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Michael Pento Asks If The Fed Ultimately Controls Interest Rates

Tyler Durden's picture




 

By Michael Pento of Euro Pacific Capital

Does the Fed Ultimately Control Interest Rates?

In forecasting the consequences of current economic policy, many
pundits are downplaying the risks associated with the surging national
debt and the rapid expansion of marketable Treasury securities. Their
comfort stems from the belief that a staggering debt burden will be
manageable as long as interest rates remain extremely low; and, as they
believe the Fed is in complete control of setting rates across the yield
curve, they see no danger of rates ever rising past the point of
comfort. Those who subscribe to this fairy tale forget that, in real
life, there are many more hands on the interest rate steering wheel.

The Congressional Budget Office estimates that the 2010 deficit will
exceed $1.3 trillion and total US debt now stands at $13.4 trillion (92%
of GDP). That’s a lot of debt that needs floating. Yet, the 10-year
note is yielding 2.8%-- which is 4.5 points below its 40-year average of
7.3%! Experience teaches that even moderately long-term investors
should be expecting rising rates. Regardless of the extreme and obvious
misalignment of fundamentals and bond prices, the mantra from the dollar
shills remains firm: “The US dollar will always be the world’s reserve
currency, and the US bond market will always be regarded as the safe-haven depository for global savings.”

With interest rates having been so low for so long, it’s understandable
that many people have forgotten that central banks are not ultimately
in control of interest rates. It is true that the Fed can be highly
influential across the yield curve and can be especially effective in
controlling the short end. But, in the end, the free market has the last
word on the cost of money.

Although the Fed has certainly created enough new dollars to send
prices higher, recessionary forces are, for now, disguising the evidence
of runaway inflation. But when inflation finally erupts into the
daylight, it will be impossible for borrowing costs to stay low. No one
can realistically be expected to loan money below the rate of inflation.
To attract buyers, the Treasury will have to offer a real rate of
return.

Since our publicly traded debt level is increasing while our personal
saving rate is not, we must inevitably rely more and more on foreign
creditors to purchase our bonds. The problem is that the Chinese have
been net sellers lately, and the Japanese saving rate is chasing ours
down the tubes. Europe is also clearly suffering through their own
sovereign debt issues. If not the Fed, who then will buy?

At this point, many economists breathe a sigh of relief. Since the Fed
has no investment objectives, it could care less how much it loses by
buying low-yielding Treasuries. Given that the Fed has an unlimited
supply of dollars to buy such debt, it could simply choose to pressure
rates lower indefinitely, so long as that policy stance is deemed
necessary for a weak economy.

I concede that the Fed can always place bids for US Treasuries, and keep those
rates low, but does that mean all debt markets will follow suit? Will
private banks continue to offer rock bottom mortgage rates if housing
defaults soar or inflation rises? What about the corporate bond market
and municipal debt? Can the Fed order a bank to loan to a company at a
rate the bank does not find profitable? The only way to keep rates in
all debt markets in line would be for the Fed to buy all kinds
of debt, not just Treasury debt. Such a policy has never been
considered, let alone attempted, by any major economic power.

And what will our foreign creditors think about such a strategy? Anyone
with the ability to move investments outside the US dollar would
clearly do so, to avoid the wholesale debasement that such an
inflationary policy would create. Once you take the argument to its
logical conclusion, it is plain to see how futile, ignorant, and
dangerous an attempt to hold all rates down would be. Americans can only
hope Fed Chairman Bernanke isn’t as foolish as his groupies.

Ask any historian of Germany, Argentina, Bosnia, or Zimbabwe why
interest rates skyrocketed during their respective battles with
hyperinflation. Why were their central banks unable to control borrowing
costs?

In the end, central banks can only temporarily distort the savings and
demand equation. The more the Fed prints, the higher the eventual rate
of inflation will be. If mainstream pundits truly believe the Fed can
supplant the entire public and private market for debt indefinitely,
then I don’t want to be around when that fantasy inevitably becomes a
nightmare.

 

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Mon, 09/13/2010 - 19:24 | 579534 Millivanilli
Millivanilli's picture

June 09'  England held 90 billion dollars of US debt.   In 2010 they increased their US treasury holdings 4 fold to 360 billion dollars.  At the same time they engaged in QE to the tune of 308 billion dollars.  

 

The question I have is this.   How does a country simultaneously buy our debt when they can't sell their own?  

Mon, 09/13/2010 - 19:32 | 579548 Implicit simplicit
Implicit simplicit's picture

They leveraged on the US treasuries as an asset that can be borrowed against.

Mon, 09/13/2010 - 20:43 | 579663 nmewn
nmewn's picture

"They leveraged on the US treasuries as an asset that can be borrowed against."

+++++++++++ infinity.

One of the things I miss the most is language...and the meaning of words when using it.

Back in the day an asset was something that was unencumbered, something that was paid off already with no claims on it. A paid off car is an asset. A paid off house is an asset and so forth.

An obligation to pay back prinicipal plus interest (a bond) can never be an asset by definition. And yet they are treated as such...it's ridiculous.

While I'm on this little tirade...in the language of today, those who take from government are called customers. Well, what exactly are they selling? What have they produced for sale?

And the term "tax cuts must be paid for" (and it's variants) is a burr in my ass that has developed into a festering puss filled boil that needs to be lanced here and now.

Pay for tax cut's?

What the hell does that even mean?  The government is going to "pay" for them? How? Where does it get it's money to "pay" for anything? If your or my revenue is cut back we slash expenditures. We don't "pay for" the lack of revenue.

Thanks for the indulgence...I'm almost better now.

Tue, 09/14/2010 - 02:21 | 580076 Spitzer
Spitzer's picture

one I would add to the list.

Recession. Recession has this new neo-keynesian meaning. Falling gdp for more then 2 quarters.

Recession should mean-a time when credit is contracting(interest rates rising)

Tue, 09/14/2010 - 13:17 | 581096 Scisco
Scisco's picture

I agree with you on the perversion of language. However I have come to realize that there are very few assets that are unencumbered. That house you paid off, repossessed if you don't pay your taxes. Cash cannot even be considered an unencumbered asset when all money is created as debt. Why is it that the first thing that comes to my mind when asked for an example of an asset I say physical gold and silver? Could be a bias.

Mon, 09/13/2010 - 19:48 | 579581 Dismal Scientist
Dismal Scientist's picture

Its a race to the bottom. US debt is worth marginally more than UK debt, due to reserve currency status. Just be glad someone is buying US debt other than Asia...

Tue, 09/14/2010 - 03:21 | 580122 Island_Dweller
Island_Dweller's picture

Just be glad someone is buying US debt other than Asia...

Be glad?  Why?  So it can all get worse before it blows up?

Mon, 09/13/2010 - 21:34 | 579742 cbaba
cbaba's picture

The answer is simple.

The FED and bank of England are same entities.

They are owned by the very same Rothschild family.. 

 

Mon, 09/13/2010 - 22:34 | 579825 SpeakerFTD
SpeakerFTD's picture

+1000

Tue, 09/14/2010 - 03:10 | 580114 Hephasteus
Hephasteus's picture

Nice spoon feeding. LOL

Tue, 09/14/2010 - 03:24 | 580123 The Navigator
The Navigator's picture

Easy.... Hocus Pocus

There aren't enough people that understand the BS so they get away with it. Same way our Treasury sells some thingy to the Fed and the Fed sells some other thingy. All BS and in the meantime, the 'tax paying units' (Hank Paulsons exact words for us) suffer from deflation, inflation and taxes thru every freaking orifice they can find.

Sorry, not a very scientific answer, just my late night pissed off rantings.

But damn good Q. How do they do it? How does the Fed continue so sell their bogus T's?

It's Musical Chairs and when the music stops, someone is gonna get burned bad

Tue, 09/14/2010 - 05:13 | 580159 joe90
joe90's picture

AKA money laundering.  Central bank currency swaps plus oil dollars being converted to gold on the way through.

Mon, 09/13/2010 - 19:29 | 579546 NOTW777
NOTW777's picture

interesting that since burnett dissed pento, he apparently is not even allowed on kudlow

Mon, 09/13/2010 - 19:37 | 579553 doomandbloom
doomandbloom's picture

"First they ignore you, then they ridicule you, then they fight you, then you win."- Gandhi

Mon, 09/13/2010 - 21:05 | 579697 liberal sodomy
liberal sodomy's picture
All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.

Arthur Schopenhauer
German philosopher (1788 - 1860)

 

Tue, 09/14/2010 - 07:01 | 580203 Voluntary Exchange
Voluntary Exchange's picture

 

You can see how Gandhi refined Schopenhauer. Ignorance is the starting point to a great many things? It seems in this world that truth starts out as a unknown.

Those who seek to evaluate the unknown without misconceptions, and then incorporate the new which works according to their own and other's experiences are a different sort of person. They are generally not public schooled, or somehow able to transcend such a handicap.

If the future is mastery of information and ability to innovate then what does that say to our tradition of public schooling which was instituted to make a semi-homogenous majority population of obedient industrial workers (and obedient  hierarchical thinkers)...  (see the works of John Taylor Gatto especially his great book at):

http://www.johntaylorgatto.com/underground/toc1.htm

Tue, 09/14/2010 - 07:31 | 580225 bobert
bobert's picture

Go homeschoolers!!

Can't beat continuing education within a chsoen profession either.

Mon, 09/13/2010 - 19:42 | 579563 Dadburnitpa
Dadburnitpa's picture

In the not too distant future, the FED will be the largest owner of US debt.  It's going to fail miserably... sort of like a doctor telling a patient to go on a strict diet that allows the patient to eat nothing but his own vomit.

Mon, 09/13/2010 - 21:08 | 579707 ToddGak
ToddGak's picture

Damn, that's an awesome analogy.  Or is it a metaphor?  Either way it's very illustrative. 

Mon, 09/13/2010 - 23:31 | 579909 Bartanist
Bartanist's picture

Yes, but at any time the governement and fed can agree that the US government defaults on the debt ... that is a mathematical positive.

Tue, 09/14/2010 - 03:28 | 580124 The Navigator
The Navigator's picture

I say we load the Fed up with every freaking toxic thingy we can find and then outlaw the Fed - let them choke on that vomit.

Tue, 09/14/2010 - 07:28 | 580220 Voluntary Exchange
Voluntary Exchange's picture

You are forgetting justice through restitution. End the Fed - yes, but also all the trillions in stolen wealth obtained by those privileged in first use of the fiat currency (a sophisticated form of fraud and theft), wealth that must be returned to those it was stolen from. First users being primality "government" entities, large corporations, Bankers, and other insider beneficiaries of the power of "government" and the "FED"  ( in quotes as  actually organized crime syndicates, not the misconceptions that people hold for the these words).

Tue, 09/14/2010 - 07:34 | 580231 bobert
bobert's picture

Perhaps we start this restitution with lump sum checks to those who have contributed to social security in the past and then dsband this department of government.

I like the above idea much more than the confiscation of 401k's and IRA's by the government as being discussed today in congress.

Tue, 09/14/2010 - 08:57 | 580303 Voluntary Exchange
Voluntary Exchange's picture
There are no governmental type services (think- primarily security and dispute adjudication services if you  unconsciously use the word "government") that I would voluntarily choose to purchase from a such a wicked monopoly.  Hence all departments of "government" ought to be "disbanded" due to lack of customers in a free market who have recaptured their right of "power of the purse" and take their voluntary transactions for security and adjudication services elsewhere.   That which you refer to as "government" is actually a criminal syndicate if you are able to understand that all involuntary transactions are crimes against those who as a group choose to live by voluntary exchange.      I like your idea about the receiving end of "restitution" for the above crimes, as a possible starting point, payable in gold or silver or the preference of the victim after the free market liquidation of criminal booty  as above described (where such booty can not be specifically returned to a particular person or group because of inability to identify the original victim or their rightful heirs).   In the case of the theft through FICA withholding ("Social Security Tax") you need and upward adjustment for the decrease in value due to fiat currency  inflating as well as the base rate of interest fairly  adjudicated for all the time interval the booty has remained in control of the criminals.  There may not be enough booty recovered to fund such a restitution, it depends on how much of the criminal's booty can be recovered from the bankers families and heirs, and other responsible parties of power and their heirs. We are talking the largest crime in known human history, and in the case of America, starts accruing since the civil war when some were cheated by the speculators when they were repaid in green-backs (fiat) in lieu of gold, and goes into high gear with the criminal conspiracy called the "FED" in 1913.   All "FED" sales of American gold to foreign central banks for fiat currency could arguable be reversed as well. It is arguable that the European and other families heirs that benefited from this would be subject to such adjudication as well.
Mon, 09/13/2010 - 19:43 | 579569 bullandbearwise
bullandbearwise's picture

Germany, Argentina, Bosnia, or Zimbabwe represented rounding errors to the world's economy at the time. A reserve currency can never hyper-inflate. Just look at gold. It's never hyper-inflated.

Mon, 09/13/2010 - 19:59 | 579604 Rusty_Shackleford
Rusty_Shackleford's picture

Now that's funny.

Mon, 09/13/2010 - 20:43 | 579665 1100-TACTICAL-12
1100-TACTICAL-12's picture

It was a joke "i Hope"...

Mon, 09/13/2010 - 20:50 | 579670 web bot
web bot's picture

When you are done pulling your head out of your recthumb, you'll realize that once a periphery issue causes the USD to default, there will be such a tsunami of dollars being dumped... that the US Gov only choice will be to raise interest rates overnight to offset the plunge. Watch what the rates will be on 2s, 5s, 7s and 10s.

Then let's watch what the deficit to GDP ratio will be. The USD will literally not be worth the paper it's printed on. Gold and Silver will be one of the few fiats that will allow for trade inter / intra nation. Other commodity trades will also be secondary substitutes... all based on the fiat value of Gold.

Mon, 09/13/2010 - 21:02 | 579692 bullandbearwise
bullandbearwise's picture

A tsunami of dollars dumped "to whom?" A USD default means the dollar disappears. This is completely different than hyper-inflation. As for gold, well, it's the ultimate store of value because it cannot be created and therefore cannot, by definition, hyper-inflate. But second in perception of store of value is the notion of a reserve currency and it is just as difficult to hyper-inflate regardless of how much is made available. The key is the the reserve currency status. If you can make a credible case for an alternate reserve currency, the dollar can easily hyper-inflate. So far, nothing credible has been proposed.

Mon, 09/13/2010 - 21:30 | 579739 AUD
AUD's picture

"A USD default means the dollar disappears. This is completely different than hyper-inflation."

Are you sure about that? Did not the Zimbabwean dollar disappear?

I think the Zimbabwe government defaulted on its obligations, they went to zero against everything else.

Mon, 09/13/2010 - 22:10 | 579789 bullandbearwise
bullandbearwise's picture

Long before Zimbabwe had even a whiff of trouble, no one wanted Zimbabwean dollars and no one held them outside of Zimbabweans. Call it the anti-reserve currency of the world. Hyper-inflation is a trivial matter with this kind of currency.

When everyone wants your currency, trades in it, holds it and cherishes it, you've got to come up with something they want even more. Otherwise, it's against the laws of physics for it to hyper-inflate.

You guys holding out the interest rate spike canard are decades away from such a possibility. Where's the viable alternate reserve currency that everyone must have in the morning?

Mon, 09/13/2010 - 22:40 | 579836 SpeakerFTD
SpeakerFTD's picture

Excellent point.  Moreover, although I think Prechter is a snake oil salesmen, I think there is something to his argument that in a true crisis scenario, everyone will want to sell their assets, and as most assets are dollar-denominated, the other side of every one of those trades will be the FRN. 

The world is massively long crap, and massively short actual FRNs.  The unwinding process will initially take the dollar into the sky.  The Fed/Treasury might be able to eventually engineer some kind of catastrophic policy to reverse that process and kill the dollar, but at that point, all dollar shorts will have long since been taken out on stretchers. 

Mon, 09/13/2010 - 23:24 | 579902 bullandbearwise
bullandbearwise's picture

But there's a third leg to the stool. There's the amount of FRN IOUs (debt) that must be satisfied relative to the crap. In an orderly unwind, the crap is exchanged for expunging FRN IOUs. If there's no crap left (collateral) and there are still outstanding FRN IOUs, the FRN ceases to exist. No chance of dollar strength.

Mon, 09/13/2010 - 23:10 | 579861 bob_dabolina
bob_dabolina's picture

Uhm...

The dollar has depreciated 90 some odd percent in the last 100 years. There is only 1 original DOW component still in existance (GE can thank the taxpayers ass)

That must be sexy to you. Having a dollar would mean in 100 years it's worth 10 cents.

I am amazed at your decision making acumen. How can I invest with you? I want tulip bulbs @ market 50 million.

BTW - History has proven that gold is the most stable medium of exchange.

Mon, 09/13/2010 - 23:49 | 579931 ToucanSam
ToucanSam's picture

It doesn't matter that the dollar has depreciated 1% or 99%.  A fiat currency's value is relative to other fiat currency when fiat currency is not backed by anything of value.  So even if the dollar continues to devalue, as long as it is exchangable with a comparably devalued foreign currency or asset valued in that currency, its relative value is what the exchange value is based on, not its absolute value since fiats have no intrinsic value at all.  Once you realize this, you'll see why central banks have been able to get away with devaluation without a fiat collapse occuring sooner.

Also, history has proven that gold used to be the medium of exchange.  Today it is not.  It has become simply another commodity as the world no longer exchanges currency backed by anything except faith and promises and yet you and I still accept the dollar as something of value because we know someone else accepts it as money.  "Hard currencies" no longer exist.  The purpose of commodities today is as a store of value, but fiat currencies are the medium of exchange and most likely for the forseeable future (even if today's currencies fail, a new fiat will arise.  Why?  Because it's too darn tempting for central banks to manipulate and control the supply.  Get rid of central banks, then you can get rid of fiat currencies since governments aren't as interconnected like central banks are).

Tue, 09/14/2010 - 01:42 | 579952 bob_dabolina
bob_dabolina's picture

"It doesn't matter that the dollar has depreciated 1% or 99%"

Are you an idiot?

Would you buy a stock at $100 p/sh if you knew it was going to $1 just because everyone else is doing it?

Fuck you for being stupid. Never reply to my comments.

Tue, 09/14/2010 - 00:25 | 579978 bullandbearwise
bullandbearwise's picture

Well, you sort of have it right.

Fiat currencies are dependent on the benevolence of floating exchange rates disciplined by the cost of money (interest rates). As long as everyone is happy to play in the sandbox, a hard, non-printable store of value like gold is not needed. But if some kids don't want to play any more, the floating currency game ends.

Getting all worked up over central banks is sort of like shooting the messenger. The real question is what stress level can floating currencies withstand. This is a political, economic and military question, not a question of monetary policy. You get one or more major players get seriously sideways with each other and the reversion to gold will be spectacular and immediate.

 

Tue, 09/14/2010 - 11:03 | 580638 web bot
web bot's picture

You're in for a surprise.

When the crash comes, I'll be back here rubbing your nose in it.

What text book did you learn this one "Fiat currencies are dependent on the benevolence of floating exchange rates disciplined by the cost of money"? Benevolence???

ya...

Tue, 09/14/2010 - 02:36 | 580087 Spitzer
Spitzer's picture

The Euro floats the price of gold on the asset side of its balance sheet. The ECB marks its gold holdings to market every 3 months. The Fed has gold marked at $ 45.

The reason the Euro will outlast the dollar is because of the gold float. Both currencies can be printed until there is a loss of confidence in fiat. When that happens the dollar will fall and gold will rise. The rise in gold automatically gets built into the Euro because they mark it to market.

Tue, 09/14/2010 - 06:20 | 580172 chrisina
chrisina's picture

"The dollar has depreciated 90 some odd percent in the last 100 years."

True.

But look at this graph:

http://research.stlouisfed.org/fred2/graph/?chart_type=line&s[1][id]=CPIAUCNS&log_scales=Left

For most of the last 100 years, we've seen inflation, no wonder the dollar has depreciated so much.

But as you can see, there has been a period of time where we've had deflation (1920-1934), 14 years out of the last 100. A 100$ bill in 1934 bought you the equivallent of $160 worth of goods in 1920. 

Now the question is, "what will happen in the coming decade(s) as more than 50% of the $52 trillion credit money gets purged from the system, either via liquidation, pay back, or restructuring"?

So, what will this graph look like in 2020, will it have continued going up, as in the prvious70 years, or go down, as in the 20s/30s ?

"BTW - History has proven that gold is the most stable medium of exchange."

Very true, and that's because it's the only asset that has zero liabilities attached to it from the credit system.

 

My view, in the coming decade(s), the price of most assets (stocks, houses, industrial commodities) will decrease in $ terms, but will decrease even faster in ounces of Gold.

For example, a house today valued at $200,000 or 160 o. of Gold, will go down to $150,000 or 50 o. of Gold in 5 years time.

Mon, 09/13/2010 - 23:33 | 579916 web bot
web bot's picture

The fact that you refer to physics tells me you are one of those #uckin wizards that thinks quantum dynamics applies to stock markets. We all know where that got us in the summers of 2007 & 2008. The law of utility breaks down when panic sets in, so there goes your bell curve and statistical toys.

Just in case you are a social misfit and have problems understanding the real world, when the USD is dumped, you will see it collapse in stages. Robots and bottom feeders like you will get on your knees and lick up the dropping dollar at various points, thinking that you can outsmart the market with your stochastic models.

When the average person realizes what is happening, they'll anticipate the rise in interest rates as the government's attempt to arrest the collapse. A falling dollar will be interepreted as the dollar losing its's ability to hold value on a comparative basis... WalMart shelves will be cleaned out in a panic... a panic that understands that a currency with little value will purchase little... driving people to hoard.

Do you finally understand that?

Tue, 09/14/2010 - 00:12 | 579961 bullandbearwise
bullandbearwise's picture

Your problem is you can only think in one direction. Thought exercise: As the price of a bond drops from selling and the yield rises, what happens to the yield when the bond defaults?

The same dynamic happens when a currency collapses. There is no more yield. No interest rate spike. No inflation. Only folks like you with their jaw dropped open.

Tue, 09/14/2010 - 02:40 | 580092 Spitzer
Spitzer's picture

the road to hyperinflation is still inflation.

Tue, 09/14/2010 - 07:17 | 580215 chrisina
chrisina's picture

so why did inflation rising from 5% in 1975 to 15% in 1980 not deteriorate in hyperinflation?

For the $, the only road to hyperinflation is a protracted deflationary depression.

(see below)

Tue, 09/14/2010 - 10:59 | 580627 web bot
web bot's picture

The problem is that I think... you think too much. You are detached from common sense. Go back to your dark matter analysis.

Tue, 09/14/2010 - 07:01 | 580196 chrisina
chrisina's picture

Just in case you are a social misfit and have problems understanding the real world, when the USD is dumped, you will see it collapse in stages.

This proposition is true. But it assumes USD will be dumped. So the question remains, why will it be dumped?

A falling dollar will be interepreted as the dollar losing its's ability to hold value on a comparative basis... 

True, but that's what has been going on for the last 70 years, 1$ buys far less goods today then it did in 1990, 1970, or 1950. But that doesn't seem to have caused anybody from dumping their dollars. So, assuming that it would continue doing what it has done for the last 70 years (loosing its value, ie inflation), what would cause people to dump their dollars? Now assume that it now does the exact opposite, (we get deflation), 1$ in 2020  buys more goods than today, why would they dump their $?

WalMart shelves will be cleaned out in a panic... a panic that understands that a currency with little value will purchase little... driving people to hoard.

What will trigger this panic? Please explain.

NB : I'm not sayin that this can't happen, I actually believe this can happen, but not before a protracted period of deflation (6 to 10 years), gradually bringing many businesses to bankruptcy, therefore reduction of the necessary supplies of goods, rationing, and eventually panic. But it's a completely different process from what you describe. It's not the loss of value of the $ that causes the panic, it never has, and God knows how much value the $ has lost in the past. It's the exact reverse, it's the appreciation in the value of the $ that causes people to want to hoard it which causes the economy to gradually deteriorate to a point when there is simply not enough supplies, then people panic and sell all their dollars to get the few goods that are left on the shelves.

 

My conclusion is that it's not the loss in value of the $ (inflation) that will cause hyperinflation, but the exact opposite, it's the appreciation in the value of the $ (deflation) that might cause hyperinflation (after a protracted deflationary depression). 

 

 

Tue, 09/14/2010 - 10:53 | 580609 web bot
web bot's picture

Chrisina,

I can't tell you what the precipitation factor will be that triggers the beginning of default. However I want you to look at the following...

* $23,000,000,000,000.00 - this is the current debt

* approximately $12,500,000,000,000.00 is held by foreigners

* by 2020, 40% of every dollar collected in taxes will be paid in interest (per COE)

* majority of debt held by foreigners is short term... meaning heavy exposure to interest rate fluctuations

* debt/GDP is over 90%. History shows that any country that is above this level declines

 

Parson's book does talk about deflation, then inflation... which leads to hyperinflation. I agree with his assessment (the data proves it)... and it may happen this way. However I bhelieve that we are living in a bifurcated economy, both with deflation (housing) and inflation (food and energy). When the default comes, it won't end well.

Tue, 09/14/2010 - 00:48 | 580002 AUD
AUD's picture

That doesn't prove default is "completely different than hyper-inflation".

And what does physics have to do with the value of a bankers promise (to pay)!?

Tue, 09/14/2010 - 04:54 | 580154 doggings
doggings's picture

And what does physics have to do with the value of a bankers promise (to pay)!?

it allows you to calculate how big the drop from floor to noose tightening needs to be, so you dont have to go round yanking their feet afterwards to finish it off.

Tue, 09/14/2010 - 02:28 | 580082 Spitzer
Spitzer's picture

The Euro

The Euro is designed to out-last the dollar. The Eurozone is China's biggest trading partner and the Euro has more gold then the US.

Sure, the Euro has Greece but the US has California.

 

Tue, 09/14/2010 - 08:03 | 580245 Voluntary Exchange
Voluntary Exchange's picture

"Where's the viable alternate reserve currency that everyone must have in the morning?" 

 

What it has always been in a genuinely free market; that which people will accept when not compelled by organized crime to do so ("government"): often gold, silver, other things readily exchangeable and durable that have some sort of intrinsic value. Since fiat currency is ultimately a crime and a lie it can only survive by other associated crimes and lies, which we see the fruits of in this world today on a global scale: as an object lesson for all humanity and our future children once we are again free and can teach them so.

Mon, 09/13/2010 - 21:40 | 579750 QQQBall
QQQBall's picture

if tulip bulbs can hyper inflate, then so can gold.

Mon, 09/13/2010 - 22:12 | 579792 Thomas
Thomas's picture

That would be, technically speaking, hypergrowth of the tulip supply, not the price. In a sense, the tulip mania was a hyperdeflation of tulips in that their purchasing power went way up.

Tue, 09/14/2010 - 03:50 | 580131 The Navigator
The Navigator's picture

Sorry I have to disagree, gold was used to buy tulips and tulips were never used as money. Gold only tracks mans foolishness in frenzies, fiat paper money, and is our only insurance against insane govts/central banks. The truth is out there in many history books - your only savior in monetary madness and freedom from oppressive governments is in PMs. The proof of that is governments throughout history have tried to remove gold from man. The day we return to real money is our next/newest 4th of July. BTW, we don't need a government decree to start that.

Tue, 09/14/2010 - 08:13 | 580266 RockyRacoon
RockyRacoon's picture

if tulip bulbs can hyper inflate, then so can gold.

The mind numbs.  Where can I get some of those gold plants so I can grow my own? Have you seen the price of gold this morning?  BTW:  What kind of fertilizer do I use?

Mon, 09/13/2010 - 22:24 | 579809 Squid-puppets a...
Squid-puppets a-go-go's picture

The world has traded for many millenia more without global reserve currencies than with one.

thus any perception of value in a reserve currency is at the whim of its historical utility, which currently has to be very low indeed

Mon, 09/13/2010 - 22:40 | 579837 bullandbearwise
bullandbearwise's picture

Actually, the perception of a global reserve currency has never been higher as its utility is not dependent on any whim of history but rather on the utility of planes, trains and automobiles.

Tue, 09/14/2010 - 02:23 | 580077 Spitzer
Spitzer's picture

thats a funny one, haha

Mon, 09/13/2010 - 20:04 | 579608 tony bonn
tony bonn's picture

to answer the question one must recognize trade-offs. the fed can keep interest rates low indefinitely as long as two things hold: 1. the fed is willing to trade interest rates for inflation or balance sheet tumescence 2. the fed can control interest rate swaps.

until you understand how interest rate swaps are constructed you will continue to be baffled and mystified by the prevalent low rates. they are an illusion courtesy of irs. once the fed looses control of irs through its proxy banksters, then the bond bubble will come undone and interest rates will go through the roof in dollars - assuming that the currency is still worth loaning.

Mon, 09/13/2010 - 20:24 | 579641 bob_dabolina
bob_dabolina's picture

Tyler -

"Although the Fed has certainly created enough new dollars to send prices higher, recessionary forces are, for now, disguising the evidence of runaway inflation"

Is this kind of like a speed-ball, where the effects of cocaine temporarily disguise an overdose of heroin?

Mon, 09/13/2010 - 21:54 | 579766 bobert
bobert's picture

Your post is spot on!

Tue, 09/14/2010 - 00:51 | 580004 Real Estate Geek
Real Estate Geek's picture

Just get another 8-ball of blow.  Problem solved!

/sarcasm

Mon, 09/13/2010 - 20:24 | 579642 Miss Expectations
Miss Expectations's picture

I believe that Zero Hedge should have some sort of 2010 awards ceremony at the end of the year.  I would like to propose "Best CNBC moment" as a category.  I would like to nominate Michael Pento.  For me, the eye roll clinched it.

Mon, 09/13/2010 - 21:09 | 579712 liberal sodomy
liberal sodomy's picture

Macke is the all time champ.

http://www.youtube.com/watch?v=EWFLfzbZQFI

Mon, 09/13/2010 - 20:25 | 579643 Belrev
Belrev's picture

All Central Banks follow 3-month bills of their respective country's Treasury. Check rate setting history vs T-Bills. Thanks.

Mon, 09/13/2010 - 20:41 | 579662 1100-TACTICAL-12
1100-TACTICAL-12's picture

I may be wrong but was that a "Bitch Slap" ?

Mon, 09/13/2010 - 21:26 | 579732 Lord and Master
Lord and Master's picture

All this monetary crap is cool to argue about, until you think about all the misallocation of capital that has been part and parcel of this over the last 100 years or so.  And then you think about the social structures/societies that have been developed as a necessary flowering of the keynesian-based policy combined with democracy.  Then you think about how the whole world has engaged in this faux-economics stuff-- and then you meditate on the opportunity cost of the toil and effort of 100 years x 10 billion or so human minds and bodies x keynesian degredation factor (KDF)of lets say .5.   I dont think building condos on Venus after terraforming the planet would have been out of the question (creating an atmosphere, making it habitable for humans)-- i.e. without the catastrophe of keynes, et al.   I know that Ms Burnett disagrees though.  She likes her Park Avenue sh*thole. 

Shes a sociable person and can be fun.  She has a modicum of intelligence too.  125 iq?..  id pick her for my soccer team.  At the same time, her pig face and mind breathe noisome fumes over much important economic dialogue.  Pento, instead of questioning whether low interest rates on bonds are sustainable, could just as easily question whether such a happy-to-be-there pig face and mind can preside over the financial/economic dialogue of the wealthiest nation the world has ever seen--- whether THAT too- is sustainable?... In her heart Erin knows something is amiss there... as do I.

Mon, 09/13/2010 - 21:57 | 579771 bobert
bobert's picture

I don't know about your taste in women. She looks pretty cute to me. And just think what a nice face she puts on the CFR!

Mon, 09/13/2010 - 22:36 | 579830 Lord and Master
Lord and Master's picture

I have a 150 iq and she's too piggy in the face to be an economic commentator in my book.  Its just not helpful to have someone like that umpiring things.  I want a sharper look-- preferably someone who i know is at least GOOD with numbers also.  OBVIOUSLY, and I havent heard this PATENTLY OBVIOUS FACT stated yet, OBVIOUSLY our poor financial situation has everything to do with people's ineptness with math.  90% of the general poulation in the USA are not 'good' with numbers.  Hence they avoid numbers and have no appreciation for the relative scale of different quantites.  Americans have no sense of what it means when one states the fact that current Medicare liabilities (70+ tril)are 35 times larger than TOTAL Federal spending per annum (2+ tril.).  They dont feel the scale of numbers and what it means.  And yet they vote, child-like and impudent dogs that they are.

In any case, as far as female financial commentators vis-a-vis burnett-- a much smaller nose as a percentage of total facial surface area would be a start.  Someone who looks like they have sharp analytical ability-- esp. with numbers would be nice too... not someone like EB, who is socially & emotionally quite intelligent, but an analytical lightweight. 

Like I said, IT IS AN UNSUSTAINABLE TREND TO HAVE A VERY PORCINE FACE LIKE HERS PRESIDING OVER THE FINANCIAL CHIT-CHAT OF THE WEALTHIEST NATION THE EARTH HAS EVER SEEN.... "not (p and q)" must be true in this situation... where  p = porcine commentator; q = america is wealthiest nation.

Fortunately for Ms Burnett, Im sure the network has no intention of letting her go...  i.e. "p" is given... Ergo: global wealth shift.  QED

 

Mon, 09/13/2010 - 22:40 | 579835 bobert
bobert's picture

It would seem smarter to me if you were more concise.

Mon, 09/13/2010 - 23:02 | 579867 Lord and Master
Lord and Master's picture

And all things considered, I would have fitted you with an anus in place of a mouth.  But Chance persists. 

Tue, 09/14/2010 - 06:01 | 580174 bobert
bobert's picture

Actually ignorant and angry aren't you?

Vulgur to boot.

Mon, 09/13/2010 - 23:13 | 579885 goodrich4bk
goodrich4bk's picture

Sorry, but "current Medicare liabilities" are not anywhere near $70 T or even $2T.  The only current liabilities are to those seniors who are currently receiving medical care.  You're talking about future liabilities, not current liabilities.  And if a new disease came along and killed everybody on their 65th birthday, there would be no liabilities in the future to worry about, would there?

I guess a 150 I.Q. and the ability to "scale" isn't everything it's cracked up to be.

 

Mon, 09/13/2010 - 23:37 | 579921 Lord and Master
Lord and Master's picture

re. "future" -- i also rendered "their" as "there" somewhere above; also "to" as "do" somewhere i think.  If you could ferret those out it would constitute further workman-like service to those readers getting caught for a moment in the bad syntax.

So yeah CURRENT-ESTIMATES OF FUTURE LIABILITIES arising from medicare are 70 plus trillion

re- disease killing everyone 65 -  sure .., right whats your point though?  If a disease killed everyone in america except buffett, gates, lebron, me and Tinky Winky the Teletubbie (I like him!) our fiscal condition would also improve.

re. 150 and scaling-- i dont know, hard to say... you feel like a god tho at times, to be honest

 

 

 

 

Tue, 09/14/2010 - 02:58 | 580102 goodrich4bk
goodrich4bk's picture

The "point" is that those future liabilities may never arise.  Yes, highly unlikely, to be sure.  But it is also highly unlikely that we will not be spending $1T a year on defense for the forseable future.  Yet Pete Petersen and savants like him only complain about grandma and grandpa's SS and Medicare future claims, always ignoring the equally large and "unsustainable" claims of the military-industrial complex.  I suspect the reason he and others keep calling these future obligations current liabilities is that Greenspan's Commission created exactly that fiction.  But it still doesn't make it true.  If that disease occurred, the "lock box" notes would be cancelled and not paid to a trust fund that had no beneficiaries.  Ergo, the SS future liabilities are not current debts.

Tue, 09/14/2010 - 06:03 | 580176 bobert
bobert's picture

Try on a little humility or please provide barf bags....you are really stupid!

Tue, 09/14/2010 - 08:03 | 580251 MichaelG
MichaelG's picture

IQ tests measure a narrow range of rather limited abilities.  (148 here, and generally aware of my vast limitations!)

Mon, 09/13/2010 - 23:53 | 579942 StychoKiller
StychoKiller's picture

[quote]

How is it that people are too dumb to fend for themselves, yet so intelligent that they can vote for the right person to fend for everyone else?

Wishing the government to be a great protector and benefactor does not make it so.  It is not difficult to find evidence that it is anything but.

All you're really asking for is to exchange the potential corruption of a private merchant for the assured corruption of a government bureaucrat. If a merchant cheats you, you won't go back. If a merchant cheats enough people, he'll go out of business.  If a government bureaucrat cheats you, then he receives no punishment. In fact, he'll probably receive more funding and more authority to do a job he was too incompetent to do and had no incentive to do effectively in the first place.

[/quote]

Tue, 09/14/2010 - 04:45 | 580148 i.knoknot
i.knoknot's picture

who dost thou quote?

'tis brilliant.

Mon, 09/13/2010 - 22:15 | 579795 bullandbearwise
bullandbearwise's picture

"All this monetary crap is cool to argue about, until you think about all the misallocation of capital that has been part and parcel of this over the last 100 years or so."

If you can misallocate capital and double the average human life span again, I say keep misallocating....

Mon, 09/13/2010 - 22:47 | 579844 Lord and Master
Lord and Master's picture

The doubling (or more) of the average human life span would have occurred anyway. 

Absent large scale global misallocation of capital this conversation could be happening on Venus-- that is my point.  And you dont get to Venus without learning a ton more about human biology Im sure.

i.e. not only to denizens of Earth have keynes et al. to thank for there current and soon-to-be woes... they have them to thank for the fact that they are still denizens of Earth.  I was riffing on the very real notion of the OPPORTUNITY cost of all this subhuman-moronic stuff regarding QE to grow the economy etc etc.

Mon, 09/13/2010 - 22:57 | 579854 Perseid.Rocks
Perseid.Rocks's picture

They're hoping to dig the banks out before interest rates become a problem, and before 1/3 of the population minds terribly not having a job for 15 years and goes on a shooting spree. If it doesn't work, then there's plan B.. false flag event or otherwise get us into a really big war where the people can become nearly fully occupied and defaulting on China becomes irrelevant. I think plan B will become a reality.

Mon, 09/13/2010 - 23:14 | 579888 Lord and Master
Lord and Master's picture

re. false flag event... this Quran burning business thats in vogue now had me fairly suspicious when i first heard about it... Then you had Romer saying "well, err, um we might have a pretty noteworthy attack soon, everyone."  I know if i were your average incumbent politician, Id be like "holy shit yes! perfect! " when i saw this whole mosque hullabaloo going down, and then the quran burning business on top of that... i mean talk about an awesome distraction from the economy, etc. ... You got less-than-high intelligence rural religious people arguing with liberal city-folk and you got govt and military officials up and down getting into the fray... Id be like F*ck yes! if i were in washington...  

Mon, 09/13/2010 - 23:01 | 579863 Bose Einstein OracIe
Bose Einstein OracIe's picture

Lol imagine the SS benefits if we lived to 150. Fuck, shoot me at 120 if Im still alive so I can stop taking up resources for the sake of great great great grandpa being alive in some decrepid state.

Tue, 09/14/2010 - 01:16 | 580022 HungrySeagull
HungrySeagull's picture

Your SS benefits will be vanishing into your IV line assisted by a nurse aide who is barely paid enough to get the job done. You will not recognize the difference anyway with the right medicines.

 

I would not want to be 120. 70 is plenty. Anything after that just gets more expensive and eventually incomprehensible.

Tue, 09/14/2010 - 01:36 | 580040 Young
Young's picture

I like Pento, but I'm so tired of this inflation/deflation debate. Therefore I'm buying commodities and shutting the hell up.

Tue, 09/14/2010 - 02:54 | 580099 Millennial
Millennial's picture

My goal is to buy commodities. Then when the bubble pops and the dollars is worthless I will use my silver coins to buy porn stars for escort detail on my nights out in Vegas where clubs are begging for just one silver coin. 

 

I may be perverse but it's only rational that I am self serving. Righteously so.

Tue, 09/14/2010 - 04:03 | 580133 The Navigator
The Navigator's picture

I like your logic - but for me, its an island with no tv, no internet, no cell fucking phone, and no fucking fed. Otherwise I agree, Silver and Gold, physical. Hope Vegas is still out there for you at the end.

Tue, 09/14/2010 - 07:28 | 580222 Thomas
Thomas's picture

I am very commodity rich. When my ship comes in and I am rich, I will spend the money on drugs, booze, and women. The rest of it I will squander.

Tue, 09/14/2010 - 04:23 | 580140 The Navigator
The Navigator's picture

Agreed. The problem with the debate is one side versus the other, and neither side can say that both are existent - we have both deflation and inflation at the same time, something that has never (in recorded history) been seen. Thus the total chaos and madness in the markets; few know where to run to find a safe haven.

Unfortunately for most of us, we don't know how to store bales of cotton or barrels of oil to go long on commodities - and for me, paper certificate for futures (or anything else) don't cut it. So my only option in the commodities bet is to own 'physicals' of Ag or Au. That may be why the spot on Ag and Au has continued it rise; the average guy is doing what I'm doing.

But I would short this bet also; too many running to the PMs safe haven now and since I'm doing it, the market is sure to fall. A day late and $10k short is my market history. Still, Ag or Au has never gone to $0 like my other investments have.

Tue, 09/14/2010 - 07:30 | 580224 Thomas
Thomas's picture

What if we are heading toward a defacto precious metal standard. In that event, it will be a trade that simply gots more crowded with each passing day, yet selling would be a mistake.

Tue, 09/14/2010 - 03:18 | 580120 Island_Dweller
Island_Dweller's picture

deleted.....

Mon, 09/27/2010 - 07:32 | 606822 Herry12
Herry12's picture

Thank u, i found this for a long time.
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