Bond collapse & impact

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investorzzo
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Bond collapse & impact

After reading a number of articles on bonds and what could happen and when. I can't help but wonder if Deflation may come first. How can Bonds collapse, dollar collapse, Real estate collapse and hyper inflation ensue? Can someone wiser than I explain this. Jon

http://www.financialsense.com/contributors/stewart-thomson/topping-out-o...

http://jsmineset.com/2010/12/14/implications-of-the-long-bond-price-coll...

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Re: Bond collapse & impact

Well I ain't wiser than you but yes I think there will be a short period of deflation first but I don't think it will technically be deflation rather it will be devaluation. When people start to see that its pretty certain that things aren't going to turn around they will start dumping their debt which until then they had seen as an asset i.e. houses, cars, investment property etc. but when it is done on masse it will create a positive feedback loop and drive prices down driven by fear. But in the end since it wasn't really deflation, meaning the money supply wasn't decreasing, it will just kick start hyperinflation and off we goooooo. 

weeeeeeeeeeeeeeeeee

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Re: Bond collapse & impact

Exsqueeze me, but isn't a "dumping of debt" rather deflationary?  The dumping of debt is ongoing and isn't likely to subside for some time to come.  The amount of debt that ultimately will be "dumped" is a number so huge that the fabled printing presses upon hearing it begin to whimper ans scurry off to a dark corner of the basement.

Now all of this wouldn't be a problem if the credit bubble would only begin to expand fast enough to generate sufficient "money" such that the interest owed on previously incurred debt (plus any principal that may be due)as well as the interest on new debt were payable.  It is sad to report that due to the prior insanity we have reached the point where it has become almost matematically impossible.

IMO inflation is a credit, or debt if you prefer, problem.  Price and inflation are often confused.  Price can be the result of credit expansion as we have seen in the recent global housing debacle.  The fundamentals couldn't support the price, but "fog a mirror" loans did - that is until the market was literally exhausted of greater fools.  The previous and current commodity insanity is running the same course as the liquidity temporarily surges through the financial world.  You have to ask yourself, just how much would you pay for that fine tulip bulb in the window?

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Re: Bond collapse & impact

IMO for there to be any meaningful deflation prices would have to collapse faster than money is being shot into the system. My point is that we won't get there before hyperinflation kicks in. I suppose what I was driving at was this. There will be a short period of panic when people start shedding their 'assetts' once they know they will not see a return and they realize the money they are putting into them is just wasted. They will sell, if they can, at any price just to get out. This in turn will most likely cause the government/Fed to react with more money printing as the economy begins to retreat into what looks like a deflationary direction.

Bernanke is not going to let deflation get a foot hold so any deflationary movement will ellicit an over reaction in the opposite direction and hasten the hyperinflation scenario.

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Re: Bond collapse & impact

The entire system is confidence and psychology driven.  What most observers either have missed or over discounted is the simple fact that there has been a dramatic 180 degree shift in the "thinking" of the average consumer.  When real estate prices were soaring and enormous amounts of "easy" money were pouring into the system, consumers couldn't borrow enough money fast enough.  This was almost all "money" being spun out by the securitization of not only RE, but also all other types of loans.  We are talking trillions of dollars a year over the course of several years.  Then the bug hit the windshield.  No more easy money and the hangover began.  The result is a consumer that for the most part now buys based on real need instead of want.  Saving is back in vogue as is the pay down of existing debt.  The stigma of walking away from debt has gone from "you lazy deadbeat" to "intelligent strategic default".  In the past these dramatic reversals have long lasting ramifications that persist for a generation or two.

Surveys of business owners clearly reveal that there is no lack of money to borrow, but they have no desire to borrow the money as there is no need (demand) sufficient for them to expand operations.  Consumer borrowing has clearly been shrinking in RE, revolving and non-revolving debt.

The system is deleveraging by paydown and default, but most importantly it is deleveraging because the overall bubble is deflating or not expanding fast enough to generate growth in new debt. Those huge reserves the banks are sitting on is not money they really want to lend because it is really all that's keeping their ratios at "solvent" levels and even it would be woefully inadequate if they were forced to mark to market and bring everything onto the balance sheet.  This is making the lenders a lot more careful about whom they lend to and at what leverage ratio.  This is what a fractional reserve system looks like when slammed into reverse.  That's the mechanics.  But the true driver of the whole system remains the dominant psychology. 

You can hold the horse's head under water, but trying to force it to drink won't work.  There is the real economy of all human interactions and there is the financial sphere made up of mostly theoretical money.  When you look at the derivatives markets and their near quadrillion dollar notational amounts, it is hard to square that against a global economy of about $70 trillion and broad measure global money supply of about the same.  Bear in mind those numbers are both from the CIA and are based on the really dumb "purchasing power parity" method which wildly inflates the true numbers.

Now if you can show me rapid wage increases, increasing debt (please don't forget to use your calculator's minus sign to allow for defaults, pay downs and write downs.) combined with physical printing of "money", then I'll be happy to consider an imminent hyperinflation after a brief period of disinflation.  I stay firmly in the deflation camp because while gravity can be temporarily overcome, once the energy is exhausted, gravity will reassert itself.  We have for the moment jumped off the floor.

 

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Re: Bond collapse & impact
yobob1 wrote:

The entire system is confidence and psychology driven.  What most observers either have missed or over discounted is the simple fact that there has been a dramatic 180 degree shift in the "thinking" of the average consumer.  When real estate prices were soaring and enormous amounts of "easy" money were pouring into the system, consumers couldn't borrow enough money fast enough.  This was almost all "money" being spun out by the securitization of not only RE, but also all other types of loans.  We are talking trillions of dollars a year over the course of several years.  Then the bug hit the windshield.  No more easy money and the hangover began.  The result is a consumer that for the most part now buys based on real need instead of want.  Saving is back in vogue as is the pay down of existing debt.  The stigma of walking away from debt has gone from "you lazy deadbeat" to "intelligent strategic default".  In the past these dramatic reversals have long lasting ramifications that persist for a generation or two.

Surveys of business owners clearly reveal that there is no lack of money to borrow, but they have no desire to borrow the money as there is no need (demand) sufficient for them to expand operations.  Consumer borrowing has clearly been shrinking in RE, revolving and non-revolving debt.

The system is deleveraging by paydown and default, but most importantly it is deleveraging because the overall bubble is deflating or not expanding fast enough to generate growth in new debt. Those huge reserves the banks are sitting on is not money they really want to lend because it is really all that's keeping their ratios at "solvent" levels and even it would be woefully inadequate if they were forced to mark to market and bring everything onto the balance sheet.  This is making the lenders a lot more careful about whom they lend to and at what leverage ratio.  This is what a fractional reserve system looks like when slammed into reverse.  That's the mechanics.  But the true driver of the whole system remains the dominant psychology. 

You can hold the horse's head under water, but trying to force it to drink won't work.  There is the real economy of all human interactions and there is the financial sphere made up of mostly theoretical money.  When you look at the derivatives markets and their near quadrillion dollar notational amounts, it is hard to square that against a global economy of about $70 trillion and broad measure global money supply of about the same.  Bear in mind those numbers are both from the CIA and are based on the really dumb "purchasing power parity" method which wildly inflates the true numbers.

Now if you can show me rapid wage increases, increasing debt (please don't forget to use your calculator's minus sign to allow for defaults, pay downs and write downs.) combined with physical printing of "money", then I'll be happy to consider an imminent hyperinflation after a brief period of disinflation.  I stay firmly in the deflation camp because while gravity can be temporarily overcome, once the energy is exhausted, gravity will reassert itself.  We have for the moment jumped off the floor.

 

 

+1

 

For the hyperinflation scenario, where do people think the money is coming from? Wages are not going up and assets against which to borrow, are still declining. Is the FED really going to make a large deposit of free money (no collateral, no repayment) in every consumer's bank account?

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Re: Bond collapse & impact

So then we will continue to see businesses collapse in the commodities areas as they cannot raise prices? Who was the recent grocery market chain to file CH-11 instead of raising prices to keep pace with the commodities increases?

And the end result is....still food products that cannot be purchased due to lack of retail space (most stores go out of business trying to eat the increase)....or that prices move higher as businesses try to save themselve from collapsing margins.

If prices do not go higher to reflect the additional costs of raw materials (corn wheat, soy, feed grains, fuel etc) then everyone goes bankrupt. If they do increase to maintain the margins, then they have to run up as much as the markets have run up.

So cotton is up 200% and wheat is up 180%.

Retail prices will eventually reflect this and if the price increases are done gradually over a period of time while commodities prices stabilize, then I don' t see too big of a problem.

But what if commodities continue to reflect the injections of cash the Fed is giving?

RIght now....now you have retailers who are over 3 months behind in price increases. They have to gain some margins back or they will not be able to stock the shelves next month. Prices must rise. Commodities prices continue to rise....price on the shelf rise again. THe Fed prints more, commodities rise....retail prices rise with it....the consumer gets fed up and starts trying to buy ahead to avoid the price increases he now knows are getting baked in. Hoarding and velocity of money both increase exponentially.....

What is that called?

I would say it's hyperinflation, but not due to productivity demand from Main St but currency inflation from the Fed.

Why is everyone saying this cannot happen? I can see that it already is by looking at the cost of goods sold column in my business and the commodities futures and the Feds continued response to the housing market and no collapsing bond market.

Jager06

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Re: Bond collapse & impact
Jager06 wrote:

So then we will continue to see businesses collapse in the commodities areas as they cannot raise prices? Who was the recent grocery market chain to file CH-11 instead of raising prices to keep pace with the commodities increases?

That would be A & P . They are a very big east coast chain.

Jager06 wrote:

Why is everyone saying this cannot happen? I can see that it already is by looking at the cost of goods sold column in my business and the commodities futures and the Feds continued response to the housing market and no collapsing bond market.

Jager06

I see inflation every day in the things that I buy - especially food.

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Re: Bond collapse & impact
Jager06 wrote:

So then we will continue to see businesses collapse in the commodities areas as they cannot raise prices? Who was the recent grocery market chain to file CH-11 instead of raising prices to keep pace with the commodities increases?

And the end result is....still food products that cannot be purchased due to lack of retail space (most stores go out of business trying to eat the increase)....or that prices move higher as businesses try to save themselve from collapsing margins.

If prices do not go higher to reflect the additional costs of raw materials (corn wheat, soy, feed grains, fuel etc) then everyone goes bankrupt. If they do increase to maintain the margins, then they have to run up as much as the markets have run up.

So cotton is up 200% and wheat is up 180%.

Retail prices will eventually reflect this and if the price increases are done gradually over a period of time while commodities prices stabilize, then I don' t see too big of a problem.

But what if commodities continue to reflect the injections of cash the Fed is giving?

RIght now....now you have retailers who are over 3 months behind in price increases. They have to gain some margins back or they will not be able to stock the shelves next month. Prices must rise. Commodities prices continue to rise....price on the shelf rise again. THe Fed prints more, commodities rise....retail prices rise with it....the consumer gets fed up and starts trying to buy ahead to avoid the price increases he now knows are getting baked in. Hoarding and velocity of money both increase exponentially.....

What is that called?

I would say it's hyperinflation, but not due to productivity demand from Main St but currency inflation from the Fed.

Why is everyone saying this cannot happen? I can see that it already is by looking at the cost of goods sold column in my business and the commodities futures and the Feds continued response to the housing market and no collapsing bond market.

Jager06

Don't you see the missing link in your scenario?  The insane "printing" by Ben & Co. is not making it to the consumer.  It is locked within the financial sphere.  The top 5% may be benefiting beyond their wildest dreams, but they cannot make up for the consumption decline of the other 95% - even if the decline is just a few percentage points.

So you can have a scenario of large retail price increases, but given that were on the edge as it is, you are also going to see significant volume drops in response to price.  Volumes always have optimum efficiency levels.  You can't run too fast, you can't run too slow.  Doing either runs the cost per unit higher meaning lower profit.  Sometimes you lose less by selling more at a lower price.

If you'll look at the "commodity bloodbath" thread you'll see a recent post that shows the levels of speculation now are higher than the height of commodity bubble circa 2008.  I have virtually no doubt that the commodities are mostly a giant bubble of speculation that may be also viewed as an "anti-dollar" trade.  You may wish to see Machineheads recent posts on that subject. 

I think the easiest sell right now is inflation - I'd sure as heck rather be selling inflation than deflation - but I have to stick with my gut on this - there's too much missing cash flow that will sooner or later rear its ugly head.  That "selling" of inflation has lead to huge speculative positions - a very lopsided bet on the verge of rolling over.  Time will tell.

I again point to the BDI.  If you just looked at the paper markets you would assume you couldn't charter a ship for your commodity booty.  You would be wrong.  If all these commodity trades aren't between producers and users, then what else are they?

If this were just paper, like equities or bonds, then there's no problem.  But commodity contracts are hooked to real things, and sooner or later the mismatch between the paper value and the street value will collide.

20 December 2010

Baltic Dry Index (BDI)    -44   1955

 

We're already seeing the hot money move off the bond markets and sell some of the riskier stuff.  I wish I knew exactly when this bubble pops, but I suspect that there will be no QE III and so the pomos will expire in a few months and we'll find out who is swimming naked.

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Re: Bond collapse & impact

Yobob1

So what end scenario do you see in this deflationary collapse?

Ok, so we have massive deflation and no hyperinflation then as everything implodes I walk away with my dollar not only surviving but being worth a lot more? Is that what you are saying?

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Re: Bond collapse & impact

Jim Puplava says that the deflationists are forgetting Ben Bernakee and the fact that he can buy more then bonds. Real estate, Munies, companies, anything it needs to. Jon

http://www.financialsense.com/financial-sense-newshour/big-picture/2010/...

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Re: Bond collapse & impact

yobob-

I understand what you are saying, but there is a lot of money being sent to the consumer, in the form of unemployment and other subsistence payments. These are dollars that are not attached to productivity and are being spent into existence every month, competeing for the same goods as most of my employees who are actually creating real goods. These dollars are competeing for commodities almost exclusively as that is the basis for life....food, clothing, energy.  Can this account for commoditiy price increases, while other nations exploding GDP create new wealth that is also looking for goods, again driving prices higher?

I understand the Baltic is down....but how much of that is accounted for as a natural response to increased prices? Or is it the same effect as national export restrictions based on scarcity? (I am thinking of the global wheat shortage)

I honestly do not know, and appreciate the answers I have seen thus far.

My thinking is: the Fed is printing gazillions and some of that money IS entering the economy as social services and government spending. Some of it is being purchased as debt by other nations, who seem to be increasingly using that to purchase commodities. Which dumps previously sequestered dollars into...??

Does it matter that the unemployment checks are going to be too little to matter as commodities/ core goods prices increase?

If commodities are a bubble....where will this money have left to go when the bubble bursts? Real goods in deflated economies like the US?

I guess I am missing the next step in the chain, since I am seeing price inflation at my level almost exclusively in the basic goods like clothing, food and energy.

Can velocity of money affect inflation? Meaning, with a limited supply of hard cash on Main St, can the limited funds availble increase velocity to the point of hyperinflation without all the money created by the Fed actually making it into the real economy?

Lots of questions, but I am curious.

Merry Christmas,

Jager06

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Re: Bond collapse & impact

Perhaps the insane money printing isn't the direct cause of any future hyperinflation, but rather has the potential to exacerbate the effects when a loss of confidence in the currency does occur at some point in the future.  Like pouring gasoline on a dying fire being starved of oxygen, it's effects won't fully be realized until the oxygen (monetary velocity in our case) comes flowing back due to another factor (loss of confidence in the currency).

My amateur opinion (at least what I see as most probable) is that we're still headed for further deleveraging and deflation first before any hyperinflation, but the Fed's printing may ultimately result in a faster and more severe deflationary collapse, a shorter length of time between that collapse and a hypothetical loss of confidence in the currency (and the following hyperinflationary effects), and more devastating effects once the confidence does collapse.  My reasoning is that the printing enables the Federal government to dig itself into a bigger fiscal hole before the deflationary crunch, and it's mostly the widespread realization of the hopeless fiscal situation itself that will be the hyperinflation trigger.  This is perhaps oversimplifying a bit, but I suspect the money printing is more of a symptom, whereas the budget (or lack thereof) is the biggest source of the hyperinflation problem.  As the gov't continues hitting the gas with this future fiscal train wreck, I find myself reappraising the odds of an extended deflationary collapse/slump.  Perhaps it could turn out any deflationary slump may only last a matter of months or a year until the bonds collapse and we experience a currency crisis.

I'm not 100% married to this line of thought, but I'm seeing this as one of the more probable outcomes.  Thoughts?

- Nickbert

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Re: Bond collapse & impact

I just posted: 

Wall Street Wealth Bailout, The Bernank Who Stole Christmas

Look at this chart from that article if you would like to see some inflation caused by this money printing.

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Jager06
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Re: Bond collapse & impact

Preeeeeeeee-cisely what I'm talking about.

See Chris's new "Insider" report......

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Re: Bond collapse & impact
Johnny Oxygen wrote:

Yobob1

So what end scenario do you see in this deflationary collapse?

Ok, so we have massive deflation and no hyperinflation then as everything implodes I walk away with my dollar not only surviving but being worth a lot more? Is that what you are saying?

Japam's sovereign debt to gdp ratio (at about 189+% is second only to Zimbabwe. 

This is a list of countries by public debt as listed by CIA's World Factbook 2010. It is the cumulative total of all government borrowings less repayments that are denominated in a country's home currency. Public debt should not be confused with external debt, which reflects the foreign currency liabilities of both the private and public sector and must be financed out of foreign exchange earnings. The figures here are represented as a percentage of annual gross domestic product.

1  Zimbabwe 282.60 2009 est. Africa
2  Japan 189.30 2009 est. Asia
3  Saint Kitts and Nevis 185.00 2009 est.
4  Lebanon 156.00 2009 est. Asia
5  Greece 126.80 2009 est. Europe
6  Jamaica 124.50 2009 est.
7  Italy 115.20 2009 est. Europe
8  Singapore 113.10 2009 est. Asia
9  Iceland 107.60 2009 est. Europe
10  Sudan 103.70 2009 est. Africa
11  Belgium 97.60 2009 est. Europe
12  Sri Lanka 86.70 2009 est.
13  Egypt 80.10 2009 est. Africa
14  Israel 78.40 2009 est.
15  Hungary 78.00 2009 est. Europe
16  France 77.50 2009 est. Europe
17  Portugal 76.90 2009 est. Europe
18  Canada 75.40 2009 est.
19  Germany 72.10 2009 est. Europe
20  Malta 69.40 2009 est. Europe
21  Austria 69.30 2009 est. Europe
22  United Kingdom 68.10 2009 est. Europe
23  Kenya 66.70 2009 est. Africa
24  Jordan 64.40 2009 est. Asia
25  Seychelles 63.20 2009 est.
26  Nicaragua 63.10 2009 est.
27  Netherlands 62.20 2009 est. Europe
28  Côte d'Ivoire 61.90 2009 est. Africa
29  Norway 60.60 2009 est. Europe
30  Brazil 60.00 2009 est.
31  Mauritius 58.70 2009 est.
32  Philippines 58.70 2009 est.
33  Albania 58.10 2009 est. Europe
34  India 58.00 2009 est. Asia
35  Bhutan 57.80 2009
36  Ireland 57.70 2009est. Europe
37  Uruguay 56.60 2009 est.
38  Cyprus 56.20 2009 est.
39  World 56.00 2009 est.
40  Ghana 55.20 2009 est. Africa
41  Morocco 55.10 2009 est. Africa
42  United Arab Emirates 54.00 2009 est. Asia
43  Malaysia 53.70 2009 est. Asia
44  Vietnam 53.70 2009 est. Asia
45  Spain 53.20 2009 est. Europe
46  Tunisia 53.00 2009 est. Africa
47  United States 52.90 2009 est.
48  El Salvador 52.70 2009 est.
49  Argentina 48.60 2009 est.
50  Croatia 46.80 2009 est. Europe
51  Poland 46.50 2009 est. Europe
52  Aruba 46.30 2005
53  Turkey 46.30 2009 est.
54  Pakistan 46.20 2009 est. Asia
55  Thailand 45.90 2009est. Asia
56  Colombia 45.80 2009 est.
57  Costa Rica 45.10 2009 est.
58  Panama 44.70 2009 est.
59  Bosnia and Herzegovina 44.00 2009 est. Europe
60  Finland 44.00 2009 est. Europe
61  Dominican Republic 42.40 2009 est.
62  Bolivia 42.00 2009 est.
63  Denmark 41.60 2009 est. Europe
64  Switzerland 40.50 2009 est. Europe
65  Malawi 39.50 2009 est. Africa
66  Yemen 39.40 2009 est. Asia
67  Bangladesh 38.80 2009 est. Asia
68  Montenegro 38.00 2006 Europe
69  Mexico 37.70 2009 est.
70  Hong Kong 37.40 2009 est. Asia
71  Slovakia 37.10 2009 est. Europe
72  Bahrain 36.30 2009 est.
73  Latvia 36.10 2009 est. Europe
74  Sweden 35.80 2009 est. Europe
75  Cuba 34.60 2009 est.
76  Czech Republic 34.10 2009 est. Europe
77  Taiwan 32.50 2009 est. Asia
78  Macedonia 32.40 2009 est. Europe
79  Syria 31.90 2009 est. Asia
80  Ethiopia 31.80 2009 est. Africa
81  Slovenia 31.80 2009 est. Europe
82  Lithuania 31.70 2009 est. Europe
83  Serbia 31.30 2009 est. Europe
84  Papua New Guinea 30.20 2009 est.
85  Ukraine 30.00 2009 est. Europe
86  Senegal 29.80 2009 est. Africa
87  South Africa 29.50 2009 est. Africa
88  Gabon 29.10 2009 est. Africa
89  Guatemala 27.40 2009 est.
90  Indonesia 27.40 2009 est. Asia
91  Trinidad and Tobago 26.00 2009 est.
92  Moldova 25.50 2009 est. Europe
93  Zambia 25.50 2009 est. Africa
94  Peru 24.80 2009 est.
95  Honduras 24.40 2009 est.
96  Paraguay 24.00 2009 est.
97  Romania 24.00 2009 est. Europe
98  Korea, South 23.50 2009 est. Asia
99  Saudi Arabia 22.90 2009 est. Asia
100  New Zealand 22.20 2009 est.
101  Angola 22.10 2009 est. Africa
102  Ecuador 22.10 November 2009 est.
103  Tanzania 21.40 2009 est. Africa
104  Algeria 20.00 2009 est. Africa
105  Uganda 19.70 2009 est. Africa
106  Venezuela 18.00 2009 est.
107  Botswana 17.90 2009 est. Africa
108  Australia 17.60 2009 est.
109  China 16.90 2009 est. Asia
110  Iran 16.70 2009 est. Asia
111  Qatar 15.70 2009 est. Asia
112  Gibraltar 15.50 2006 est. Europe
113  Namibia 15.10 2009 est. Africa
114  Cameroon 14.90 2009 est. Africa
115  Luxembourg 14.90 2009 est. Europe
116  Bulgaria 14.80 2009 Europe
117  Nigeria 14.30 2009 est. Africa
118  Kazakhstan 14.20 2009 est. Asia
119  Uzbekistan 9.60 2009 est. Asia
120  Kuwait 8.10 2009 est. Asia
121  Estonia 7.20 2009 est. Europe
122  Russia 6.30 2009 est.
123  Chile 6.10 2009 est.
124  Wallis and Futuna 5.60 2009 est.
125  Azerbaijan 5.10 2009 est. Asia
126  Equatorial Guinea 5.00 2004 est.
127  Oman 4.50 2009 est. Asia
128  Libya 3.90 2009 est. Africa
129  Mozambique 3.70

2009 est.

 

 

 

 

Africa

http://en.wikipedia.org/wiki/List_of_countries_by_public_debt

Yes I know its impossible to conceive, but your dollar could end up worth more.  It certainly wouldn't be the first time.  Have you noticed the inverse relationship of the stock market to the dollar?  Dollar up, market down.  Dollar down, market up.  Now if you firmly believe that the dollar is going to zero, then I'd say bet the farm on Apple, Google, Amazon and Government Motors.  May as well throw in some BAC and JPM for diversification. 

If these guys aren't fighting deflation, then just what are they doing?   Do you think they are winning?  Do you think the Fed and the Govt. have finally shown competence in something?  Better stop the presses on that one.  For everything they have thrown at the debt deflationary vortex created by fractional reserve banking in reverse, all they've managed to do is keep the tidy bowl man circling the drain instead of plunging in.  Every time they end a program, what happens?  The prevailing trend reasserts itself in a more aggressive manor. M r. Bernanke is apparently quite ignorant of the law of unintended consequences.  You would think that the Fed announcing a big buy of bonds would have increased the "demand" in the market and caused yields to at least not rise and more likely decline.  The market spit in his face.  He hasn't proven to be bigger than the market so far.

 

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Jim H
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Re: Bond collapse & impact

I find the thought of deflation very comforting... oh if all of my dollars, many of them trapped as they are in a lump sum pension buyout that I can't touch until and unless I quit a job that I really like... were to actually hold their value!  And yes, left to a free capitalist market... we would be in the throws of one wicked deflation right now.  

But it's not happening.    I am not sure what part of;  It's a fiat currency system, and they can and will print as much as they need to... people don't get.  I have been trying to figure out why we keep having this discussion here.. and I really think that it is a form of denial... denial of the idea that the dollar, which we have all held as a representation of the greatness of America, the steadfastness of America.. might crumble.  We are in the end game folks, and the end game means a haircut if you hold dollars.  The end game is not going to be good to people holding dollars.  It is going to be better to people holding real assets.  The end game will involve a loss of confidence in US Treasury debt... and as money pours out of bonds.. it will be going into everything real... and that will look like inflation.  

I find Jim Rickards very credible,  much like Chris.  Worth a listen;   

http://kingworldnews.com/kingworldnews/Broadcast/Entries/2010/12/19_SPEC...  

For those arguing deflation... are you doing so as a rationale to not buy Gold and Silver?  It will be truly amazing to me if there are people who manage to find their way here to CM.com... and spend these last valuable weeks/months/years of dollar hegemony arguing to the bitter end for a deflationary outcome, only to get destroyed.

Finally, with regard to Japan... using Japan as support for a US deflationary thesis is way off base.  Yes, they have extraodinary levels of debt.  Yes, they will default ultimately.  BUT...  the chart mentioned is public debt... not external debt.      

When you look at external debt.. the tables are turned, and US is number one (in absolute value);

http://en.wikipedia.org/wiki/List_of_countries_by_external_debt

Japan has done some QE.. but nothing compared to the US.... and indeed they remain mired in deflation.  Because so much of their debt is held internally, by the Japanese public and pension funds... you won't get a virulent attack by bond vigilantes .. unless those vigilantes want to bring down their own country!  The Japanese will suck it up... they will live in a shoebox, work 18 hours per day, and continue paying their mortgage on their underwater apartment until they die.... they are not (in general) spoiled, coddled kids like we are (I have been there several times on business).  One other note of relevant cultural relativity;  their top managers do not make anywhere near the multiple of incomes at the bottom rung that US Exec's do... less income disparity.  We will default before they do.   http://csis.org/blog/us-tolerance-income-inequality

We will not suck it up.  We will not stand for lowering our standard of living.  We will not vote for a bunch of Chris Christies because we don't want to be told the truth (I am not talking about CM subscribers here).  We will drive this Country right into the debt wall at full speed... and your dollars will not buy more stuff afterward than they did before.           

Charles Hugh Smith hit it out of the park today I think;  http://www.oftwominds.com/blogdec10/trade-offs12-10.html 

 

yobob1's picture
yobob1
Status: Silver Member (Offline)
Joined: Apr 20 2009
Posts: 132
Re: Bond collapse & impact

Yes it is a fiat currency system.  All of it - top to bottom, front to back.  There is not a single specie backed (or backed by anything else) currency on the planet.  So you are left with determining the value of one currency by comparing it to another or several others.  Those values on a theoretical fundamental basis are determined by the "markets" and greatly influenced by the perceptions of political / social stability and the ability of an economy to generate the revenue to pay the bills. While disputed, one might also note that the US has 8,000 tons of gold.  Of course many will quickly point out that countries like China and Russia are accumulating gold (mostly from internal production if at all) - but then who has audited them or any other claim of gold reserves?

I've owned gold and silver for a decade - it should be a part of anyone's asset base as an anchor of safety.  I don't ever expect to "spend" it, unless every other system fails- even then its not clear how well it would work in the very real modern world.  Take a look around - how many of your neighbors have any gold or silver coins?  If only 2 out of 50 households have any precious metal, how will you form a functioning economy? If you have a bunch and nobody else does, do you think that someone may desire to obtain your gold by a less than friendly "takeover"?

I bought gold and silver when it was the most despised "investment" on the planet.  Now it seems to be the most loved.  Those are the extremes of investment emotions.  Today the dollar appears to be the most despised - it has no friends and as a consequence every possible way to bet against the dollar has been employed.  These one way bets rarely work out and when this one unwinds, it should be a fairly rapid and durable trend.  While nobody is looking, the dollar has outperformed gold since mid-October.  Too early to call it a trend, but then the beginning is a point determined in retrospect.

Ultimately, the end game is a loss of confidence - in the money and the govt.  Those inflection points in the past have often resulted in the govt breaking down and either ensuing chaos or a coup d'état with the potential to end up with somebody like Hitler, Mao or Stalin.  I do expect to see fiat failures - more likely somewhere else first.  Europe may be the poster child for the ultimate fiat fiasco.  If any of the major currencies suffer a failure prior to the dollar, what might happen to the "value" of the dollar on a relative basis?

Few understand the power or ramifications of debt deflation and are quick to hit the "+" sign on their calculators to account for the "printing", but somehow they all seem to own calculators that do not have a "-" button and therefore do not account for the extinguished debt - most of which is happening off the books or hidden and delayed by various shell games.  All of those not making their payments are putting a serious dent in the cash flow of the system not being accounted for at all since the affected securities "value" is being artificially maintained.  None the less the reality is, the money isn't coming in.

As to Japan, they were at QE for about 5 years between 2001 and 2006.  We saw then preceisly what we see today - huge bank reserves that went unlent. 

Under quantitative easing, the BoJ stopped targeting the level of the overnight call rate, which had already been lowered to zero in an effort to end deflation and stimulate the Japanese economy. Instead, the BoJ set the level of its current account as the operating target and raised the target level of its current account to $250 to $300 billion, which was far in excess of the roughly $40 billion level needed when the operating target was the overnight call rate at zero percent.

Operationally, the quantitative easing policy required the BoJ to purchase trillions of yen of financial securities, including about $120 billion per year of Japanese government bonds in an operation known as “Rinban.” The BoJ also purchased asset-backed securities and equities, and extended the terms of its commercial bill purchasing operation up to 12 months. The combined effect of these operations was to effectively flood the Japanese financial system with excess liquidity.

 

 

http://europe.pimco.com/LeftNav/Viewpoints/2006/Masanao-+Quantitative+Easing.htm

It would appear that proportionally Japan was in the same range as a percentage of GDP as the US - it would take some more digging to get the actual numbers if they are to be found.  They stopped in 2006 as they began to see a rising growth rate of GDP.  In reality that rise in GDP was more likely a result of the global building boom and the associated lending boom.  Of course they recently went back to some QE as deflation rears its head again.  Japan has a larger demographic problem than the US - the clock is ticking.

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