I'm upping my probability that the USA fails as a functioning nation from 70% to 85% by 2020.
It's all very interesting, because the stone-broke FDIC is forcing the better banks to merge with poison ones, instead of paying their own insurance obligations, because they lack mere pocket change to reimburse a relative few displaced depositors.
Ironically, if we didn't have the FDIC wrecking ball, U.S. banking might survive after a few unremarkable losses. But with a bankrupt FDIC promising some $15T they obviously don't have, and opting to extract it by wiping out stronger bank shareholder equity and exposing otherwise unrelated depositors, there is simply no way our banking system can survive.
Wednesday, September 23, 2009
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Hey God, a little bit of help down here!
ReplyDeleteHi FDR,
ReplyDeleteIf the Fed indicates later today that interest rates will remain low won't that encourage the dollar carry trade and push down the dollar even more? What do you think it will take to cause the dollar to begin its major rise that you predict, a stock crash or some other fear producing event?
Thanks for having this great blog!
What do you think happens first, DOW 11500 or 9000?
ReplyDeleteHi FDR,
ReplyDeleteDo you believe that there is anyway that quantitative easing can out pace the deflationary pressure?
If so, how. If not, why?
You have some very interesting takes and I would just like to further understand your position.
Thanks!
"What do you think happens first, DOW 11500 or 9000?"
ReplyDeleteI have a trading alert out to short the Dow. There may be another 100 points or two in it. The key is not to over leverage yourself. Leverage itself it a key source of the meltdown, and nature will react with a price pattern that attempts to destroy leveraged players on both sides of the trade.
Remember that cash in your home safe is yielding 20%-100%/year as prices fall, and for now that will continue as far as the eye can see.
With that kind of rate of return within the walls of a steel vault, risk must be weighed.
Cash is King.
"If the Fed indicates later today that interest rates will remain low won't that encourage the dollar carry trade and push down the dollar even more?"
ReplyDeleteWith respect to exchange rates, it could. But remember, the Fed doesn't have any say about interest rates, interest rates are purely market driven.
Particularly on the down sloping side of the interest rate curve, the Fed only reacts to market interest rates in order to save themselves.
Look for more on this in a coming article.
"Do you believe that there is anyway that quantitative easing can out pace the deflationary pressure?"
ReplyDeleteHi BMF,
No. The fundamental reason is that deflation ravages previous commercial bank 40:1 leverage, and easing no longer carries a lever.
FDR- What is your background? If you don't mind
ReplyDeleteHi FDR,
ReplyDeleteAre not European banks leveraged even higher than 40:1?
Another question: when the dollar gets stronger and the price of gold drops, do you think gold's lower asset value will have the same spending power as right now... or not? What I mean is, will it buy a set of tires now and a set of tires in the future, or just get you a hubcap? Regards,
I don't know who wins the speculation battle between EU banks and US banks, I doubt there is a significant distinction today. All modern banks are with rife with misguided speculation, even the supposed "safe" ones quickly gamble your money away.
ReplyDelete"Another question: when the dollar gets stronger and the price of gold drops, do you think gold's lower asset value will have the same spending power as right now... or not? What I mean is, will it buy a set of tires now and a set of tires in the future, or just get you a hubcap? Regards,"
I've written a lot about value vs price, but I haven't addressed future gold values (as opposed to price) recently.
As most know I recommend shorting the gold price, so it comes as a confusing surprise to gold bugs when I always recommend holding some physical gold. That is because gold value rises as it's price falls, the same is true with all hard commodities.
When paper is all the rage, gold prices are driven higher. Ironically, having fallen out of favor, physical gold buys less; its value falls as its price rises. The opposite is also true.
I often say that no one really cares about gold when it costs $1,000 /ounce, but somebody might try to kill you for a $50/ounce gold piece.
I remember a Great Depression story about how a family tore a wooden porch off their house when someone remembered they had dropped a silver coin through the cracks, years prior.
Most people don't "get" that concept, but it sounds like you will.
If you believe the probability that the U.S. fails as a functioning nation by 2020 at 85%, what is your timeframe on holding U.S. treasuries? Surely you must recommend ditching them well before then since once that occurs, U.S. treasuries will be worthless paper since the treasury itself will no longer be in existence, right?
ReplyDeleteSo what timeframe are you thinking of for ditching U.S. treasuries?
As for the FDIC not having $15T, they *do* have it as long as the guys running the Fed want the banking system to continue to "function". It can be made available to them on demand from the Fed by way of the Treasury, no?
That's the "beauty" of a fiat currency, and the *real* difference between it and a hard-asset-backed one: the issuing agency can always print more when it deems it necessary. *Always*. That wasn't the case during the 1930s. The option of printing more money on demand simply wasn't there the way it is now.
The rules you seem to be assuming the players will be playing under are not the same as the ones in play during the 1930s. Therefore, the outcome this time around will be different in ways that will matter a great deal to those who try to play the events this time around the way that would have worked last time around. History does *not* repeat itself. There is always some subtle but very, very important difference between "last time" and "this time".
After all, do you really think the people who wield power would make the game so predictable as that?
I agree we will see deflation, but I don't think it will be nearly as pronounced as it was during the Great Depression. The greatest amount of deflation will be that of the average person's buying power. It will drop much more quickly than prices will. With a fiat currency, it seems to me that what primarily matters is the relative rate of those two things, as opposed to the absolute rate of either. However, I believe one thing will remain true: asset prices will fall, even if slowly, as fewer and fewer people are able to afford them, and this will keep banks from loaning (thus keeping them from reinflating the currency). The downward spiral will continue until labor prices here in the U.S. are competitive with those in the rest of the world. Then, and only then, will we see production return to the U.S., in about 10 years time or so.
"If you believe the probability that the U.S. fails as a functioning nation by 2020 at 85%, what is your timeframe on holding U.S. treasuries?"
ReplyDeleteI have no financial answer for the US functionally failing. I am only trying to make the most money I can, for as long as I can make it. After that, we'll have to see what unfolds.
I agree with your basic assessment of deflation, but I disagree that we have the ability to print one dime. The US govt doesn't print our cash, a commercial bank prints it exclusively for their personal profit.
Why would the private central banks print more, when they can make sooooooooo much more money holding cash hostage like they did in the 1930's, even after 50 congressional bills passed to try to force them to print?
They hate us, KCB, they are trying to break us, not help us.
I agree they're not trying to help us. Not for our sake, at any rate.
ReplyDeleteThe problems with the idea that they're trying to break us are:
1. They have no need to. They've already done so. They're in essentially complete control of the U.S. government. They control the means by which candidates become "electable". And they're in nearly complete control over the information sources people use in their daily lives. It doesn't get much better than that.
2. If the entire system goes under, they risk losing their power. An unstable siutation is an unpredictable situation. People in power hate unpredictability, because it poses a risk to their power. So it directly follows that they will do what they can to prop up the system, because it is precisely what gives them their power over the government.
3. Their power in the world derives not from money but from the ability to project force. That power derives directly from their control over the government and the people of the U.S. If they lose the ability to project force, they lose their power in the world. So it is very clearly in their best interests to keep the U.S. government, and therefore the society that supports it, afloat.
I agree that they're in this only for themselves. But that is precisely what will cause them to behave differently this time around. There are other forces in the world than just them, and they have to concern themselves with that as well.
They don't have to worry about congressional bills passing that would "force" them to do anything. They're firmly in control of both congress and the president.
Finally, I disagree that money is the primary thing of interest to them. Money is merely a tool. Power is what is of interest to them. Getting more buying power than they already have is of no consequence to them because they can already buy absolutely anything they want. At their level, it's all about power and control on a vast scale. And their strongest power base right now is here in the U.S., where they have a tighter grip over the government and its people than they have anywhere else in the world. The U.S. is the *last* place they'll want to destroy.
I agree the people with a seat at the global central bank table want power, but they would greatly prefer a world without the freedom-loving US citizen as a constant nuisance to their worm-eaten monarchical slave suppressing ambitions.
ReplyDeleteWhat have they to fear from the "freedom-loving US citizen" now?
ReplyDeleteNothing at all. The political system as it is today in the U.S. is a testament to the ineffectiveness of the freedom-loving US citizen. Laws which chip away at what freedom we have left are continuously being passed, and the "freedom-loving US citizen" does nothing -- because he is powerless to do anything.
With this as the state of affairs in the U.S., what power-hungry central banker would be stupid enough to risk losing his power just to defeat the already-defeated US citizen? The only way for him to eliminate the freedom-loving US citizen entirely would be to nuke the US from the face of the map. But if he does that, he loses his ability to project power in the world.
No power-hungry central banker is going to destroy his own power base just to rid himself of an already irrelevant and ever diminishing thorn in his side.
kcb u have posed some interesting questions.But apart from your "power" centric theory which is open for debate do u agree with rest of fdr's thesis on deflation coz i remember u were all for inflation earlier? To understand what is coming i guess its very important for us to decode how and what the FED "intends" to do.Keep posting.
ReplyDeleteFDR you said that the FED will soon be gone , give or take a couple of years to 5 years from now.If that is the case then will everything will be back to normal and we continue to prosper again? So i presume that if the FED is gone within 2 to 5 years from now , DOW may not go below 1000?
ReplyDeleteAnonymous wrote: "kcb" ... "do u agree with rest of fdr's thesis on deflation coz i remember u were all for inflation earlier?"
ReplyDeleteAs I see it, inflation versus deflation depends on the balance of the forces involved.
Firstly, you have people in large numbers finally paying down their debt. These people still have their jobs, have seen the writing on the wall of the economy, and want to get out from underneath the burden they currently carry. So they're paying their debt off at an accelerated rate. This is highly deflationary.
Secondly, banks are much more reluctant and much less able to lend now than before. A large part of this is the fact that primary asset prices are declining as a result of fewer people able to chase after them, since unemployment is on the rise, so the bank insists on much larger down payments and such. Another reason is the relative dearth of potential lendees, thanks again to the high and rising unemployment rate.
Thirdly, the rising unemployment rate combined with the lower spending rate of those who are still employed directly results in fewer people able to or willing to afford goods and services, which results in a strong decrease in demand. That's obviously deflationary with respect to the price of those goods and services. Note that this is not equally applicable to all goods and services. Necessities such as food and gasoline will see a drop in demand, but nothing like the drop that other luxuries will see. But regardless, this is deflationary, and will remain deflationary until the job market stabilizes. As long as unemployment continues to rise, demand will continue to fall.
Finally, you have government spending. Whether this is inflationary or deflationary depends on the source of funds and how it's spent. If the source is money borrowed from individuals and institutions that already have the money in question then it is not inflationary, as it doesn't increase the currency supply. But if the source is the Fed, then it's very inflationary, as it is a direct increase in the currency supply. And, of course, whether the government spending is inflationary or not depends also on how the money is spent. If the money is spent by giving it to banks a la the big bailouts, then it is certainly not inflationary, and in fact might even be at least temporarily deflationary, since the banks took most of that money and applied it against the defaulted loans they had on their books (to "repair their balance sheets"). That's deflationary for that money because the money disappears in the same way that it does when someone pays off their loan. The balance sheet repair makes it possible for said banks to lend money later on, and that would be inflationary, but it's not inflationary until it actually happens, and in this environment it's not happening much. On the other hand, if the government spends the money by paying employees and contractors or otherwise somehow delivering the money to the people, that's inflationary to the degree that it got that money by borrowing from the Fed.
The government right now is going through the same cycle that individuals have already been through: it has spent its savings and is now borrowing like crazy. The flow of borrowed money may end at some point, but only when the Fed decides it should. Since the government is the Fed bankers' puppet and provides them with a great deal of their power, I expect they will do everything in their power to keep it alive.
(continued in my next message)
(continued from my previous message)
ReplyDeleteAlso note that the plutocratic system of government we currently have results in currency in the system percolating towards those who tend to spend it the least: the super-rich. That's also deflationary, in that the currency in question is effectively taken off the market even though it technically is still there.
Given the balance of forces, I think for now we will see deflation on balance, but how long that continues depends on the rate at which money the government borrows from the Fed is injected into the economy via payments to individuals and contractors, versus the rate at which loans are being paid off. As I mentioned before, defaults are not deflationary in and of themselves because the borrowed money remains in the economy.
I think we can safely assume that lending from normal banks will not resume with any degree of normalcy for quite some time.
The real question in my mind is whether or not banks will be allowed to fail in such a way that they take their deposit accounts with them. If they are, that will be massively deflationary, but it will also be massively disruptive to both the U.S. economy and the U.S. government. Such disruptions are inherently unpredictable. The last time this happened was during the Great Depression, and frankly it is probably only luck that kept the country from descending into civil war. Civil war would be VERY VERY BAD for the Fed bankers because it would put their power base at high risk, so it follows that the Fed bankers will do what they must to prevent that from happening, and the easiest way to do that by far is to make sure that the FDIC continues to backstop banks regardless of what its official balance sheet says.
One other thing: failure of even one bank in such a way that the deposit accounts aren't preserved will cause *everybody* to pull their money out of their bank right then and there. Why? Because unlike the 1930s, we now have an instant, nationwide, uncontrolled broadcast medium: the internet. News of such a bank failure will spread like lightning throughout the world, even if the banker-controlled mass media remains entirely dark on the subject.
I wrote: "Secondly, banks are much more reluctant and much less able to lend now than before."
ReplyDeleteI should explain that I believe the above to be inflation-neutral with respect to the currency (since it means banks aren't increasing the currency supply through lending). For some reason it seems to me that FDR considers that to be deflationary, and he's right, but only to the degree that it affects the price of goods and services. The reluctance of banks to lend directly results in a reduced demand for high-priced items such as houses, so it's deflationary with respect to those items but not really with respect to much else. Of course, this feeds back into the very thing that's causing banks to be reluctant to lend, namely the falling asset prices.
So on balance, I'd have to call the reluctance of banks to lend as mildly deflationary.