∙ ‘Rambo Fed’ Will Buy Treasuries to Combat Crisis [Bloomberg]
∙ Mortgage Rates May Fall to Lowest Since WWII on Fed Purchases [Bloomberg]
∙ Dollar Rally Crumbles as Fed Ramps Up Printing Press [Bloomberg]
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∙ ‘Rambo Fed’ Will Buy Treasuries to Combat Crisis [Bloomberg]
∙ Mortgage Rates May Fall to Lowest Since WWII on Fed Purchases [Bloomberg]
∙ Dollar Rally Crumbles as Fed Ramps Up Printing Press [Bloomberg]
I’m not sure what to make of this Fannie decision. Overall, I don’t know that I’d make too much of it. Fannie may stop gauranteeing these, but it’s not unlikely that the govt will just create yet another entity to do this instead… the govt seems to have no restraint in its overspending these days.
For instance, the Fed [yesterday] signalled today that it will begin purchasing more agency debt, more MBS, and will start Quantitative Easing as well (The Fed will create money to buy longer term Treasuries). My thoughts are that these actions will have more ramifications to the housing market than Fannie’s announcement.
Although I’ve talked for some time about the fact that the Fed/govt would likely start quantitative easing, I am very concerned now that they are doing it.
The govt is devaluing our currency (that’s why the dollar plummeted today and gold skyrocketed). and they’re doing it in a way that could IN THEORY reduce mortgage rates (buying longer duration Treasuries, buying MBS outright themselves, buying more Agency Debt), depending on what the risk premium on MBS going forward is.
but the signal is clear: the Fed will try to print it’s way out. If you’re not concerned, you should be.
LMRiM: you still think I’m kooky for my Ka-POOM prediction? We’re one step closer today. The POOM is inevitable, I know you know that and I know you really just disagree with me on timing.
All you economists, was the quick drop in the dollar’s value on the news that the Fed was “printing” $300B to buy treasuries an indication of expected inflation, or something else? Perhaps just a reflection that interest rates on dollar-denominated debt will now be lower than, say, Euro-denominated debt? Something else?
the printing is much more than 300 billion, Trip.
We’re looking at about 1 trillion in expansion of the fed’s balance sheet (purchases of agency debt and MBS are going to be around 700-800 billion more).
Now, in normal times, this would have led to a sudden and MASSIVE drop in the dollar compared to other world currencies. However, the fed has a bit of luxury here, so the dollar only took a slight tumble. The BOJ and BOE are already in quantitative easing mode, so the dollar is simply racing to the bottom with them, but the dollar is seen as a risk free safe haven, so instead of a precipitous drop in the dollar index, we saw a slight but significant drop.
The reason – as you surmised – is ‘inflation.’ Or to put it better, a drop in the projected value of the dollar compared to other world currencies.
The interest rates on dollar denominated debts remain lousy, but that has little impact (at present) on the drop in the dollar’s standing. The yen has paid virtualy nothing in interest for quite some time yet it is seen as a safe haven currency and up until recently gained strength despite persistently low interest rates in this crisis (our resident chief economist, Satchel, has indicated that he holds some of his (sizeable?) net worth in yen.
At present, people care little about interest rates, but instead focus on return of principal. Due to Japan’s current account surplus (but shrinking fast!), and nearly untouchable credit rating, and (still) virtually non existent domestic inflation (that lost decade had one benefit), yen denominated debts have been seen as a safe haven, and thus the yen has been reasonably strong.
The dollar may have taken its little tumble today, and it may have been weakened in the very long term by this QE decision by the Fed (because it is pro-inflationary as you surmised Trip), but actual true inflation is still a mirage on some far away horizon.
XSfr is of the opinion that a Poom is coming. He may well be right. But it is very far away from now. It is also true that at present, the Fed’s decision should actually make the Chinese government smile. I know this seems to make no sense, but then, look a bit closer.
The Fed is not the same as the Treasury. People conflate the two, but they are very much distinct entities. The Fed is an essentially private (public oversight is minimal) banking organization, which is loosely allied with the private banking system in the USA (Satchel likes to call this the banking cabal, I’m not a conspiracy theorist type, but for all intents and purposes it functions like one). It cares deeply about the strength of the dollar, maintaining dollar hegemony, and thus, is always worried about the evils of inflation (massive inflation in the US and not elsewhere threatens to destroy the dollar and vis a vis, the Fed’s power). The Treasury, on the other hand, is interested in political enterprises. It is part of the public government, and needs to be able to sell its debt to finance governement operations.
The Chinese care deeply about the strength of US Treasuries, and GSE Debt, since they hold an enormous amount of their net worth in these instruments. Until the Fed began its quantitative easing program last year (and now has ramped it up signifcantly), the Fed was not nearly as wedded to the health and strength of US Treasury issues.
That has all changed now. The Fed, in short order, will be directly aligned with the Chinese. Together, they will be the two largest Creditors of the US Treasury. This should make China thrilled.
I know XSFr would disagree, but I would submit that this alliance of interests will function to prevent the sort of hyperinflation that would threaten the value of the Chinese holdings of our debt, precisely because the Fed now stands to lose, even more so than the Chinese government, from a sudden Ka-Poom event in US Treasury issues.
So, my feeling is that the Fed has looked at the massive asset deflation and credit destruction, and has decided that this is the time to get in bed with the Chinese, stake the future of the dollar (and vis a vis the Fed’s power) on the safety of long term US Treasury issues, and at the absolute first sign of trouble – they will drain the liquidity out of the system so fast that a return to signficant deflation is a bigger risk than any hyperinflationary event.
The QE might work for a little bit, but when the Fed has to protect itself, it will have no qualms about causing a second leg of the recession to keep itslef, and the dollar, firmly in the driver’s seat.
Trip,
I wouldn’t read too much into the dollar “collapse” (lol) today. It’s up, what, 18% or so against the Euro even after today, as compared with a year ago.
The biggest determinant of currency moves on a short term basis was always the weight of positions and the desire of the players to squeeze customers (from my experience as part of a macro hedge fund group in the 90s that typically expressed views through currency, interest rate and equity markets derivatives). Quantitative easing – although expected for a while – is one of those news items that has the potential to move markets a bit. Add the fact that the speculative market is long dollars (obviously, given the trend since mid-summer 2008 when the commodity complex started its collapse), and I bet the fraudsters at the banks “ran the stops” and made sure that [long] dollar holders were forced to cover. Not enough time for the natural demand or corporates to do anything except take their lumps 😉
I really wouldn’t try to read to much into a 3% move regarding future inflation expectations/interest rate differentials, etc.
Maybe Red Pill or k10 could chime in as well, but stop running is what it looked like to me. I wouldn’t get too worried just yet about EUR/USD for your upcoming European litigation stay this summer 🙂
@ ex SF-er – I’ll try to post a few ideas tomorrow morning about “ka-poom” but no tomes this time. I’ve been really busy with trading the last week or so!
I just read polip’s “rant” and…..
I LIKE it! Finally, some sense. Maybe I don;t have to write anything after all about “Ka-POOM”.
$1T being printed. American’s net worth goes down $11T just last quarter (and I’m guessing another $4-6T already this quarter, notwithstanding the recent rally in the S&P). I’m not too worried about inflation anytime soon. Wake me up when total debt/gdp is under 200% and someone has eaten the losses on all these SIVs, structured products, CDS, etc.
Trip,
Jamming another US$ 1.0 trillion into the system collectively devalues all dollars by some amount . The EUR / USD cross moved immediately from 1.31 to 1.345 when this was announced. It opened at 1.30 and moved up early because enough market participants suspected that without the ability to cut rates, Ben and friends would concoct something else to persuade the doctors and dentists to continue returning to the equity markets. The dollar has held up strangely fine thus far because while it was our economy that sneezed, many others actually caught the cold (the UK has full blown pneumonia and Iceland is catatonic). The US is like a nice house in D-7, it’ll take alot to finally bring it’s ask down despite the absolute obviousness of the outcome (insert family drama anecdote here).
Just as GM is the corporate equivalent of a zealot strapped with C-4 and a jumbo box of roofing nails, the US has the ability, and now the willingness to postpone our debt day of reckoning. That day can’t really happen until we are in measurably worse shape than the collective supply of stable currency in circulation at which point the developed world shrugs and moves on without us. It’s impossible to script how all of this will get sorted out, and we may lurch back from the edge somehow, but the probability of a multi sigma dollar devaluation event is no longer statistically insignificant. I expect developed economies will collectively lurch from one decent sized crisis to another for years to come, like the gods playing Whack-a-Mole. In a few years, the US may look like a sprawling, dystopic Italy, minus the culture. Or Poland.
Have you ever been to New Zeelun’? Direct flights from SFO to Auckland can be had for $598.00. Sensibly run country that would be glad to have your skill set in exchange for a nominal investment in the local (and stable) kiwi.
LMRiM and others – curious to get your thoughts on the recent rally the financial stocks have seen over the past week or so. From my (admittedly removed)perspective, it seems like there is still a whole lot of garbage on the bank balance sheets – and it would also seem to follow that those companies will get whacked as this continues to unwind. But maybe the USG’s apparent willingness to continue spending taxpayer money to prop them up will provide some backstop to the stock price declines…?
Polip, LMRim, Red Pill — excellent stuff! Many thanks (for confirming this is all way over my head and convincing me that I should never get involved in currency trading)! Yes, LMRiM remembered this is a selfish question as I have a 6-week trial in Europe this summer (mostly work — very little fun) and am just keeping an eye on exchange rates. Looks like some money could be made if you had a friend inside to tip you off on the Fed’s public statements . . .
“curious to get your thoughts on the recent rally the financial stocks have seen over the past week or so.”
Here is some context for that rally. My view is that earnings will continue to deteriorate and more waves of debt will be going bad so fundamentals will continue to deteriorate. I don’t think the market has hit bottom. I’m still out.
That said, if the Fed decides to start buying citibank stock for $100/share then it will be $100/share. We’re in the long dark tea-time of the soul where fundamentals are subservient to the madness of men with printing presses. To profit one must anticipate which area they’re going to be hosing down with liquidity next and be there with your bucket.
“The Chinese care deeply about the strength of US Treasuries, and GSE Debt, since they hold an enormous amount of their net worth in these instruments.”
Yes, but they’re in the Red Queen’s Race. To maintain the value of their current debt instruments they have to keep buying more. They will one day have to decide to stop throwing good money after bad. No idea when that will be though.
My initial take, before I’ve had an opportunity to hear from the experts: This is a hail Mary pass because nothing the fed is doing is actually working. They need more money to throw at the problem, and no one wants to finance any more debt except China, who is undergoing its own problems right now and may no longer have the ability to fund unlimited amounts of US government debt.
The government can either tax or borrow and raising taxes in a recession is politically difficult, and they are going to have to raise taxes as much as they can anyways, as tax revenues positively sink because incomes are dropping and will likely continue to do so. There is only one other source of funds, and that’s people’s savings. It was only a matter of time before they went after them, and that time has now started.
So what the fed is doing is essentially taxing savings and hoping no one will notice. The value of everyone’s savings went down a little today, and the fed captures that value and loans it out, hoping to convince the people that they are better off if everyone contributes just a little bit.
People are too scared to make many loans and so the fed essentially is forcing them to make loans, by confiscating some of their money and loaning it out by the fed. Of course, people’s bank statements will say that the value of their assets is unchanged, so most people won’t even notice right away.
Will commodities rise in dollar prices when the dollar is losing value? Hard to know. In a sinking economy, how much copper do you really need? On the other hand, if the money gets loaned out and people start building more houses, maybe a lot. But 10% employment could temper any housing related benefit – this could just keep us treading water.
And will the money really get loaned out this time? Was the problem a lack of truly credit worthy borrowers, or was it a lack of funds to lend when you found credit worthy borrowers. FHA loans didn’t seem to dry up, and those loans go to the least credit worthy borrowers, so I doubt it was really a shortage of money. But the real problem has been an aversion to risk, and so the easier money may help. And lower interest rates make risky borrowers into safe borrowers, so that helps some too.
But the fed does not exist in a vacuum. If people realize that their savings is being confiscated, and put it somewhere else, we’ll be a truly dire straights. But the economy continues to sink, so we’d be in dire straights anyway. May as well try this, because we’re toast if we keep going along the same path: it wasn’t really working anyway.
I’m sure I’ll have a different view in the coming days, but I may as well provide fodder to the people who REALLY know what’s happening. I don’t profess to be one of them.
polip:
excellent analysis. actually, I agree with everything you wrote save one point.
My only disagreement comes with one point you made, that LMRiM also makes. it is this:
So, my feeling is that the Fed has looked at the massive asset deflation and credit destruction, and has decided that this is the time to get in bed with the Chinese, stake the future of the dollar (and vis a vis the Fed’s power) on the safety of long term US Treasury issues, and at the absolute first sign of trouble – they will drain the liquidity out of the system so fast that a return to signficant deflation is a bigger risk than any hyperinflationary event.
I agree with the first half of that statement, especially that the Fed is really gambling with our currency trying to do something that has rarely if ever been successfully achieved. But I disagree that the Fed has the foresight OR ability to drain the liquidity out of the system when it needs to be done. My guess is that they will be late (as always) and then when they start to do it people will squawk because we’ll have a contraction in the economy.
Hence the POOM.
as for timing: I’ve stated for some time that I have no idea when the timing of POOM would occur… too much left up to politics. So I’d guess (major guess pulled out of my bum) that it’s 2-4 years out. could even be longer. but it’s coming. (IMO)
this is why I’ve said that LMRiM and I don’t really disagree as much as it seems externally. I TOTALLY AGREE that the Fed THINKS that it can add liquidity and alter the marketplace and then withdraw when needed…
but then I think to 2003 when it was obvious we were in a major worldwide credit bubble/RE bubble, and Mr. Alan Greenspan talked about how there might be a little froth but definitely no bubble.
and I think of all the speeches they made discussing how one cannot see a bubble… instead one must just mop up after the fact.
maybe they’ve learned this time… but I’m not as optimistic as you. they don’t seem capable of learning.
even if they do learn, there’s the politics of the situation. The Fed is NOT autonomous, cabal status or not. When the Garbage hits the Fan and the Fed starts to try to remove liquidity you’ll see how autonomous they really are.
no… I’m sticking to the fact that they will miss the turnaround point and we’ll get POOM. but there is no doubt we’re in Ka right now, and in Ka for at least medium term.
ex SF-er,
I agree – we really don’t disagree! That 2-4 year horizon for the “POOM” is a number I’ve used before many times on SS! However, as you note, none of us exactly knows the timing. I think I’ve also said that it could be 2 years or it could be 10 from now. Too many issues of politics, and the factors are all too endogenous, to have any real confidence on predictions.
I think the key is the level of total debt in the system. So long as debt is very high relative to GDP (I’ve posited more than 150-200% – we’re at 370% now!), the Fed is going to be careful, like polip says.
Sure, these guys are incompetent – no question. But look at how slowly this has all unfolded. The Fed was draining liquidity up until the Lehman collapse. There is no question in my mind that the Fed wanted this recession, and “caused” it through its policy of tightening money from Februray 2006 on. (Of course, the economy would have imploded on its own, but the Fed was trying to deflate the credit bubble with as little collateral damage as possible in the short term, and if they had let the bubble go on for another year or two, we may have really gotten total collapse.)
If the Fed loses control of long term rates (mortgages, corporates, munis, etc.) at these levels of debt/gdp, the US is going to melt down. That’s Red Pill’s “multi-sigma” event. Right now, they have obviously reached a deal with our Chinese partners in crime and the number is $300B for outright treasury monetization, which is really a pretty small number in view of the credit contraction coming. As the economy continues its controlled crash into the ground, I’m sure these purchases will increase, but until a rise in interest rates is not catastrophic (either private debt has contraced enough and/or the USG has absorbed everything) I suspect the Fed will stay behind the curve.
BTW, even when the “POOM” comes, at least for the early stages, it’s not going to help nominal price levels of SF real estate (because of rising rates). Income real estate at high levels of low-fixed rate leverage should be a nice place to be, though, as the POOM unfolds.
I think Fannie Mae’s steps to pull back on condo financing is a key indicator that something is very different and very sinister at large this time around. Never in my 18 years of watching markets have I seen a period of time where the Fed lowered interest rates and credit actually tightened in the face of it. Fannie, even though it is government owned, is tightening credit by taking this action. What this should say to us is the following: It doesn’t matter if I borrow at zero and lend at 5%, I’m not willing to make a loan in an abandoned building where the developer is probably going bust. The Fed is printing money to stimulate lending, when the fundamental problem is declining asset values. I disagree with Tipster when he says that part of the problem is risk aversion. The real problem is that risk was mispriced for years. Everyone borrowed money to finance purchases of assets at ridiculous valuations that made no economic sense. I think the condo analogy is perfect. Did it really make sense to build a 20 year supply of condos in places like Tampa, Phoenix, and Vegas and try to sell them for $500k, when rentals were easily attainable at a fraction of the cost? It made perfect sense when anyone with a pulse could get approved to buy 17 condos in your project with no money down and no income. Now, when the reality of actual demand is present, we’re left with a bunch of empty buildings (ie too much supply, no demand.) How is lowering interest rates going to change the fact that there are going to be a bunch of bankrupt developers and a bunch of banks that go bust because they lent to them?
We are suffering through a period of deflation as everyone is puking assets. The Fed is trying to reflate through all of the many steps it has taken. It hasn’t worked so far and the jury is still out on what all of the many unintended consequences of its actions will be.
BTW, even when the “POOM” comes, at least for the early stages, it’s not going to help nominal price levels of SF real estate (because of rising rates).
agreed. I think I’ve said this before:
deflationary depression or inflationary depression. both suck.
POOM without aggregate wage increases will kill RE valuations. wage increases in an era of global wage arbitrage is difficult if not impossible.
which is why I foresee protectionist measures in our future. (whether or not economists think they’re a good idea).
the one thing the Fed has going for it right now is that all the major world economies are in competitive devaluation (“beggar thy neighbor”) mode now. If it can be coordinated into a multinational cooperative currency devaluation then things may turn out “ok” (ok used loosely).
we’ve already seen the british decimate the pound, the Euro is starting to devalue, the Yen has been for decades, the Chinese also for decades, we’re in the club too, and so on.
the biggest problem to the multilateral devaluation plan are commodities, especially gold and oil. not sure how that will play out. when I see POOM I may get into RE, but more likely will get into commodities espcially physical.
I thought you might be trading a lot since even I was trading again, and I don’t like to trade. But it was too tempting in end-January
for nonbelievers, I stated as such here
https://socketsite.com/archives/2009/01/actual_san_francisco_foreclosures_down_42_qoq_up_70_yoy.html
disclosure: I now anticipate a major equities collapse again in the short term (1-2 months) and will (not yet) invest accordingly. thus I am not completely unbiased in what I just wrote, but I will have “skin in the game”.
Posted by: ex SF-er at January 28, 2009 1:04 PM
This is an attempt to reflate asset prices with lower interest rate. Presumably, it’s a temporary measure to prevent deflation. For a home buyer, however, lower interest rate is not necessarily a good thing. It’s like buying a long term treasury when the interest rate is low; you may end up losing more than you saved on the interests if you try to sell it in a few years and the interest rate is back to normal. And then there is cash buyers who should stay out till the interest rate goes back up to where it should be.
Are they printing money now?
If they successfully bring down the rate on the 30 year to 4%, this is going to put a lot of money into people’s pockets, which is what this is all designed to do. As pointed out by others, this is a competitive race to devaluate by all the major world currencies, or to put it another way, a coordinated effort to reflate the worlds economy, following the credit bust.
It is sure tempting in this environment to refi at a fixed 15 year rate, but I am going to wait a few weeks and see if rates come down some more. Any predictions where they will land? How cheap will a fixed rate 30 year conforming loan be by summer? Will that be the bottom? If so, this might be the right time to buy some income producing properties in the outer burbs or East Oakland, where prices are down quite a bit already.
LMRiM, where do you get your “370% of GDP” figure from? In the current lending environment, it is hard to imagine that the economies overall debt has increased, though perhaps the GDP has. Most of what has happened is that some of the debt of the “shadow banking” system has shifted to the Feds balance sheet. But the overall amount of debt has stayed constant, or even gone down a bit, as consumers and businesses deleverage.
In a true inflationary environment, I expect wages to go up, especially for people with skills that are in short supply. I am hiring right now, and while I am getting plenty of resumes, the good candidates are all still asking for salaries equal to their last job. If this recession goes on long enough, that might change, but my company still has lots of tech openings. Programmers and DBAs are still especially hard to come by.
In the mean time at the other end of the pipe, defaults on Jumbos are rising and Moody’s is considering cutting $241B of Jumbo MBSs:
http://www.reuters.com/article/bondsNews/idUSN1940364820090319
No wonder they’re turning on the debt spigot as fast as they can. Nobody wants to buy Mortgage debt in a quickly deflating RE market and the buyer of last resort is the USG.
NVD Said” LMRiM, where do you get your “370% of GDP” figure from? In the current lending environment, it is hard to imagine that the economies overall debt has increased
Really? There have been no big write downs beause the government has stepped in to prop the markets up. Meanwhile the government has borrowed more an more money to do this. 370 is probably about right.
And yep, whenever the Fed buys treasuries straight from the DOT it is effectively printing money out of nowhere.
NVJ,
I just back of the envelope extrapolated the 370% current debt/gdp ratio from the latest data I’ve seen – 357% at Q2 2008. You can see it here:
http://market-ticker.denninger.net/archives/698-Quantitative-Easing-FAIL.html
Given the slight contraction in GDP, and the outsize deficits (at the Federal level) that have been run and committed to since Q2 2008, that figure is almost certainly even higher than 370% now! I think the USG is adding an additional 10-15% debt (expressed as percentage of GDP) this year alone! There has been no significant deleveraging of the private and household sector debt – at least nothing that is changing this trajectory. It could be 360% or it could be 400% – I think the exact level is pretty immaterial at this point for the outlook, as none of these levels would be sustainable 😉
About quantitative easing and the relationship to “ka-POOM”, Mish had a worthwhile piece a few last month that’s really worth reading IMO.
http://globaleconomicanalysis.blogspot.com/2009/02/fiat-world-mathematical-model.html
In a true inflationary environment, I expect wages to go up
this really depends on what happens. we had modetately high inflation from 2000 to 2007 and yet wages did not keep up due to global wage arbitrage (i.e. offshoring jobs to cheaper COL areas) and also tech advances.
Remember, devaluing doesn’t help us because countries peg to our dollar. So when we drop our dollar, their currency drops too (such as the chinese Yuan/Remnimbi). as our currency drops then raw materials/etc become more expensive in nominal terms… thus more pressure to offshore or use tech. which might DROP salaries.
this is the “problem” with globalization. the US makes “too much” and the ROW makes “too little”.
in order to get significant wage increases we need either
-to get China et al to drop their pegs
OR
-get China et al to pay their employees more
OR
-enact protectionist measures (trade war)
(or a combo of the three)
but increased wages STILL might not increase housing prices IF the other necessities cost more.
For instance, if we all make 10% more, but bread costs $6 and gas $4/gallon then more of our incomes go there instead of to housing.
my guess is that we’ll see price appreciation in other commodities well before we see it in RE again. (which is why I have been and continue to be long oil and gold, but am still way upside down on the oil trade).
If you’re not overloaded on AIG yet, here’s a good article:
http://www.slate.com/id/2214107/
Of course, the truly bad guys continue to get away. Many are mentioned in the article (except unfortunately the #1 culprit Hank Paulson). Great line near the end about how the AIG bailout is the greatest transfer of American taxpayer wealth to Europe since the Marshall Plan.
Yes, I love the “outrage” over the AIG bonuses, which are less than 1/10 of 1% of the cash handed to the bad guys through just this one company — no more significant than a rounding error. Reminds me of the two minute hate directed at Goldstein in 1984. Clever diversion!
But I disagree that the Fed has the foresight OR ability to drain the liquidity out of the system when it needs to be done.
Just to add a bit more… The early “sterilized” Fed programs (TAF, TSLF) moved to 84 day windows, so they can be shutdown in a (relatively) quick and orderly fashion. TAF is currently around $.5 trillion. However, if the Fed is indeed printing, the assets (MBS, ABS, etc) they bring onto their balance sheet may be significantly harder to force back into the system when the time comes to drain the swamp awash in cheap money (unless significantly discounted).
Not to be totally naive, but where does the “printed” electronic money show up on the Fed’s balance sheet. The best I can come up with is “Reserve balances with Federal Reserve Banks”, with “Currency in circulation” being a weak second choice. If it is indeed “Reserve balances with Federal Reserve Banks” a light bulb just went off… I guess this is where banks park some of their actual deposits with the Fed (now earning interest) and where electronic money just “appears”. Is there a way to tell the difference, or do I have to go to a different Statistical Release (like the ones LMRiM favors from the St. Louis Fed)?
Real median income was flat from 2000-2007, but it went up in nominal dollars.
http://www.epi.org/publications/entry/webfeatures_econindicators_income_20080826/
There are only two ways out of the debt overhang: outright repudiation or devaluation via inflation. As LMIRiM points out, it is unlikely that we are just going to either pay back or grow our way out of a debt/GDP ratio of 340%. And while I dispute his claim that the ratio has increased by a bunch, I don’t think it has decreased by any either.
Which one do you think is going to happen?
Repudiation, mostly, NVJ. To devalue through sudden and high inflation cuts off the supply of funds at the source of lending, and all the phony valuation (which was built on the idea that the debt would be ever-increasing) collapses anyway, taking along with it the whole debt/wealth structure.
Over time, after the USG has eaten most of the debt and some has been repaid/defaulted, then devaluation of the currency will be the way out – we don’t disagree about that. Between now and then, though, most people who have structured their financial future on the idea of ever rising asset values will wash out financially. No big deal – it’s pretty clear to see what’s coming and anyone who gets caught wrong footed will have just been foolish.
Let’s chack back on where debt/gdp is. I haven’t seen the latest chart (if available) but all this keys off the Fed’s Z.1 report i’m pretty sure, so it’s probably derivable or around on the net somehwhere for 3Q and 4Q 2008. I bet a burrito it’s higher than the 357% shown at end Q2 2008 😉
About rising nominal income 2000-2007, take a look at just how much debt the US eCONomy required to generate that zero (in real terms) income growth! If debt is not growing like that now, think of where income must be going 🙁
It’s really not a partisan thing. Take a look at the chart and note that the debt growth has been buiding steadily since the late 70s/early 80s, and it went parabolic in the mid-90s. It’s the Fed and the stupid USG/Fed policy of trying to smooth business cycles that has enabled this. Deus ex machina Fed shenanigans in 1987, 1991-93, 1998, 2002-05, and mid-2007-present in particular haven’t helped matters 🙂
in Q409 it was at 370%. graph here:
http://www.economagic.com/em-cgi/data.exe/var/togdp-totalcreditdebt
notgreat — awesome link, thanks! Yikes, you can argue (casually) that contraction hasn’t even started yet!
polip/LMRIM:
on your theory that the Chinese will actually be pleased by the Fed’s move to buy up Treasuries, what do you make of this from Reuters:
http://www.reuters.com/article/usDollarRpt/idUSLJ93633020090319
China backs talks on dollar as reserve -Russian source
also, i gotta say that xsfr brings up a strong point when he says the Fed isn’t as independent from the USG as you seem to think. in fact, there’s a quote by Arthur Burns, i think, an erstwhile Fed chair, to the effect of “I had to give in to Nixon & pump in money (to get him re-elected) or the Fed’s independence would have been compromised.” hahaha
a busy day for me – no time to read all of these comments until now (that makes for a very good day, actually, in my books!)
xsfr – (and thanks LMRIM for the link to Mish – missed it myself) – I’m quoting from the link from LMRiM to Mish:
“The credit bubble that just popped exceeded that preceding the great depression, not just in the US but worldwide. Thus, it is unrealistic to expect the deflationary bust to be anything other than the biggest bust in history. Those looking for hyperinflation or even strong inflation in light of the above, are simply looking at the wrong model.
At some point the market value of credit will start expanding again, but that is likely further down the road, and weaker in scope than most think.”
So Mish writes, and thinks, much more clearly than me – 🙂
If there is one thing that I do know, it is that the Fed has been trained, weaponized, and indoctrinated for the fight against inflation. If there is one war that I would trust the Fed to fight, it is the war on inflation. There are many reasons why this is true, but perhaps the simplest is something that LMRiM in his slight conspiracy theoryish way has alluded to numerous times – the Fed (and the US Govt – the partner in crime whose strings they pull – and not the other way around as many would think and still believe!) realizes its power and control is based on the preventing the sort of runaway inflationary even that could completely destabilize their power base. Deflation is fine, because it actually concentrates power in the hands of the bankers (the surviving ones at least) and government. But severe inflation – watch out.
So the Fed has learned the tricks needed to extinguish inflation, and if a deflationary crash is necessary – well then so be it! Up until the financial system almost completely imploded, the Fed was working overtime to drain liquidity and fight the inflationary bias it saw coming down the pipeline. They succeeded. So long as they continue to hold the cards that they hold, they will always succeed. This does not make them smart – it just makes them well trained. Think of it as a Pavlovian response – one that any well trained US Central Banker will respond to with as draconian means as are necessary.
So we will continue to disagree, Xsfr, because while I agree that they (Fed) will be late, I disagree that they will not succeed. The Poom may come, but if and when it arrives, it will barely get the capital P out before the drain is opened yet again and the liquidity is sucked right down into the sewage pipes. The government or populace may squawk, but they will not be heard until the inflationary tide is stemmed – at least enough to prevent the destabilization that the Fed fears.
I will admit that I have hedged my bets a bit 🙂 I recently put 5% of my long term net worth in commodity futures, and I have always held a significant portion of my net worth in US inflation linked bonds (TIPS and I Bonds).
But, if you ask me if I am worried about a US dollar devaluation of significant severity – certainly not from this popping bubble. This one is a currency race to the bottom, and right now, the US Fed still holds all of the cards. Better to be seen doing something now (even if it is way too little – QE of a trillion is still a drop in the bucket – that string won’t move no matter how hard you push). The reality is that the US govt debt/GDP ratio is still around 40%, and while it will rise, it won’t rise nearly as fast or as high as the other ‘1st world’ currencies (Iceland blew up at 300% govt debt/gdp). So a ‘competitive devaluation’ event seems very unlikely – barring a massive ‘decoupling’ of economies in the future – and that seems to be a long way away (ah yes, decoupling – that myth of yesteryear).
Off topic – but check out this article if you haven’t already:
http://www.rollingstone.com/politics/story/26793903/the_big_takeover
Paulson, Geithner, Summers, Rubin, Bernanke, Phil Gramm, Joe Cassano, Blankfein, Fuld, Thane, Greenspan, Liddy, Cayne, Mozilo, Dodd, Frank, Raines – there are more psychopaths in this saga than in Hitler’s Third Reich.
The rolling stone article is funny because it keeps mentioning “meth addics”, and saying “f*ck” and “sh*t” — you know, playing to it’s jaded, aging hipster demo.
The pope on a meth binge! Can they *SAY* that? How edgy!! 🙂