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    Where do we go from here?

    by Chris Martenson

    Sunday, March 15, 2009, 6:55 PM

    Sunday, March 15, 2009

    Executive Summary

    • Hang on, the bottom isn’t here yet…
    • China voices concern over dollar holdings
    • Slump in global trade most severe ever recorded
    • When is a reduced trade deficit a bad thing?
    • US government fiscal deficit explodes
    • Tax receipts at an all time low
    • Print, print, print (Switzerland and the UK)

    Hang on, the bottom isn’t here yet… 

    As I see it, my work in preparing and sending these reports is to provide a different view from the mainstream press outlets, which I frequently regard as being overly optimistic or pessimistic, often at the same time.  For now, there is a lot of talk that "the bottom is in," and I wish to illustrate why I am convinced that the risk for additional downside is much higher than the chance that we’ve bottomed and are now on the road to recovery.   In this report, I will the case that the bottom is not in on the economy, recent stock market action notwithstanding.

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    Time to Prepare – Massive Federal Deficits Announced

    by Chris Martenson

    Saturday, March 21, 2009, 2:29 PM

    Saturday, March 21, 2009

    Executive Summary

    • US federal deficits reported to be $9.3 trillion over the next decade
    • Fuzzy Accounting means these deficits are actually vastly under reported
    • Actual deficits closer to $6 trillion per year, or $60 trillion over the next decade
    • Deficits defined and explained
    • Risk of a dollar collapse only increasing
    • You need to step up your personal efforts at mitigating the potential impacts of a US currency crisis

    The Congressional Budget Office just announced that the fiscal deficits of the federal government are going to be a lot larger than previously estimated. This news was taken in stride by the financial markets, especially the FOREX markets where the dollar is traded, but it will only be a matter of time before these massive deficits are recognized for what they are – signs of terminal illness for the financial prospects of the US, and, by extension, the dollar itself.

    It is vital that you understand the true extent of the illness, and the ways in which we systematically sugar-coat and under report the true magnitude of the situation by the use of Fuzzy Numbers – in this case, more accurately described as Fuzzy Accounting.

    In this report I will explain how to interpret the reported deficit, demonstrate the actual size of the true deficit, and then make the case that you should seriously consider stepping up your personal efforts at preparing for an uncertain future.

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    Oil – The Coming Supply Crunch (Part I)

    by Chris Martenson

    Sunday, April 5, 2009, 7:59 PM

    Sunday, April 5, 2009

    Executive Summary

    • The relationship between oil and global GDP is explored
    • The “undulating plateau”: How Peak Oil and the economy interact
    • The G20 plan: Why the stimulus plans cannot possibly return the world to growth
    • Oil demand
    • Oil supply (production)
    • Why volatility in energy prices is virtually assured
    • Shortages and a spectacular rise in the price of oil predicted

    The world’s energy system is at a crossroads. Current global trends in energy supply and consumption are patently unsustainable – environmentally, economically, socially. But that can – and must – be altered; there’s still time to change the road we’re on. It is not an exaggeration to claim that the future of human prosperity depends on how successfully we tackle the two central energy challenges facing us today: securing the supply of reliable and affordable energy; and effecting a rapid transformation to a low-carbon, efficient and environmentally benign system of energy supply. What is needed is nothing short of an energy revolution.

    IEA World Energy Outlook for 2008

    This is one of the most important Martenson Reports I will write this year. In this report, I explain why the global stimulus plan will not succeed at returning the global economy to a path of sustainable growth or even to its former heights, seen in 2006/2007.

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    Oil – The Coming Supply Crunch (Part II)

    by Chris Martenson

    Sunday, April 12, 2009, 8:17 PM

    Sunday, April 12, 2009

    Executive Summary

    • Explaining Oil Pricing – oil prices are "set at the margin"
    • Oil Storage – When it’s pumped out of the ground it has to go somewhere
    • Oil Price Behavior – slight supply and demand imbalances drive prices
    • The Total Shortfall – too little oil to support a robust recovery
    • Nothing Fails Like Success – the worst thing would be a rapid economic recovery
    • Timing – when will Oil Shock III arrive?
    • What should you do?
    • Investments, food, selecting a community, and an abbreviated buy list

    These prices now are dangerously low. The lower prices fall, the less oil will be produced and the greater the chance of an oil spike.

    We are three, six, maybe nine months away from a price shock. We are not talking about three to five years away — it will be much sooner.

    Within a few months, we are going to realize our visible inventories are really tight — squeaky tight — and what would really be inconvenient is to see a recovery in the economy."

    Matt Simmons, Chairman of energy investment-banking firm Simmons & Co, March 26, 2009

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    Survey Says…

    by Chris Martenson

    Sunday, April 19, 2009, 8:15 PM

    Sunday, April 19, 2009

    Executive Summary

    • Beware the gap between survey data and actual economic data.
    • The stock market appears to be responding to survey data, not actual data.
    • Surveys contain many potential pitfalls.
    • Examples of influential survey data are given.
    • Tax data is a relatively reliable indicator of the true state of the economy.
    • Beware the "spin."
    • The bottom is not in yet.
    • Remain skeptical and bide your time wisely.

    The past few weeks have seen the stock market shrug off bad news and seize upon whatever glimmer of good news it could find.  I am of the opinion that the stock market rally of the past six weeks is long in the tooth and built upon some highly questionable, if not patently misleading, reports.  I understand the importance of consumer and investor psychology to our economy, and can even sympathize in some small way with those who spin data in an attempt to be helpful, but I still find the practice of self-deception to be distasteful.

    It is my opinion that this is not the time to be lulled back into spending more, nor is it a good time to get back into the stock market, unless you are a highly skilled trader who is willing to track your positions on a minute-by-minute basis.  This is a great time to lighten up on any stock or 401k positions that you might have regretted holding onto about a month ago…

    One key oddity for me these past two weeks was the startling gap that appeared between so-called survey data (discussed below), which mainly surprised to the upside, and actual economic data, which mainly surprised to the downside.

    This report explores that gap.  My theory is that survey data is being ‘massaged’ to paint a brighter picture than actually exists.   If these "glimmers of life" that Obama recently referred to, or "green shoots" as Bernanke said, have you thinking of spending more money or wading back into the stock market, you especially need to read this report carefully.

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    Fuzzier Than Ever – The Latest GDP Report

    by Chris Martenson

    Thursday, April 30, 2009, 1:17 PM

    Thursday, April 30, 2009

    Executive Summary 

    • GDP report for 1Q2009 is a mess of Fuzzy Numbers.
    • The surprising 2.2% increase in PCE, or Personal Consumption Expenditures, is discussed.
    • Ostensible signs suggest that the bottom is in, but the numbers do not line up at all with hard, factual data.
    • Sales tax receipts declined in first quarter.
    • The GDP report for the first quarter of 2009 is in serious conflict with actual state sales tax data.
    • Vehicle sales are down nearly twice as much as the 19% claimed by the BEA.
    • The extent to which investors are fooled by these government reports is the extent to which they risk losing a lot of money in the stock market.
    • Trust yourself.

    As attendees of my seminars and regular readers know, I am deeply critical of the cheerleading spin cycle that exists between the government and the media, because it often inappropriately mixes facts, opinions, and beliefs. The aim, it would appear, is to foster optimism or confidence in the average investor.

    Of course, as chronicled here many times, Wall Street lives off of the fees and products that it sells to retail investors, while the political machine favors a pacified, if not buoyant, electorate. Both of these aims are served by constantly spinning things to the upside.

    While it is possible that "investors" are indeed optimistic, focusing on the "slightly more upbeat" report from the Fed and "signs that consumer spending rebounded," these claims deserve a bit of exploration.

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    Bank Stress Tests Have Already Failed

    by Chris Martenson

    Sunday, May 3, 2009, 8:39 PM

    Sunday, May 3, 2009

    Executive Summary

    • The bank stress tests are a sham.
    • Reality is already worse than the worst case stress test scenario.
    • The stress test results will be used as a “positive indicator” anyway.
    • Don’t fall for it.

    The bank stress tests, the results of which are to be announced later this week, have already failed. Why? Because the stress test is supposed to assess how a bank’s loan portfolio would fare under a variety of scenarios, but reality is already far worse than the worst-case scenario. The FDIC, Treasury, and Federal Reserve went ahead with their weak input assumptions to conduct the stress test, even though they knew that reality was outpacing their most dire scenario.

    In other words, the stress test is a sham.

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    It Has Hit The Fan!

    by Chris Martenson

    Sunday, May 17, 2009, 6:04 PM

    Sunday, May 17, 2009

    Executive Summary

    • Stop waiting for "it" to happen; it already has.
    • Keep the big picture in mind.
    • This is a crisis of too much debt, not too little spending.
    • This is a global crisis.
    • The energy situation is getting worse, not better.
    • It’s not possible for an insolvent nation to borrow money from an insolvent financial system to bail out insolvent financial, real estate, and insurance companies.
    • Change is necessary, and we must embrace it.

    If you have been waiting for further confirmation about the direction of the economy, or waiting for a sign that it’s now time to get serious about preparing for a future filled with less, this report is written for you.

    My job is to provide you with a big-picture view of where we are and where we are headed, with an emphasis on clarifying the ways in which the dominant spin-cycle news machinery attempts to lure us back into the false comfort of borrowing and spending more.

    At, people often wonder about what they’ll do "when things fall apart."  A frequently-used acronym-containing alternative to this phrase is "when TSHTF," where the "F" refers to a fan and the other letters to something else hitting the fan that I will be coy about, so as not to offend anybody’s sensibilities or trigger any spam filters.

    I have news for everybody:  It has hit the fan.

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    Food Outlook 2009 – Understanding the Risks

    by Chris Martenson

    Monday, May 25, 2009, 1:36 AM

    Sunday, May 24, 2009

    Executive Summary

    • Global grain stocks at lowest levels in over four decades
    • Shockingly low fertilizer sales suggest possibility of a disappointing yield
    • Food supply and demand are tightly balanced
    • Food distribution networks are cost-efficient but not terribly robust
    • Ways you can increase your food security


    Food is something that many of us take for granted, but it is important to recognize that this luxury is a recent development in human history. It is time to give more thought to this critical staple in our lives.

    In March of 2008, food commodity prices hit an all-time high. This coincided with a world-wide food crisis, food riots, and even a few instances of national rice hoarding. Many believe that this was triggered by economic conditions (e.g. a flood of cheap money), not a fundamental or structural shortfall in food production. But I hold the view that both were at fault.

    Food demand has grown steadily over the years, as has food supply. However, in recent years the excess margin of supply over demand has tightened and even gone negative several times. Reserve stocks are incredibly tight, resting at levels not seen since the early 1970’s. 

    It is easily conceivable that food deliveries could be disrupted within any country, leading to rapid onset of local food shortages. This report will apprise you of several of the challenges that currently exist regarding world food supplies and the possibility that these challenges could lead to a structural shortfall in global food supplies in 2009 or 2010. It also contains specific actions that could greatly enhance your own food security.

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    The Five Horsemen

    by Chris Martenson

    Sunday, May 31, 2009, 9:12 PM

    Sunday, May 31, 2009

    Executive Summary

    • What can we expect next, and how will we recognize it?
    • A series of sharp, interrupted shocks is more likely than a major sudden collapse.
    • Five game-changing events, what I call The Five Horsemen, will indicate that the rules have changed and a new reality is about to take over:
      • The First Horseman: New credit growth falls below interest payments
      • The Second Horseman: The Fed monetizes debt
      • The Third Horseman: Government deficit spending exceeds 10% of GDP
      • The Fourth Horseman: The dollar goes down, while interest rates go up
      • The Fifth (and final) Horseman: US debt becomes denominated in foreign currencies

    Severe structural damage has already been inflicted on our economy. As I wrote two weeks ago in It Has Hit the Fan:

    If you have been waiting for further confirmation about the direction of the economy, or waiting for a sign that it’s now time to get serious about preparing for a future filled with less, this report is written for you.

    You are living in the midst of the collapse of western economies, which are moving from a more complicated state to a less complicated one. This is it.  Keep a journal, because it’s happening right now.

    After the Great Depression, many people remarked that it was only obvious in retrospect. While it was unfolding, things steadily eroded. But 75% of the workforce remained employed, while hopeful signs of progress were constantly trotted out by various politicians, private economists, and official-sounding government agencies. It is often quite difficult to appreciate the true magnitude of sweeping change while it is occurring.

    The most pressing question now is this:  What can we expect next, and when? 

    In this report, I give you the precise combination of macro-events that will cause me to issue an alert and kick my thinking and actions into new orbits.

    The Path

    I do not expect a major sudden collapse to be the most likely path, although it is a possibility. Instead, I anticipate a series of sharp shocks, followed by periods of relative tranquility. 

    Here’s how I described the various paths in May of 2008, in a report entitled Charting a Course Through the Recession:

    While it is possible, I do not anticipate a one-way slide to the bottom, wherever and whenever that may be. I lean towards the ‘stair-step’ model, where a series of sequential shocks and relatively placid periods mark the path to the future. The three scenarios around which I tend to form my thinking (and actions) are:

    • No change. The future looks just like today, only bigger, and no major upheavals, shocks, or recessions happen. The Fed and Congress are successful in fighting off the deleterious effects of the bursting of the housing bubble, and everybody carries on without any major changes or adjustments. This is not a very likely outcome.  Probability: 1%.
    • A series of short, sharp shocks. Moments of relative calm and seeming recovery are punctuated by rapid and unsettling market plunges and marked changes in social perspective. Think of the food scarcity and riots, and you know what this looks like. One day there was low awareness about food scarcity and the next day shortages and prices spikes were making the news. Soon enough, relative calm returns, prices fall, and order is restored, but prices somehow do not recover to their previous levels, leaving people primed and alert for the next leg of the process. I see this as the most likely path forward.  Probability: 80%.
    • A sudden major collapse. Under this scenario, some sort of a tipping point causes a light-speed reaction in the global economic system that requires shutting down cross-border capital flows. Banks would no longer be able to clear transfers and accounts, which would wreak all sorts of havoc upon our just-in-time society. Food and fuel distribution would be the most immediate concerns. There’s enough of a chance of this scenario occurring, and the impacts are potentially so severe, that you should take actions to minimize the impacts to yourselves and your loved ones.  Probability: ~20%.

    Based on the odds, the most likely outcome that I see is a series of short, sharp shocks (#2, above) as being the most likely to define the path forward. So far this has been our exact pattern with the first shock occurring in 2007, the second between October 2008 to March 2009 and now a period of stability between March and June of 2009. I invite you to re-read the piece linked above as a means of assessing my information,gathering abilities, and my ability to connect the dots, and shine a light on the future.

    In the grand sweep of the trajectory that will deliver the United States, and many other western countries, to a lower standard of living (although not necessarily a lower quality of life, but that’s another story), there are several discrete elements that I think of as The Five Horsemen.

    The Five Horsemen

    I believe that a diminished standard of living is in the future for each of the major economies across the world especially those where the inhabitants have been living beyond their means.

    Another belief I hold is that any period of living beyond one’s means must certainly be followed by an equivalent trough of living below one’s means. For example, if you produce 100 but consume 110, then at some point you will need to produce 100 but only consume 90. 

    There are two ways that we might expect this period of adjustment to unfold economically. I laid out the basic elements in Crash Course: Chapter 12 – Debt. When too many claims (debts) are laid upon the future the only question is whether those debts will be defaulted upon or paid back (with “inflated away” being a form of default). If all those claims are destroyed by default, then the reduction in future living standard falls to the holder of the debt(s). If the debts are paid back, then the debtor must accept that they will have less money to spend on consumption.  Either way, somebody has less coming to them in the future than they either expect or currently enjoy.

    Stretched across an entire nation, too much debt becomes an unsolvable problem, a predicament, due to the fact that no benefit accrues from shifting the burden of bearing the impact of default from one sector to another.  Shifting a promisory note from one pocket to the other does not change the net worth of the individual and this tactic is equally ineffective for an entire country.

    Thus the fact that the US government is assuming massive piles of bad debt from stricken financial corporations does nothing to solve the underlying problem, which sprouts from a nation that has overconsumed for decades. But this is exactly what the government is doing, and the goal seems to be to preserve the status quo at all costs. 

    Assuming this view is correct, there are signs we can read along the way to confirm if our fiscal and monetary authoritites have selected the right path or the wrong path.  This report details the signposts that will tell us when certain thresholds have been crossed that will mark that the current strategy is failing and that a new leg of the journey has begun.

    The problem and the mindset of the economic elites are neatly revealed in this quote:

    May 30 (Bloomberg) — World Bank President Robert Zoellick warned policy makers that fiscal-stimulus plans are insufficient to turn around the “real economy” and rising joblessness threatens to set off political unrest across the globe.

    “While the stimulus has given an impulse, it’s like a sugar high unless you eventually get the credit system working,” Zoellick said in an interview yesterday

    I like this quote because it distinguishes between the “real economy” and the economy resulting from excessive government borrowing and spending. Stimulus money is almost by definition wasted money because the probability of it resulting in proper investment is so low. The gains from stimulus money run out the very second the juice is turned off. 

    But it is the second part of the quote that is revealing – “…unless you eventually get the credit system working…” – apparently those in charge find it unthinkable that an economy could be built on anything other than credit.

    An alternative quote expressing a more fundamental view would read, “While the stimulus has given an impulse, it’s like a sugar high, unless it is followed by growth in wage-based income“.

    The difference between the real quote and the one I provided is like night and day. The Zoellick quote assumes that our past period of living beyond our means is recoverable and extendible, and mine does not. Mine assumes a long-term relationship exists between what people earn and what they can spend. In order for us to service our past debts, we need to grow our incomes, not our access to easy credit.

    There is a mathematical limit to this “game,” at which point it cannot be carried on any longer. I think we have reached the outer limits of our debt-fueled fantasy, although I recognize that the extreme efforts to carry it on a bit longer may well produce short-term results.

    The most obvious and mathematically-defendable end of a credit economy comes when interest payments exceed all income. However, things rarely progress that far, as the trouble becomes painfully obvious far earlier and creditors withdraw their continued support.

    How will I know that the participants in this game have finally caught on to the fact that it’s over? Here are the five game-changing events that will indicate that the rules have changed and a new reality is about to take over.  As I mentioned, I have been tracking these for years and, unfortunately, been watching them unfold one by one.

    The First Horseman: New credit growth falls below interest payments

    Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist.

    ~Kenneth Boulding, economist

    In our debt-based monetary and economic system, it is imperative that new credit growth at least equal the interest payments on past debt. If this does not happen, then the entire financial edifice, levered up as it is, immediately begins to wobble and crumble. Of course this imposes an exponential growth “requirement” on our entire debt/money system rendering it a long-term impossibility.

    Total credit market debt (chart below) stood at over $52 trillion at the end of 2008 and has fit an exponential curve nearly perfectly over the past 5 decades.

    The “getting the credit system working again” quote by Mr. Zoellick refers to keeping the curve of this chart sweeping upwards in an uninterrupted fashion, as nothing less will get us back to “how things were.”

    Where this chart required ~$1 trillion of new yearly credit growth in 1995, the remorseless math of the exponential function turned that into $2 trillion per year by 2000, $3 trillion by 2005, and more than $4 trillion by 2008.

    While the government’s $1.8 trillion of deficit spending for 2009 is certainly heroic, it needs to be complemented by more than twice that amount from the private sectors in order to keep this chart on a smooth path. That, I am confident to say, will not be happening this year.

    Status of the first horseman: Arrived.


    The Second Horseman: The Fed monetizes debt

    “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

    ~Ludwig Von Mises

    My second sign occurs when the Federal Reserve directly “monetizes debt,” which is a fancy way of saying “prints money out of thin air and exchanges it for private and/or government debt.”  This started in 2007 with the first set of rescues, although at the time the Fed took great pains to stress that it wasn’t really monetization because they planned to reverse their actions soon.  Of course, that has not happened yet.  Some of their activity was cleverly concealed with complexity, such as when the Federal Home Loan Board (FHLB) bought up $160 billion in mortgages from failing originators such as Countrywide and then quietly passed them to the Federal Reserve for cash.  Minus the FHLB complexity, this represented nothing less than the Fed printing up some fresh electronic cash and handing it over to Countrywide for some failing mortgage products.

    The beginning of the end for nearly every debt-ridden country has always been the attempt to pay for past expenditures with newly-minted money. It always starts innocently enough and seems like the right thing to do, but soon the programs grow and grow, and eventually the currency of the country is destroyed.

    Now the Fed is openly and actively buying dodgy debt from the government as well as from the private sector. I covered this in a recent “In Session” posting, where I charted the amount of US Treasury debt that was being purchased by the Federal Reserve on a daily basis. 

    Fed POMO activity daily rate v2.jpg

    This chart reflects only the Treasury purchases. When we add in agency debt, mortgage-backed securities, and various other corporate debt programs, we find that the Federal Reserve is printing up roughly $15 to $30 billion dollars a day just to keep things limping along.

    As for the opening quote by Mises, which I think most accurately reflects how things will turn out, I think it is safe to say this: Any country that is printing up to $30 billion a day just to keep things moving along is not voluntarily abandoning credit expansion.  

    This means that we are risking a final catastrophe of the currency system involved. Unfortunately, the currency in question also happens to be the world’s reserve currency, so this has enormous, far-reaching implications. 

    Status of the second horseman: Arrived.


    The Third Horseman: Government deficit spending exceeds 10% of GDP

    I did not expect to see this one arrive for the US this early in the game and I am quite stumped by the apparent acquiescence by the rest of the world’s financial authorities to the US running a fiscal deficit of over more than 13% of GDP.  I would have expected some resistance on their part, such as a refusal to continue buying US Treasury debt, more than a third of which (this year) has been bought by foreign central banks.

    I am convinced that this stimulus money, as historical and enormous as it is, will fail to provide any lasting benefit, in part because so little of it is being spent on investments in the future. Promising to cover the losses for bad debts only protects those who financed past malinvestments.  At most, a few measly percent of the total cost of this bailout and stimulus is going towards investments such as beefing up our energy independence or modernizing our transportation infrastructure.  If, instead, 95% was going towards investments, and Wall Street had to fight over the remaining scraps, I would be singing a different tune. 

    The inertia of government spending programs assures that these record deficits will recede slowly only under the best of circumstances and will actually grow larger under normal or worsening conditions.  I also want you to recall here that government deficit spending has the strongest correllation with future inflation handily beating out the impact of bank monetary reserves, a common red herring argument trotted out most recently by Paul Krugman who wrote in the NYT:

    Now, it’s true that the Fed has taken unprecedented actions lately. More specifically, it has been buying lots of debt both from the government and from the private sector, and paying for these purchases by crediting banks with extra reserves. And in ordinary times, this would be highly inflationary: banks, flush with reserves, would increase loans, which would drive up demand, which would push up prices.

    Again, inflation correlates most highly with government deficit spending and I remain at a loss as to why this clean, clear fact eludes so many who should, truth be told, know better. 

    Status of the third horseman: Arrived.


    The Fourth Horseman: The dollar goes down, while interest rates go up

    As long-time readers know, it is this fourth horseman that I watch on a daily basis. The combination of a failing dollar and a rapidly rising interest rate on US Treasury obligations will signal to me that the “limitless borrowing spree” of the US government is over.

    Currently, more than $7 trillion in US Treasury debt is “held by the public.” (The other $4 trillion is owed by the government to the government, so it is not on the open market.)  Treasury debt is bought and sold in vast quantities on a daily basis. More than half of it is held by foreigners.  If foreigners sold this debt, rates would rise. If they then took the dollar proceeds from these sales and exchanged them in preference for some other currency, the dollar would fall.

    The combination of rising interest rates and a falling dollar will signal (to me) that a final loss of confidence in the US dollar as an international store of value has occurred.  When (not if) this happens, all manner of financial ills will stalk the globe.  Everything priced in dollars will go up in price – in dollars.  That includes basically all commodities.  All holders of US dollars and US debts will be desperate to get out of their holdings, and you can expect wild plunges and gyrations in most markets.  Interest-rate derivatives, which are mainly denominated in dollars and linked to US interest rates, will become toxic destroyers. 

    So much hinges on the US dollar retaining its role as the reserve currency of the world that thinking through this scenario would require a report all its own. Suffice it to say, that you cannot overestimate the impact of a rapid decline in the value of the dollar coupled to rising US Treasury interest rates.

    Because of this, I am quite perplexed that the other central banks continue to play along and buy US debt, while the Fed monetizes like crazy and the US government sports a 13% of GDP fiscal deficit. 

    Here’s the latest data. We certainly are seeing a bit of a decline in the dollar and a bit of a rise in interest rates espoecially since mid-March when the Fed announced its intention to buy massive quantities of US Treasury debt. 

    USD down.jpg

    TNX up.jpg

    However, these moves are not not yet strong enough to cause me to issue an alert or take personal actions.  They definitely have a big portion of my attention, but are not yet at the top of my list of immediate concerns.

    What would make me sit up and take notice?  Right now that would involve the dollar slipping into the low 70’s, while the $TNX (ten year bond yield) vaulted up by some massive amount which, for me, would be 50 basis points in a day (which is one half of a percent).

    At that point, I would be putting out an alert that it’s time for any fence-sitters to hurry up and grab some dollar-decline protection. 

    Status of the fourth horseman: Maybe it’s here. Maybe. But not yet in full swing.


    The Fifth (and Final) Horseman: US debt becomes denominated in foreign currencies

    For whatever reason, some people still trust the debt-rating agencies, and one of the more farcical practices is that these agencies routinely “rate” the US for credit-worthiness. The good news is that Moody’s recently reaffirmed that the US still has a “AAA” rating, which is the highest possible rating. Or is this good news?

    The reason this is a farce is captured in a post that I wrote in an “In Session” forum thread on this matter:

    This is a bit of a non-issue.  For a country that has 100% of its debt denominated in its own currency there can be no other rating besides AAA.

    The idea behind the rating is to answer the question, “What is the probability that this entity can pay off this debt?”

    Well, that probability is 100%, when the entity has a printing press.

    The only thing that would change this would be if/when that entity has debt denominated in something other than its own currency.

    So while we can all be relieved that Moody’s has such a high opinion of the US, this is useless information for the purpose of deciding if one wants to hold the debt of that country.  An alternative measure would be, “What’s the chance that this country will resort to printing to relieve itself of its debt burden, thereby eroding the claims of the current bondholders?”

    Let’s call this new rating the “M system.”  One M means, “Sort of likely,” two Ms means, “Probably will do it,” and three Ms means, “No doubt, they will print.”  By this system, I rate US government debt as quadruple M, or MMMM.

    Off the charts, in other words.

    However, the absolute game-changer would be if the US had to pay off borrowed money in a currency other than its own.  Yen, for example. In order to pay off that loan, we’d have to get Yen from somewhere, with the usual source being a positive trade balance. 

    If the US could not get the Yen through legitimate trade, then it could always print up dollars and buy Yen off the open market.  But this would serve to drive up the value of Yen and drive down the value of the dollar, so this scheme would rapidly unravel in a currency crisis.  If this sounds familiar, it should.  This is how most developing nations get in trouble and experience severe currency and debt crises.

    Having your debt denominated in your own currency is an enormous privilege.  Should that luxury go away, it would become immediately apparent how much the US depends on the kindness of strangers to continue living beyond its means.

    So far, only Japan has made some low-level noises about denominating their loans to the US in Yen instead of dollars, but you can be sure other countries are quietly considering it as well.

    Status of the fifth horseman: Not here yet.



    Three out of the five “horsemen,” which indicate where we are in the trajectory of our downfall, have already arrived.   A fourth is possibly here; perhaps not quite yet. And the final one will mark an inevitable date with a vastly lower standard of living for US citizens and all countries that are the accidental holders of too many US dollars and debts.

    I urge you to begin keeping a close eye on these five horsemen:

    1. New credit growth falls below interest payments
    2. The Fed monetizes debt
    3. Government deficit spending exceeds 10% of GDP
    4. The dollar goes down while interest rates go up
    5. US debt becomes denominated in foreign currencies

    The current presence of three, or possibly four, of these signs has me thinking very carefully about my assets, my family’s needs, and how we will manage the changes ahead.  When the fifth horseman arrives, it will bring a new reality for all of us, and I intend to be as ready as possible.

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