Predict The Timing Of Coming Debt Implosion & Dollar Collapse?

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Nichoman's picture
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 

       

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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.

 

 

 

 

 

 

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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)!

 

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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.

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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.

 

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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.

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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.

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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.

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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.

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

 

Scepticus wrote:

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.

 

Can you please explain how a negative interest rate would inflate anything?  I heard the Swiss are doing it, but I do not understand it.  It seems a negative rate will cause people to hoard cash, depleting bank reserves.  Even if it drives them to spend, someone has to wind up with the money, and they're not going to put it in the bank where they'll lose 3% per year.  I'd put it under my mattress (after paying off debt).  If people hoard cash, where is the cash that is supposed to turn the world on its head and pay you a return for borrowing money going to come from?

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First know the facts. . .

So when we talk about the US dollar being held in forgeign hands in the form of currancy or bonds, the question is - how much of thier bonds and currancy does the US hold? and shouldn't that equate to a "determined in-balance"  . . which (Dr Martenson) could that be a predictor of value? 

We saw a huge swing in Icelandic currancy a year ago and how does that become deterimed? My guess is someone just "dumps" their Icelandic currancy on the market and it has few buyers so it tanks. OR, was thier currancy directly related to thier ability to produce hydrogen and then it was found the commodity wasn't needed so corporation sold the currancy they were going to use to build up h production?

Sorry, more questions than answers to the topic but finding out what moves the currancy / bond markets will be enlightening, rather than guessing or trying to time a market (which I have yet to hit but hope to some day) . . EGP

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Re: First know the facts. . .

EGP,

The US has been exporting it's currency in exchange for debt for decades.  While we do lend to other countries, the countries that have most of our debt (China, Japan, UK, Canada) by definition have a $ surplus (which is why they can buy our debt) so they would have no need to borrow from us.  Sure, we have credit out there I suppose, but not to those countries.  

I am not knowledgeable enough to opine on the Iceland situation, but from my limited understanding, they monetized their debt to cover un-payable government deficits, causing a crisis of confidence in their currency.

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

My gut feels like another massive deleveraging is on the way this Fall. It's not based on anything in particular and it may be the result of a level of ignorance on my part.

That said, can anyone explain how the derivitive market is expected to affect the value of the dollar? (here I am assuming this includes hedge funds but honestly, I don't know the difference between a hedge fund and a derivitive)

I understand that JP Morgan Chase holds about 95 trillion in derivatives of a 300 trillion total market. If these are to come due within the next year it seems to me that puts a huge elephant in the room. These numbers so dwarf any of the other bubbles such as the commercial real estate loans, that it seems this alone would require such a massive "bailout" that it would have to crash the system and end the dollar as a reserve currency. When that occurs I can't see what would stop the dollar from going to zero.

Economics, trading, etc is not my forte' so any comments are appreciated.

Coop

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

 Coop:

http://www.investopedia.com

 

 

 
What Does It Mean?
What Does Hedge Fund Mean?
An aggressively managed portfolio of investments that uses advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark). 

Legally, hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment. Investments in hedge funds are illiquid as they often require investors keep their money in the fund for at least one year.

 
Investopedia Says
Investopedia explains Hedge Fund
For the most part, hedge funds (unlike mutual funds) are unregulated because they cater to sophisticated investors. In the U.S., laws require that the majority of investors in the fund be accredited. That is, they must earn a minimum amount of money annually and have a net worth of more than $1 million, along with a significant amount of investment knowledge. You can think of hedge funds as mutual funds for the super rich. They are similar to mutual funds in that investments are pooled and professionally managed, but differ in that the fund has far more flexibility in its investment strategies.   

It is important to note that hedging is actually the practice of attempting to reduce risk, but the goal of most hedge funds is to maximize return on investment. The name is mostly historical, as the first hedge funds tried to hedge against the downside risk of a bear market by shorting the market (mutual funds generally can't enter into short positions as one of their primary goals). Nowadays, hedge funds use dozens of different strategies, so it isn't accurate to say that hedge funds just "hedge risk". In fact, because hedge fund managers make speculative investments, these funds can carry more risk than the overall market.

 
 
What Does Derivative Mean?
A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage. 
 
 
Investopedia Says
Investopedia explains Derivative
Futures contracts, forward contracts, options and swaps are the most common types of derivatives. Derivatives are contracts and can be used as an underlying asset. There are even derivatives based on weather data, such as the amount of rain or the number of sunny days in a particular region. 

Derivatives are generally used as an instrument to hedge risk, but can also be used for speculative purposes. For example, a European investor purchasing shares of an American company off of an American exchange (using U.S. dollars to do so) would be exposed to exchange-rate risk while holding that stock. To hedge this risk, the investor could purchase currency futures to lock in a specified exchange rate for the future stock sale and currency conversion back into Euros.

 

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

Patrick, negative nominal rates would cause people to seek 0% cash or cash substitutes like gold. Accordingly one line of thinking is to abolish cash, or to tax it by basically breaknig the 1:1 exchange rate between electronic money and paper money. You'd get paper money at a forward discount taking into account current interest rates on electronic money. That way cash has carrying costs similar to (but not identical to) the electronic money.

However in my view this is not required. Since cash will pretty much stop circulating if rates go -ve, I'm not sure it would be much of a problem. Likewise for gold. Simply withdrawing all notes above say $5 from circulation would make the carrying costs of $20,000 quit significant if you had it in a paper money hoard.

Gold would be hoarded and could also be subjected to transaction taxes but this is also probably not required. In a long term secular decline and contraction gold would lose purchasing power at the rate of contraction - say -2%. However good investments in equities and bonds of a riskier nature not to mention sound businesses could still yield +ve returns, so there would still be alarge class of investments which outperform gold in this scenario.

How do -ve rates reinflate the economy? By ensuring that all demand for saving is met by equivalent demand for loans at some rate, thereby keeping all currency circulating and avoiding the hoarding problem which is causing deflation. Don't forget that savings are in fact spendings (just someone elses spendings), so unless savings are all lent out the economy just contracts. Deflation can only be beaten by -ve nominal rates, as long as the overall demand for saving remains significantly in excess of loan demand. 

 

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

Just some personal comments:

1 - Much of the perception of the Dollar is based a) on its role as the reserve currency following Bretton Woods and the fact that b) the Dollar was based on and linked to the price of a physical, limited, valued commodity, namely Gold.

2 - Following Nixon's removal of this link, all currencies, fiat based, were/are now valued against the Dollar as the 'ultimate' currency, also fiat based.

3 - The values of currencies have been RELATIVE to each other, i.e. the confidence in a particular country, its interest rates and the amount of that currency in circulation (I realise this is simplistic).

3 - The continuation of the Dollar as the World reserve currency has been partly the historical result of 1 above and the dominance of the USA both on the World stage and as a consumer of World goods and commodities.

4 - The USA's role in 3 above is now being questioned. There is no reason why it should continue to be the only 'reserve' currency. HOWEVER, it is still relative valuation that is important, i.e. 'The USA is in a bad way, but the UK/Europe/Rusia/BRIC is better/worse/in the same state'.

5 - I can remember my Father telling me one (old) penny was worth one cent when I was young (late 1960s) - one Pound Sterling was 240 old pennies, hence 1GBP = $2.40 and this lasted quite a while.

6 - In 1985, the Pound hit a low of nearly parity with the Dollar, $1.052 and I can remember the talk of it possibly breaking below parity. In other words, there is scope for massive movement one way or the other from where we are now. I think towards the downside for the Dollar.

7 - With all the talk of the UK and Europe being in a worse state than the USA, the former don't appear to have financial insitutions running the Government, an overt arrogance of officials to questioning (Geithner's refusal to answer a direct question about possible further bailouts was astonishing) and appear to want to retain some fiscal responsibility (the UK not putting more currency into the system this week, and the ECB holding rates and questioning the prudence of the USA's actions). This is in addition to the BRIC and Russia's questioning of the Dollar as what appears to be, at times, a smugness in its role as the World's reserve currency.

8 - I would be saying the same of the Pound Sterling, the Euro or other currencies, acknowledging that all of them have their own problems at the moment but not (to me) on the same scale fiscally or politically.

DavidC

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

First off, I don't have much of an understanding of how macro economic work.  In my view (from reading so many opinions in many, many posts and articles) it very complicated and therefore hard to predict.  However, I think there's one major event which could sink the economy before the others and that's California failing.  It's my understanding that October is the next milestone for the CA IOUs to be redeemed.  I don't put a lot of faith in the state to fix the budget problems by then so they will probably default on payments again.  This could set off a chain reaction which will greatly effect the economy.  After all, people have to eat and winter will be coming.  My guess is that the Nov-Dec time frame would show a major event. Maybe 1Q2010 since things always seem to take longer than I think. 

BTW, CA isn't the only state with budget problems so however CA handles it's problems (Fed bailout?) is how the others will follow.

Of course, this my just my gut feeling guess.

 

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