A Nightmare Before Christmas

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A Nightmare Before Christmas


Like many pragmatic economists I have always warned that rapid expansions of government debt would result in inflation and higher interest rates. The explanation was always simple: rising supply of government debt inflates the money supply and weakens the government’s ability to service its debt through legitimate means.

But In recent months, government has flooded the market with hundreds of new Treasury obligations and telegraphed its intention to increase the deluge even more. In response, both bond prices and the dollar have risen. This benign reaction has led many to the happy conclusion that the doom and gloomers are wrong and that bailouts and economic “stimuli” can be financed with deficit spending without any adverse consequences on interest rates or consumer prices. Recent action in the foreign exchange markets suggests these hopes will prove illusory. The renewed strength in gold, together with the long overdue rupture of the correlation between the movements of foreign currencies and U.S. equities, is further evidence that recent market dynamics are changing.

When the financial crisis of 2008 kicked into high gear in September, the U.S. dollar began to rally furiously. While America’s economic ship was sinking from stem to stern, its currency was becoming the must have asset for public and private investors around the world. The dollar benefitted from the positive flows that result from massive global deleveraging. Treasuries got an added boost from a reflexive flight to “safety.” As a result, politicians were able to fill out their Christmas wish lists with complete confidence that Santa would deliver. However, as these dollar-positive forces appear to be giving way, the Grinch is about make an unwanted appearance.

Last weekend Barack Obama announced his intention to implement a New Deal-style stimulus and public works program. What he somehow forgot to mention is that the United States is wholly dependent on the willingness of foreign creditors to supply the funds. But a weakening dollar makes continued foreign purchase of U.S. Treasuries a much more difficult decision.

Once the dollar begins to collapse beneath the weight of all this new deficit spending, accumulation of contingency liabilities, and the socialization of our economy, commodity prices and interest rates will head skyward. In addition, once all the going out of business sales at U.S. retailers are over, and excess inventories have been reduced, watch for big price increases at the consumer level as well.

Once the government runs out of foreign and private sector bidders for new treasuries, the Federal Reserve will be the only buyer, and the hyper-inflation cat will be completely out of the bag. Sensing this, the Fed has recently indicated a desire to begin issuing its own bonds. However, since dollars are already recorded as liabilities on the Fed’s balance sheet (dollars are in actuality Federal Reserve Notes) the Fed already issues debt. The difference now is that they are proposing to issue interest bearing debt. Perhaps the Fed feels this will make holding its notes more appealing. However, since the interest will be paid in more of its own scrip, I do not believe this con will work.

In the end, rather than filling our stockings with Christmas goodies, our foreign creditors will likely substitute lumps of coal. Of course given how high coal prices will ultimately rise as a result of all this inflation, in Christmas Future perhaps our stockings will be stuffed with nothing but our own worthless currency. It might not burn as well as coal, but at least we will have plenty of it.
 
I dont know who the author is of the quote above but he is right.

I had not thought about the final consequences of all the bailouts until this past Sunday. A financial counselor at my church came to speak with the young marrieds and he had a big talk about the spending habits of Americans today and the problems debt cause.

We we may be really screwed. The last time this happened about 40 million people died in the war that made the USA a world power.

But don't worry. We figured out nuclear weapons last time. I wonder what our evil maniacal corporate geniuses will cook up this time.
 
Quote:
to the happy conclusion that the doom and gloomers are wrong and that bailouts and economic “stimuli” can be financed with deficit spending without any adverse consequences on interest rates or consumer prices.



Excellent ..we can go right back to doing the exact same thing!! Brilliant!
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What's that term for engaging in the same process and expecting different results?

What's the next "economic fad" going to be? VeeDub?? Any hints?
 
Originally Posted By: crinkles
should've bought gold a month ago, would've made 10% by now


Would've made lot more than that. Arse fell out of the $Oz, so your gold greenbacks went way up in reality.
 
With all the crazy things going on in the [world] economy, I can't think of any other country in which I'd rather weather the current storm.
 
Originally Posted By: SuperDave456
. . . We we may be really screwed. The last time this happened about 40 million people died in the war that made the USA a world power.

But don't worry. We figured out nuclear weapons last time. I wonder what our evil maniacal corporate geniuses will cook up this time.


Next up: Faster-than-light motors, so we can flee to other, fresher planets. It'll be a while before anybody complains of the overcrowding.
 
Originally Posted By: oilyriser
Stay tuned for shortages of toilet paper...
Good thing we gear heads didn't throw away those used bondo scrapers.
 
Australia is in the best position to weather the storm. Massive budget surplus gives the govt money to spend and it has been. Far tighter banking regualations meant there were not the failures as seen in the U.S, UK, Europe. Report last night retailers are surprised at the high spending from customers. Fuel well down in price, interest rates low and about to dtop again. China's economy shrinking more the only glitch as we supply their resource hungry industries.
 
This guy is right on. But hey, as long we delay the pain and failure to future generations of politicians, what's the problem?

And what does it say about Europe's and other economies that everyone is jumping on the dollar...
 
Originally Posted By: Gary Allan


What's the next "economic fad" going to be? VeeDub?? Any hints?


Top Ramen.....as in are you going to like eating Top Ramen in your retirement?

The helicopter drops have turned into B52 drops.
 
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