Monday, May 11, 2009

Nothing but the Numbers

I got a call tonight from the Mad Scientist.  I wished he would have called somebody else.

You see, we have both been watching the debacle in the U.S. Treasury market and the Obama Budget and thinking the same thing:

"There is not enough money in the world to fund the deficit".

Only, the Mad Scientist ("MS") had to go and quantify the issue.  My word, but I will bet he is a hell of a fun first date.  I keep meaning to ask his wife.

Anyway, as MS wanted to ruin my night - which I was doing quite well on my own - I made the mistake of answering the phone:

"Hello?"

"Do you know how much the interest on the U.S. Debt was in 2008?"

"Oh, hey dude.  Wassup?"

"$412 Billion".

"How's the weather up in Calgary?  Been raining like a bitch here."

"The OMB just upped the 2009 budget deficit to $1.84 TRILLION this morning."

"Hold on man, the baby just puked on me..."

"If the 10 year + rates should hit 6%, and that would only be a first stop, you are talking about coming up on $1 TRILLION just for interest, and that is before we take into consideration declining revenues and the bailouts of California, New York, Florida, Mass., etc..."

"Oh, sh*t, these diapers don't fit... Honey?!"

"Are you listening to me?"

"I am trying to ignore you."

"Alright, smart ass, if the market freaks out about a $14 Billion funding, what is going to happen next September when the U.S. is going to need $31 Billion each and every DAY?"

"Is that a rhetorical question?"

"There isn't enough money in the freaking world to fund the U.S. Treasury market.  Do you know what that means?!"

Yes, MS, I do know what it means.

Stay tuned.  This might be slower than last year's credit crisis, but it will be a whole lot bigger.

Mentatt (at) yahoo (d0t) com

24 comments:

Donal Lang said...

....and all this just when the Chinese have decided they don't want to buy all those dollars - or even hold on to the ones they already have!
Doesn't bode well for the Rest of the World either; everyone's trying to borrow for their deficits.

So with a huge shortage of real cash, when will the price of borrowing that last bit of cash (interests rates) skyrocket?

oOOo said...

Interesting. What exactly does that mean? Default? or will they try to instigate hyperinflation? Or something else?

Donal Lang said...

I don't think anyone needs to TRY to instigate hyperinflation.The US and UK governments are buying their own debts, making fiat money worthless. Inflation is the devaluation of money.

And if China isn't buying, who else is there? I'm not sure what happens if governments can't sell their debt. What is the mechanism for a big country to go bankrupt?

Anonymous said...

It means KABOOOOOMMMM!

Anonymous said...

It means bye-bye to the dollar as global reserve currency.

It means bye-bye petrodollar.

It means dwindling shipments of high tech imports and all the other sweet deals we have had since WW2.

It means that the consumption and service based economy model is history. The power is migrating to the economies that produce real stuff.

It means bye-bye dollars and hello gold-backed Asian and Arabian reserve currencies.

Of course, we have the military. We can threaten countries. Or we could operate a protection racket to earn some oil. Oh..I forgot that we are already doing that.

A Quaker in a Strange Land said...

oOOo:

There won't be a default, per se.

The Fed will most likely be required to monetize the debt in a one time currency devaluation. The MS was thinking on a 50% to 75% devaluation... Always the life of the party...

Donal Lang said...

That would have interesting consequences. For example, 50% $ devaluation means doubling oil price which, given the USA uses 25% of the World's oil, would decimate demand for oil.....

So would oil price then fall?('cos oil is VERY inelastic). Or just fall in non-dollar terms?

But oil makes food, so food would rocket in price, and there'd be massive worldwide shortages.

I think my head just exploded!

The Mad Scientist said...

Hey..I do not remember it like that!
The way I remember it was that you told me you were completely lost without my insight and I MADE your day Dirty Harry.

bureaucrat said...

On the other hand ... and there is always another hand ;) ... 10-year yields hitting 6%+ would be totally fabulous! ...

Because of my canaries (in the coal mine, one of whom is Jeffers), I moved my entire TSP balance -- about a quarter million $ (TSP = Federal Govt's 401k) to the G Fund, which is kinda like a "special money market fund." This fund doesn't put my money into marketable securities (so there is no bond value risk of loss), but does increment the value of the fund based on the long-term Treasury yields, of which the 10-year note is one. It's kind of a phony investment pool (I don't actually own anything, like actual bonds), but if yields skyrocket (and I'm hoping they do), I could be in fat city in 2024. :) ....

Now, will the Fed govt. give me my principal back, someday, when I'm old? Will it be worth anything? ... hmmmm ...

Donal Lang said...

Bureacrat; seems to me that a 6%+ return on something devaluing 50% isn't such a great deal.

Have you considered investing in a more stable currency? Say Cuban pesos, or something? ;-)

Anonymous said...

Hey Everybody,

The dollar is ALREADY devalued! It just hasn't shown up in the spending power that WE see yet. Think about it. The price of all those underlying assets that give the dollar value (The houses and shopping centers and business parks) and that secured all that debt has fallen 50%. No matter how you slice it, the VALUE of the underlying assets is GONE. POOF! The whole financial system is insolvent. Now amount of transference of debt from the banks' balance sheets to the US treasury's balance sheet will change that. Debt is greater than Equity. In the aggregate, there is or soon will be no cash.

So, there is a choice, let the debt go bad, or change the value of the dollar to match the value of the underlying assets. Either way, the deed is already done. Now, it's all a about how the loss is distributed. Can we call it redistribution of loss?

Regards,

Coal Guy

Anonymous said...

The British pound was devalued significantly a few months ago so seeing the US dollar dropping isn't hard to believe. If this is going to happen, then holding cash is a big risk. Would you recommend buying solid ADR stocks such as Chinese companies to have the protection of the Yuan or should we load up on commodities?
~Dennes

Anonymous said...

How does a government go about making a one-time 50% devaluation?

Regards,

Coal Guy

A Quaker in a Strange Land said...

M.S.:

I AM lost without your insight...

still, you really know how to through a bummer in the mix...

Next time I see you I am going to strip you of your pocket protector, calculator, and f***king spread sheet.

Anonymous said...

Just declare it, I think.

The problem is that when you do a 50% devaluation, you are no longer the global reserve currency.

This means that the US no longer can dictate interest rates on our govt debt. It will be determined by others outside of our control. And nobody lends to you for a long long time. But I think the Feds have made a number of guarantees to the Chinese about the safety of their dollar holdings.

It also means a very POed bunch of Chinese. These folks have been earning $0.25/hour by making all kinds of essential products that the US cannot function without re high tech products and medical supplies etc. To make a trillion bucks worth of these people's savings go POOF will have serious repercussions - they do not take such thievery lightly.

Anonymous said...

I think there have been promises to the banks and other bond holders too. That's why there has been such an effort to protect them. This has been coming for over three decades, and the promises are probably not that new and have been reitterated many times.

However, the a big slice of the value behind those bonds is just plain gone. The question to bond holders is will you take pennies on the dollars in today's dollars or full payment in tomorrow's dollars that are worth pennies on today's dollars? Not so good either way.

Still, I don't think that the government can just declare all dollars to be worth 50c. They have to do something equivalent to a stock split and actually double the number of dollars. Something like decalring that all demand deposit and savings accounts now have 2X the dollars in them and filling them from the Fed. But I have no idea what the real mechanism might be.

Regards,

Coal Guy

bureaucrat said...

You don't get to invest Federal retirement money in Cuban anything. ;) Our choices are limited.

Anonymous said...

What it looks like is a government black hole has fully formed over the Potomac. So far it has been relatively slowly sucking the money out of the pockets of US taxpayers, Chinese savers and Arab Oil Sheiks. Now they speed of hoovering will increase but since some of the foreigners are now investing their money in real things like metals and minerals and food. Additional money will have to be printed up to throw into the black hole. This is not likely to be inflationary in the short term. In fact there will be a lack of money experienced by everyone in the real economy. Business investment will be displaced by the governments insatiable need for cash and its ability to pay any interest and at a perceived high level of safety that no business can match. Higher interest rates will destroy what is left of the housing market, CRE, services, manufacturing, and increased debt creation. Although some of the money will go into gold and silver it is unlikely that they will do spectacularly well in the short run. There are likely to be too many sellers of these assets just to put food on the table. Also the buyers will not be looking to load up on expensive gold just when they lose their money in other assets. The stock market is likewise going to go to 4000k on the Dow or even lower. Once the economy does hit a complete reset then and only then I would expect a hyperinflation situation like Zimbabwe but not until then.

I still think that in the long run, only gold will save your but from poverty. Just not yet. IMHO.

Best regards,
Chuck H.

A Quaker in a Strange Land said...

I think it not as complicated as some of you make it out.

A house = a house. 1 potato has the same utility as one potato.

Has the U.S., or the West, really lost any value in its housing? Not one brick or 2 x 4 worth. Your house still has the same number of shingles, bricks, and plywood. Nw, as a trading vehicle your house has just experienced a 42 car pile up....

The series of promisory notes and debts, which are owned by the RICH, are about to get devalued. Those folks in debt for a house or a car are about to get a windfall of sorts. Inflation BENEFITS debtors at the expense of creditors. It also benefits the establishment holders of real assets - farms, precious metals, fisheries, livestock, etc...

These things do not happen smoothly or easily, and the unintended consequences and unconsidered outcomes will rule.

Some folks will figure them out before hand, and benefit. Others will not.

We are working on this...

Donal Lang said...

Greg, I agree there are base values to 'things' and people still need food, houses, basic education, healthcare; all those are the real economy and will continue.

Trouble comes when an economy is 60% retail (of stuff made abroad) and 35% financial services (mostly debt, and gambling by another name). The 5% that's left isn't going to meet many people's expectations into the future!

We have too many people whose jobs are between the making of something useful, and the person using it.

So much for the much vaunted 'post-industrial' society!

A Quaker in a Strange Land said...

Donal:

I am with you there, bro.

Stay with me, over the next few days we will flesh this out.

Hope all is well

Anonymous said...

Again, just how does a government go about making a one-time currency devaluation? Who gets the additional dollars that appear over night? Devalued against what? How does one prepare for such an occurrence? Who wins and who loses?

As far as the value goes, yes a house is worth exactly one house, unless everyone believes that the house will be worth more in dollar terms later. Then the house is worth a house plus its expected future increases in dollar value. In that case, the logical move is to buy the biggest damn house you can afford at a particular monthly payment and finance as much as you can. Now, the expected future gain part of the value of a house has been eliminated, but the debt against it has not.

That's what got us into this mess. This bubble grew out of the inflation of the late '60s and '70's. The bubble was hidden by cheap imports and a ratcheting down of interest rates from 17% to 4% over four decades. Creating inflation will set us up for the next bubble. And, so it goes.

The Mad Scientist said...

See Russia and Mexico for history of one time devaluations. Very complicated in the case of US due to reserve currency status, not to mention the political pressure in the Euro-zone against a strong euro.

If it does happen expect...well I think I will put a whole post on that

Donal Lang said...

I don't see how the US can take the decision to devalue the dollar; there'd be uproar, not least from China. Other currencies would collapse too where there reserves were held in dollars.

I think at best it would be a managed decline in the markets, at worst a crisis collapse when no-one wanted to buy US bonds. It seems to me it could start with US municipal bonds, and the lack of confidence could spread to government issues.