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One Chart tells it all-Happy American Liberty Day

Submitted by thetrader on 07/04/2011 14:43 -0400

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Mon, 07/04/2011 - 17:25 | 1425118 Troublehoff

What I have learned about economics, has purely been from Blogs and Peter Schiff et al videos over the last two years, and I recently bought 'The theory of Money and Credit by Von Mises, So let me get this straight:

Assuming that the US makes practicaly zero cuts to the budget, and thus runs a $1Tn deficit which is a significant chunk of the existing M2 or M3 money supply, and is forced to keep interest rates low, and is forced to purchase its own treasuries to do so, this will result in a growth in the money supply at such a rate that foreign holders of US treasuries will have no appetite to take on more, and in all likelyhood, will encourange the selling of UST's which, back in the day would have pushed up interest rates, but that wont be allowed to happen, at least not while there are significant holders of UST's other than the FED, so the FED will purchase them to keep the rates low.

If this sharade can be perpetuated until a point where the money supply has inflated to a point where government tax revenues cover the budget, then perhaps a stable equilibrium can be restored.

So how is a 25% increase in TAX revenues likely to occur? It is unlikely to be via tax rises as these would further choke the economy and would prove very unpopular so we can assume that the government is hoping for a little wage inflation.

With unemployment so high, wage inflation will not keep pace with real inflation so we could assume that to get 25% increase in wages, we would need signifcantly higher expansion of the money supply which is what we have been seeing.

How all this will end, I have no fucking idea but is that more or less the situation we're in?

Tue, 07/05/2011 - 00:01 | 1425770 chairsatan

Yes, that is the situation we're in. If there was high inflation, GDP would soar, tax revenues would soar, and the $14t would become more manageable as it became a smaller fraction of GDP (never mind that prices of everything would also be soaring... that doesn't matter... all that matters is that the real value of the debt is wiped out). The game is to keep printing as much as possible until the debt becomes easy to repay in nominal terms. The problem is that once people figure out what's happening, the holders of the debt and dollars lose confidence and begin to unload the debt and dollars (already happening), and that's when all hell can break loose if confidence collapses too quickly (rush for the exits and immediate hyperinflation). The game is about keeping confidence alive by hiding the true inflation, suppressing the price of metals and commodites through whatever means necessary, confusing people so they don't understand what's happening, preventing a panic dumping of treasuries and dollars, and hoping they can do again what they did in 70's and early 80's (high but bearable inflation for a decade+ wiped out the national debt... but it's a lot worse today than it was then). As for how it ends, try Dying of Money by Jens O'Parsson.

http://esocap.com/uploads/files/Dying%20of%20Money.pdf

Mon, 07/04/2011 - 16:46 | 1425065 Sudden Debt

Net interest at 6,31% are scary!

Just imagine rates would go to 14% like in the 70's.... they would need to print so much money to pay for it all that rates would have to pop to 50% to tame inflation.

The sollution to save money?

1. NO CHILD LEFT BEHIND: kids leave school faster even if they can't read or write.

2. CLOSE SCHOOLS: There are no schools like the streets, so why put money into those right?

Yep, economics at it best...

Mon, 07/04/2011 - 16:41 | 1425057 Sudden Debt

You could build 60.000 skyscrapers with 14 trillion...

You could bomb the world 50 times with 14 trillion...

You could put a 100.000 people strong colony on Mars and support it for 10 years with that money.

but in fact, most of it went to bankers and their bonusses....

Mon, 07/04/2011 - 16:39 | 1425052 Robslob

market timers always lose one way or another...

you should be happy to average down and up the slope in gold or silver if you believe and I mean TRULY believe in the long run (5 years) we are totally fucking screwed.

if not then play the game until there isn't one...

Mon, 07/04/2011 - 16:31 | 1425046 ljag

I've read that the 'bottom is in' on junior mining stocks. If a person invested some cash now, the 64M question is ....(drum roll please!), will the 'investor' have time to get out of the market with his supposedely profits, place said profits (and initial investment) in a bank, wait for the 'large check' to clear, write said check to Apmex and get his MONEY out before the whole shit comes crashing down? I mean, we are talking 2 months just to get out if you start tomorrow morning?! Any suggestions?

Mon, 07/04/2011 - 16:43 | 1425063 FeralSerf

Why not have your broker wire the $$$ direct to Apmex?

Mon, 07/04/2011 - 16:04 | 1424989 walküre

US debt is over 14 trillion.

Deficit is at over a trillion. We spend more than we generate or have.

The interest expenses are "only" at 235 billion or 6% of the budget.

Effective interest 1.68%..

If rates go up .25, the cost of borrowing increases by 35 billion

At a full 1% increase, the cost to service debt is at 375 billion or 140 billion higher than now.

Typically rate increases and deficit cutting result in lower GDP growth, lower income from taxes.

But just for entertainment value, with a full 1 percent rate hike the cost of borrowing for the US government is a sizeable 10% of their budget! Taking the lower income from taxes into consideration, the portion of debt service goes up proportionally!

It's bizarre to say the least that political leadership quibbles about raising the debt ceiling. Does it matter anymore? Do numbers really matter anymore?

Nobody ever said to take government for granted.

Mon, 07/04/2011 - 16:15 | 1425014 thetrader

take a look at the second chart....

BIS warns of rising interest rates

Mon, 07/04/2011 - 16:33 | 1425049 vast-dom