The nationâs debt clock is ticking faster than ever & Wall Street is getting worried

Drock409 · May 3, 2009

so all these people with the PLETHORA of new jobs will be able to afford food and shelter with inflation rising causing even more uncertainty for businesses to plan their future???

if inflation kicks in..FOOD RIOTS...not too far behind

I personally think 2-3 yrs minimum before inflation rears

TM1982 · May 3, 2009

So I assume all of you will put your money where your mouth is and convert all your savings to a foreign currency.

RiceRocket · May 3, 2009

Quote from TM1982:

So I assume all of you will put your money where your mouth is and convert all your savings to a foreign currency.
More...

Or just trade the hell out of the dollar bear market. There are so many trades you can put on in a falling dollar environment. Inflation is great for speculators. You get huge bubbles to capitalize on. With a little leverage, you can offset inflation with your gains.

TM1982 · May 4, 2009

Quote from RiceRocket:

Or just trade the hell out of the dollar bear market. There are so many trades you can put on in a falling dollar environment. Inflation is great for speculators. You get huge bubbles to capitalize on. With a little leverage, you can offset inflation with your gains.
More...

Rice, what's your trade? Long TBT? Is that the best way to play it? Start scaling in..

Mvic · May 4, 2009

Quote from Bob111:

i'm kind of agree too, but.....then all homeowners will be the kings of the hill. whole entire country did borrow and refinance @ super low rates and will be able to repay for their mcmansions with one week of their salary of let say year 2012,because businesses have to adjust employees salary according to inflation rate..and payment on 1M mortgage not going to change..
do you really believe that US gov and banks will be happy about it? they already in deep sh*t..
More...

By then the banks and the fed will own most of the housing stock through foreclosure, they will be quite happy

ByLoSellHi · May 4, 2009

On a serious note, inflation is a tough mofo.

Many 'brilliant' people won and lost their fortunes playing currency markets, such as Soros.

Gold, for all the hyperbole, well, that hasn't been such a great long term investment, despite sprints and phases from time to time.

Mvic · May 4, 2009

Quote from ByLoSellHi:

http://www.nytimes.com/2009/05/04/business/economy/04debt.html?_r=1&hpw

Worries Rise on the Size of U.S. Debt

By GRAHAM BOWLEY and JACK HEALY
Published: May 3, 2009

The nationâs debt clock is ticking faster than ever â and Wall Street is getting worried.

As the Obama administration racks up an unprecedented spending bill for bank bailouts, Detroit rescues, health care overhauls and stimulus plans, the bond market is starting to push up the cost of trillions of dollars in borrowing for the government.

Last week, the yield on 10-year Treasury notes rose to its highest level since November, briefly touching 3.17 percent, a sign that investors are demanding larger returns on the masses of United States debt being issued to finance an economic recovery.

While that is still low by historical standards â it averaged about 5.7 percent in the late 1990s, as deficits turned to surpluses under President Bill Clinton â investors are starting to wonder whether the United States is headed for a new era of rising market interest rates as the government borrows, borrows and borrows some more.

Already, in the first six months of this fiscal year, the federal deficit is running at $956.8 billion, or nearly one seventh of gross domestic product â levels not seen since World War II, according to Wrightson ICAP, a research firm.

Debt held by the public is projected by the Congressional Budget Office to rise from 41 percent of gross domestic product in 2008 to 51 percent in 2009 and to a peak of around 54 percent in 2011 before declining again in the following years. For all of 2009, the administration probably needs to borrow about $2 trillion.

The rising tab has prompted warnings from the Treasury that the Congressionally mandated debt ceiling of $12.1 trillion will most likely be breached in the second half of this year.

Last week, the Treasury Borrowing Advisory Committee, a group of industry officials that advises the Treasury on its financing needs, warned about the consequences of higher deficits at a time when tax revenues were âcollapsingâ by 14 percent in the first half of the fiscal year.

âGiven the outlook for the economy, the cost of restoring a smoothly functioning financial system and the pending entitlement obligations to retiring baby boomers,â a report from the committee said, âthe fiscal outlook is one of rapidly increasing debt in the years ahead.â

While the real long-term interest rate will not rise immediately, the committee concluded, âsuch a fiscal path could force real rates notably higher at some point in the future.â

In some ways, ballooning deficits should not matter. Deficits are a useful way for governments to use public spending to stimulate the economy when private demand is weak. This works as long as a country closes its deficit and pays back its borrowings after its economy starts to recover.

The trouble is that government borrowing risks crowding out private investment, driving up interest rates and potentially slowing a recovery still trying to take hold. That is why the Federal Reserve announced an extraordinary policy this year to buy back existing long-term debt â $300 billion over six months â to drive down yields. The strategy worked for a while, but now the impact of that decision appears to be wearing off as long-term interest rates tick up again.

Then there is the concern that the interest the government must pay on its debt obligations may become unsustainable or weigh on future generations. The Congressional Budget Office expects interest payments to more than quadruple in the next decade as Washington borrows and spends, to $806 billion by 2019 from $172 billion next year.

âYouâre just paying more and more interest and having to borrow more and more money to pay the interest,â said Charles S. Konigsberg, chief budget counsel for the Concord Coalition, which advocates lower deficits. âIt diverts a tremendous amount of resources, of taxpayer dollars.â

Of course, no one is suggesting the United States will have problems paying the interest on its debt. On Wednesday, even as it announced its huge financing needs for the latest quarter, the Treasury said financial markets could accommodate the flood of new bonds. âWe feel confident that we can address these large borrowing needs,â said Karthik Ramanathan, the Treasuryâs acting assistant secretary for financial markets.

One worry, however, is that there are fewer eager lenders to buy all that American debt. Most of the world is in recession, and other nations have rising borrowing needs as well. As other nationsâ surpluses turn to deficits, America will face competition in global financial markets for its borrowing needs. For the moment, the United States is actually benefiting from a flight to quality into Treasuries brought on by the global financial crisis, which helped reduce rates to record lows this winter. But the influx will not continue forever.

China has lent immense sums to the United States â about two-thirds of its central bankâs $1.95 trillion in foreign reserves is believed to be in United States securities â but it has begun to voice concerns about Americaâs financial health.

To calm nerves and fill the deficit hole, the government is getting creative. The Treasury is ramping up its auction calendar, holding more frequent sales of government debt and selling the debt in expanded amounts. It is now holding sales of its 30-year bond each month, up from four times annually.

It is also resuscitating previously discontinued bonds, such as the seven-year note and the three-year note, to try to mop up any available money all along the yield curve. There is even talk of issuing billions of dollars of a new 50-year bond, though the idea has not won official approval.

On a second front, the Treasury and the Federal Reserve are trying to bolster the mechanics of the market â to make sure every auction goes smoothly. With such enormous sums involved, every extra basis point on the interest rate the government pays could mean extra billions of dollars for the taxpayer. Earlier this year, when demand was hesitant at a Treasury auction and when a British bond auction went poorly, investors grew nervous that the government might struggle to sell its mountain of debt.

To avoid such an outcome and to keep borrowing costs low, the government is trying to expand the group of firms that bid at Treasury auctions. After the demise of such names as Lehman Brothers, the number of these firms, called primary dealers, has shrunk to 16, the smallest since this elite club was formed decades ago. Now the government is in discussions with smaller firms like Nomura and MF Global to persuade them to join.
More...

I think anyone who is paying attention knows this is coming, probably sooner than later. The real question is when to get long based on the hyperinflation scenario. I have been a big bull on commodities, mostly the grains and metals (not gold) but recently sold them all because if we are going to re test the lows and potentially make news ones this year or next it is still too early to be thinking about the inflation scenario. So do you risk buying in here things like KOL, DBA, DXO, JJG, UNG, or the futures or do you wait for a better entry when the bear reasserts itself?

Podimer · May 4, 2009

as the writers had used CBO projections to corroborate their argument, checked out some other CBO projections and surprisingly (at least to me), they have the CPI peaking at 1.9% in 2016 and hanging out there for the next few years.

at least they're optimistic.

greddy · May 4, 2009

Not to worry.

The new currency, "Amero" will come to the rescue.

Why not just confiscate gold at the same time. The
governmnent can do whatever they want.

Thalamus09 · May 4, 2009

Real-estate will continue to plummet for many years with too few buyers and fewer people qualifying for ever harder to get loans. Money = Debt and the banks aren't giving it out. Sell everything and get out of debt.

Quote from RiceRocket:

Inflation is going to be so bad in a year or two, people will forget about the housing collapse. Get ready for 1,000,000 for a 2,500 sqft house. The 100 dollar bill will become the value of the 10. Movie rentals, 45.00. Gas prices, 25.00 per gallon instead of 2.50.

Maybe they will just do a one time massive devaluation. 1 trillion is the new billion. 1 billion is the new million. It happened already. In the 70's you could buy a house for 25-50,000.
More...

The nationâs debt clock is ticking faster than ever & Wall Street is getting worried

The nationâs debt clock is ticking faster than ever & Wall Street is getting worried