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We're Just Gonna Inflate Our Way Out Of It! (Or Are We...)

Tyler Durden's picture


From Contrary Investor

We're Just Gonna Inflate Our Way Out If It!...Oh really?  I don't think so, Scooter.  In a recent discussion we mentioned the fact that lately former Fed member Larry Lindsey has been talking up the idea of a potential fiscal trap for the US.  To be honest, we believe this idea has already played itself out in Japan and day by day is coming to a Euro theater near you in terms of individual country experience. The whole idea of a fiscal trap involves the combination of sovereign debt levels with manipulated domestic interest rate levels. Japan has been a poster child example of this simple concept.  By artificially holding its domestic interest rates at the theoretical zero bound, it has allowed the government to lever up in a magnitude that most likely never could have happened had free market forces set domestic interest rate levels.  Japan has enjoyed an artificial depressant on nominal dollar (in this case Yen) interest costs that has made incredible sovereign debt expansion feel relatively benign from an ongoing debt servicing cost perspective relative to what has been up to this point the magnitude of ongoing sovereign revenue collection.

Many moons ago we were involved with an investment idea for a time that was essentially a rollup of and specialized focus upon ventilator hospitals.  The company was called Vencor.  As a result of that investment we necessarily needed to get up to speed on the medical profession subspecialty that is pulmonology.  And what struck us at the time as being so critical in many patient cases was the "weaning period" or window of opportunity so necessary for a patient to get off a ventilator.  In the majority of cases involving a shorter term illness, the weaning period was simply a natural part of total patient recovery.  But as you would imagine in a smaller number of cases, patients were not so fortunate.  Although this is a very generic comment and completely dismisses patient and circumstance individuality, the fact is that the longer a patient remained on a ventilator, the greater the chances they would not be able to be weaned off of the machine.  The body “learns” not to breathe on its own after a period of time.  Essentially a patient would pass a critical window of recovery weaning period opportunity.

So, first, our personal apologies as we know this analogy is neither light hearted nor fun to discuss.  Somber may be the true characterization.  But we believe this analogy is incredibly apt in terms of describing the reality of the sovereign debt fiscal trap.  The longer Japan has been on the artificial zero interest rate "breathing machine" over the last decade plus, the harder it has become to wean itself off.  Although we could spend an entire discussion on Japan alone, we personally believe Japan has already passed the critical "weaning period" demarcation line for zero bound interest rate/monetary policy.  At this point, meaningfully rising rates in Japan would cause a rise in debt service payments that would crash directly into the current level of offsetting revenue collection by the government and leave little else in the way of excess funds in its aftermath.  Of course after so many years of zero bound for Japan , investors seem to believe rates will remain near zero indefinitely.  This is what complacency is all about.  Although this sure seems to be the real world reality that hovers over Japan, the Japanese fixed income markets have clearly not priced this in as of yet.  Somewhere down the road it appears an inevitability.  Again, a very big story that will be told another day.  But when that day comes, it may indeed be quite the eye opener and repricing event for sovereign debt globally.

It just so happens that a few weeks back, those thoroughly lovely folks at the US Treasury Department were kind enough to give us a current look at just where the structure of official US Federal debt stands as of January 2011 month end.  We pulled out our calculators and went to work to produce the chart you see below that breaks down the maturity structure of Federal debt by year looking out over the next decade.  Let's cut right to the bottom line.  A touch over 22% of US Federal debt matures in one year (2011).  A touch less than 50% of total Federal debt matures within three years.  And as you eyeball the debt maturities of 2011 through 2013, we believe it's fair to say that the average maturity of just shy of half of “official” US total Federal debt is roughly a year and one half.  Trying to be conservative, with one year Treasury paper near 30 basis points in cost and three year paper near 100 bp, we believe it's fair to say that a bit less than one half of total publicly traded (excluding intergovernmental transfers) Federal debt has an average cost of capital of about 55 basis points, again remembering that in weighting these numbers the bulk of maturities occurs w/in 1 year.  And without question this is a gift of Fed interest rate engineering at the theoretical zero bound.  The cost of servicing US Federal debt interest payments has been hooked up to a Fed sponsored ventilator, if you will, as it's certainly not breathing on its own.  So the much longer term thematic investment question becomes, just when will the eventual "weaning period" from the zero bound begin and what will be the character of the patient when this occurs?

For now, the US has in good part traveled down the path already trodden by Japan in the prior decade.  But as we see life, the US has not yet passed the critical "weaning period" stage where it can no longer "afford" to get off the ZIRP ventilator.  Time remains, but the clock is ticking ever louder with each passing day.

Here’s a fun fact you can use to thrill your friends at the next Wall Street cocktail party.  At year end 2006, “official” US Federal debt outstanding stood at $4.9 trillion.  The latest Fed Flow of Funds numbers tell us that by the third quarter of 2010, that number is now just over $9 trillion, an increase of $4.1 trillion.  Not quite a doubling in US Federal debt.  To find a similar increase of $4.1 trillion prior to the beginning of 2007, one has to travel back a quarter century and combine ALL Federal debt taken on.  We’ve now accomplished in three and three quarter years what took a quarter century to accomplish.


And of course what has happened to 1 year Treasury rates since the dawn of 2007?  They have fallen from literally 4.94% to under .3%.  You get the picture.  The government has been able to take on this magnitude of new debt as debt service costs are negligible under 30 basis points.  This is the birth place of the fiscal trap.

Remember, the numbers we are discussing do not include the impact of Fannie and Freddie, nor take into account the present value of SSI and Medicare liabilities.  But since Federal debt costs have been artificially lowered for now by the Fed sponsored breathing machine, debt service costs during this period of what truly is unprecedented US sovereign debt buildup have been totally benign.  Everyone and their brother know, or better know, that from a longer term standpoint this reality in current US Government funding circumstances is absolutely unsustainable.  Somewhere ahead, "something" will change.  It's how this set of circumstances is reconciled and what influences or effect this reconciliation has on financial asset classes and prices that will be important to investment decision making.

Sorry to have dragged you through the above, but it sets the stage for hopefully a thematic truism looking ahead.  Right to the bottom line.  The set of facts and circumstances we've dragged you through so far in this discussion argue incredibly strongly that the US is not going to be able to "inflate its way out" of its current leverage/entitlement obligation position.  Of course this thematic comment rests squarely upon the assumption that US interest rates would rise in an accelerating inflationary environment.  And yet wildly enough, does it not appear that Fed monetary actions seem absolutely hell bent on reflation at all costs?  It sure seems that way. 

You know that a few weeks back we received the new budget from the Administration.  Of course it came on the same day that the $1.5 trillion budget estimate for 2011 became $1.65 trillion.  (You may remember we entered the current year with an estimate of $1 trillion, but who's counting at this point, right?)  Of course the missing item from the current budget proposal was any type of an attempt at reconciling entitlement costs.  God forbid in a pre-election year, no?  C’mon, what’s more important, the long term economic health of the country, or near term election results?  Unfortunately and quite sadly, you already know the answer.  The key fact in this balance sheet and deficit funding drama is that the US is facing chronic short term budget deficit acceleration due to the now inevitable fact that here and now entitlement costs are accelerating as the baby boom generation has come to collect, so to speak.  Since there has never been any attempt by the Government to look at long term funding of these long term entitlement costs (match funding), it's a pay as you go set of programs.  And that means the Government long ago chose to fund these short term.  Hence the current structure of Government debt maturities.  The Government long ago chose to fund its entitlement obligations with an adjustable rate mortgage, if you will.  And for now, the chief pulmonologists at the Fed have chosen intubation and ventilator assistance in terms of current interest costs.  But the longer the patient (US Government debt acceleration) remains on the artificial interest rate ventilator, the tougher it's going to be to successfully move through and past the "weaning period".  Hence the description of the fiscal trap.  This is only amplified by the fact that this year SSI inflows will not meet outflow requirements, leaving the Government to make up the shortfall as part of the budget.  Just imagine what this will look like in a few years, let alone a decade.

For a minute, let's flip this set of circumstances on its proverbial head and ask under just what set of circumstances could the US Government potentially successfully inflate its leverage problems away.  It's a bit of compare and contrast with the reality of current factual circumstances.  The US could successfully "inflate away" its debt issues if 1) the structure of debt maturities was decidedly skewed to the long term, and 2) the US had not chosen to fund its longer term entitlement obligations on a pay as you go basis at the short end of the curve.  Small annual budget deficits with large long dated debt obligations could easily and absolutely be reduced in "real" terms vis-à-vis a process of accelerating inflation.  The problem, per se, could very much be inflated away.  But this set of circumstances stands in polar contrast to the current reality of the Federal Government debt structure and ongoing and accelerating short term funding needs.  Message being, the US will not be able to inflate its way out of what will be growing budget problems as we move ahead.  In fact, the Fed trying to force macro inflation short term is simply counterproductive to Government longer term budget and debt service interests.  Question:  How does the Fed creating another stock market ramp help to solve bigger picture US debt and ongoing funding cost issues?  We do not have an answer, not unless we are going to tax Wall Street and big bank record bonuses as well as stock related capital gains at a 100% marginal rate.

With a projected $1.65 trillion budget deficit for this year, the US will borrow about 11% of estimated GDP.  It has likewise been estimated that interest costs to service US Government debt singularly will total about $190 billion, or roughly 1.3% of GDP.  Due to the Fed manning the financial ventilator, borrowing costs are low, but borrowing needs are high.  With this type of a structural backdrop, inflation (assuming higher interest rates would be a result) is the last thing the US Government needs, but its the very thing the Fed seems intent on provoking.  The longer this set of circumstances not only exists, but continues to accelerate in trajectory, the tougher the "weaning process" will ultimately become for the Fed's zero interest rate policy.  Unlike Japan , we believe the US still has the time to address this key issue for longer term US economic outcomes.  Of course the most important question of all becomes, does it have the will?

The larger the US debt burden grows ahead as the Fed maintains the financial ventilator setting on zero bound, the greater the potential for a sovereign debt dislocation in the US to arise at some point.  We are already seeing these exact circumstances in the EU zone along with fallout consequences.  We personally believe it will not be long before the global capital markets "recognize" and price in the reality of fiscal and monetary circumstances in Japan .  The US given a bit of lead time has a key choice right now.  Either deal with this set of colliding circumstances proactively, or the global capital markets will do so somewhere ahead.  Unfortunately as sovereign debt issues continue as a critical theme ahead, the spotlights will shine on this problem ever more brightly from a global perspective.  We mentioned thematically many moons ago that the final provocateurs in generational credit cycle expansion would be sovereign entities.  Just as it was clear in the middle of the last decade that US households were heading toward a generational tipping point in terms of balance sheet leverage extension, so too is it clear now that many global sovereign entities are exhibiting similar character.  Unfortunately, our elected and appointed officials, as well as Wall Street and financial sector hangers on, told us "no one could have seen this coming" in 2008 and 2009.  We're telling you right now that from a sovereign sector balance sheet standpoint it's coming, okay?  We're just hoping we won't be calling ourselves "no one" in a few years.


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Sun, 03/06/2011 - 13:07 | 1023600 Long-John-Silver
Long-John-Silver's picture

Reality is rapidly approaching.

Sun, 03/06/2011 - 13:12 | 1023610 Michael
Michael's picture

No one could have seen it coming.

Sun, 03/06/2011 - 13:18 | 1023625 Rainman
Rainman's picture

" How could we have known ? " will be revised to " How could they have been so stupid ? "

Sun, 03/06/2011 - 13:26 | 1023643 Temporalist
Temporalist's picture

WTFK?  Whothefuckknew?

Based on the information we had at the time there were WMDs but upon further was just opium...errr...I mean oil...

Sun, 03/06/2011 - 13:29 | 1023653 Michael
Michael's picture

Pot cures cancer.

Cancer Gate Rick Simpson Cure Medicinal Studies Cannnabis Marijuana CBD CBN THC Cannabinoid

Sun, 03/06/2011 - 14:12 | 1023752 Clint Liquor
Clint Liquor's picture

Reality is the antidote for hope.

Sun, 03/06/2011 - 14:23 | 1023774 Bicycle Repairman
Bicycle Repairman's picture

"We personally believe it will not be long before the global capital markets "recognize" and price in the reality of fiscal and monetary circumstances in Japan".

Really?  The 'facts' have (seemingly) been in plain view for years.  Can the market really be that stupid or is there something else?

If history is any indicator, "Instant Karma" is not going to hit Japan or anyone else in the short run.  In the long run ............

Sun, 03/06/2011 - 16:54 | 1024168 RockyRacoon
RockyRacoon's picture

Last ditch effort to loot the country by the folks who don't need any more.

Not really hard to figger out.   Tragedy of the Commons.

Sun, 03/06/2011 - 20:40 | 1024699 Bicycle Repairman
Bicycle Repairman's picture

They need our military.  And will for some time.

Sun, 03/06/2011 - 13:10 | 1023608 Oh regional Indian
Oh regional Indian's picture

A few observations and questions:

1) Whatever happened to the Yen carry trade. Did it unwind in an orderly fashion? It was going to blow the financial world apart a couple of years ago. As it should. No news of it at all for the past 18 or so months.

2) Repeated use of artifical inflation devices is said to cause terminal limpness. Is that the desired outcome of proposed inflation?

3) How do you inflate in a zero-bound environment? Is there other stealth ways, unknown to me/us?

4) Across the board inflation? How can that cure anything at all? Bi-flation I can see. BUt that is a twin-squeeze. A double whammy.

5) "We" will inflate "our" way....etc... Who is this we and our? Banks or peeps or Everyone, praise the Lord?



Sun, 03/06/2011 - 13:28 | 1023645 Oracle of Kypseli
Oracle of Kypseli's picture

Governments are running out of other people's money, so they print their own. Why not then repeal taxation and spark consumerism? If that is what jump starts the economy.

The government can print its own money for spending. (As they now do anyway.)

Instead of giving it all to the banks, just share with the people.

Oh! yea. That's a bold experiment, they will say.

Yes! But it is more equitable experiment than the government's.

Sun, 03/06/2011 - 13:51 | 1023705 Bob
Bob's picture

That appears to be  the problem with anything that remotely resembles actual "socialism." 

Sun, 03/06/2011 - 15:22 | 1023904 cxl9
cxl9's picture

Why not then repeal taxation and spark consumerism?

Because without taxation there is no fundamental demand for dollars. You'd also be giving people back 40-50% of their lives, and you know they would just spend that extra time getting into all sorts of mischief.

Sun, 03/06/2011 - 13:28 | 1023649 Long-John-Silver
Long-John-Silver's picture

RE: How do you inflate in a zero-bound environment?

Simple; you add a zero to the price of everything just like Jimmy Carter.

Sun, 03/06/2011 - 13:49 | 1023698 Oh regional Indian
Oh regional Indian's picture

Easy as that, eh?




Sun, 03/06/2011 - 13:58 | 1023718 Orly
Orly's picture

1) Whatever happened to the Yen carry trade.

It moved to Australia and is about to catch a major, major unwind.

3) How do you inflate in a zero-bound environment? Is there other stealth ways, unknown to me/us?

You simply allow unlimited speculation in the commodity markets.

How can that cure anything at all?

It allows deflation to be quenched in the hopes that consumers must pick up the ball, go back to work and gripe about paying higher prices.  Overall and in the grand scheme, it does nothing in the end.

Home prices in the US, which is the main deflationary asset, are still overvalued, in most places, by at least 20%.  When wages catch up with the ability to purchase these homes, or when home prices come down to the level of wages, then it will be set straight.  It will probably be a combination of both factors but the equilibrium will take years to achieve.

Sun, 03/06/2011 - 14:30 | 1023785 Bicycle Repairman
Bicycle Repairman's picture

"equilibrium will take years to achieve"

Yes.  Moderate inflation over as many years as it takes.  Wages will lag, living standards will drop slowly.  Negative interest rates.  Savers and J6P pay for all the sins.  No mad max.

History books will read: "Sir B. S. Bernanke Saved the World".  Brings a tear to my eye.

Mon, 03/07/2011 - 08:11 | 1025579 1984
1984's picture

That's where you're wrong.  History books will say "The Bernank ...".

Sun, 03/06/2011 - 14:32 | 1023796 Tedster
Tedster's picture

I hear that now and then - that housing "needs" to reset to some historical formula, e.g. three times avg. annual wage or somesuch. Years ago I read about an old sleepy mining town in Colo. - Telluride. Once the big money moved in for the then-new ski industry, the locals were displaced because they couldn't afford the property taxes, much less the land and housing. The analogy I see in our future is the public being un-assed from
the country. Everuthing seems to point that way - wages stagnant, inflation, loss of property and self defense rights, rule of law, crushing tax hikes in the pipeline, crumbling core infrastructure, etc.

Sun, 03/06/2011 - 14:54 | 1023833 Spalding_Smailes
Spalding_Smailes's picture

Hot money flowing into the emerging markets like water. The speculation in the commodity markets •  currency peg the real reason for run up in prices. Not uncle Ben.


Housing prices down 45% in Arizona. Many , many people questioning " why the fuck did I buy this " during the shadow banking credit orgy, stupid reigned ( keeping up with the joneses • fellow morons ). Many people thought credit was money.

Sun, 03/06/2011 - 15:02 | 1023862 akak
akak's picture

Many people thought credit was money.

And there are still some deflationary flat-earthers who continue to believe so today, despite the ubiquitous evidence to the contrary in front of their closed eyes.

Sun, 03/06/2011 - 15:13 | 1023878 Spalding_Smailes
Spalding_Smailes's picture

Different argument.


Treasuries are not money, also. So don't look toward that growing pile of paper and thing it's money. But the deflation in a massive asset class like housing does trim some fat and drink down flowing digital bits. Bottomless pit of shadow obligations.

Sun, 03/06/2011 - 17:01 | 1024186 RockyRacoon
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Sure • is • interesting • to • read • your • comments.•••••••

Sun, 03/06/2011 - 17:25 | 1024249 akak
akak's picture

Autism: It's not just for idiot savants any more!

(Or is it?)

Sun, 03/06/2011 - 22:01 | 1024883 Orly
Orly's picture

If you don't mind, my nine year old son is autistic.  Can we skip the retard jokes, please?

Thanks in advance.

Sun, 03/06/2011 - 22:08 | 1024905 akak
akak's picture

Will do.

Henceforth, I will stick to mocking just niggers and cripples.

Sun, 03/06/2011 - 22:13 | 1024923 Orly
Orly's picture

I appreciate that.


Oh, and the Irish.

Sun, 03/06/2011 - 22:22 | 1024954 akak
akak's picture

Oh, and the Irish.

The day that we can't mock pasty-white alcoholic Celts with hideous red hair and freckles is the day that all humor finally dies.

Sun, 03/06/2011 - 23:08 | 1025092 Orly
Orly's picture

All right, all right.  I'll lighten up.

Sorry to be a drag!

Of course, the Irish thing was a reference to Blazin' Saddles.

I'm now gonna occupy myself by singing Camptown Laties...

Sun, 03/06/2011 - 17:44 | 1024292 Spalding_Smailes
Spalding_Smailes's picture

What mac are you running .... Are you in the print industry also, or do you just like apple computers ?

Sun, 03/06/2011 - 19:20 | 1024481 Spitzer
Spitzer's picture

Treasuries back the dollar. As US debt defaults, the dollar sells off(inflation). Just like the Euro sold off when Greece was in trouble. Using your logic, the Euro should have went up.

Sun, 03/06/2011 - 19:22 | 1024488 equity_momo
equity_momo's picture

Greece , and the rest of the PIIGS , still in trouble Spitz. Euro , still doing nicely.

Mon, 03/07/2011 - 04:22 | 1024640 Guy Fawkes Mulder
Guy Fawkes Mulder's picture


Many people thought credit was money.

And there are still some deflationary flat-earthers who continue to believe so today, despite the ubiquitous evidence to the contrary in front of their closed eyes.

I remember you. You like to talk about inflation or deflation purely as a change in money supply (which money supply do you mean, by the way? For that matter, what even is it that you mean by money? It seems like you call dollars, which are credit money, "money" too. Maybe I'm getting you wrong.)

It is meaningful to talk about price inflation, and to talk about inflation in terms of specific currencies or asset values.

The term "deflationary flat-earther" can only come from the mouth of a small mind.

I saw cjbosk make a good case that consumer prices won't be hyper-inflating any time soon, over on this thread:ès-nous-le-délu

What happens if Bernanke actually stops QE?

What happens if a US debt default is allowed to occur?

What happens if the market stops rising by Ponzi magic?

These things can happen; they are options on the table. These actions may benefit the infamous powers-that-be, and they may opt for them. I've heard it argued very well before that they have to continue QE, but at the end of the day I think they can still choose to let gravity have its say (to "pull the plug on the ventilator").

If you open your conception of "deflation" to include the loss of purchasing power (for example, Joe-65-Year-Old thinks he has "a million dollars" worth of investments today, but tomorrow the markets are allowed to crash and next week he has nowhere near the amount of purchasing power he had today), then you will realize that deflation is possible and it is serious threat. It's the knife that's at people's back as they Ponzi their way forward.

edit: TLDR = For consumer goods: "money" is fiat paper credit money, and "credit" is credit, and no one could possibly mix up "credit" with "money". The credit money we have now is paper Kool Aid. The bankers are planning to hyperinflate over the longest period possible and set themselves up in the ensuing new monetary order. But if the central bank juice stops flowing... deflation, bitchez.

Sun, 03/06/2011 - 15:20 | 1023894 Nathan Muir
Nathan Muir's picture

"currency peg the real reason for run up in prices. Not uncle Ben."


Are you really that ignorant?  You do realize uncle Ben controls the currency these countries are pegged to, right? 


"Many people thought credit was money"


Do you understand credit is money in a fractional reserve banking system?  I always assumed a blind bull like yourself not only understood debt as money, but was all for it.  Whereas the intelligent bears on this sight understood debt as money can never work in the long-run due to laws of exponential math.  Clearly, I gave you undeserved credit.  Here's some advice: critically think before you comment here...your nonsense is getting old.

Sun, 03/06/2011 - 15:29 | 1023911 Spalding_Smailes
Spalding_Smailes's picture

And they can move the peg. Ben can't move the peg. If they did not peg at suppressed rates they would not be drinking inflation.


Credit is not money until it is spent. Please read a book or something before you post. Just like treasuries are not money.


So who's the ignorant one ?

Sun, 03/06/2011 - 15:29 | 1023920 Orly
Orly's picture

It seems he may be correct, Mr. Smailes.  Credit is money (created from thin air or not...).  It has no velocity unless it is spent.

In a sense, you're both correct.  It is just a matter of semantics.

Sun, 03/06/2011 - 15:39 | 1023930 Spalding_Smailes
Spalding_Smailes's picture


Credit is not money. Credit can stay credit until infinity. Credit becomes money when you purchase an asset and then velocity is affected in the existing money supply..

Point being, existing money supply not effected by new credit on the banks books.

Sun, 03/06/2011 - 15:44 | 1023957 Orly
Orly's picture

So if I have a credit limit on my card that is ten grand, that is not money?  Of course it is money.  It may be potential money but it is still money, nonetheless.

When I go to Best Buy and plunk down two grand on a new LCDHDTV (!) and put it on my card, then the "money" takes on velocity.

I do understand your point, though. Which is why the talk of Zimbawaism in the American economy is just silly to me.  As long as the banks hold on to potential money and the velocity of said money (credit...) is not realised, then there can be no hyperinflation from it.  Eventually, the Fed can drain this credit out and it will be no harm, no foul.


Sun, 03/06/2011 - 15:51 | 1023973 Spalding_Smailes
Spalding_Smailes's picture

Yes your credit is not money until its spent on an asset. You can call it money if you want.


Maybe he will stop tossing out insults and turn off the t.v. and read 20 books on finance.


Correcting • educating people like him is very,very tiresome. Lol


Wish the junker would step up. I'll link to volumes of information supporting my thesis.

Sun, 03/06/2011 - 15:51 | 1023989 Orly
Orly's picture

Perhaps but you have posted more times than I have today, Mr. Smailes.  Seems to me you love it more than I!


Sun, 03/06/2011 - 16:18 | 1023995 Spalding_Smailes
Spalding_Smailes's picture

Hey, I hate seeing guys like ( Nathan Muir  )maybe telling friends and family the wrong information. Notice the dead silence on his part after tossing out all the insults in his first post.


Clearly, I gave you undeserved credit.  Here's some advice: critically think before you comment here...your nonsense is getting old.


Fucking Lol' .... Got financial books ??? The Macro View - Roger Miller or Handbook of Financial Markets and Institutions Sixth Edition or The Wealth of Nations - Adam Smith Books I-III Lol

Sun, 03/06/2011 - 19:17 | 1024471 Spitzer
Spitzer's picture

The peg is just the act of printing that same amount of local currency as what is coming out of the US.

Credit is money.

Sun, 03/06/2011 - 19:48 | 1024529 Spalding_Smailes
Spalding_Smailes's picture

Once again your dead wrong ...

They must print much more than 1 to 1 to suppress.

China M2 over the last 2 years going up at a 25% clip. Construction 70% of GDP trying to print 10% GDP, USA M2 with QE and POMO up 2% last 2 years.

Credit is not money until it is spent • velocity. Economics 101.

Sun, 03/06/2011 - 15:29 | 1023915 cxl9
cxl9's picture

Home prices in the US, which is the main deflationary asset, are still overvalued, in most places, by at least 20%.

Just outlaw mortgages entirely. If you can't save up and pay cash for a house, then you shouldn't buy one. Better still, do it Viet Nam style. All real estate purchases must be settled in physical gold. That'll eliminate the whole fraudulent real-estate industry and restore some semblance of sanity to house prices.

Sun, 03/06/2011 - 16:38 | 1024117 Orly
Orly's picture

That may be a bit extreme.

Instead, how about having the homeowner put 20% of the cost of the property down on the loan up front.  That way, they have skin in the game.  Only allow HELOCswhen the value is 20% above the market value and then, only for the amount in excess of the 20%.

Banks get paid, young families can save to purchase a dream home and there is no incentive to rip anyone off.


Works for me!

Mon, 03/07/2011 - 06:23 | 1025531 Oh regional Indian
Oh regional Indian's picture

Orly, thanks for the responese waaaay up thread. :-) It got busy thereafter.


Sun, 03/06/2011 - 13:20 | 1023630 equity_momo
equity_momo's picture

The whole idea of being able to "inflate away the debt" is a banker-perpetuated falsehood :it only works if the level of debt isnt growing by an order of magnitude greater than the means to repay it.

the article falls down in the last paragraph - it still paints the US in a position being able to chose. We are no different to Japan. The choice is simple - hyperinflate and then default or just default.


It doesnt matter how proactive the US , it is past the point of no return.  We have no lead time. Japan was able to live through its liquidity trap thus far due to global growth (what was the average price of oil from 1989 to now?)

Globalization is over , and with it comes widescale defaults.



Sun, 03/06/2011 - 13:38 | 1023665 Oracle of Kypseli
Oracle of Kypseli's picture

Very true. The threshold has been crossed. US hands are tied. The saying used to be "inflate or die" but I guess there is a way out. Default before you die.

The government's conundrum is how do you know when death is near? And if you default, how can you survive from your creditors?

Is it therefore, the current uprisings US's attempt to create world wide revolutions to destroy its creditors before the US defaults?

Please weigh on this discussion as it appears to me that this may be the only way out.




Sun, 03/06/2011 - 13:44 | 1023683 LawsofPhysics
LawsofPhysics's picture

"Is it therefore, the current uprisings US's attempt to create world wide revolutions to destroy its creditors before US defaults?"

Quite possible, or at least cause enough damage that U.S. companies can make money rebuilding our creditors countryside.  The debt, and "growth economics" are both fraudulent, either way, now things get interesting.  Possession will go from 9/10 ths of the law, to the law itself, hedge accordingly.

Sun, 03/06/2011 - 13:42 | 1023685 equity_momo
equity_momo's picture

I dont think there much to discuss! You just completed the circle - war.

History is full of examples of money printing episodes prior to economic collapses prior to war.

Money printing has never worked. Never. Its the sign of the end. Im of the belief WW3 started with the invasion of Iraq. The US puppet masters knew where we headed back then. Desperate grab for what oil is left before we start the great unwind.

A tip that i dont read in many places : travel. If there anywhere you wanted to visit in your dreams,go see it now whilst its 1) relatively affordable and 2) relatively safe.  Both those are about to go out the window.

Sun, 03/06/2011 - 13:51 | 1023702 Alcoholic Nativ...
Alcoholic Native American's picture

Ya think?  You still think 9/11 wasn't government assisted and greenlighted like the first WTC bombing? It was.   Jigs up, We got crooks on wallstreet and war criminals in the pentagon.  NO ONE HAS GONE TO JAIL.  There is literally no such thing as treason in a post 9/11 world.

That right there is the best indicator of things to come/happening.  



Sun, 03/06/2011 - 13:56 | 1023712 Dangertime
Dangertime's picture


You nailed it.  Especially with this line.


"It only works if the level of debt isnt growing by an order of magnitude greater than the means to repay it".


Once you borrow 10 dollars, you owe 11.  But only 10 exist.  Usury trap.

Sun, 03/06/2011 - 14:28 | 1023784 zaknick
zaknick's picture


Globalization= conquest

They've spawned little bankster clones in the invaded (infected) countries to act as majordomos. Now comes the time to squeeze them like zits (Mubarak and his 70 billion bribe).

Mankind's prosperity and peace lies down this path (who you gonna believe, the banksters?). I tell you this from experience. If we had the utter sleepy peaceful zeitgeist that reigned during much of my father's life, without these monster corporations hogging all the good businesses of life (the commanding heights of the economy) it would be a hell of a lot easier for entrepreneurs to thrive.

Sun, 03/06/2011 - 14:30 | 1023788 Sean7k
Sean7k's picture

Have to disagree. Unless a mechanism is created to control states that create money and credit ( as would exist in a gold standard or if other countries were not inflating as well) there is nothing to stop all countries from creating their own credit.

Ireland is creating it's own credit and the ECB is going along. All the major currency countries are creating their own credit and buying it with more credit. Everyone is paying interest only and keeping interest at minimal levels. 

Since there is no credit policeman, there is no way to stop it. You don't even need to default.

However, people will become progressively impoverished as wealth can still be transferrred through special priviliedges in markets for market makers and their investors, as well as from tax and spend policies from government.

Your proximity to the center of influence will determine your opportunities and costs. Providing you play along.

Sun, 03/06/2011 - 17:51 | 1024309 equity_momo
equity_momo's picture

Take the to the logical conclusion Sean .... ergo we can no longer afford the interest on the debt. We are already at the point where we cannot ever repay the principle , so its all about interest management.  As i have said , Japan have managed it for over 20 years (due to a global credit binge and global growth output)   . I see that paradigm not being sustainable , and like many , predict japan will be one of the first major developed economies to implode.    There comes a point where this exponential model breaks down : when the interest on the compounding debt can no longer be serviced.

Sun, 03/06/2011 - 18:53 | 1024427 Sean7k
Sean7k's picture

Of course, but the question is when? I used to think the elites would move to a global currency, but this would make it HARDER to extend and pretend. There is no disciplary factor in the equation. Therefore, it is ultimately open ended- forever.

There has to be a force that appears on the scene- a force that requires discipline. By the way, central bankers were predicting a complete collapse of the US in 1958. They have extended it for 53 years. (Gold Wars, Ferdinand Lips). 

Wealth transfer is a game of magnificent proportions, one I'm afraid we know entirely too little about. The Elites have the power and resources to do it all. 

The only disciplinary force is the people and the people lack discipline. This is the epic battle, the question is: when will it be fought and by whom?

Sun, 03/06/2011 - 19:24 | 1024491 equity_momo
equity_momo's picture

The disciplinary force is energy.

The law of thermodynamics is working its irrefutable equation on globalization as we speak.

Sun, 03/06/2011 - 13:20 | 1023633 lynnybee
lynnybee's picture

I'm currently listening to EGON von GREYERZ of MATTERHORN ASSET MANAGEMENT :

According to him (& in my humble opinion, he's right) NIXON should have been shot for severing the gold connection & the DOW will lose 90% in relation to GOLD .   


Sun, 03/06/2011 - 13:28 | 1023646 equity_momo
equity_momo's picture

Take a look at a log chart of the s+p (or dow) priced in gold over the last 100 years.

Its as obvious as the hole in my ass that gold is going to hit a level where it will be about 5 times as expensive as the S+P , ie , s+p 400 , gold 2k.   (or in the really exciting Weimer outcome : s+p 2k , gold 10k)

Sun, 03/06/2011 - 13:50 | 1023701 pitz
pitz's picture

Dow/Gold being = 1 has been a more traditional 'bottom', reached both in the 1930s, as well as in 1979. 

Sun, 03/06/2011 - 15:16 | 1023885 High Plains Drifter
High Plains Drifter's picture

Franlin Sanders always said that the end game would be one oz of gold would buy the DOW.

Sun, 03/06/2011 - 14:09 | 1023739 High Plains Drifter
High Plains Drifter's picture

Did Nixon do it or did someone tell him to do it? It is silly to play this game where everything in our system works and we should only blame the guy at the top even though the real money power comes from the City of London. Who found this man called Nixon? Rockefeller did, no?  Who are the Rockefellers?  Agents of the Rothschilds, si? Then we see what happened to Nixon when he decided to make a move on the dual citizen twits that are swarming all over our government. He got watergated. What was the purpose of watergate breakin. Nixon had suspected that the Democratic party was taking bribes from the Chinese government. Oh my perish the thought. He got set up by someone and he got taken down over bullshit. Was he their yes man?  Yes , no doubt, but as is the case from time to time, sometimes these men get in power and they suddenly decide to want to do the right thing, then something usually happens to them.

Sun, 03/06/2011 - 14:27 | 1023779 akak
akak's picture

HPD, you make a good point about Nixon just being the front man for much larger forces.  As much as I despise the fact that Nixon severed the last link of the dollar to gold, his action in doing so was only the final acknowledgment of a process that had already been going on for decades, namely, the steady hemorrhage of US gold reserves to foreign creditors to maintain the fragile Bretton Woods monetary agreement.  The simple fact is that the Bretton Woods system (the "gold exchange standard") based on the US dollar being backed by gold was unsustainable from its inception, and was doomed from the start.  Heavy US federal government overspending to pay for the Vietnam War and simultaneous growing welfare programs perhaps hastened the process, but from the very beginning of the Bretton Woods system, a continual depletion of US gold reserves began that could only have ended in de facto default and abandonment of the dollar's tie to gold, weak as it was.

To put all the blame on Nixon for ending the dollar's last link to gold is like blaming a modest breeze for toppling the giant oak that had in fact been rotting from the inside for decades beforehand.

Sun, 03/06/2011 - 14:43 | 1023822 zaknick
zaknick's picture

What would you suggest? Keep in mind, the US owned 80,000 tons of gold at the end of WWII which it acquired tgrough the lend-lease programs. The dollar was pegged to gold and other currencies were pegged to the dollar so it was a quasi-gold standard that could have held up without the warmongering and imperialistic bullshit (wouldn't be where you are now).

Sun, 03/06/2011 - 15:05 | 1023867 High Plains Drifter
High Plains Drifter's picture

The gold around here was long ago stolen and sent to London. FDR sent us into bankruptcy.  The reason they stopped the joke known as metal backing of fiat money is so they could continue on with the ruse, except at a much greater rate. I mean the same people own the military industrial complex. How can we fight wars and borrow money and have bubbles when there is only so much gold in the world and that gold backs paper money?  The answer is you can't so they got rid of that standard. It was a joke anyway, just like most rules and the biggest joke of them all is called "the rule of law". there is none and never was probably.

Sun, 03/06/2011 - 14:47 | 1023830 Orly
Orly's picture

Who found this man called Nixon? Rockefeller did, no?

Errrmmm, no.

It was a man called Prescott Bush.

Look at the images on this page and all will be made far more clear.

Sun, 03/06/2011 - 15:13 | 1023884 High Plains Drifter
High Plains Drifter's picture

Nixon was Rockefeller's boy.

Prescott Bush was of course George W Bush's grandfather. He was another boot licker that got ahead by getting into certain circles of power that allowed advancement by making your bones so to speak, and this was started when he was at Yale and was a member of skull and bones. The name Bush is a interesting name. I myself feel the spelling was changed once upon a time.

Sun, 03/06/2011 - 15:24 | 1023905 Orly
Orly's picture

"I myself feel the spelling was changed once upon a time."

From Zapata?  Or Arbusto (a word my Mexican friends have never heard of...)?


Thanks for the link.  Old Goldwater.  Man, would things be different now!?

Sun, 03/06/2011 - 17:22 | 1024241 High Plains Drifter
High Plains Drifter's picture

The whole thing about the Watergate breakin is weird if you ask me. Looking back now, one can easily see, based upon what we do know ( I guess) , is that all Nixon had to do was fess up to what he did and not lie or cover it up and they would have had no grounds to impeach him. But the idiot tried to lie about it and cover it up. Why I don't know. But from what I have read, Nixon was sure that the Chinese were giving illegal campaign contributions to the Democrats and he was determined to find out. Now after what went on during the Clinton years, this is not so far fetched as it may see. I had just gotten out of the army when this whole thing blew up and I remember , sitting on my bed in my little apartment in Macon Georgia, a couple of blocks from Mercer and watching this bullshit day in and day out and of course under the influence of some delicious bud and in the company of some delicous georgia peach that my musician friend , next door had introduced me to. Oh the memories .......ha ha ha

Mon, 03/07/2011 - 01:42 | 1025295 Orly
Orly's picture

I have read somewhere (can't find it right now...) that the Watergate break-in was done because Nixon got wind that there were papers implicating him and Johnson in the plot to kill Kennedy in the DNC offices at the hotel.

Someone snitched and the Boyz got wind of it, so Nixon decided that there should be "plumbers" to go and fix the leak.

Of course, after the bust, Kissinger and Haig were Nixon's confidantes and urged him to resign so that they could bury the story forever.  Agnew got canned and replaced by Ford, a prominent member of the Warren Commission, who had to know all the sordid details.

It was best to enjoy the peaches and the pot but if we knew then what we knew now, our worlds would have been shattered.  I didn't wake up until about 1993 myself and after 9/11, I could watch this stuff unfold right before my eyes and piece together everything that was going on.

Of course, I was a kook and probably still am to most Americans...until they wake up, too.  I don't blame them, though.  This stuff is still just unbelievable, even to me.  I mean, I see it, I hear it, I know it but I just can't believe that this could happen in America and everyone stays sleeping.

Maybe I'll find me some good bud and just zone out, too.  Maybe it would be better that way?


Finally, and to set the record straight:

(Source: Three Men and a Barge", Teresa Riordan, Common Cause magazine, March/April 1990, and San Francisco Chronicle, May 7,1977, interview with Frank Sturgis in which he stated that "the reason we burglarized the Watergate was because Nixon was interested in stopping news leaking related to the photos of our role in the assassination of President John Kennedy.")

Sun, 03/06/2011 - 14:36 | 1023810 gwar5
gwar5's picture

I agree with him too. The stakes don't get any higher than control of the money system and gold.

Records from circa 1965-68 indicate the US even contemplated assassinating Charles DeGaulle for his insistance that France redeem it's USD for physical gold and for pushing a gold standard. De Gaulle wasn't interested in going along with the London Gold Pool suppression of the gold price. Nixon finally closed the window.

FDR and Nixon merely had to raise the price of gold to reflect the devaluatation of the USD. But TPTB can't steal nearly enough if they do that. 

Sun, 03/06/2011 - 16:09 | 1024042 Diogenes
Diogenes's picture

The way you talk you would think he had a choice. Gold had been flowing out of the US for years due to the balance of payments deficit in other words, buying more stuff from foreigners than they were buying from you. And thereby spending the gold that had been put in the bank during the thirties and forties.

His choice was to either keep sending out the gold until the vault was empty, or change the rules and keep what gold was left.

The third choice, stop inflating the currency and let America live within her means, was never considered. And here we are forty years later with the result of the uncontrolled spending that has been going on since WW2.

Sun, 03/06/2011 - 13:45 | 1023663 LawsofPhysics
LawsofPhysics's picture

Inflate/deflate, who cares.  Time to call the central bankers out and call the "debt" for what it is, a fraud.  Here are the keys to the country, come get us fuckwads.  I like the "weimar outcome", bring it.

Sun, 03/06/2011 - 13:48 | 1023690 razorthin
razorthin's picture

Fun fact:

Section 19 of Coinage Act of 1792, prescribed the death penalty for any official who fraudulently debased the people's money

Perhaps this is why in 1913 Congress thought it better to have a private entity do it.

Sun, 03/06/2011 - 13:53 | 1023706 gwar5
gwar5's picture

They'll inflate and extend and pretend, until the IMF SDRs are more developed and people are conditioned to accept it. The USD will be continue to be incrementally euthanized. The tipping point isn't far off when people will run from the USD. The Bernank is trapped and can't raise rates.

The USD will crash and be so crippled Americans will beg for new money. It's the only way TPTB can pull off circulating a new reserve fiat and have it accepted. 

Sun, 03/06/2011 - 14:02 | 1023723 Alcoholic Nativ...
Alcoholic Native American's picture

I'm an American and I've been calling for a Global currency backed by something like the upcoming SDR.   The U.S. has shown they can't be trusted with unlimited printing presses in the bailing out of wallstreet, literally using TRILLIONS  to prop up an unsustainable economy based on debt, and not to mention the CIA filling every tin pot dictators/drug dealers pockets up with BILLIONS in hush money.

Fuck people wrapping themselves in the flag, Ill take a stable global currency over a USD used to bribe every POS in the world to work against their own people's interest anyday.

Sun, 03/06/2011 - 14:16 | 1023761 equity_momo
equity_momo's picture

Dont be so naive. Europe can barely hold together its own currency - trying to control various cultures through one currency is global communism.  In another post you were railing against socialism - you think SDRs are the cure? Thats funny.


Sun, 03/06/2011 - 14:20 | 1023771 skipjack
skipjack's picture

That's funny right there.  Who do you think can be trusted to not loot...the UN ?????  Laughing my ass off here.  You've gone into outer orbit with that supposition.


They're all printing.  China at about 25% a year, Ireland just printed up 25% of their GDP, the US is on a trajectory to print up a T or so...and on and on.


My suggestion is to pull your head out of your ass and look around.

Sun, 03/06/2011 - 14:43 | 1023819 Temporalist
Temporalist's picture

There is an Global Currency that is thousands of years old - Precious Metals.


Sun, 03/06/2011 - 14:44 | 1023821 Nels
Nels's picture


Fuck people wrapping themselves in the flag, Ill take a stable global currency over a USD used to bribe every POS in the world to work against their own people's interest anyday.

I love the stupidity.  All the USA can find to staff our government are corrupt bozos, and this guy thinks he can find a source of angels to staff the NWO global government.  And of course he can't mean the UN, as they were deep into bribery in the Iraq Oil for Food scandal.

It's not like he can point to a stable global anything to back up his case.

Sun, 03/06/2011 - 14:58 | 1023851 zaknick
zaknick's picture

The UN is corrupt because of the Iraq oil for food program scandal.

To use the joooooo expression: oy vey!

You are suffering under the banksters propaganda straight out of Faux News. Yes, there is corruption there but the one Faux News wont tell you about is the deep kind.

The grounds for the UN building in Manhattan were donated by OVERPOPULATION-USeLESS EATERS Rockefucker. His "foundation" (others too: Kellogg, Carnegie etc) would use these "official" UN agencies for ethnic cleansing and genocide in a myriad countries.

Food for oil!? Koool aid, my friend.

Sun, 03/06/2011 - 15:55 | 1024001 Orly
Orly's picture

Plus, you'd be taking away my lifestyle, Alky...

Mon, 03/07/2011 - 03:40 | 1025490 rich_wicks
rich_wicks's picture

I'm an American and I've been calling for a Global currency backed by something like the upcoming SDR

You fool.

The U.S. has shown they can't be trusted with unlimited printing presses in the bailing out of wallstreet, literally using TRILLIONS  to prop up an unsustainable economy based on debt, and not to mention the CIA filling every tin pot dictators/drug dealers pockets up with BILLIONS in hush money.

Yet, a group outside of any country's jurisdiction can be trusted. That is what you apparently believe.

A global currency will just make anybody that creates it, the rulers of the planet.  At that point, when your government goes crazy, and starts killing whatever group you happen to belong to, good luck escaping by moving to another "country."

Fuck people wrapping themselves in the flag, Ill take a stable global currency over a USD used to bribe every POS in the world to work against their own people's interest anyday.

It will just be the global currency that is used to bribe every POS in the world, and only POS will be running the world then.

You can see how corrupt our Federal Reserve is, what makes you think a world Federal Reserve would be any better?  The only thing holding our Federal Reserve in any sort of check at all, is the threat of foreign nations holding our money and able to crash us if it gets too out of control (something they will probably do...)  A global currency system will be entirely unchecked.

There is a reason gold keeps coming back as a money over and over again and that's why.  If we have a global currency, the misery that the United States will experience soon will be nothing in comparison to when a world regime collapses.

Sun, 03/06/2011 - 13:53 | 1023709 SparkyvonBellagio
SparkyvonBellagio's picture

Great Ron White putdown reference by using 'Scooter!'

Sun, 03/06/2011 - 14:08 | 1023735 Dr. Porkchop
Dr. Porkchop's picture

Federal Reserve:


World's largest payday loan operator.

Sun, 03/06/2011 - 14:12 | 1023746 John Wilmot
John Wilmot's picture

I agree with everything in the article, which is very well reasoned, except for the central premise: "the U.S. cannot inflate its way out of its debt problem." To me, the article explains in shattering detail exactly why the U.S. WILL inflate its way out of its debt problem. The options are two: inflate or default. No government ever chooses default, they have not chosen default thus far, they will inflate. What am I missing?

Sun, 03/06/2011 - 14:35 | 1023798 akak
akak's picture

I agree completely, John.  What the author of the article fails to acknowledge or recognize by only focusing on debt repayment and the rolling over of treasuries is the MUCH greater fiscal factor of Social Security, Medicare, Medicaid, and other "entitlement" spending, which in a fair and honest world would be indexed to the true rate of currency debasement (instead of the laughably manipulated and lowballed CPI), but through which the feds are already cheating tens of millions of recipients of these payments by refusing to index them properly to the real rate of inflation. 

Going forward, with rising currency debasement and prices, by holding down the CPI and the indexing of payments the federal government CAN in fact inflate its way out of the  bulk of its total debt by essentially defaulting on its promises to its own citizens rather than its foreign creditors.

Sun, 03/06/2011 - 14:35 | 1023807 Bicycle Repairman
Bicycle Repairman's picture

Yes, but they will also continue to try and devalue the $ and screw our foreign creditors as well.

I wonder what our Arab creditors are thinking right now?

Sun, 03/06/2011 - 14:18 | 1023765 Rogerwilco
Rogerwilco's picture

Jethro Tull wrote the theme song for this black comedy:

"Locomotive Breath"

In the shuffling madness
Of the locomotive breath,
Runs the all-time loser,
Headlong to his death.
He feels the piston scraping --
Steam breaking on his brow --
Thank God, he stole the handle and
The train won't stop going --
No way to slow down.
He sees his children jumping off
At the stations -- one by one.
His woman and his best friend --
In bed and having fun.
He's crawling down the corridor
On his hands and knees --
Old Charlie stole the handle and
The train won't stop going --
No way to slow down.
He hears the silence howling --
Catches angels as they fall.
And the all-time winner
Has got him by the balls.
He picks up Gideon's Bible --
Open at page one --
God stole the handle and
The train won't stop going --
No way to slow down.

Sun, 03/06/2011 - 17:36 | 1024273 High Plains Drifter
High Plains Drifter's picture

Its like Bill Hicks said , music of that time period was produced by people under the influence of some serious drugs....ha ha ha

Sun, 03/06/2011 - 14:19 | 1023769 misterc
misterc's picture

Sorry, but I don't understand the point of this article.

Why won't the government inflate its way out? Why does maturity of the debt matter at all?

The government needs money to repay debt. The FED creates a few extra 0000 on some account.

Sun, 03/06/2011 - 14:33 | 1023797 Bicycle Repairman
Bicycle Repairman's picture

"We are no different to Japan. The choice is simple - hyperinflate and then default or just default."

We are different than Japan.  Let's count the ways.  I'll start:

1.  A military capable of domination not seen since Roman times.

2.  The world's reserve currency

3.  We are far more willing to throw our aged under the bus.

Sun, 03/06/2011 - 14:45 | 1023815 razorthin
razorthin's picture

On points 1 and 2 - Who's being naive now, Kay?

Sun, 03/06/2011 - 15:02 | 1023859 Bicycle Repairman
Bicycle Repairman's picture

1.  Don't assume you know what the goals are in Iraq or Afghanistan.  Does it look like the US military is done fighting?  Let's review what the world's only aircraft carriers are up to.

2.  See my original point 1.

Sun, 03/06/2011 - 14:41 | 1023814 sschu
sschu's picture

The main difference between Japan and the US is the $$ is the world reserve currency.  The Feds attempts to inflate necessarily cause the price of those commodities settled in $$ to likewise inflate.  Hence those countries that have pegged to the USD bear much of the pain of the $$ inflation.

Who really cared (outside of the Japanese) that Japan financed their debts/deficits internally at near zero interest rates.  It would seem that the Chinese and Middle East countries do care a bit about the $$.

The solution becomes a "new" reserve currency and dramatic standard of living reductions in the US.  Again, export oriented China etal are years away from consuming their own excess capacity.  Plus the US will not easily forgo the privilege of reserve currency. 

These guys at the top have war-gamed most scenarios, far beyond our abilities.  In the end they have no better answers that us I would surmise.

It is just a matter of the details of how and when it blows up.


Sun, 03/06/2011 - 14:42 | 1023818 JR
JR's picture

The frightening charts on Federal debt suggest that our nation’s finances are not following a cycle of on and off prosperity.  Instead, the recent debt shows a dramatic change in the cycle; instead of draining taxpayer wealth to spur a consumer recovery, the gears have shifted to cutting into the means of production, not just the fruits of production. They are taking over the means.

For nearly hundred years, the Fed has been siphoning off America’s free enterprise system.  This is no longer siphoning.  Now they’re eating the seed potatoes, rather than planting.  They’ve gone into the quick of the wealth of the nation. 

Sun, 03/06/2011 - 14:43 | 1023820 sangell
sangell's picture

So, has the UK found its escape route? 14 year maturity on their gilts, got inflation above US and EU levels and an austerity program in place now.

Sun, 03/06/2011 - 15:00 | 1023853 PulauHantu29
PulauHantu29's picture

"Happy days are here again! Stock markets are strong, company profits are up, bankers are making record profits and bonuses, unemployment is declining, and inflation is non-existent. Obama and Bernanke are the dream team making the US into the Superpower it once was.

Yes, it is amazing the castles in the air that can be built with paper money and deceitful manipulation of all economic data.  And Madame Bernanke de Pompadour will do anything to keep King Louis XV Obama happy, including flooding markets with unlimited amounts of printed money. They both know that, in their holy alliance, they are committing a cardinal sin. But clinging to power is more important than the good of the country.  An economic and social disaster is imminent for the US and a major part of the world and Bernanke de Pompadour and Louis XV Obama are praying that it won’t happen during their reign: “Après nous le déluge”."


by Egon von Greyerz

Sun, 03/06/2011 - 15:02 | 1023858 poydras
poydras's picture

The author is incorrect.  The Fed and/or Treasury can monetize new spending and maturing debt as necessary.

Once again, comparing Japan with the US is silly to a great extent.  Japan has a chronic trade surplus, a large, positive NIIP, and historically a large savings rate.  The mirror image of the US!

Sun, 03/06/2011 - 15:39 | 1023940 JR
JR's picture

Yes, monetizing can be done as needed as the Keynesians say; but the inevitability of disaster arises because the unheeded “as needed” has exceeded far beyond its boundary.

At what price such policy?

Ron Paul said in 2003 that our very “liberty is virtually impossible to protect when the people allow their government to print money at will.”

We now are literally walking on the cracking ice, as the author warns.

Said Paul: “Inevitably, the left will demand more economic interventionism, the right more militarism and empire building.  Both sides, either inadvertently or deliberately, will foster corporalism.  Those whose greatest interest is in liberty and self-reliance are lost in the shuffle…

“If unchecked, the economic and political chaos that comes from currency destruction inevitable leads to tyranny…”

We have arrived.  Japan, the USSR, post WWII England, Weimar Germany, China, America? What’s the difference, without freedom?

Sun, 03/06/2011 - 15:38 | 1023900 zenon
zenon's picture

One thing the article & alot of commmentators leave out is that, dealing with this connundrum, highlights one of the (unspoken) rationals for using QE.  By printing $100B per month, the government doesn't have to float that much more debt in the markets. I know, they end up on the Fed's balance sheet but they can be erased with the stroke of a pen. I guess the game plan is that if they can turn the economy around, budget deficits will come down. Any funding pressures will be dealt with more printing and less borrowing. The crux is how the bond market receives this new cash and whether it places a permanent inflation premium in the term structure. If the Fed can get away with another QE round (on account of high unemployment or some other number that the Fed doesn't give a rat's ass about) without a bond market revolt, then QE will be the way to accomondate large budget deficits into the future - QE to infinity.

Sun, 03/06/2011 - 16:17 | 1024069 JW n FL
JW n FL's picture

********* "Remember, the numbers we are discussing do not include the impact of Fannie and Freddie, nor take into account the present value of SSI and Medicare liabilities." ************************


So all the wanna be conservatives... write about how expensive entitlement programs are... AGAIN!!!


How about these programs, COMBINED!!!! going froward in multiples of decades could have been paid for with QE 1? no... still Grandma's fault that she paid in for 60 years of working in shitty factory conditions now she should be downgraded from her daily dinner of cat foo to dog food?


QE 1 could have paid for every entitlement program going forward for decades... but it is still the broke people who caused this mess..


The Bankers robbed the U.S. Blind... then they Fucked the U.S. out of Trillions more...








You Fucking Morons! 

Mon, 03/07/2011 - 00:04 | 1025224 mark mchugh
mark mchugh's picture

I like how you think, Jdub.

I'm not trying to judge the author's intent; I liked the article, but...

Conveniently forgotten is the 2.4 Trillion SS surplus squandered by congress.  Had they held precious metals in the "lock box" instead of using it as a slush fund there wouldn't be a crisis.  Of course, this would have required them to know their asses from their elbows as well.

The missing piece in this kind of analysis is understanding that US equities are undeniably a ponzi scheme in the purest sense.  The Fed's own data confirms this, but no one seems to notice.  So whenever you say that SS won't work, make sure you recognize that the 401(k) model doesn't work even a little.  The money's not really there, and like I said before, the Fed's flow of funds confirms this.

Guess who benefits from replacing one Ponzi with another?

Sun, 03/06/2011 - 16:46 | 1024150 Lord Peter Pipsqueak
Lord Peter Pipsqueak's picture

The UK has most of its debt dated at the long end, this is advantageous as it will not face the impending crisis the US is staring at,but the structural problems of the UK are by comparison massive and unknown to most people who do not live in the country,it has been kept from national bankruptcy for the last thirty years by North Sea oil tax revenues,which unlike Norway which decided to create a national investment fund,just used it to pay unemployment benefits and general government spending. Now the fields are being run down at the same time as the greatest financial collapse the west has experienced and the bailout of the banks.The UK is royally fucked and has already started QE,having painted itself into the same zero interest corner as the US,that is why interest rates can never go up in either country,a point the article completely fails to mention.

So the maturity curves of either the US or the UK don't really matter since they are going to be printing ever increasing bilions/trillions of dollars/pounds,in the process keeping rates effectively at zero.

Japan has been able to fund its defecits not by issuing debt to foreigners,but by tapping the vast savings pool of its own citizens and effectively borrowing at close to zero,now this pool is drying up they too will be forced to follow the US and the UK and print their own currency to oblivion to maintain spending,since the market will demand much higher rates,conclusion:since when do bond markets and bond yields matter when you can print your own money at zero cost?

Sun, 03/06/2011 - 19:53 | 1024554 tom
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Excellent piece, one of the best on ZH in a while.

I can only quibble with one minor point: global capital markets can't price in Japan's circumstances into JGB prices because global capital markets abandoned JGBs long, long, long ago. Only 6% of JGBs are owned by foreigners, most of whom are foreign central banks, and all of whom hold JGBs as a yen-equivalent, not as an interest-earner.

The reasons to hold the yen are:

 - The yen has for decades been depressed by central bank intervention to support exports (Japan taught China how to play that game).

 - Japan's loose monetary policy has for decades been funding a carry trade into foreign capital markets. But as Japanese society ages, the savings rate declines, and domestic demand for JGBs declines, the government's only, and I do mean only means to boost demand for JGBs is to somehow force that carry trade back home and into JGBs. Since the big players in the carry trade are all big Japanese financial institutions, some state-owned, all likely to fail in any serious government funding crisis, the government has some powerful leverage in this situation. Japan can't get off the respirator, but it does have this one last life-prolonger: forcing the carry trade back home. That will keep the yen strong, for a while yet.

Sun, 03/06/2011 - 22:28 | 1024986 gkm
gkm's picture

Uh, so now you know why gold and silver continue to rally?  This article while good is hardly rocket science.  The entire world is essentially in a debt trap.  When the suckers, i.e. bond holders, finally get a clue en masse then we'll get the final capitulation move.  

The 2008 collapse of markets was an orchestrated event by the banks to make a market for their worthless t-bill, t-bond, or other fixed income (via the Fed laundry) paper.  They could never have dumped it so effectively without the collapse and subsequent volume.  

You have to hand it to the banksters.  They're going to own the world - or at least what's left of it.  The only problem for them is that the damn thing is round and if they run hard enough and fast enough in one direction they'll eventually run into the mob that is looking to pwn them.

Mon, 03/07/2011 - 03:39 | 1025488 halvord
halvord's picture

As I love anyone who challenges the ZH cult dogma of The Weimar Endgame, it pains me to call BS.

This post makes the classic propagandistic conflation of Social Security and Medicaire. SS is a "trust fund" meaning that it is funded by interest payments on the national debt. Soverign default is profoundly unlikely. In general, SS is quite well-funded from current employment projections. Really.

Medicaire is a different kettle of fish altogether. It was mostly doing OK until the bizarre Schedule D madness was pushed through in 2005, jacking the Govt. and the People around on pharmaceutical prices.

Since there has never been any attempt by the Government to look at long term funding of these long term entitlement costs (match funding), it's a pay as you go set of programs. And that means the Government long ago chose to fund these short term. Hence the current structure of Government debt maturities. The Government long ago chose to fund its entitlement obligations with an adjustable rate mortgage, if you will.

Liar. "long ago" was 2002- the Bush Treasury switched from 30-year bonds to 10-year bonds; thus the bump. This was criminal negligence given the 30-year rates at the time. 2002, 2005: I don't want to hear any moaning about incompetent liberals. This was deliberate damage by the radcons.

Mon, 03/07/2011 - 04:01 | 1025495 rich_wicks
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This post makes the classic propagandistic conflation of Social Security and Medicaire. SS is a "trust fund" meaning that it is funded by interest payments on the national debt. Soverign default is profoundly unlikely. In general, SS is quite well-funded from current employment projections. Really.

Really?  Because the amount of money flowing into Social Security is less than the amount of money flowing out of Social Security since 2010 and the boomers haven't even retired yet.

What's your plan to fix that?  Raise taxes on Social Security?  That was what was done in the 1980s, when they raised it to a maximum of $2,000 per person, making $50,000 or more per year.  That was back when $50K would buy you a decent house, not a shack rotting on it's foundation in Detroit.

I also don't understand this concept of Social Security being a "trust fund".  So, the government takes this surplus money (around 2 trillion dollars), spends it on all sorts of happy crap, replaces the actual money with an IOU (from the government) that will later be paid by by the government.  So, the government spent the surplus, but it's OK, because the government put in an IOU for the surplus - so.. how exactly does this surplus actually exist?

It doesn't.

To pay back the money the government stole from the trust, it will have to come out of general revenue taxation, during a time that the government is running a 4.13 billion dollar deficit a day.

Sorry you've been snowed, but there is no surplus at all.  There's no trust.  Do young Americans make enough money to pay for Social Security?  where is this money going to come from anyhow to pay for all this?  Well, the government could allow deflation, but that would make them unable to pay the debt, or they could borrow more money from...  Wait - who has the money to pay for this anyhow?

You know we're at the end game - it's so freaking obvious, and yet people like you just can't see the horrifying truth.  We can neither borrow any more money (not really, the Fed is just buying what amounts to it's own debt) and we can't deflate.  The Fed will just create more money, and will buy more debt, which is basically just printing more money.  It's just a slight of hand trick, and I'm not playing 3 card monte with the US dollar anymore, most of the world won't either.  We're screwed.



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