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The US Has No Chance of Option 1… So That Leaves Options 2 or 3
The big
financial myth-buster of the week is that the alleged deleveraging of the US
consumer has in fact been a giant myth. According to the Wall Street Journal, if you account for defaults, US consumers have
only pared down their debts by an annual rate of 0.8% since mid-2008.
The Journal writes (emphasis added):
Over the two years ending June 2010, the
total value of home-mortgage debt and consumer credit outstanding has fallen by about $610 billion… Our
own analysis of data from the Fed and the Federal Deposit Insurance Corp.
suggests that over the two years ending June 2010, banks and other lenders
charged off a total of about $588
billion in mortgage and consumer loans.
That
means consumers managed to shave off only $22 billion in debt... In
other words, in the absence of defaults, they would have achieved an annualized
decline of only 0.08%.
This is a
major deal-changer for the US financial system. For months we’re been hearing
tales of consumers are doing the right thing by paying off debts and living
more frugally. While this is true for some consumers, the Journal’s article
makes it clear that the vast majority of folks are simply spending until
they’re officially bust and have their credit lines pulled.
Whether this
is because Americans are stuck on a “buy ‘til you’re bust” mania, or if it’s
simply because the cost of living in the US today is so high relative to
incomes and other expenses that most folks can’t
get by without using credit is up for debate.
Personally I
think it’s a bit of both, with some folks obsessively buying the new iPad while
skipping on mortgage payments while others are simply using credit cards to try
and get by after being unemployed or underemployed.
Indeed,
another story run in the Wall Street
Journal supporting the second argument points out that incomes have
actually fallen 4.9% since 2000. Add
to this the $1.5 trillion drop in household wealth in 2Q10 and it’s clear US
consumers are making less and losing even more from their investments.
This leaves
credit as the one means of maintaining living standards.
Regardless,
the primary point is that the US credit bubble has not deleveraged in any
meaningful way. The system remains debt saturated to the gills on a personal,
corporate, state, and Federal level.
In plain
terms, the entire US system is one giant debt bubble. And there are only three
ways to deal with a debt problem:
1) Pay
it back
2) Default/
restructure
3) Hyper-inflate
it away
The US has
no chance of #1, which leaves either #2 or #3. Both involve the Dollar taking a
sizable hit, which might explain why Gold has begun breaking out while
Treasuries are dipping.
Keep your
eyes on these two, if they don’t reverse soon then something big is coming down
the pike for the Dollar.
Good investing!
Graham Summers
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Government intervention has prolonged resolution of real estate debt. The transfer of bad debt to the FED balance sheet, and the support of the GSEs clearly helped the banks. But, the underlying market was damaged and efficiencies negated through the exclusion of default. The market price was manipulated and the credit instruments corrupted, the result, a non-economy.
Mark Beck
Option 2 will undoubtedly be the CHOICE, but Option 3 may end up being the RESULT! I can't imagine option 3 ever being an intentional choice. But once the house of cards begins to fall, the Fed can't choose or stop the consequences. Their history is abysmal at foreseeing or preventing catastrophes.
Needless to say, either option 2 of 3 is going to be catastrophic for America!
While it seems unthinkable to most good people, there are some amongst the elitist circles who have explicitly stated that they want to bring the USA to disaster so that they can remake America -- "transform" it into something vastly different.
I know for a fact that this is the case. I met a man once whose family are some of the world's wealthiest people. He explicitly told me 5 years ago that they want to:
1) Destroy the Dollar and thereby sink the US economy,
2) Destroy the US Constitution by #1 above, and
3) They plan to accomplish this by sinking the Republic into a quicksand of debt!
He also told me that they were, even at that time, getting close to acheiving their goals. This man's closest living relative is the HEAD of this global cabal, and he said this relative had "100% control" of the Fed. I kid you not!
There acutally is an option #4: find some source of additional wealth and devote it to paying down the debt. However, this is just pie in the sky. The closest we came to this was when the NAZ was creating money out of thin air with IPOs in the DOT.COM bubble and the US Treasury was happily accepting very large estimated tax payments.
Those days are over for at least one generation, so any new wealth creation will have to real wealth from real assets.
My best friend has done exactly what is described in this article. In April 2009, he got a new mortgage to consolidate all his debt onto his house, paying off all his credit cards. He had a very difficult time getting his house appraisal high enough to take out enough money to do the job. But wait! Over the course of the following year, he has incurred $30,000 more in credit card debt! During that time, he borrowed most of this to make high-risk, speculative investments, all of which have failed.
This is a guy with a successful business, but he hates it because it requires him to work so hard. He bleeds this cash cow dry for all his hair-brained "trading" and investment schemes, leaving the business without sufficient capital to grow or even maintain itself. He wants to be a Forex trader instead, but he has lost well over $250,000 in trading so far!
So the last few times I've been at his house, the credit card companies have called. He doesn't answer the telephone, screening his calls with caller ID. Now, they are in the process of cutting off his credit. Even if he wanted to, he can't refi again because his home is worth less and his debt is piling up. Meanwhile, he has two sons that require $5000 each in braces and a daughter just beginning college. A year ago, he told me he'd NEVER lose his home to foreclosure. Last week, he told me he may lose his home to foreclosure!
Nice guy, but a foolish one!
If the rest of America is as foolish as my buddy, WE'RE TOAST!
uhh...option 3, hyperinflation, does not "deal with the problem"
in fact, it makes the problem worse
hyperinflation equals collapse
"Default, Inflate, Repudiate, it does not matter."
Eggsackly!. While we are all arguing inflation versus deflation and "end games", they accumulate assets. Sure, some assets (houses) deteriorate; so what? They were "bought" with scrip, and there are too many houses, anyway.
There is no end game, no certain number of bullets, no soft landing/hard landing. Our choices of metaphors blind us to the full range of possible paths.
In Las Vegas when the "house" starts to lose (when a few players figure out an edge), the house adjusts the rules of the game and/or bans the winners. And when to their advantage they fade out some games and promote new ones.
The FED/Govt is The House. Real estate = slots. Stock market = blackjack. Natural resources = craps. Gold/Silver = Texas Hold'em?
There is an option 4. Roll the debt over, which is what we have been doing successfully so far. I do grant you at the rate we are going, particularly with the duration of the debt there may come a day when the market says pound sand. But, if you believe it can be pulled off, that also leaves option 5, which is a combination of 1-4.
Oh wonderful, the BoE confirms it's in the race to the bottom.
http://www.marketwatch.com/story/sympathy-for-more-stimulus-grows-at-boe...
Everyone loves a good party. Unfortunately, knowing the UK's tendency for binge drinking, I suspect we'll hit bottom first...
not smart enough... only 3 choices.. reality is more complex..
US cant pay it back.. it surely 100%
default - impossible.. its in local currency..
so only choice is hyper-inflation or QE v. 1,2,3,4,5,6..
so i guess future is gonna be like
#1 FED will print money to keep ZIRP, and stocks market under controll.. eventually
creditors will freak out,,there will be money/gold/capital/currency coontrols ( see all failed states esp in S America).. $ will fall... so ALL STUFF AMERICE IMPORTS WILL RISE... so its only way for America to produce somothing and start creating again average paying jobs 15-30$ per hour..
alx
The silver lining of the USD destruction is that next time people will tend to give the government the trust that it deserves. That is, none.
Sigh, if only... People still won't get it, that at issue is concentration of power. They'll still flock to something, some religion or...
I was thinking tonight about how with every bullet fired by the Treasury/Govt/Fed, the Austrian/Sound Money/Tin Hat crowd in which I proudly belong to holds it's collective nose in the air and convincingly proclaims, "Ah ha! Your second to last bullet has now been fired. By firing the last one you will end this sick game of yours with a hyperinflationary depression/currency collapse." I've been thinking this way for three years now, and I've been reading a lot of people who tend to confirm this belief. It's left me unprepared, frustrated, and disillusioned at major turning points in the market.
Trouble is, the Fed has a few more rabbits to pull out of the hat. Now before you start calling me Kudlow I should point out that I have long since prepared for a total collapse of the system as well as I possibly can with the resources available to me. Unfortunately I don't have the wealth to buy land in a foreign country, but I've done everything short of that and I'm content. That said, I believe the Fed will continue to tease the market with QE2, QE2.5, QE3 for as long as this drug works. When it no longer does they could embark on a joint effort with congress of loan forgiveness to debtors, where the Fed pays the lender, and the lender forgives the debt. With balance sheets cleared they could take Mankiw's psychotic advice and take interest rates below zero, and coordinate with a newly elected Republican congress and President to simultaneously slash taxes. All of these ideas are dangerous, ridiculous, inflationary, etc, etc. But to these people the reality is only what is perceived by a sufficient number of sheeple. So you implement them while manipulating the public into ignoring the negative short term effects engage a sufficient number of the opinion makers into a game of cheerleading, and you win the round. The Game was lost long ago. Our side won, and their won't be enough rounds played for the Statists/Keynesians to catch up. It's as if the referee told both sides who one long ago in secret, but agreed to give the fans a good show by calling everything in their favor for the the final half.
I realize how crazy these ideas sound, but look who we're dealing with. Why would they restructure debt, devalue the currency abruptly, or in other words take the straightest line between here and collapse? The can will be kicked as far down the road as possible, as many times as possible, before sound money and honest government is restored. Does this revelation encourage me to put my Dow 40,000 hat on? Absolutely not. Nor does it blind me to the possibility of an abrupt, tyrannical act of aggression such as gold confiscation or forced conscription. But it does make me feel more prepared for the possible outcomes of this mess, and I imagine it will be less frustrating when the Fed ramps up the PR operation for their next "campaign to save the world from ruin."
"But to these people the reality is only what is perceived by a sufficient number of sheeple. "
Every day more people are acutely perceiving that they have no job, no income, and no way to pay for anything remotely resembling a first world standard of living. This is not a problem that can be made to disappear via media spin or printing presses. The government cannot keep paying for these things forever, and in increasing quantities.
I think it's easy for a lot of people, those here included to miss the bigger picture on where exactly we've ended up and/or are going. I think the best description might be neofeudalism
Generally speaking, I cannot own land. I can sort of pretend its mine if I pay the government enough each year. If I don't, I get kicked off and they let someone else pay rent on it. Anyone who says that this is ownership is full of shit.
The government claims that it is owed a cut on anything I make, anywhere in the world, because of the geography of my birth. Barter is not recognized - if I get "something", the IRS expects a cut in cash. Everything is expected to take place in their currency - I have to pay taxes and fees with it.
All I want to do is get some land, build a freakin' home, and work with my two hands, but apparently this is too much to ask. Instead, I'm just a 9-digit number who is expected to run on a hamster wheel for their benefit and then die.
If I can't live a productive life, then at least I want to live long enough to see large numbers of "them" bite the dust.
Attention hamster 123-45-6789. Shut the fuck up and get back to running on your assigned wheel. It's hooked up to printing press at the fed and you are fucking up the world economy.
It appears to me that there's a sort of circular/non-sequitur-ness to your presentation. I'd think that neo-feudalism would mean that there wouldn't be any State: yes, perhaps there could be, but I'm not thinking that the State could, at such a time, really have that much power: consider that the greatest military the world has ever seen is totally incapable of overcoming feudalistic Afghanistan and you start to see the point.
And if it's not the State asking for its slice, then it'll be the local fiefdoms. To be fair, and reality-based, we live in a shared world in which we do have contracts that we abide by that result in us paying fees/taxes in recognition of obtaining services. The fundamental is that if you use that road (or whatever is in the Commons) that you WILL pay for that use.
That property can't be taken with you when you die. While I believe that "ownership" seems to bring with it a greater likelihood that a person will exercise more responsibility (toward what he/she has, as well as what others have), I don't believe that it's really the end-all. To paraphrase Churchill (?), it's a shitty system, but all others are shittier. I'm just pointing out that it's shitty.
Lastly, to believe that you can only be productive if you don't pay taxes (or whatever) seems like a cop-out. If you were responsible to, say, your family, then I'd hope that you'd be productive for their benefit. One shouldn't use the excuse to not be productive because others are doing wrong; one should endeavor to be productive because that's what we believe is the right thing, what we believe we want to see in others- to borrow from the Avett Brothers' lyrics from Head Full of Doubt- Decide what to be and go be it Or, as I learned in the Marine Corps, set the example.
I see your point and it's a good one. Let me see if I can put another spin on that.
We don't have a "military" in the sense that history has depicted it. We don't go in, scorch the earth, win, take all their stuff, and leave. Haven't had this since 1/2 of Korea and certainly not in Vietnam. Wars are not run according to the rules of WAR.
We don't have an economic system that is purely the capitalistic system that was originally envisoned. Gold and silver are not currencies. The gold standard that we had was not a pure system. If it had been we would not have had the problems. Hell, we can't even do Keynesianism right. We didn't accumulate a surplus in the good times as he outlined.
We don't have the Constitutional Republic that began this country. It has devolved into some bastardization of several philosophies, none of which has proven to be successful. This one will not be either.
What has caused all this to develop? Entire books could be written on each aspect, but the system won't reset until it tilts (I love pinball).
Well said Rocky.
The real object of modern war is just as much the internal peasant population as is the external “enemy” peasant population. Hence we had the false flag attack of 911 that killed numerous internal peasants to incite the remaining (brainless, TV and neocon zapped) internal peasants to support a war against the external peasants (AKA “Islamo fascists”).
I'm not referring to you personally in my post above, but to American men in general.
Amen, brother. Houses are being taken for delinquent property taxes in greater numbers. Sounds like feudalism to me. Too bad they don't teach that in school. The whole thing frustrates me to no end, and I feel as if my intuition to get angry is contrary to the conditioning I received in public school. The natural response when a man has his property taken by threat of force is to react strongly and swiftly. But not to worry if you feel immasculated. Just post up on the couch this Sunday and participate in the modern day equivalent of bread and circuses. They'll be sure to tell you how manly you are for watching their trivial game. Maybe you'll forget about how much you're being kicked around by your overlords.
Of course we're going to restructure the debt - unless we're idiots.
Look at history. This is what people do. People always need credit and those who have cash are always willing to put them in hock up to the point they can't pay. It's not a new phenomenon.
it's numbers on a balance sheet. Time and again, governments have changed those numbers. It's even in the Bible - Jubilee. Everybody says it's going to be the end of the world and it isn't. What is destructive is not admitting that the debt is impossible to pay - as in the Weimar years in Germany.
Default happens. It's not the end of the world. Nobody is interested in confiscating your gold or conscripting you.
I think you misunderstood. I was simply responding to the post, which suggests that the Fed is left with three options, all of which end in catostrophe in the near future. It sounds like you agree with me that the State does not want chaos, and it does not want to disrupt the game they have rigged against us. My comment about conscription was to illustrate that my most irrational fears have clouded my judgement by believing that the Fed is out of bullets and the world could end at any moment. This view has been expressed numerous times on this site and others, and it needs to be taken into context of how the Fed and the State have and will react to the storm on the horizon.
True, debt restructuring is not new. I realize that. But my point wasn't that it was new. I find it unlikely because it would likely end the game. The government would no longer have the ability to borrow at current levels. Raising income taxes to levels sufficient to cover the deficit would cause a revolution, and cutting federal spending would cause a deflationary depression. So yes, it isn't new, but it isn't the ideal outcome for the folks who will ultimately make the decision. I'm not familar with Jubilee, but I would venture a guess that the details of that event are sketchy and that the Bible offers the only detailed historical account. Just because everybody says it was going to end the world in the Bible, and then it didn't, doesn't mean much. Paul Krugman said their wasn't enough stimulus to get us out of the recession. The economy didn't recover, but that doesn't mean Krugman was right.
That word "Jubilee" again. It keeps coming up.
Someone let us know when the CNBS wankers start using the word Jubilee!
Evening, I agree with you on the fact that the impending hyper inflation/deflation is NOT so impending. It is in everyone's dream that this will occur quickly making the value of their gold skyrocket supporting their Mad Max fantasy. Yes, the US is broke. The sad reality as long as the sheeple still believe in the slowly deteriorating system, it will plod along with the Fed and gubimint in control. I am guessing we have minimum 2 to 3 years before things unravel with lots of pain for the American working classes. The point at which the central banks can no longer print money and the actual economy ceases functioning is when the SHTF event will occur.
Interesting you mention the working class. It takes a lot for a driven, intelligent, and motivated individual to abandon productive work and join the bureaucratic elites in public service, or worse, become a ward of the state through welfare (which still exists btw, through social security 'disability' insurance. Get diagnosed with chronic fatigue syndrome (which cannot be scientifically diagnosed), depression, etc and you can collect a check). Otherwise productive people fall victim to this when they get beaten down and the productive part of them dies. They will never vote for another tax break or welfare cut. They become one of "them". "They" are getting close to outnumbering us, and as the country ages and more retirees start drawing a check after ten years of work (the minimum to collect social security), "they" will outnumber us. The country will die slowly and collapse under it's own weight without radical change. However, this is 5-10-15 years out, and the oligarchs will extend and pretend for however long they can get away with.
Your scenario sounds a helluva lot less foolish today than it did 3 years ago!
Time has a way of bringing the previously tin-foil hat ideas into the mainstream.
Funny how that works. Somebody will come up with a famous person quote to back us up.
I think they (Fed & Treas) will try to do a combination of all three. Why? Because there's no rules and it's the most obvious and unscrupulous thing to do, so why change after 97 years?
1) they'll pay back or secure, in some way, those they will want something from in the future.
2) they will default on unfriendlies they have leverage over, and those of beneficiaries in #1
3) they will hyper-inflate away the rest after the default/ collapse of currency value.
There's more money to be made in Asia. It's easier and cheaper to move capital and resources to Asia in a corporate takever at a fraction of the cost post-collapse. Asia doesn't want our money, they want the world's resources for the next 100 years. Getting us to spend ourselves into bankruptcy on plastic toys was genius.
Reserve currency status as leverage is gone. We're broke. The dollar will be wiped out. $300/bbl oil. Bye Bye. Adios. Sayonara. Adieu. Ciao.
The fed and their member (intentional usage of the word member) banks have accumulated the rights to a lot of assets. They don't care what happens now--option one or two. All they want to do is accumulate more and more rights to hard assets. When the end of the line comes, the fed will either own or have an ownership interest in a lot of stuff. Have a mortgage through fanny or freddy? Well, guess what-they own your house-for example. People will do what the fed tells them to do--through our politicans of course. Yep, the fed owns them too. Default, Inflate, Repudiate, it does not matter.
LOL assets - you mean empty houses that decay as we speak? Go visit some houses in these cookie cutter subdivisions that have been empty for years and make your own decision what they are actually worth. The whole system is going to crash and crash hard no matter what remedies are thrown at this.
Empty houses, full houses - empty buildings, full buildings, if the fed has a debt interest they will take ownership. The fed really does not care. I agree with you, the system will come down. I am surprised it has not already. I once told a group of tea partying boomers that they could wake up one morning to a real dollar crises and they looked at me like I had a tin foil hat on. My main concern is that when the system comes down-it is going to catch a majority of people totally off guard. The only way I can find of coping with this in an urban area is to either get out, or make sure you have a couple of bags of rice in storage to help the people out who were surprised. Contrary to most of the comments here, I still believe that the system will come down abruptly, unpredictably, and very nastily. Remember, there are sociopaths in charge.
+ 1000
Options 2 & 3 are the same thing, since the bond is the dollar, is deflation is inflation...
Fuck'em all, Time for some shots, beer & geetar playin. Goodnight all....
One way for the government to solve the looming bubble is to drop the rate on home mortgages to about 3.00 - 3.25 percent for a 30 year, but then have FNMA and FHLMC issue calculated bonds that pay a coupon of 5.00 percent. FNMA and FHLMC would make up the difference with a interest margin coverage. They draw on the line of credit with the Treasury to subsidize the interest cost, which is much cheaper than recognizing all the losses from foreclosing on underwater mortgages.
I dunno.
I think from what the author is citing, the nut on principal is just too big - even at those low rates.
I think the better solution would be a purely bookkeeping one. Just create a standard haircut on mortgage debt, take it out of shareholders' hide, simply create a paper refinancing of bank core assets through a common core asset "facility" (whatever that means, just basically created money) and move on. Is it equitable? No. A lot of irresponsible behavior gets papered over. But it's just stupid to waste time and money trying not to admit that there was a real estate bubble.
Major dollar rally against what ? Other currencies, well sure. Whoever debases their currency fastest is the winner... no ?? That's what has kept employment happening in China while the U.S. is bled dry.
But a major USD rally against Gold in the medium term ? That's one hell of a wall of credibility that Bernanke and Obama cannot cobble together.
C'mon, nobody said the dollar was going to rally against gold. The dollar trades against other fiat currencies, so it's implied that he was referring to a rally vs. other paper money. It's not exactly irrelevant, as it does put pressure on exports which affects the jobless rate, which, oh hell, why bother.
Correct. He said to watch the two charts, not correlate them.
Of course it's going to be Option 2.
Too much debt = too much wealth in unproductive hands and too much malinvestment.
The world's holders of fixed income would love to enslave everyone into paying them interest for the rest of their lives. Well, although the spirit is apparently still willing, the flesh is weak.
The money ain't there.
It will be a combination of #2 and #3 -- i.e., selective default (raising the retirement age, means testing, etc.) and mass inflation -- on the vain hope that the latter won't result in hyperinflation.
Forget that, though, as it's already baked in the cake, never mind the deflationary head-fake:
http://fofoa.blogspot.com
How the debt will be dealt with is a guessing game at this point (not going to be paid off, for sure), so with that said: GOLD BITCHEZ!
One correct answer...congrats! Gold will kick the crap out of all paper, including the dollar. What else do we need know?
'All forms of paper assets are shorts on gold' FOFA
I disagree with the results if option 2 were taken. Mass defaults by consumers, etc would imply a vanishing if dollars. I think option 2 would lead to a continuation of an already sizable dollar rally. One that has been hated since its inception. Hyperinflation will not happen because it would mark the immediate end if te US as crime.would skyrocket as survival would be the name of the game. Given sentiment and the precarious condition of too much debt that will never be repayed = dollars vanishing i think we are in the early stages of a Major dollar rally.
uformula,
I think you are confusing mass defaults by the private sector (households and businesses) and mass defaults by the sovereign.
Mass defaults by the private sector is already happening and is indeed deflationary, dollars are vanishing which causes the dollar to appreciate.
But Mass default by the sovereign issuer of the currency is a different matter altogether. It would be sufficient that rumours of such default be on the table (not even actually implemented yet) for holders of US treasuries to sell en masse (a default means they take a major haircut on their holdings so of course they would sell treasuries to buy Gold, other currencies or other commodities) and to cause a run on the dollar.
The slightest rummours of a US Govt default/restructuring would be sufficient to cause hyperinflation.
Option 2 is already well underway. Default is the game. Dollar devaluation will certainly happen of course, but despite the enormous levels of misunderstanding on ZH, dollar devaluation is not hyperinflation. Money and credit are contracting. Also, oil prices are a powerful counterweight to dollar devaluation at a certain point. Currently supplies are at a 24 year high, so there's cushion there, but not enough to withstand a prolonged period of dollar devaluation. Gold bugs love to directly correlate gold prices with the USD, but until we see a dollar correlation with oil, we're seeing coincidental inverse moves in gold-usd (ie: the fear trade and basic supply/demand) and not causation.
you seem to be confusing option 2. for households and businesses (already happening) with option 2. for the US Govt (not happened yet as far as I know).
Sure total credit is contracting, but US Govt debt is not.
What do you mean with "dollar devaluation"?
Do you think foreign powers, competitors and allies alike, like China and Japan, are going to allow the US to default? Or would they rather just take a haircut through inflation? Take Ben Bernanke at his word, go back and look at his many speeches, he states he would always choose inflation over deflation. The gold - USD correlation is broken; gold goes up no matter what the dollar does. I'm not a gold bug, I just know this fiat will end as all the rest did.
I ask the same exact two questions but arrive at opposite answers. No, they will not "take a haircut" through inflation. They would cease to buy debt at the next auction, forcing a raise. PD system be damned.
Bernanke would indeed love to create inflation. We're not disagreeing at all about the intent of the Federal Reserve. We are in strong disagreement over it's capacity. We're also not in disagreement over the vector of fiat currencies, but we are in disagreement over imminence.
I agree that Bernanke doesn't have the capacity to create inflation because he can't force borrowers to pile on more debt. But he could well cause hyperinflation (which is not the same thing as inflation but causeb by a sudden loss of confidence in the US Govt's ability to honour its obligations) if he monetized too much of the US Govt debt.
Bernake tring to create inflation by monetizing the US Govt debt is a bit like shaking ketchup out of an old bottle. Shake once, no ketchup, shake twice, still no ketchup, shake a few more times, and you get a big red splash all over the table.