even reading who quoted that.  I can easily respond that our current national debt is quite contained when compared to the net value of all assets of the American people, who, actually do by law back the government.  So, if we are going down this path we are utterly, totally solvent.

zeroenergy - I agree with you.  In addition, I might add that hyperinflationist and many on this site totally discard any chance of technological breakthrough....which I find very interesting given the advances of the last 100 years.  And yes, there might even be an advance that doesnt take lots of water or oil!

Nate - totally agree.  Any idea on how to bet on both at the same time?  My take is that one negates most of the other!  The only things I can think of are to be as self sufficient as possible!

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Re: Daily Digest - March 16

Rickets,

Any idea on how to bet on both at the same time?

Put some $ in gold /silver and farmland so that can be (more or less) self-sufficient and the balance in debt instruments.

Debt instruments include something like MERKX and debt of local business.

Nate

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Re: Daily Digest - March 16
rickets wrote:

zeroenergy - I agree with you.  In addition, I might add that hyperinflationist and many on this site totally discard any chance of technological breakthrough....which I find very interesting given the advances of the last 100 years.  And yes, there might even be an advance that doesnt take lots of water or oil!

Here's a cool technological breakthrough for those of us in the snowy areas of the world:

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Re: Daily Digest - March 16

Nate - ok.  Thats kind of why I said one offset the other outside of being self-sufficient.  Gold would likely tank in deflation, debt in inflation....so I lose comperable amounts of money in either right!  The farmland/self sufficiency thing makes sense to me.  I guess buying gold and buying debt seems like I am hoping to keep 50% of my buying power!

I guess that might be good relatively speaking if half the outcomes predicted here are accurate!

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How to Invest for Both Inflation and Deflation

Rickets,

I'm not sure if this is still the case, but one investment that should provide some protection in both inflation and deflation is TIPS. The inflation protection of TIPS is obvious, but it would be meager. But if deflation took hold, the TIPS would still return your principle to you in dollars that had greater purchasing power than those used for the initial purchase.

In that sense, your purchasing power is somewhat protected in both inflationary and deflationary environments.

Do you know if that still a viable option, or have things changed?

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Re: Daily Digest - March 16

Rickets:

I've been on this site for a long time and have often mentioned that some new technology could save us or at least kick the can down the road. Two things I've read about are promising: Sulfur batteries and wind off the Maine coast 15 miles.

I expect neither tomorrow.  

Until the day comes we are a service not a manufacturing nation.

Nate: I agree - but if the average Joe doesn't pick the right one and invest accordingly they aren't going to be able to afford any technology (existing solar or some new energy technology) that will help them uphold their standards of living.

I think for both scenarios: An ample stock of food and water. During the last deflation they plowed crops under because it was cheaper than a harvest - people starved.

Deflation is a no brainer - food and cash. Inflation isn't much harder.

Rickets: You might want to read their work. Take care

This statement you wrote:

rickets wrote:

Of course, I am guessing, but because thatnumber is so absurdly out of line I dont feel like even reading who quoted that. 

 concerns me deeply. 

Sprott has found a lot of things 99.99999% of people missed. They are calling for default/collapse. You can share your track record with me, but right now I'm leaning towards Sprott, Williams and alike. The 122 trillion adds the UL to the Debt. ZeroHedge did that a week or 2 back when they ran this Sprott piece.

Here are some Sprott quotes:

In November 2007 we wrote an article entitled “Surreality Check… Dead Men Walking”, in which we discussed the early warning signs of the impending credit crisis and highlighted companies that were looking particularly troubled to us at the time.

We identified General Motors with a book value of negative $74 per share that boasted a market cap of $15 billion. (Ask your friendly neighborhood Chartered Financial Analyst to explain that one to you). Two years later? Following a $50 billion government injection, GM declared bankruptcy on June 1,

We identified Fannie Mae, which, at the time, had a market cap of $40 billion and owned/guaranteed $2.7 trillion of mortgages - or about a quarter of all residential mortgages in the United States. Fannie’s leverage ratio was a sobering 67:1. Two years later? Fannie Mae and Freddie Mac have both been nationalized. On September 7th, 2008, the US Treasury announced the two mortgage giants were being placed into a conservatorship run by the FHFA and pledged up to $200 billion each to back their crumbling balance sheets.

We highlighted Citigroup as a candidate for collapse under the weight of its subprime portfolio. One year later? $25 billion from the TARP program, a massive US government guarantee on $306 billion in residential and commercial loans and a cash injection of $27 billion into Citigroup for preferred shares. It was a de facto nationalization.

 

In case you failed to catch it in our previous articles this year, we thought we’d state it outright for our
readers this month: the United States Government is on a trajectory to default on their obligations.In case you failed to catch it in our previous articles this year, we thought we’d state it outright for our
readers this month: the United States Government is on a trajectory to default on their obligations

 

 

In case you failed to catch it in our previous articles this year, we thought we’d state it outright for our

readers this month: the United States Government is on a trajectory to default on their obligations.

 

 

Three years later, the financial condition of the US government is completely untenable. The projected US deficit from 2009 to 2019 is now slated to be almost $9 trillion dollars.3 How on earth does anyone expect them to raise this capital?

 

 

A, we outline theTotal US government Obligations, using actuarial reports from the Social Security Administrationa nd the Medicare Trustees Reports. In column B we identify Total Federal obligations according to GAAP accounting provided by Shadow Government Statistics, calculated on a US fiscal year end basis with estimates for 2009. The differences in the absolute amount of total obligations ($114.7 trillion vs. $74.6 trillion in 2009) are a function of timing, the calculation timeline for Social Security and Medicare, and other obligations included under GAAP rules.

 

 

 

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Re: Daily Digest - March 16

Britain defends budget deficit after EU warning

By Europe correspondent Emma Alberici

http://www.abc.net.au/news/stories/2010/03/17/2847912.htm?section=justin

British chancellor of the exchequer Alistair Darling has hit back at the European Union (EU) for criticising the size of Britain's budget deficit.

Reports from Brussels suggest the European Commission will officially recommend that Britain more quickly reduce its ballooning deficit, which stands at 12.6 per cent of the country's gross domestic product.

But Mr Darling said that acting sooner than his government intended would take $60 billion out of the British economy.

"I believe that my judgement, which is backed by many international commentators, is right," he said.

"To go further would be to seriously damage the fabric of our country."

Mr Darling said Britain noted the EU advice with great interest, but that he would aim to cut the deficit in half within four years.

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Re: Daily Digest - March 16

It seems to me that inflationists sometimes forget about all the money that will be taken out of the economy via debt destruction, which will probably be a lot more than the feds can borrow or print. However, a sovereign debt crisis would cause a loss of confidence in the currency and these inflationary sentiments would trigger a self-reinforcing cycle.

That being said, this is a unique time in history in almost every way imaginable, so I would not be surprised if the traditional analysis of mutually exclusive deflation vs. inflation does not hold up.

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Re: Daily Digest - March 16

Interesting video. A wonderful example of human ingenuity! And the creativity in making the video itself. And yet it points to the very problem we are facing as we head towards that cliff (or wall, depending on which way you plot your exponential curves Cool) We continue to find ways to replace "renewable" human labor with all these non renewable resources (the materials to build the robot) and then power it with energy that has issues of decreasing net energy. 

Then we get in the car and drive to the gym to go exercise since our personal energy store is increasing from a less active life style. Tongue out

Sigh,

S

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Re: Daily Digest - March 16

Rickets,

I read through the chain of responses between you and Davos and decided to chime in a bit. First, let me say that i admire both of you for disagreeing so respectfully. Civil, truth seeking, intellectual discourse about truly important matters is just not that common these days and for achieving that I salute you both.

The difference between deflation and inflation may be as simple as the underlying assumption regarding human nature? Is it good? Is it fundamentally flawed? Is man perfectable? Do we have good intentions? Is evil just misguided passion with an ends justify the means mentality? Should government fix everything that is wrong by dictating perfect behavior or should its power be limited in case it falls into "evil" hands?

Those currently in power believe that big government is the answer are executing pretty well on the cloward pivins strategy. It calls for increased entitlements and when things start to get bad and the knees start to shake under the weight of the entitlements simply double down on spending and debt but strengthen your partnership with the unions. As you can see in current events playing out in Greece, austerity measures can be a good pretext for civil unrest. Civil unrest unleashes the power to restructure society so that perfect people (ok they would say nearly perfect) can rule.

If we try to adjust our spending, the social unrest which will ensue (and which may be funded by fiat money provided by Acorn via your tax dollars) may be significant enough to keep the machine on its current track - off the cliff.

But as Davos has said, we will see, and in my opinion what we wil see is human nature, which is fundamentally flawed. So I am working for a good outcome, but am preparing for a bad one.

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Re: Daily Digest - March 16

Prepare for new farming revolution, CSIRO says

By Brigid Andersen

http://www.abc.net.au/news/stories/2010/03/17/2848048.htm?section=justin

Australia's peak scientific body, farmers and supermarkets say they are gearing up for a new Green Revolution.

In 50 years the world's population will be more than nine billion people, supplies of fertiliser could be severely depleted, and competition for land will have increased.

According to CSIRO scientist Peter Carberry, these factors, combined with climate change, will challenge our agriculture industry like never before.

Mr Carberry is deputy director of the CSIRO's Sustainable Agriculture Flagship, established by the Federal Government earlier this year to reduce the carbon footprint of Australia's land use, while boosting productivity.

He says we are facing an agricultural revolution similar to the Green Revolution that followed World War II.

"The first Green Revolution was a revolution that was essential to feed the world's population at the time. We have to do it again, but the parameters have changed, which makes it a challenge for science," he said.

He says population growth and increased wealth in countries such as China and India mean there are new and increased demands for food.

Supply issues such as land degradation and the growth of biofuels will also play a role.

"As we go forward it's a much greater challenge to think about maintaining productivity levels when you have issues around limited resources," he said.

"So our second Green Revolution has to be built on increasing our resources' efficiency, getting much greater productivity out of the inputs we use, [while being] conscious of our environment.

"So it is absolutely a challenge as we go into the future, and much more so a challenge than faced in the past."

Mr Carberry says climate change cannot be ignored when discussing the agricultural revolution.

"It's all about risk management isn't it? The sceptics about climate change talk about whether they believe the projections or whether it's human induced," he said.

"But the fact that the majority of the scientists say that there is some risk of human-induced climate change suggests that it's one of the parameters that one must look at when we're planning for the future."

The Sustainable Agriculture Flagship is running a number of research projects, breeding new varieties of disease-resistant grain and rice, and developing technologies to cut greenhouse gas emissions in agriculture.

Mr Carberry says another concern for scientists is the availability of fertilisers going into the future.

"There's that pressure on land as well as issues such as the availability of fertilisers going into the future, such as phosphorus - so we're reaching peak phosphorus [usage] and our access to ready fertilisers is going to decline in the future," he said.

But he says the huge task of feeding the world over the coming decades is achievable.

"It's not a challenge that science or humanity is saying is impossible," he said.

"There are technologies on the horizon and opportunities to further increase our productivity from the existing resource base and new technologies."

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Re: Daily Digest - March 16
ashvinp wrote:

It seems to me that inflationists sometimes forget about all the money that will be taken out of the economy via debt destruction, which will probably be a lot more than the feds can borrow or print.

From the national debt clock, US personal mortgage and credit card debt = 16T.

So, if say 1/2 the consumer debt defaulted, we would need 8T.  Hmm, according to this, we are already at almost 13T, and that was in April of last year.  Since then we have have more QE, more Fed debt purchases, unlimited guarantees on Fannie and Freddie, the list goes on.  Sure looks like they can borrow and print as much as they want at this point. 

When debt is destroyed (defaulted), the money from it is not.  After all it's when the loan is paid off that the money is removed from the system, so debt destruction is inflationary.  When the Fed/Govt. puts money in that they can never remove or payback that is also inflationary.

But I think the ignition for hyper-inflation will be loss of faith in the US government and thus a loss of faith in the currency.

 

 

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Re: Daily Digest - March 16

Okay, I just don't get it.

If the money "created" is sitting on the balance sheet of a bank, it seems to me the only way hyperinflation can take place is if they actually loaned it out. Who are they going to loan it to? Are they going to increase everyones credit card limit to 100k? Unless the cash in in the hands of the consumer, how will this work? I believe I read somewhere (hell, I may have dreamt it) that the Zimbabwe government just kept sending out larger checks every month to its people.

I understand that I am not as sophisticated as some here when it comes to understanding the complexities of Economics but geeze, are Zimbabwe, Argentina and Germany comparable here? Did they go through a monster bubble (or two) bursting, wiping out trillions of dollars in wealth, as well as accumulate a paralyzing debt? I am not being a smart ass I honestly don't know, did they?

Another thing. If Ollie Garchy and his band of merry men really are conspiring against us peeons wouldn't they prefer deflation as it would make their stash of cash that much more impressive? Hyper-inflation would eat away at them too.

Lastly, I choose deflation (with some inflation in energy and food, a la CM) because most people say inflation. If I have learned anything the last few years it's " whatever everybody else is doing, do the opposite"

Now back to my painting...I love it.

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Re: Daily Digest - March 16
derfman64 wrote:

Okay, I just don't get it.

If the money "created" is sitting on the balance sheet of a bank, it seems to me the only way hyperinflation can take place is if they actually loaned it out. Who are they going to loan it to? Are they going to increase everyones credit card limit to 100k? Unless the cash in in the hands of the consumer, how will this work? I believe I read somewhere (hell, I may have dreamt it) that the Zimbabwe government just kept sending out larger checks every month to its people.

I understand that I am not as sophisticated as some here when it comes to understanding the complexities of Economics but geeze, are Zimbabwe, Argentina and Germany comparable here? Did they go through a monster bubble (or two) bursting, wiping out trillions of dollars in wealth, as well as accumulate a paralyzing debt? I am not being a smart ass I honestly don't know, did they?

Another thing. If Ollie Garchy and his band of merry men really are conspiring against us peeons wouldn't they prefer deflation as it would make their stash of cash that much more impressive? Hyper-inflation would eat away at them too.

Lastly, I choose deflation (with some inflation in energy and food, a la CM) because most people say inflation. If I have learned anything the last few years it's " whatever everybody else is doing, do the opposite"

Now back to my painting...I love it.

All the debt in the world is fine - as so long as it is serviceable.

Our debt is no longer serviceable, we are short each year with no surplus and we now have a massive deficit the difference in what we take in and what we owe or have spent.

We used to borrow the deficit and service the debt.

We can't do that any longer.

Now we "print". That difference using GAAP is about 9 trillion bucks. That spells Zimbabwe IMO. I don't think people get the importance of the deficit and that it is as baked as Lehmans repos or Enron's books... In my book painting s*cks and we are insolvent - soon the world will wake up to this and there will be a massive currency crisis.

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Re: Daily Digest - March 16

This may sound simplistic but the inflation vs. deflation debate to me is about who has the most influence, the government or the people.  No, they are not the same thing.   People who understand that the standard of living is going to go down want to save money.  This deflationary, economic contraction is the antithesis of what the big money managers and the government want which is "growth."  They want to grow our way out and will print money to try to do that.  But no one's borrowing!  So they have to print more. If the people win we vote in representatives who will stop the madness, if there are any left.  The political will has to be there with enough mass to effect the needed restraint.  This is a low probability in my view because of the naivete and entitlement mentality of probably a majority of Americans.

Ideally I believe we should have some deflation first, redistribute assets and values accordingly and then build it back up from there.  I really believe a little deflation is a good thing.  Unfortunately the Feds are simply not going to let that happen.  They have never had a bigger more powerful arsenal of mechanisms to manipulate the markets; SLP, ESF TALF, etc etc.   Hence my bias towards the inflationary outcome.  The politico's will not be able to do otherwise.

 

Mark

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Re: Daily Digest - March 16

1) Gotta love those Europeans at the GEAB- the ring of fire of Sovereign debt -   http://www.leap2020.eu/GEAB-N-43-is-available!-The-five-steps-of-the-global-geopolitical-dislocation-phase_a4420.html

2) more retirement disasters ahead   http://www.moneyandmarkets.com/more-retirement-disasters-6-38326

3)  Understanding the extent of Lehmans insolvency  http://www.marketskeptics.com/2010/03/understanding-extent-of-lehmans.html

4) evidence of a financial coup in America  http://www.globalresearch.ca/index.php?context=va&aid=18147

5) EU Fudges greece rescue yet again - Andrew evans Pritchard  http://www.telegraph.co.uk/finance/economics/7459048/EU-fudges-Greek-rescue-yet-again.html

6)  K Denninger - a very serious warning to Nancy Pelosi  

http://market-ticker.denninger.net/archives/2087-A-Very-Serious-Warning-To-Nancy-Pelosi.html

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Re: Daily Digest - March 16
eye wrote:

But no one's borrowing!

The federal, state, and municipal governments still are, and they are handing out money like crazy.  For states much of it is in health benefits and unemployment benefits.  They are borrowing to make up revenue short falls but eventually it will have to stop.  However, they will then probably just default.  All the money pushed into the system, still in the system.

derfman64 wrote:

I believe I read somewhere (hell, I may have dreamt it) that the Zimbabwe government just kept sending out larger checks every month to its people.

In Zimbabwe they handed out money to government employees & soldiers, not the general public.

Read about how the government employment has grown a lot recently and how salaries have increased? Kind of sounding like Zimbabwe.  We just hide it behind fancy names like QE and TARP.

On top of this you have the Fed pumping money in via asset purchases, and flows of money back into the US from foreign creditors trying to get hard assets instead of dollars.

All of this is inflationary.  Just waiting for the spark when the majority wake up and say, hmm, these pieces of paper with pictures of dead people might be a problem, I should buy something with them now. BOOM!

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Re: Daily Digest - March 16

Davos and Rickets, my hat is off to you both for an excellent discussion (debate?). I particularly applaud you for keeping it civilized and respectful.

I really think you are starting to hit on something very important, and I think the conversation could be expanded and re-framed around what I'm calling policy reflexivity. But I also know that these digest threads always die out when the next day's digest is posted. For that reason, I've taken the liberty of creating a new thread here to continue this discussion. I put my own reactions to your several comments in the new thread, and I hope you guys will keep the excellent exchange of ideas going there.

Erik

 

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Re: Daily Digest - March 16
derfman64 wrote:

Okay, I just don't get it.

If the money "created" is sitting on the balance sheet of a bank, it seems to me the only way hyperinflation can take place is if they actually loaned it out. Who are they going to loan it to? Are they going to increase everyones credit card limit to 100k? Unless the cash in in the hands of the consumer, how will this work? I believe I read somewhere (hell, I may have dreamt it) that the Zimbabwe government just kept sending out larger checks every month to its people.

I understand that I am not as sophisticated as some here when it comes to understanding the complexities of Economics but geeze, are Zimbabwe, Argentina and Germany comparable here? Did they go through a monster bubble (or two) bursting, wiping out trillions of dollars in wealth, as well as accumulate a paralyzing debt? I am not being a smart ass I honestly don't know, did they?

Another thing. If Ollie Garchy and his band of merry men really are conspiring against us peeons wouldn't they prefer deflation as it would make their stash of cash that much more impressive? Hyper-inflation would eat away at them too.

Lastly, I choose deflation (with some inflation in energy and food, a la CM) because most people say inflation. If I have learned anything the last few years it's " whatever everybody else is doing, do the opposite"

Now back to my painting...I love it.

My view (Not a professor or anything, just my viewpoints)

They dont need to loan it to US citizens, US dollars invested in a foreign country = they have to exchange the US dollars for said countrys currency to do so (on the open market). As soon as the money stops sitting still it'll start causing the dollar to fall.

Can't say for Zimbabwe, Argentina had a semi-bubble, at least what could be called some "good years", before it all came down. Germany (Weimars) moneyprinting was (initially) caused by repayments due to World War 1 "crimes".

For bankers inflation is always better. In deflation, not only money, but debt spirals in "value", and for bankers that works both ways. All the Ollies in the US look to be very debt-burdened to me. In inflation the debt is annihilated. At the same time, inflation doesn't destroy money for bankers, because bankers are in an easy position to quickly and often move money across borders, between currencies. The latest years tech has gotten normal people some access to that too, but hyperinflation is still a good place to be for a banker.

At least it's not like the entire world has chosen to give the bankers control of the moneysupply so that they can crea.....oh....wait....

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Posts: 238
Re: How to Invest for Both Inflation and Deflation

JAG - regarding TIPS - at first glance I too thought that would be a good way to go.  However, these instruments are only adjusted once every 6 months based on the CPI.  Two major issues:  1) you are relying on the government calc of CPI - and in a crisis thats no good.  2) In hyperinflation, or even steep inflation, you lose as your interest is only recalced every 6 months.  That is to say you are lagging market conditions by 6 months.  If we go into inflation >10% that becomes a pretty big deal, and if we hit 100% or some crazy Davos like estimate (haha...I say with total respect and humor) then TIPS will be worthless.

 

ashvinp's picture
ashvinp
Status: Gold Member (Offline)
Joined: Jan 20 2010
Posts: 412
Re: Daily Digest - March 16
rhare wrote:
ashvinp wrote:

It seems to me that inflationists sometimes forget about all the money that will be taken out of the economy via debt destruction, which will probably be a lot more than the feds can borrow or print.

From the national debt clock, US personal mortgage and credit card debt = 16T.

So, if say 1/2 the consumer debt defaulted, we would need 8T.  Hmm, according to this, we are already at almost 13T, and that was in April of last year.  Since then we have have more QE, more Fed debt purchases, unlimited guarantees on Fannie and Freddie, the list goes on.  Sure looks like they can borrow and print as much as they want at this point. 

When debt is destroyed (defaulted), the money from it is not.  After all it's when the loan is paid off that the money is removed from the system, so debt destruction is inflationary.  When the Fed/Govt. puts money in that they can never remove or payback that is also inflationary.

But I think the ignition for hyper-inflation will be loss of faith in the US government and thus a loss of faith in the currency.

Does your figure factor in corporate debt? My understanding was that total private credit market debt was somewhere around 50T even after some deleveraging has occurred, and not including "off balance sheet liabilties". Also, a lot of the money that has been thrown at the economy isn't really going anywhere, or simply going into the casino speculation economy. At the same time, there is a lot of pressure on Western governments to cut defecits, and a significant part of that is debt servicing costs.

I don't agree that debt destruction is inflationary. I do think a decent amount of destruction is from people paying it off, and therefore removing money from the system and sacrificing spending on other things, which is obviously deflationary. Also when someone defaults on his/her debt, that means the lender's asset (loan) goes down in value or becomes worthless, which is also money being taken out of the system (as long as it is actually exposed, which is obviously not being fully done yet).

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