Peter Schiff was Right.

When they get desperate enough, they'll probably try something like that... at least to the 50% of us who don't pay federal income tax.... "wealth redistribution", don't you know.

 

Governments will probably do something similar in order to help local governments, public institutions and private corporations alleviate their debt burden. This makes sense and shouldn't be opposed based on the supposedly moral principals that I often hear. Ultimately this is just patch work though, it can't counter a deflationary trend. If it's done efficiently it will only shorten the time it takes to play out.

 

Supposedly moral pricinpals of people earning money, saving it only to have it wiped out by government?

??????

 

It's the people that have saved and have been prudent with personal debt that are pulling the long end. They're not victims in any way, in fact they will be amongst the few who willl be able to maintain the lifestyle that they're used to during this recession.

The argument is moral as it tells us that debasing the currency is morally wrong. I agree on that when it comes to forcefully taking away people's savings like what happend in Argentina. That is wrong. The moral argument is based on a non-moral premise however, which is that we're going to have high inflation. This is why I refer to it as only a supposedly moral argument. I reject the premise of high inflation and so has the market. The reason is that inflation decreases the ability to service debts thus increasing the debt burden. This inturn causes prices to drop again. We've seen this exact same process happening in Japan, which is the major precedent to current economic events.

 

They are trying to dump USD reserves? Really? Care to provide a link to substantiate this rumour?

 

Personally, I think you are spot on. If you've been listening to the Chinese rhetoric lately, there has been more and more talk about increased Chinese domestic consumption. It may take several years, but the Chinese (and to a lesser extent India) will absolutely increase domestic consumption while the USA decreases consumption and increases exports via low value USD. I expect this trend to continue slowly for many years. USA can't be expected to drive worldwide consumption forever.

 

peter schiff, jim rogers, lenny dykstra, robin prechter of all these gurus i've learned nothing.

the only guru i learned something of is karl denniger, at least he has scoops.
Especially interesting was the fact that the FED withdrew liquidity from the markets back in september 2008, when they were supposed to add liquidity to keep the markets from collapsing.

 

•The economy will NOT recover in 2009: I'll take this one, although some would argue I only deserve half (I said 8% unemployment U3, we actually got 10%.)
•Deflation, not inflation, will become evident well beyond housing. Miss. Valid if you look at energy, but the "well beyond" includes a meaningful subset of the various things people buy. Nope.
•Housing prices will continue to decline: Direct hit.
•The Fed's attempt to "pump liquidity" will be shown to be an abject failure: 1/2 a point. Certainly if you look at stock prices, it's a miss. If you look at whether credit creation was stabilized and increased, its a horrifying score. We did get the instability in the dollar, but no bond market crash. I didn't specify how, so I can't take credit for that which I didn't predict.
•GDP will post a 12-month negative number, Depression print. Clean miss.
•The stock market has not bottomed. 1/2 credit. It had not bottomed but my SPX 500 @ 500 call was not achieved. The 50% swing, however, got damn close. Lots of money to be made if you're quick and good, but an absolute minefield if you're a long-term investor - spot on.
•Precious metals will not be a safe haven: Clean miss. Gold and silver have both performed well.
•The Dollar will not collapse. Correct. It hasn't. It ended the year of 2008 at 82, it now trades at 78, down 5% or so.
•The pound or Euro - and perhaps both - will be where the FX dislocation initiates if it occurs. Early, which means wrong. Clean miss although the last month sure looks bad for the Euro.
•The US Consumer goes from negative savings to positive: Direct hit.
•Commercial Real Estate will effectively collapse: Direct hit although the effect has been well-hidden. Several Tickers have been written on this, including major banks walking off 50% underwater properties. I can't take full credit as the REIT explosion I expected didn't happen, so I only get half a point.
•Along with the above, expect 10% of retail stores to close. I don't have accurate numbers on this but it sure looks that way.
•Several states will get in serious financial trouble and the default of one or more may occur. Point. While the default didn't happen that wasn't a condition of the test, and the list of states in trouble is long and getting longer.
•Mortgages are not done: No kidding. Default/delinquency/foreclosure rates continue to skyrocket. Point.
•If you want to refinance you may get one brief shot with long rates around 4%. You got two, but I don't lose for multiple points of impact. Both of those were good opportunities IF your property isn't severely underwater (in which case there is no such thing as a good deal.)
•Those who have said that the corporate bond market is being "unreasonable" will start to look like the jackasses that they are. Maybe. Actual defaults did in fact skyrocket but new issues are coming to market and subscribing - even for crap-grade paper. I can't take a point on this one as my expectation when I wrote it was that issue would go in the toilet. Miss.
•The calls for "more lending" will go exactly nowhere. Bingo.
•GM and Chrysler will go bankrupt. Bingo.
•Protectionism and currency manipulation: Miss, at least in the way I described it.
•Commodities will appear to be headed for a new bull market (falsely): Hit. Soy, Wheat, etc - all looked to be going parabolic in June. Now, not so much. "Beans in the teens" eh? NOT!
•Sovereign debt defaults will number at least three: Clean miss. Greece and a couple of others are on track but didn't happen this year. No points for "on track."
•China will have its first large-scale rumbling of civil unrest: Clean miss. I have to admire how they prevented it - more capacity building into an overcapacity world. That won't end well but for now they've stove it off.
•Foreign uptake of Treasuries will be choked off - by necessity: Hit. Almost missed that one, but China has stopped buying as the trade imbalance disappeared. They have, as expected, turned resources inward.
•The City will get it worse than we are: Since the test was relative I get credit for it; they're doing things like imposing 90% taxes on banker bonuses.
•Things will get "revolting" in nations: Nope. Riots and such in Greece don't count - "revolting" meant what it said.
I count 14 "hits" (including half-points) out of 25, for a score of 56%. That's not so good, especially compared to last year.


http://market-ticker.org/archives/1793-Where-We-Are,-Where-Were-Heading-2010.html

 

How can debt be brought back to serviceable levels?

Our economy is 75% dependent on spending (including Government)

Take a look at the budget deficit - 9% of GDP. That is, Government borrowing accounts for 9% of GDP, every year.

That's a ~9% GDP contraction when America decides to just stop the bleeding on the debt.

Reduction isn't even on the radar !

In order to begin debt reduction, we'd have to allocate even more tax revenue to extinguish maturing treasuries. Say another 400 Billion a year. The Federal budget takes a massive hit. Considering deflationary conditions erode wages > taxable income, revenues could decline another 20-30%. Industrialized countries (like China) are in the best position to weather the storm because they've got low indebtedness and a large manufacturing base (high velocity). Doesn't mean China isn't a bubble and won't pop if and when America does.

My point is that bureaucrats and politicians will avoid deflation like the plague. The repercussions at this level of indebtedness is a severe Depression. Unemployment > 30%+. And that's if we do it your way, and destroy credit. Unfortunately, I don't see it happening. No politician has the will, balls or foresight to throw America to the wolves. Although it needs to be done. Because what happens next is Bernacke just prints and gifts Dollars to the Treasury, velocity tanks, and commodities go to the moon. Even if we take the free world down with us, which is totally possibly seeing as Western economies are just as indebted as we are, currencies might stay within relative bands, but commodities will not. That's how we get an inflationary Depression.

 

This is not a redux of Japan.

Japan had trade deficits in America and Europe to prop her up.

When America goes down with Europe, who will run trade deficits to prop up our economies? China??!

I made this point earlier in the thread.

If we get a deflation, it will be far, far worse than Japan.

Japan was able to maintain employment and wage-levels because America and Europe bought her exports.

When America go does with Europe, there's no economic counterweight to buy our cheap shit!

How do we avert a Depression while reducing debt? Remember, Government deficit borrowing accounts for 9% of GDP. We stop the bleed on the national debt, and get a ~9% GDP contraction overnight. That's just the start.