tools the powers that be can use to kick the can even further

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Subprime JD's picture
Subprime JD
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Joined: Feb 17 2009
Posts: 562
tools the powers that be can use to kick the can even further

Lets assume the US finds itself in a serious fiscal crisis, and by serious I mean bond yields start flying higher with no bids and heavy selling from overseas holders. The yields are high enough to put the US at serious risk of default. Given that roughly 4 trillion of treasuries are held overseas there is the risk that there can be a selloff. Lets assume a sell off like that takes place. Or, in the alternative, the US fiscal situation continues to deteriorate and the powers that be realize at this point there is no point in window dressing. Per the president, "bold action needs to take place, shared sacrifice by all americans to put our country back in a position of fiscal strength and stability." Statements like these get uttered constantly to get the American people mentally ready for the next leg down. Here are some tools TPTB can use to avoid a US default/hyperinflationary scenario.

(1) US holders are not allowed to sell, basically a freeze on treasury sales

(2) The fed gobbles up a few trillion

(3) 401k accounts are confiscated by instituting a "swap", meaning 15% of each 401k is required to own a special nonmarketable treasury security

(4) serious cuts are implemented in medicare and social security, possibly on a longer time frame

(5) tax increases on corporate revenue, households and other entities

(6) a means test for social security recipients

These 6 actions can be implemented over time or in a emergency situation. I believe these types of actions will take place under the guise of an emergency. The same way Nixon slammed the gold window, the same way the accounting rules were suspended for bank assets, the same way the fed tripled its balance sheet to 2.6 trillion, expect the unexpected. In addition, expect further reaming of the middle class. Sure, there will be an outcry, some screaming and maybe even violent protests. But look at how resilient heavy handed governments are in the face of widespread violence in the middle east. The US has used similar means to quell civil unrest in the past (think Waco, Kent state, LA riots, hurricane Katrina).

The point that I'm trying to make is that the US gov has plenty of breathing room to kick the can down the road for an extended period of time before it loses control of the situation and by losing control I mean breakdown of the federal system of control. In addition, throw in peak oil issues and still its very likely that the economic system will continue, sickly as it may be. For example the US consumes 21 million barrels a day. In a crash the country will be forced to consume possibly as low as 15 million bpd. Throw in reduced consumption in europe by the tune of 3-4 million, plus china which has been on a construction frenzy and we may possible see a 10 million bpd oil glut, sending the price back down to the low 30's. This is a process not an event and thats the trouble I have with "TSHTF" statements. The human mind likes certainty, a moment where things change for good. Its relieving for sure, knowing that at some point in the future things will change and from then we can rebuild. But what if its a slow, drawn out process, where the rules keep changing in order to maintain the closest resemblance to the status quo? There is plenty of fat to cut, from social security, to medicare, to defense, to raising taxes to 401k treasury swaps. Think what you would do if you were a greedy power elite trying to keep the current system going. So far they continue to act as I would anticipate them acting. Notice in the media now the words "adjustments to social security, medicare" keep popping up.

I subscribe to the totem pole theory, meaning the people at the bottom of the totem pole will continue to get wacked. Martenson has said similar words in the past, meaning those with the least political power will pay the price for the mistakes caused by those at the top. To keep the current system functioning, cuts will be made at the bottom. The middle class will continue to sink into the lower class, while severe poverty will begin to afflict those already in poverty. Those at the top will continue to consolidate and cling on to their power. Lets keep in mind that S&P 500 companies derive over 50% of their revenue from overseas markets. Thus, the US consumer is no longer indispensible. GE doesnt need us to sell microwaves and refrigerators anymore. Just look at Turkey, which used to be a basket case, now with a GDP of 1 trillion. 70 million consumers ready to buy buy buy.

I see reduced living standards across the board for the majority of Americans. Bondholders, the true power holders in this country, will fight tooth and nail to avoid a hyperinflationary scenario wiping out their perceived wealth. Maybe in a decade we may see the USD get wiped out, only to be replaced by a new fiat currency of a global nature. I am of the opinion that those who hope for collapse are secretly hoping for freedom from the power crazed monsters at the top, hoping for justice by these power elites losing their asses. It would be a great thing to see, as all debts would be wiped out, in effect a jubilee. Perhaps this will one day be the case. Just consider that the power holders will cut to the bone before their wealth goes poof.


Johnny Oxygen's picture
Johnny Oxygen
Status: Diamond Member (Offline)
Joined: Sep 9 2009
Posts: 1443
Re: Tools TPTB can use...

Good post Subprime.

I agree with the information you have posted but not with the long term kick-the-can theory.

The point that I'm trying to make is that the US gov has plenty of breathing room to kick the can down the road for an extended period of time before it loses control of the situation and by losing control I mean breakdown of the federal system of control.

I don't think so. I don't think the trouble we are in is a linear process. I think its an exponential one. The time to kick the can will get shorter then exponentially shorter.

The middle and lower classes are not bottomless wells and once food, gas and shelter make daily living difficult to impossible then the game is over.

I agree with what you are saying I just think the luxury of time is running out faster than we think.

gregroberts's picture
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Joined: Oct 6 2008
Posts: 1024
The Story of Mouseland

Rings true...

docmims's picture
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Joined: Jun 17 2009
Posts: 644
Ummmm.  The US treasury

Ummmm.  The US treasury holds 20 Trillion Iraqi dinars that are devalued.  Revalue them to half prewar levels and tie their value to Iraqi oil reserves.  The average Iraqi now has 100,000 dollars in their pocket of fiat and the fed owns the Iraqi oil reserves as well as a fiat asset to back our fiat assetts.  Can kicked successfully.  Iraqis further screwed and they don't even know it.

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