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EJ
09-16-10, 04:11 PM
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The committee to wreck the USA

Forget the Bush tax cuts. We need a $1 trillion per year post credit bubble debt cut, but we’re not going to get one. That’s why the gold price is going through the roof.
Gold Rises to Record on Increased Investor Demand (http://finance.yahoo.com/news/Gold-Rises-to-Record-on-bloomberg-2632723508.html?x=0&sec=topStories&pos=2&asset=&ccode=)
Thursday September 16, 2010 (Bloomberg - Nicholas Larkin)

Gold rose to a record in London and New York as investors sought protection against turmoil in the global economy and financial markets. Silver rose to the highest price since March 2008.

Bullion climbed as high as $1,277.07 an ounce in London. The dollar fell to a five-week low against the euro today. The metal usually moves inversely to the U.S. currency. Global holdings of gold by exchange-traded products are up 16 percent this year and this month reached a record, Bloomberg data show.

“People are worried about the European financial system and debt market, and the outlook for the U.S. and global economy,” said Mark O’Byrne, executive director of brokerage GoldCore Ltd. in Dublin. “People are worried about equities, debt, property” and currencies, he said.
Wrong. “People” may be worried about equities, debt, property and currencies, if by “people” the report refers to private investors. But that’s not why the gold price is rising. The gold price is rising because global central banks are buying gold, and they aren’t buying it because they are worried about equities, debt, or property in the US, although they are worried about currencies. They are buying gold because they are increasingly afraid that America’s banking lobbies are going to take the United States all the way down the road to ruin (http://www.itulip.com/forums/showthread.php/8244-Road-to-Ruin-Final-stretch-Eric-Janszen?p=78579#post78579) and wreck its credit and currency. They’ve seen this movie before, in Argentina and a dozen other nations, and it’s a real horror show.

The movie is about special interests masquerading as abstract economic principle. The ruse is easily defeated. It follows from a simple fact of borrowing.

A loan by any other name: the borrower's liability is the lender's asset

After you take out a mortgage loan for $200,000 you wind up with a $200,000 liability on your household balance sheet. You owe the $200,000 in principal plus interest over the term of the loan, usually 30 years.

To the lender, your $200,000 liability is its $200,000 asset. You debt represents a flow of principal and interest payments from you to the bank. Your liability is a bank’s asset.

Multiply millions of mortgage loans by hundreds of thousands of dollars and you have trillions of dollars in liabilities of households that are trillions of dollars of assets of banks.

Now, housing prices are normally determined by local incomes, but trillions of dollars of mortgage debt today is fictitious, left over from the asset inflation of the housing bubble era. It does not represent home price increases justified by rising income levels. Now that the housing bubble has deflated for four years, the relationship between home prices, home equity, and the mortgage debt owed on homes looks like this.


http://www.itulip.com/images2/housingwealth.gif

At the top of the housing bubble over $10 trillion in housing debt was owed on $24 trillion
in housing “value.” As of October 2009, according the Federal Reserve, housing "value"
declined to $16 trillion but households still owed more than $10 trillion on it.


In 2005 we forecast a 10 to 15 year mean reversion period, so we are nowhere near through the process. In my late 2007 Harper’s Magazine article “The Next Bubble” I forecast a $10 trillion loss in home value, considered outlandish at the time. A year ago we were already nearly there.

While households are still paying mortgages as if their homes were worth as much as during the bubble, and mortgage debtors owe more than their home is worth – they have negative equity – two key benefits of the inflated home price have vanished. One, the wealth effect of feeling richer by the amount of the home’s equity, and two, the ability to borrow against the value of the home.

The trillion dollar debt cut

Over the course of the housing bubble from 2002 to 2006, the amount that households spend just to pay the interest on mortgage debt grew from 15 cents to more than 22 cents of every dollar, starting from 6 cents before the FIRE Economy took off in 1980.


http://www.itulip.com/images2/mortgagepce1980-2010.gif

As of July 2010, personal consumption expenditures (PCE) for US households totaled
$10.3 trillion year to date. Of that $2.3 trillion of went just to pay just the interest, and
none of the principal, on mortgages.


If home values are permitted to decline another 20% to pre-bubble levels, and mortgages are written down to pre-bubble levels, US households will have approximately $1 trillion dollars more to spend annually.

Just imagine the kind of stimulus that will provide. It’s the equivalent of a $1 trillion per year tax cut, and without reducing pension liabilities, military spending, raising taxes on the rich or anyone else.

This is the debt overhang that is killing the US economy. It is owed to the politically protected banking industry by the increasingly politically impotent American voter. It is curiously framed as a left versus right issue, but the real battle is between creditors and borrowers, and between debtors and saver, and the interests that represent them.

The banking lobby has effectively engaging conservatives in the cause of securing their assets. They argue that debtors should be held responsible for bubble era debts. The mortgage debt is the responsibility of the borrower, they say. This is true, so far as the debtor is contractually on the hook to pay back the money. However, determining the creditworthiness of a borrower is always the lender’s responsibility. Capitalism can’t work otherwise. Anyone who thinks for five minutes about personal loans they have made to friends that were not repaid knows this. Whose fault was is that the loan to your brother-in-law was not paid back? Only your own. You should not have lent him the money, and you did not go looking for someone to blame.

That’s where the buck stops, with the lender. Mortgage lenders who cannot competently determine the creditworthiness of borrowers should go out of business, just the way the incompetent venture capital firms did after the technology stock bubble collapsed in 2000 to 2003. Thankfully, no VCs were bailed out by the government. Those that made poor investments were allowed to fail. Stock of companies in the portfolio that had value was sold to other investors at pennies on the dollar. The same principle applies to mortgage lenders. Sell the assets of the poorly run banks to the well-run banks. Too big to fail? Then let the Fed take them over and sell the assets off and write down the fictitious value over time. The process is not at all complicated.

Of course, the free market solution to the US balance sheet recession will not be allowed to happen. The banks don’t want to take a loss, and as long as they have as much political influence they do today, they won’t have too. Instead, we will continue to get this:


http://www.itulip.com/images2/consumerdebt1967-August2010.gif

Private credit continues to contract debt overhang. Balance sheet recessions are not like other recessions.


As consumer credit outstanding continues to contract, a corresponding rise in government borrowing to compensate for the decrease in private sector borrowing is required to keep the money supply from imploding. If that happens the economy will enter a brief deflationary crisis before an extreme debt and currency crisis (referred to as a Ka-Poom process here on iTulip since 1999).


http://www.itulip.com/images2/QEvsNetGovtSaving2006-June2010.gif

Government spending is expanded to borrow money into existence when the private
markets don’t. Let up on the spending, and down it goes as in 1938 in the US and in
Japan in 1996. Again, balance sheet recessions are not like other recessions.


Until the bubble era debt is written down to the lower prices of the homes in some orderly way, the US balance sheet recession will continue, and the fiscal deficit will continue to grow, until one of three following scenarios occurs.
A. The US runs out of credit, leading to a debt and dollar crisis, and self-reinforcing downward spiral of rising interest rates, economic contraction, a declining dollar, and rising inflation.

B. The second Peak Cheap Oil Cycle pushes the US back into recession, leading to A.

C. The financial oligarchy loses influence over bank reform legislation, the housing bubble era debt is written off, and the TECI Economy is developed as the FIRE Economy is phased out.The reason why the gold price keeps climbing is that the probability of scenarios A or B is rising since the appointment of Summers, Rubin, and Geithner to head up economic and Treasury policy. With Obama’s recent nomination of sub-prime lending apostle and all around housing bubble cheerleader Austan Goolsbee chairman of the Council of Economic Advisers, the disastrous bailout of the FIRE Economy (http://www.amazon.com/gp/product/1591842638?ie=UTF8&tag=wwwitulipcom-20&link_code=as3&camp=211189&creative=373489&creativeASIN=1591842638) will continue.

Investor Implications: We repeat the same position we took in our previous commentary on this topic.

For iTulip readers, the same hold position as we have had since September 2001 when we took a 15% gold allocation at $270.

If we didn't already have gold would we buy it today at this price?

Yes, but we would not be happy about it. Despite the fact that the value of the gold we bought in 2001 has increased more than four times since then, its role in our portfolio is not capital gains but insurance against a disorderly breakup of the current international monetary regime resulting in a sudden currency value dislocation and inflation. The gold price rise represents an increase in the FIRE Economy insurance premium. The fact that we paid a low premium is great, but the rising price means that the chances of a fire are increasing.

Evidence: Central banks last year for the first time in 20 years became net gold buyers. This indicates a serious breakdown in trust and confidence in the system among members of the central banking establishment. They do not like the direction that the United States is taking.
Central banks turn net gold buyers in 2009-CPM Grp (http://www.reuters.com/article/idUSN2746801820100427)

NEW YORK, April 27 (Reuters) - Central banks turned to buyers from sellers of gold for the first time in 20 years in 2009, driven by Chinese stockpiling and worries over global currencies, metals research and consultant CPM Group said on Tuesday.
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See also:
Lessons of the American Lost Decade – Part I: The gold bugs were right (http://www.itulip.com/forums/showthread.php/13706-Lessons-of-the-American-Lost-Decade-%C2%96-Part-1-The-gold-bugs-were-right-Eric-Janszen?p=141535)

iTulip Select (http://www.itulip.com/showthread.php?t=1032): The Investment Thesis for the Next Cycle™
__________________________________________________

For a concise, readable summary of iTulip concepts read Eric Janszen's September 2010 book The Postcatastrophe Economy: Rebuilding America and Avoiding the Next Bubble (http://www.amazon.com/gp/product/1591842638?ie=UTF8&tag=wwwitulipcom-20&link_code=as3&camp=211189&creative=373489&creativeASIN=1591842638)http://www.assoc-amazon.com/e/ir?t=wwwitulipcom-20&l=as2&o=1&a=1591842638.

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Spartacus
09-16-10, 05:16 PM
Even as we get into record nominal prices, in the last couple of months I have heard not a single well reasoned critique for being in Gold.

Not one.

It's all ad-hominem ("all you gold bugs expect an apocalypse; you're all bloody vicious thugs")

or sloganeering ("you can't eat Gold")

or tired old reasons that are being proved wrong or inconsequential ("Gold pays no dividend") (but my dividends and/or my dividend paying investments are all down over the last couple of years)

charliebrown
09-16-10, 07:48 PM
It's fine having the banks eat the losses, but who is holding the bank's bonds. If the equity holders get wiped out, I'm not too worried, but what about the bond holders? I'm sure it's not just a bunch of fat cats, the bank bonds are probably stuffed into money markets, pension funds, etc. Who is going to take the haircut?

oddlots
09-16-10, 07:52 PM
Question for EJ: what would an orderly unwind of mortgage debt look like? How do you reverse the securitisation process?

The fact that this is the one solution that very nearly no-one is talking about makes it the only likely solution.

EJ
09-16-10, 08:06 PM
It's fine having the banks eat the losses, but who is holding the bank's bonds. If the equity holders get wiped out, I'm not too worried, but what about the bond holders? I'm sure it's not just a bunch of fat cats, the bank bonds are probably stuffed into money markets, pension funds, etc. Who is going to take the haircut?

That is an excellent question. We can start to answer it by first looking at the state of the market of asset-backed securities (ASB) that backed the mortgages that made the housing bubble go.


http://www.itulip.com/images2/ABS2001-July2010.gif

Still no market for them. Where are the ASBs that the banks used to have on their balance sheet? They're over here on the Fed's balance sheet.


http://www.itulip.com/images2/FedBalanceSheetBeforeAfter1.gif

How are they valued? At the full price that the bank paid for them.

What's the Fed going to do with them? They can't sell them. There's no market for them at the buy price and to sell them at a lower price will mark them to market at the very low price suggested by the ASB chart above. At that moment we'll have to stop pretending that the Fed's balance sheet is viable. So they will do anything to avoid it.

Is there a cost to holding them on the balance sheet? Yes, because they are backed by an equal dollar of Treasuries on the Treasury account. The longer they stay on the Fed's balance sheet, the more they discount the value of Treasury bonds, even though they represent a small portion of total outstanding.

But to your question, the Fed and Treasury long ago swapped Treasury bonds for Agency debt. The real risk, then, lives on Fannie and Freddie's balance sheets. That's where the epiphany will appear, and my best guess is that the best time to come clean on that is after the 2012 elections, just as the new Greek government did on it's real versus reported debt position after elections last year.

Chomsky
09-16-10, 08:36 PM
Your graphic of Fed liabilities post-crisis adds up to 110%.

jpatter666
09-16-10, 08:46 PM
Your graphic of Fed liabilities post-crisis adds up to 110%.

Given government accounting standards these days, that's probably correct.... ;-P

bill
09-16-10, 09:33 PM
. The real risk, then, lives on Fannie and Freddie's balance sheets.

Fed will take it.
Paulson guaranteed the holders to ease the pressure. But for how much longer.
Start:8:30min
http://wwsg.com/warren-buffetts-interview-with-secretary-paulson

Pressures building.
http://www.reuters.com/article/idUSTRE68F1GY20100916

A recap on Balance Sheet recession for those that missed it.
http://www.itulip.com/forums/showthread.php/showthread.php?p=57848#poststop
http://www.itulip.com/forums/showthread.php/showthread.php?p=145873#poststop

http://csis.org/multimedia/video-economic-outlook-discussion-richard-koo

dpandorf
09-16-10, 09:38 PM
As gold and silver make new highs, its interesting to see what our congress may do:

Congressmen Weiner and Waxman Set Gold Hearing (http://seekingalpha.com/article/225579-congressmen-weiner-and-waxman-set-gold-hearing)

BuckarooBanzai
09-17-10, 01:13 AM
Question for EJ: what would an orderly unwind of mortgage debt look like? How do you reverse the securitisation process?

The fact that this is the one solution that very nearly no-one is talking about makes it the only likely solution.

I'm not EJ but this is an easy one to answer: you can't reverse the securitization process, the same way you can't unbake a cake. It's a one-way process.

magicvent
09-17-10, 06:48 AM
EJ --

In the above you say that "As consumer credit outstanding continues to contract, a corresponding rise in government borrowing to compensate for the decrease in private sector borrowing is required to keep the money supply from imploding. If that happens the economy will enter a brief deflationary crisis..."

Isn't this counter to your previous position that there won't be deflation?

jpatter666
09-17-10, 07:44 AM
EJ --

In the above you say that "As consumer credit outstanding continues to contract, a corresponding rise in government borrowing to compensate for the decrease in private sector borrowing is required to keep the money supply from imploding. If that happens the economy will enter a brief deflationary crisis..."

Isn't this counter to your previous position that there won't be deflation?

My understanding is that there will be no deflationary spiral. It's possible to get another brief 2008-style shock.

BiscayneSunrise
09-17-10, 07:56 AM
As gold and silver make new highs, its interesting to see what our congress may do:

Congressmen Weiner and Waxman Set Gold Hearing (http://seekingalpha.com/article/225579-congressmen-weiner-and-waxman-set-gold-hearing)

Sounds like the the left is reverting to form and attacking the messenger. Next, they will vilify "speculators"

Milton Kuo
09-17-10, 07:57 AM
My understanding is that there will be no deflationary spiral. It's possible to get another brief 2008-style shock.

Eric might also be referring to a brief period of deflation before the currency goes bananas, which he stated in his article, Does USA 2009 = Argentina 2001 (http://www.itulip.com/forums/showthread.php/10538-Does-USA-2009-Argentina-2001-Part-I-Falling-economy-reaches-terminal-velocity-Eric-Janszen)? That is, the subsequent poom is going to dwarf the poom we've seen so far.

jpatter666
09-17-10, 08:20 AM
Eric might also be referring to a brief period of deflation before the currency goes bananas, which he stated in his article, Does USA 2009 = Argentina 2001 (http://www.itulip.com/forums/showthread.php/10538-Does-USA-2009-Argentina-2001-Part-I-Falling-economy-reaches-terminal-velocity-Eric-Janszen)? That is, the subsequent poom is going to dwarf the poom we've seen so far.

Oh certainly. In fact, the oscillations might be greater.

The next Ka (should we experience one) might be even more significant than 2008. This will give the Fed the excuse to run the presses full board and here comes the Poom.

This is why I keep a serious diversification of assets -- so I can run in any direction.

ViC78
09-17-10, 09:48 AM
Eric might also be referring to a brief period of deflation before the currency goes bananas, which he stated in his article, Does USA 2009 = Argentina 2001 (http://www.itulip.com/forums/showthread.php/10538-Does-USA-2009-Argentina-2001-Part-I-Falling-economy-reaches-terminal-velocity-Eric-Janszen)? That is, the subsequent poom is going to dwarf the poom we've seen so far.

I am confused about the "currency going bananas" forecast. On one hand, EJ has repeatedly pointed out that reserve currencies do not suddenly collapse, they are wound down over a long period of time (for example, the pound sterling). Where does the Argentina scenario fit into this observation?

Also, if the theory about reserve currencies is true, how does the US "run out of credit" ?

I think people who are looking for the collapse of the dollar will be dissapointed. The most well armed military in the world should count for something, in the worst case.

jpatter666
09-17-10, 10:34 AM
I am confused about the "currency going bananas" forecast. On one hand, EJ has repeatedly pointed out that reserve currencies do not suddenly collapse, they are wound down over a long period of time (for example, the pound sterling). Where does the Argentina scenario fit into this observation?

Also, if the theory about reserve currencies is true, how does the US "run out of credit" ?

I think people who are looking for the collapse of the dollar will be dissapointed. The most well armed military in the world should count for something, in the worst case.

Depends on how you define "collapse". If you mean a hyper-inflationary Weimar scenario, I'm doubtful. If you mean Argentina where the currency devalues (say for the $ on DXY from 82 to 50/60 range) in a matter of months (or weeks) then I think that is quite possible.

The military won't matter for much -- not like Russia's saved them, did it?

ViC78
09-17-10, 10:50 AM
Depends on how you define "collapse". If you mean a hyper-inflationary Weimar scenario, I'm doubtful. If you mean Argentina where the currency devalues (say for the $ on DXY from 82 to 50/60 range) in a matter of months (or weeks) then I think that is quite possible.

The military won't matter for much -- not like Russia's saved them, did it?

I would say that a 40% devaluation over a period of months qualifies as a collapse ;_Y

Having said that, I would be curious if EJ agrees with your assessment, because I remember him talking about a 40% devaluation over a period of years. The only exception is the "sudden stop" possibility, which seems to be in conflict with his reserve currency theory.


Re: Russian military. I will have to concede that point to you. Dude, don't harsh my mellow. I am trying to be optimistic here. :D

EJ
09-17-10, 12:34 PM
EJ --

In the above you say that "As consumer credit outstanding continues to contract, a corresponding rise in government borrowing to compensate for the decrease in private sector borrowing is required to keep the money supply from imploding. If that happens the economy will enter a brief deflationary crisis..."

Isn't this counter to your previous position that there won't be deflation?

The fact of the dependence of the US economy on government spending to continue to expand the money supply is well understood by policy makers.

That means that no matter what anyone says the spending will continue. You will hear about spending reductions and austerity as a campaign platform but it isn't going to happen, and at this point it shouldn't. Dependence on fiscal stimulus at the zero bound of interest rates is well understood, as explained in Richard Koo's 2008 analysis that we covered here at the time. Remove the stimulus "too early" and an economy in a balance sheet recession contracts.


http://www.itulip.com/images/koojapanstimulus.gif


The policy that is being pursued is that of using the government's balance sheet to substitute for household balance sheets while they pay down bubble era debts.


http://www.itulip.com/images/koobalancesheetrecession.gif


As to your question about deflation, if for some reason candidates who are now marketing themselves as fiscal reformers to get elected by conservatives in fact engage in fiscal reform, the most extreme outcome is a brief run-on-the-bank deflation as capital flight drains the system, followed by a soft default, say, a suspension of interest payments on foreign debt. This is akin to the period when panicked depositors withdraw money from a bank they are afraid might fail, draining funds, and causing the event they fear. It's not a lengthy deflation process, lasting usually weeks or months. In an extreme case it looks like this, as happened to Argentina in 2001 as investors fled the local currency into dollars, thus causing the very outcome they feared, a debt and currency crisis.


http://www.itulip.com/images/argcpiNOTES.gif

Long time iTulip readers will recognize this as the "Kap-Poom" process. The US case cannot be this severe because the US has a buffer: it owes its foreign debt in dollars, so there is no other currency for investors in dollar assets to flee to except the euro, yen, and of course the fourth currency, (http://fourthcurrency.com/) gold -- which is why the gold price is rising.

The relevance to us is that while Argentina had been drifting in and out of recession for a decade, and the debt-to-GDP ratio had ratcheted up over the period. Before the crisis, unemployment was high and rising.


http://www.itulip.com/images/argunempNOTES.gif


Argentina was not in a balance sheet recession. In fact, the inflation of the previous decade wiped out the debts of households, the hard way. Our precariousness results from the fact that we are in a balance sheet recession and dependent on government spending to support the money supply, as Japan has been starting in 1992. But unlike Japan, and like Argentina, the US is a net debtor. Given total public debt-to-GDP that will trigger a crisis, but no one knows what it is. For Argentina in 2001 it was 55%. We're close 100%, but then we're not a small, politically isolated economy that owes money in foreign currencies, nor do we have a long history of sovereign debt defaults and high inflation.

The way a US version of such a crisis will happen, if it does, is not that the government will suddenly increase spending and that will cause a jump in the debt-to-GDP ratio past the threshold. What happens is that an external event occurs that triggers a recession. In the case of Argentina in 2000 that triggered the 2001 crisis it was technology bubble crash in the US, Argentina's largest creditor via the IMF, and the recession that followed. At the same time foreign lending dried up, the recession shrank GDP relative to already high debt levels, pushing the ratio past the threshold.


http://www.itulip.com/images/argdebtNOTES.gif

In our case, a crash in China that both takes away a source of lending to finance US government expenditure and leads to a new US recession might trigger a "Argentina Ka-Poom with US Characteristics." Another possibility that I go into in detail in thepostcatastropheeconomy is a recession triggered by the next Peap Cheap Oil Cycle. The event will be preceded by a reversal of net capital inflows. If they reverse for two quarters in a row, we can expect a crash that makes 1987 look like a cocktail party. That's why we watch them through our contacts like a hawk. The quarterly data are reported too late to act on.

But the extreme scenario is not the most likely. More likely is a near miss of this event, brought about by market perceptions based on the US election cycle.

You may recall from earlier analysis that announced the official end of the First Bounce of the Debt Deflation Bear Market (http://www.itulip.com/forums/showthread.php/15700-Debt-deflation-Bear-Market-Update-Part-I-First-Bounce-officially-over-Eric-Janszen?p=162589)in April 2010 that the stock market in a balance sheet recession correlates both to the fact of fiscal stimulus and market expectations of future fiscal stimulus.


http://www.itulip.com/images2/japanstimulusVSgdpVSstocksNOTES122409.gif


We may be approaching the end of the second bounce as the election arrives. The consensus among traders and money managers I know is that everyone is lining up to buy after the November election because stocks "always go up" after mid-term elections. But we also know that there are enough traders who understand this post-election herd mentality of fund managers that there are many traders to get on the other side of it. That makes shorting the post-election market hazardous, as does going long. So we're going to sit it out.

A final point on Koo and the balance sheet recession stimulus orthodoxy. I agree with the points that Koo makes that, under the circumstances, since our leadership made the mistake of allowing a balance sheet recession to develop in the first place by failing to stop the housing bubble as we warned them to in 2002,that ongoing stimulus to maintain money supply growth is necessary, unfortunately. But we part company on one major point. Fiscal stimulus is not a "cure" for a balance sheet recession it is a political accommodation. The only "cure" is to write off the credit bubble era debt. That's the point of my article.

Chomsky
09-17-10, 01:18 PM
Great thread EJ, thanks.

BK
09-17-10, 01:51 PM
Lets not forget about the Spanish Empire of 1500-1600 (approx ?) - a very powerful Navy that once ruled the seas - the empire became addicted to silver from the 'New World". The 'printing press' for the Spanish Monarchs was the Silver found in the 'New World'. The Business of the Empire would come to a stand still when deliveries of Silver were interrupted by Pirates - encouraging Pirating became an important strategy for Spain's enemy England.
Massive global Military might has through out the ages required great wealth or a Printing Press. Neither strategy works forever......

we_are_toast
09-17-10, 02:51 PM
The fact of the dependence of the US economy on government spending to continue to expand the money supply is well understood by policy makers.

That means that no matter what anyone says the spending will continue. You will hear about spending reductions and austerity as a campaign platform but it isn't going to happen, and at this point it shouldn't.



As to your question about deflation, if for some reason candidates who are now marketing themselves as fiscal reformers to get elected by conservatives in fact engage in fiscal reform, the most extreme outcome is a brief run-on-the-bank deflation as capital flight drains the system, followed by a soft default, say, a suspension of interest payments on foreign debt. This is akin to the period when panicked depositors withdraw money from a bank they are afraid might fail, draining funds, and causing the event they fear. It's not a lengthy deflation process, lasting usually weeks or months. In an extreme case it looks like this, as happened to Argentina in 2001 as investors fled the local currency into dollars, thus causing the very outcome they feared, a debt and currency crisis.


So will the next recession be triggered by politicians who actually plan on implementing their campaign promises? This isn't your father's Republican party and I fully expect them to do what they say they're going to do.

touchring
09-17-10, 02:56 PM
Lets not forget about the Spanish Empire of 1500-1600 (approx ?) - a very powerful Navy that once ruled the seas - the empire became addicted to silver from the 'New World". The 'printing press' for the Spanish Monarchs was the Silver found in the 'New World'. The Business of the Empire would come to a stand still when deliveries of Silver were interrupted by Pirates - encouraging Pirating became an important strategy for Spain's enemy England.
Massive global Military might has through out the ages required great wealth or a Printing Press. Neither strategy works forever......


the same how certain countries are encouraging terrorists to curb american influence. who are supporting Iran, the Talibans?

Slimprofits
09-17-10, 03:07 PM
The banking lobby has effectively engaging conservatives in the cause of securing their assets.

"...any attempts to reduce the influence of F.I.R.E., either by a new political party or any other entity are going to come under massive attacks by Joe Six Pack Republicans." 08-24-09 09:10 AM (http://www.itulip.com/forums/showthread.php/11465-Neo-Libs-on-their-last-legs?p=118097#post118097)

Chris Coles
09-17-10, 03:08 PM
They need a new mechanism to fund the overhanging pile of debt.

Slimprofits
09-17-10, 03:13 PM
Even as we get into record nominal prices, in the last couple of months I have heard not a single well reasoned critique for being in Gold.

American Liberals/Dems, because of the whole Glenn Beck / Goldline / Anthony Weiner event, delight in ridiculing gold speculators/investors. Even Stewart and Colbert have gotten in on the ridicule.

If any of them have money to invest, it won't ever be going into metals.

sishya
09-17-10, 03:32 PM
We may be approaching the end of the second bounce as the election arrives. The consensus among traders and money managers I know is that everyone is lining up to buy after the November election because stocks "always go up" after mid-term elections. But we also know that there are enough traders who understand this post-election herd mentality of fund managers that there are many traders to get on the other side of it. That makes shorting the post-election market hazardous, as does going long. So we're going to sit it out.



EJ, Thanks for your articles. Great objective analysis with no political leaning, though I started leaning left(monetary only) since the start of the Fin Crisis.
But I think it will be a great point to start shorting Stocks and Dollar combo, in Dec 2010, I could be wrong but I will watch and decide then if there was a huge run up.
Also Capital gains tax is going up starting next year.

magicvent
09-17-10, 03:34 PM
Thank you for the great explanation

Mega
09-17-10, 07:09 PM
Eric
How long?
How long until it becomes a run-a-way unstopable process?
What will China's reaction be?

Cheers
Mike

lsa420
09-18-10, 12:04 AM
Eric
How long?
How long until it becomes a run-a-way unstopable process?
What will China's reaction be?

Cheers
Mike

1 year and 47 days from now. Not now. Right now.

touchring
09-18-10, 01:21 AM
Eric
How long?
How long until it becomes a run-a-way unstopable process?
What will China's reaction be?

Cheers
Mike


China will be busy building weapons and preparing for war to take back Asia.

DToM67
09-18-10, 01:21 PM
Lets not forget about the Spanish Empire of 1500-1600 (approx ?) - a very powerful Navy that once ruled the seas - the empire became addicted to silver from the 'New World". The 'printing press' for the Spanish Monarchs was the Silver found in the 'New World'. The Business of the Empire would come to a stand still when deliveries of Silver were interrupted by Pirates - encouraging Pirating became an important strategy for Spain's enemy England.
Massive global Military might has through out the ages required great wealth or a Printing Press. Neither strategy works forever......


the same how certain countries are encouraging terrorists to curb american influence. who are supporting Iran, the Talibans?


...The way a US version of such a crisis will happen... is that an external event occurs that triggers a recession. In the case of Argentina in 2000 that triggered the 2001 crisis it was technology bubble crash in the US, Argentina's largest creditor via the IMF, and the recession that followed. At the same time foreign lending dried up, the recession shrank GDP relative to already high debt levels, pushing the ratio past the threshold...

In our case, a crash in China that both takes away a source of lending to finance US government expenditure and leads to a new US recession might trigger a "Argentina Ka-Poom with US Characteristics." Another possibility that I go into in detail in The Postcatastrophe Economy: Rebuilding America and Avoiding the Next Bubble (http://www.amazon.com/gp/product/1591842638?ie=UTF8&tag=wwwitulipcom-20&linkCode=as2&camp=1789&creative=9325&creativeASIN=1591842638)http://www.assoc-amazon.com/e/ir?t=wwwitulipcom-20&l=as2&o=1&a=1591842638 is a recession triggered by the next Peap Cheap Oil Cycle. The event will be preceded by a reversal of net capital inflows. If they reverse for two quarters in a row, we can expect a crash that makes 1987 look like a cocktail party. That's why we watch them through our contacts like a hawk. The quarterly data are reported too late to act on.

Reading all this is making me wary... Oil is our 'silver', and China's for that matter. Seems like any interruption in the regular flow of oil out of the gulf region could begin a SHTF event.

vt
09-19-10, 11:11 PM
EJ, you said within the last few months that you foresaw a Dow as high as 11,000 then falling to as low as 7,000 to 8,000 by the end of 2010. Do you still see this range?

touchring
09-20-10, 09:04 AM
Reading all this is making me wary... Oil is our 'silver', and China's for that matter. Seems like any interruption in the regular flow of oil out of the gulf region could begin a SHTF event.


Iran having the nuclear bomb will scare the shit out of the Gulf states not to sell oil to the Americans? If so, the day is very near.

thriftyandboringinohio
09-20-10, 09:16 AM
I can't see how that strategy would work.
Oil is higly fungible and the market network would redistribute the supplies for no net change.

beachgirl
09-20-10, 10:28 AM
Will someone define the "ka" and the "Poom" in simple terms i.e. prices going up or down ? Thanks

touchring
09-20-10, 10:28 AM
I can't see how that strategy would work.
Oil is higly fungible and the market network would redistribute the supplies for no net change.


if that were the case, why iraq war? :o

Chris Coles
09-20-10, 11:07 AM
Will someone define the "ka" and the "Poom" in simple terms i.e. prices going up or down ? Thanks

Perhaps it will help if you think of the two as ka is the screech of the brakes and tyres as the vehicle tries to stop before it hits the brick wall; and the Poom is the "Crash - Bang" when it does.

cjppjc
09-20-10, 04:00 PM
Will someone define the "ka" and the "Poom" in simple terms i.e. prices going up or down ? Thanks

First of all it seems to be Ka Ka Ka Poom. Still wainting impatiently for the Poom. Metal you want to take this?

EJ
09-20-10, 06:18 PM
EJ, you said within the last few months that you foresaw a Dow as high as 11,000 then falling to as low as 7,000 to 8,000 by the end of 2010. Do you still see this range?

You are asking if I still think the second bounce of the Debt Deflation Bear Market will end before the end of the year. Last year I got the timing of the end of the first bounce wrong by four months. The second bounce is even less deterministic, especially considering it's an election year.


http://www.itulip.com/images2/reals&p5002000-2010.jpg


The answer is, I don't know, but I am convinced that the second bounce will end lower than the first, the third lower than the second, and so on until we, as a country, get our act together.

anoop
09-20-10, 08:12 PM
"economic principle" is correct.
"principle plus interest" should be "principal plus interest".

In any case, thanks for the great work!

Ben
09-21-10, 11:43 AM
EJ,

I'm very interested in hearing more about how a 'near miss' might go.

Thanks for the thread,

Ben

Raz
09-21-10, 12:52 PM
if that were the case, why iraq war? :o

Because of incredible arrogance and hubris? Because "W" never read T.E. Lawrence, or anything else heavier than Reader's Digest?
Because it will pay for itself when Saddam is no longer a threat to Mideast oil supplies? Because "W" is a dumbass?

Take your pick. I choose all four, and there are probably more.

Slimprofits
09-22-10, 07:19 PM
You will hear about spending reductions and austerity as a campaign platform

http://www.mcclatchydc.com/2010/09/22/100988/gop-plans-new-agenda-to-reverse.html


WASHINGTON — Republicans in the House of Representatives Thursday plan to offer a detailed blueprint for how they’d dramatically change what they term an "arrogant and out of touch government of self-appointed elites” by pledging to repeal and replace the Obama health care law, continue all Bush-era tax cuts and significantly cut spending.

The agenda, scheduled to be unveiled by GOP leaders at a Virginia lumber and hardware store on Thursday, tries to give voters a clear, pointed choice in November. McClatchy obtained a copy Wednesday night.

The “new governing agenda” quickly draws a stark contrast with the Democrats who now control Congress and the White House.

“An unchecked executive, a compliant legislature and an overreaching judiciary have combined to thwart the will of the people and overturn their votes and their values,” the Republican document says, “striking down long-standing laws and institutions and scoring the deepest beliefs of the American people.

“An arrogant and out-of-touch government of self-appointed elites makes decisions, issues mandates, and enacts laws without accepting or requesting the input of the many,” it adds.

metalman
09-22-10, 11:11 PM
You are asking if I still think the second bounce of the Debt Deflation Bear Market will end before the end of the year. Last year I got the timing of the end of the first bounce wrong by four months. The second bounce is even less deterministic, especially considering it's an election year.


http://www.itulip.com/images2/reals&p5002000-2010.jpg


The answer is, I don't know, but I am convinced that the second bounce will end lower than the first, the third lower than the second, and so on until we, as a country, get our act together.

in other words... we're f*cked?

jpatter666
09-23-10, 07:58 AM
in other words... we're f*cked?

F'd enough so that the wife and I bought a year's worth of THRIVE to have as an emergency reserve should a short-term panic occur (in such an event, with JIT delivery in the cities, *food* is more important than gold). In time, order would return, but we decided safe rather than sorry and if nothing happens, in five years they are camping rations.

dbarberic
09-23-10, 08:58 AM
http://www.mcclatchydc.com/2010/09/22/100988/gop-plans-new-agenda-to-reverse.html


WASHINGTON — Republicans in the House of Representatives Thursday plan to offer a detailed blueprint for how they’d dramatically change what they term an "arrogant and out of touch government of self-appointed elites” by pledging to repeal and replace the Obama health care law, continue all Bush-era tax cuts and significantly cut spending.

The agenda, scheduled to be unveiled by GOP leaders at a Virginia lumber and hardware store on Thursday, tries to give voters a clear, pointed choice in November. McClatchy obtained a copy Wednesday night.

The “new governing agenda” quickly draws a stark contrast with the Democrats who now control Congress and the White House.

“An unchecked executive, a compliant legislature and an overreaching judiciary have combined to thwart the will of the people and overturn their votes and their values,” the Republican document says, “striking down long-standing laws and institutions and scoring the deepest beliefs of the American people.

“An arrogant and out-of-touch government of self-appointed elites makes decisions, issues mandates, and enacts laws without accepting or requesting the input of the many,” it adds.

I’m beginning to think that the media and government spin on austerity is to guilt the American people into blaming themselves for the massive debts and get them to accept higher taxes, lower public services/benefits, and lower expectations without actually calling it an austerity program. It almost feels like a PR program to get the public to beg for austerity programs, without them even knowing what it is they are asking for.

Prazak
09-23-10, 01:11 PM
"THRIVE"? I'm assuming this is an acronym, and apologies for the ignorance, but could you elaborate?

jpatter666
09-23-10, 01:43 PM
"THRIVE"? I'm assuming this is an acronym, and apologies for the ignorance, but could you elaborate?

np.

http://www.costco.com/Browse/Product.aspx?Prodid=11487214

ThePythonicCow
09-23-10, 01:47 PM
"THRIVE"? I'm assuming this is an acronym, and apologies for the ignorance, but could you elaborate?
Shelf Reliance THRIVE Food (http://www.shelfreliance.com/all-products/thrive-foods.html), mentioned here on iTulip a week or two ago with reference to a special on one of their products at COSTCO (http://www.costco.com/Browse/Product.aspx?Prodid=11487214#).

jpatter666
09-24-10, 04:02 AM
All of you reading this about Thrive should take note that almost all the so called meat products in Thrive are made from TVP, Testured Vegitable Protein which in turn is made from Soy. May I therefore also reccomend that you read and watch this from Dr. Mercola.

This "Miracle Health Food" Has Been Linked to Brain Damage and Breast Cancer
http://articles.mercola.com/sites/articles/archive/2010/09/18/soy-can-damage-your-health.aspx

Just about anything I eat these days has been linked to brain damage and cancer (sigh).

Chris Coles
09-24-10, 05:30 AM
All of you reading this about Thrive should take note that almost all the so called meat products in Thrive are made from TVP, Testured Vegitable Protein which in turn is made from Soy. May I therefore also reccomend that you read and watch this from Dr. Mercola.

This "Miracle Health Food" Has Been Linked to Brain Damage and Breast Cancer
http://articles.mercola.com/sites/ar...ur-health.aspx (http://articles.mercola.com/sites/articles/archive/2010/09/18/soy-can-damage-your-health.aspx)

aaron
09-24-10, 12:30 PM
I bought mine a week ago. The costco sale is good. I appreciate it.

Some thoughts:

- This $800 dollar "investment" has already given me a peace of mind that will more than make up for the soy damage.
- I hope I never have to eat this crap anyway, but if it gets to that point, TVP will be of little concern.
- As with most Americans, my main food store is around my waist. I estimate I have at least a 90 day supply. This should not be underestimated. With a can of tuna and multi-vitamin a few times a week, I suspect I could live for at least 6 months at a reasonable level of activity.

jpatter666
09-24-10, 12:35 PM
I bought mine a week ago. The costco sale is good. I appreciate it.

Some thoughts:

- This $800 dollar "investment" has already given me a peace of mind that will more than make up for the soy damage.
- I hope I never have to eat this crap anyway, but if it gets to that point, TVP will be of little concern.
- As with most Americans, my main food store is around my waist. I estimate I have at least a 90 day supply. This should not be underestimated. With a can of tuna and multi-vitamin a few times a week, I suspect I could live for at least 6 months at a reasonable level of activity.

Exactly. We had the (ever depreciating) cash, winter is coming and well, we figured better safe than sorry. As an emergency store over ten years, it's $80/year for very cheap insurance.

Times grow more and more uncertain. We've have our PMs (some electronic, some physical) and just trying to cover as many bases as we can.

steveaustin2006
09-25-10, 01:13 PM
in other words... we're f*cked?

Long dated puts on the SP500 - lose a little if wrong, make a lot if right. Only those who don't protect themselves are f*cked.

I'm a little confused about the Debt Cut Plan - wouldn't this level of write off ($1 trillion annually) solicit bank runs on several large ones in short order?

BigBagel
09-26-10, 10:27 AM
China will be busy building weapons and preparing for war to take back Asia.

They gave Japan a nice bitch slapping this week.

touchring
09-26-10, 01:53 PM
They gave Japan a nice bitch slapping this week.


That show is actually not for Japan. There's a Chinese saying, before you hit the dog, you must know who the owner is.

BigBagel
09-26-10, 03:09 PM
That show is actually not for Japan. There's a Chinese saying, before you hit the dog, you must know who the owner is.


Your right. I took it as payback for old animosities. Shame on me for looking at things in such a superficial way.

ThePythonicCow
09-27-10, 05:24 AM
That show is actually not for Japan. There's a Chinese saying, before you hit the dog, you must know who the owner is.
Your post may be one of the most prescient posts of the week, touchring.

Japan is America's dog - has been since 1945. China knows this. China is not an erratic novice making foolish moves it can not or will not follow through on.

I do not see how this can end well for Pax Americana (http://en.wikipedia.org/wiki/Pax_Americana).

BigBagel
09-27-10, 09:15 AM
http://www.ft.com/cms/s/0/4b148650-c9a1-11df-b3d6-00144feab49a.html

"gold has gained traction for a simple reason that has afforded it a central place as a store of value for more than 2,000 years: it is nobody’s liability"

Key quote from a Financial Times article on central bank gold buying.

bill
09-27-10, 10:27 AM
Japan is America's dog - has been since 1945.

Off the leash. “click”
http://www.itulip.com/forums/showthread.php/showthread.php?p=10027#poststop

touchring
09-27-10, 12:55 PM
Your post may be one of the most prescient posts of the week, touchring.

Japan is America's dog - has been since 1945. China knows this. China is not an erratic novice making foolish moves it can not or will not follow through on.

I do not see how this can end well for Pax Americana (http://en.wikipedia.org/wiki/Pax_Americana).


Japan is the weakest link right now in the coalition. China does buy Japanese exports so Japan is heavily reliant on the Chinese market.

Finster
09-28-10, 07:02 PM
Great piece, EJ!


Even as we get into record nominal prices, in the last couple of months I have heard not a single well reasoned critique for being in Gold.

Not one.

It's all ad-hominem ("all you gold bugs expect an apocalypse; you're all bloody vicious thugs")

or sloganeering ("you can't eat Gold")

or tired old reasons that are being proved wrong or inconsequential ("Gold pays no dividend") (but my dividends and/or my dividend paying investments are all down over the last couple of years)

I don't think you need "single well reasoned critique for being in Gold". Gold is the default asset, what you have when you don't have reasons for being in other things. Or when you have reasons not to be in other things.

Think about it. What if stocks are overvalued and the economic outlook is cloudy. And what if bonds are even more overvalued? (e.g. 1.x% on five year notes and 2.x% on ten year notes, from an issuer that is effectively broke). And what if the Fed is printing money like the dickens trying to devalue your cash and punish savers? Currencies are in competitive devaluation. And what if on top of all that, commodity futures are in deep contango (i.e. overvalued).

In short, the outlook for every liquid investment asset class stinks? That's what you have gold for. There's no reliable way to value it; you don't have dividend yields, book values, PE ratios, etc. to go by. Instead you value everything else, and if everything else out there looks high, then by the process of elimination you have gold.

It's everything else you need an affirmative investment rationale for. If you can't find one, go for gold.

EJ
09-28-10, 10:10 PM
Great piece, EJ!

I don't think you need "single well reasoned critique for being in Gold". Gold is the default asset, what you have when you don't have reasons for being in other things. Or when you have reasons not to be in other things.

Think about it. What if stocks are overvalued and the economic outlook is cloudy. And what if bonds are even more overvalued? (e.g. 1.x% on five year notes and 2.x% on ten year notes, from an issuer that is effectively broke). And what if the Fed is printing money like the dickens trying to devalue your cash and punish savers? Currencies are in competitive devaluation. And what if on top of all that, commodity futures are in deep contango (i.e. overvalued).

In short, the outlook for every liquid investment asset class stinks? That's what you have gold for. There's no reliable way to value it; you don't have dividend yields, book values, PE ratios, etc. to go by. Instead you value everything else, and if everything else out there looks high, then by the process of elimination you have gold.

It's everything else you need an affirmative investment rationale for. If you can't find one, go for gold.

Gold is home for capital.

“Home is the place where, when you have to go there, they have to take you in.”
— Robert Frost

Chris Coles
09-29-10, 06:07 AM
Nothing has replaced Gold throughout the entire history of the planet. At every juncture, Gold comes out as the one asset everyone can rely upon; everyone accepts; never refused. Gold is the one asset, when you have to go there; no one will ever refuse to accept as fair exchange for what ever you need. Spartacus needs to read The PostCatastrophe Economy.

Slimprofits
10-15-10, 04:48 AM
If home values are permitted to decline another 20% to pre-bubble levels, and mortgages are written down to pre-bubble levels, US households will have approximately $1 trillion dollars more to spend annually.

Seen this?

via The Big Picture

http://www.politico.com/static/PPM170_101006_amherst.html

Amherst Securities Group
Amherst Mortgage Insight

October 1, 2010
MBS Strategy Group
Laurie Goodman / lgoodman@asglp.com / 212.593.6026
Roger Ashworth / rashworth@asglp.com / 212.593.6095
Brian Landy, CFA / blandy@asglp.com / 212.593.6094
Lidan Yang, CFA / lyang@asglp.com / 212.593.6093

The Housing Crisis—Sizing the Problem,
Proposing Solutions

This article summarizes the size and scope of the housing crisis, making the point that if governmental policy does not change, one borrower out of every 5 is in danger of losing his/her home. A crisis of this order of magnitude requires both supply and demand side measures. On the supply side, a successful modification is critical. This will require principal reductions to re-equify the borrower. The moral hazard (strategic default) issues must be addressed by first recognizing that this is an economic issue, not a moral one. Second liens must also be addressed. As supply side measures alone are likely to prove insufficient to address a crisis of this size, we discuss demand side measures to increase the buyer base.

[..]

Our take—we believe the government needs a mandatory program that forgives principal on the 1st lien and substantially eliminates the 2nd lien. Voluntary programs won't work. The idea of earning the reduction over time is appealing. We like the PRA in which principal is initially forborne, then forgiven over a 3-year period, with 1/3 of the amount forgiven each year. We would make it a mandatory first step in any modification, rather than part of a voluntary program.

Down Under
12-05-10, 06:55 AM
The answer is, I don't know, but I am convinced that the second bounce will end lower than the first, the third lower than the second, and so on until we, as a country, get our act together.

The S&P 500 is now higher than it was in April 2010. Presumably, it shouldn't go much higher from here, if your prediction is too hold.

Not trying to have a go here, or anything, but would be interested in any feedback regarding the state of play.