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Predict The Timing Of Coming Debt Implosion & Dollar Collapse?

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  • Sat, Jul 11, 2009 - 02:14pm

    #1

    Nichoman

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    Predict The Timing Of Coming Debt Implosion & Dollar Collapse?

Here’s an opportunity to participate in an unscientific forecast to see how readers view this potential serious risk.

Debt, Debt, Debt.  Chris has stated in the past this crash comes down to an unsustainable amount of debt which I agree.

Since it getting worse…I’m interested in others views when this debt implosion will occur?  This could include a bank holiday.

Just some quick background information first for those who might need a refresher.

1.)  Rising record delinquencies in all areas.   For example see this Rising Credit Losses Post.

2.)  Decelerating Growth, Wages, Increasing Unemployment, Rising Debt Coming Due.  Example:  Green Shoots To Brown.

3.)  California Debacle.  One example…See Day Of Reckoning

4.)  Mounting Wall of Consumer/Comercial Debt Coming Due.   Pick your data source(s). 

5.)  Record Foreclosures next few months. One example Upcoming Foreclosure Spike.

6.)  Record Federal Debt Financing and Rising.   One example…Record Auctions

Here’s the bottom line from a study did in my local town past couple weeks on 6 local banks in Iowa from statements (Bankrate.com–31 March 2009) plus several local conversations with their executives and loan officers.   These are all stable banks…according to data in top 25-50%…our unemployment is 5.8% compared to 9.5%.

  • Acknowledge Debt becoming more of a problem in all areas.
  • Statistical Analysis suggests many of these "stable" banks will be in "poor" shape within 12 months…if not insolvent at present rates of degredation from the last 15 months. (I am still stunned and mulling this over).
  • What’s it like for local/regional banks for 90 percent of US who are worse than us?

Here’s the 3 part question…

So…do you see a pending financial event(s) (Y/N)…including a bank holiday…if so…when will it really get going?

  1. August-September
  2. September-October
  3. October-November
  4. November-December
  5. First Quarter 2010
  6. Second Quarter 2010 
  7. Later
  8. Won’t be a significant event. 

My current prognosis:  Yes. Sept-Oct with second choice Oct-Nov.   Inclined this will require a bank holiday.

 

Nichoman 

       

  • Sat, Jul 11, 2009 - 03:46pm

    #2
    Peak Prosperity Admin

    Peak Prosperity Admin

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    Re: Predict The Timing Of Coming Debt Implosion & Dollar …

There will never be a collapse. People think the feds have no escape route but of course they do. They have some options.

Regardless, what will happen in the immediate future is that more private debt will be taken onto the public books as more banks collapse. The feds will as a result own most of the banks.

So what next? Either governments will then monetise vast amounts of the debt they have acquired form the private sector, and this can be prevented from causing hyperinflation simply by raising bank reserves. I calculated that the entire existing US public debt of 11tn could be fully monetised, and if bank reserves were raised to 20% (and the stupid sweeps rule that means although the nominal current reserve need is 10%, in fact the reserve is 0 is abolished), then that would result in inflation of only 100%, but leave the government debt free. It would be very deflationary becaase it would seriously curtail future credit availability, but it wipes the slate clean and keeps the dollar in reasonable shape. Alternatively half the debt could be monetised and keep the dollar at current levels.

Alternatively, the fed funds rate could be pushed nito negative territory until the economy reinflates. -3% should do it.

Both have implementation issues but they remain potentiall viable escpae routes.

 

 

 

 

 

 

  • Sat, Jul 11, 2009 - 04:28pm

    #3
    Peak Prosperity Admin

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    Re: Predict The Timing Of Coming Debt Implosion & Dollar …

The more I read the more I tend to agree with Stoneleigh & Ilgari:

We have a very long way to fall, and the deleveraging process is likely to play out over several years. During this time we can expect to be mired in a worse depression than the 1930s, as the excesses that led to our current situation are far worse by every measure than were those of the Roaring Twenties. Unfortunately, we are much less prepared to face such an occurrence than were our grandparents. Our expectations are far higher, our knowledge and skill base is much less appropriate, we are far less self-sufficient and we have a structural dependency on cheap energy. This will be a very painful time. Deflation and depression are mutually reinforcing, leading to a vicious circle of decline that is very difficult to escape. It will be over when the (small amount of) remaining debt is acceptably collateralized to the (few) remaining creditors. At that point trust will begin to rebuild.

Regarding forecasts of the dollar collapse, Stoneleigh again:

Forecasts of a collapse in the dollar are premature. Deflation will prop up the value of the dollar on a flight to safety, which will also drop bond yields to historic lows for a time. There is more dollar-denominated debt in the world than any other kind, hence its deflation will increase demand for dollars more than any other currency (except perhaps the yen as its carry trade unwinds). Eventually the value of the dollar will collapse, as all fiat currencies do, but that time is not now.

The amount of ‘money printing’ that as happened so far is completely dwarfed by the scale of credit contraction. We are not vulnerable to inflation as a result of this. On the contrary, most of it has disappeared into the black hole of credit destruction, never to be seen again. Much of the rest is being hoarded. It is doing nothing substantial to increase the velocity of money, although rallies are accompanied by a temporary return of liquidity along with the temporary return of confidence. In a very real sense, confidence IS liquidity. Once the rally is over, both will disappear again and the velocity of money will plummet.

Of course no one knows for sure.  It’s entirely possible the dollar will collapse and inflation and high interest rates will arrive in 2010. But you asked for opinions, so here is mine (for today, at least)!

 

  • Sat, Jul 11, 2009 - 05:00pm

    #4
    Peak Prosperity Admin

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    Re: Predict The Timing Of Coming Debt Implosion & Dollar …

I tend to agree that there will not be a complete collapse either. The world will have a hard time decoupling from the dollar which will take many years & they know they will suffer also. My guess is they will try to string out the pain of all this just like we are doing.

  • Sat, Jul 11, 2009 - 05:43pm

    #5
    Peak Prosperity Admin

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    Re: Predict The Timing Of Coming Debt Implosion & Dollar …

Here’s a view that seems entirely rational to me (from Brad Setster’s blog at the CFR).

The dollar has an overhang problem.

For the past 60 years the dollar has been the only game in town. It was the lubricant for financial and trade globalization, the undisputed store of value in the international monetary system and the primary medium of exchange/unit of account for commerce. The world held more dollars, and the world transacted more often in dollars. Demand outside the U.S. for dollars grew rapidly for many, many years. For monetary balance inside the U.S. to be maintained, the Fed had to provide these dollars; otherwise interest rates at home would have been much higher.

Fast forward to today. The world has undergone a radical transformation. Abstracting from the current global recession, most countries across the world are in much better economic shape than was the case 15 years ago, and their currencies are more stable and increasingly more freely convertible. People trust their own currencies more, as well as the currencies of other countries. Dollar holders — central banks, sovereign wealth funds, international corporations and individuals alike — realize they have accumulated too many dollars over the years. Holding such a high percentage of one’s precautionary balances in dollars no longer makes sense in today’s world. Not because the dollar is bad per se, but because there are so many opportunities to diversify safely.

Mexicans no longer have to keep as many dollars under the mattress. Brazilian companies no longer need to keep a war chest of dollars hidden in the Cayman Islands in order to ensure access to imported inputs. Sovereign wealth funds have realized that it is neither wise nor prudent to keep so much of its stock of wealth in one currency. Investment management firms are starting to offer more non-dollar share classes for their products. And Italians, Poles, and Turks — peoples closely linked in one way or another to the euro — are thinking less and less in dollars (it is amazing that they still do at all).

The transactional demand for dollars is also declining. This too puts downward pressure on the dollar. In countries like Brazil and India, hotel bills used to be presented in dollars. Not any more. Cabs in emerging economies used to prefer payment in dollars. Now it’s not worth the hassle. Many countries that historically quoted real estate prices in dollars are doing so less and less. Bilateral trade, on an ad hoc basis, is ever more frequently eschewing the dollar for other currencies.

With the demand for dollars structurally falling, the dollar should face headwinds until currency stockpiles have adjusted and a new equilibrium is found. With some 70 percent of dollars in circulation held outside of the US, unwinding this overhang may take a long time. This doesn’t mean we can’t have vicious countertrend rallies in the dollar. Every time risk aversion gets intense enough, the dollar tends to do exactly this. But it does suggest that you can expect the dollar to be undervalued relative to any intertemporal, goods market concept of its underlying value for quite some time.

I am quite hesitant to project a future path for the dollar based on what happened in 1929-1938 when we were on a hard money standard.  A pure fiat standard is an entirely different beast.  There is no physical limit to what can be printed nor how rapidly it can be dispersed.

 

  • Sat, Jul 11, 2009 - 05:46pm

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    Peak Prosperity Admin

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    Re: Predict The Timing Of Coming Debt Implosion & Dollar …

Personally, I think there will be another major de-leveraging (deflation) event in the next 6-8 months. It seems likely that the Fed will not let the major banks "appear" to fail during this event. But I’m not keeping any "extra" money in my bank account for the foreseeable future.

As far as a dollar crisis, I personally agree with Martin Armstrong’s One World Currency article where he forecasts that the USD will continue to rise until mid-2011. After that, all bets are off IMO.

  • Sat, Jul 11, 2009 - 05:49pm

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    Peak Prosperity Admin

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    Re: Predict The Timing Of Coming Debt Implosion & Dollar …

my understanding is dollar will probably implode in beginning of 2010 below 70.

just have to  watch it daily.

  • Sat, Jul 11, 2009 - 06:50pm

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    Re: Predict The Timing Of Coming Debt Implosion & Dollar …

What constitues a collapse in the dollar? Sterling lost some 30% from 2007 highs in very short order and I can assure you us brits are all still here, the government has not fallen and neither has the sky.

  • Sat, Jul 11, 2009 - 09:01pm

    #9
    Peak Prosperity Admin

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    Re: Predict The Timing Of Coming Debt Implosion & Dollar …

Good point, Scepticus.  "Collapse" as far as the $ goes needs to be defined.  I would use a failed government bond auction as a pretty good definition of failure, but in a way we’ve already had that happen with the Fed having to monetize the debt, so I guess we have to use a higher standard.  A >50% bond auction purchase by the Fed?  Maybe collapse will turn out to be how the Supreme Court once defined porn:  you’ll know it when you see it.

  • Sun, Jul 12, 2009 - 01:11am

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    Re: Predict The Timing Of Coming Debt Implosion & Dollar …

Can the Fed really just screw around with the dollar continuasly for years to come stemming an economic collapse? I thought it would be based more on GDP and debt levels etc. Will everything be about the same next year despite the US government being trillions and trillions more in debt, skyrocketing unemployment, a commercial and private real estate collapse and country after country going bankrupt because they monetized the debt?

All the other countries will be fine during this time (despite these bankrupties) because they can rely on there own currency and are not so dependent on the US dollar, which is fine.  

 

Alternatively, the fed funds rate could be pushed nito negative territory until the economy reinflates. -3% should do it.

Both have implementation issues but they remain potentiall viable escpae routes.

 

An escape route to what? What we had before say 2001? A growing economy based on what? All this is also assuming that there will be no problems regarding energy (ie oil).

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