By Monty Pelerin, on December 28th, 2009 Our ability to fund our deficits and fixed income needs ended last year. The Treasury market is perhaps the biggest bubble yet to burst. It is highly probable that this bubble reached its zenith and started to deflate 2009, propped up only by extensive and surreptitious quantitative easing.
It is nearly certain that it bursts in 2010. When it does, our economy stops functioning, at least in what most would consider a normal manner.
Zerohedge provides an excellent analysis of the situation (red emboldening added by me):
Brace For Impact: In 2010, Demand For US Fixed Income Has To Increase Elevenfold… Or Else
Submitted by Tyler Durden on 12/25/2009 17:31 -0500
As everyone is engrossed by assorted groundless Christmas (and other ongoing bear market) rallies, and oblivious to the debt monsters hiding in both the closet and under the bed, Zero Hedge has decided it is about time to present the ugliest truth faced by our ‘intellectual superiors’ and their Wall Street henchman who succeeded in pulling off Goal #1 for 2009 – the biggest ever bonus season (forget record bonuses in 2010… in fact, scratch any bonuses next year if what is likely to transpire in the upcoming 12 months does in fact occur).
If someone asks you what happened in 2009, the answer is simple – two things. There was a huge credit and liquidity crunch, and then there was Quantitative Easing. The last is the Fed’s equivalent of band-aiding a zombied and ponzied corpse, better known as the
Continue reading Treasury Bubbles About To Burst
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By Monty Pelerin, on December 6th, 2009 David Malpass has written an outstanding article in the Wall Street Journal. He details how the Fed’s low interest rate policy is adversely affecting capital allocation, creating what the Austrian School of Economics would call malinvestment. His analysis is microeconomic-based as opposed to the macroeconomic nonsense so prevalent today and is well presented and sound.
My only objection to his piece is that it ignores the political environment in which it must be applied. While allowing interest rates to rise would be politically unpopular, that is not my specific objection. Rather, I refer to issues raised in a previous post where I likened the Fed to the Treasury’s ATM machine. There I stated “…the reality is that the Fed is an arm of the Federal Government. It is not the dog, it is the tail. It has become the Treasury’s ATM machine, whether it wants to be or not.”
Given the deficits that the US Government is running and plans to continue to run, the Fed is unlikely to be able to stop buying Treasuries. Either they continue to do so or the Federal Government becomes insolvent, unable to pay its bills. If they are unable to stop this Quantitative Easing, it is unlikely they can have much of an effect on interest rates. The Fed administers some interest rates, but the market determines most interest rates. If liquidity keeps pouring into markets, real interest rates are apt to remain low for a long period.
Even if the Fed
Continue reading David Malpass: Economics Yes; Politics No
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By Monty Pelerin, on November 30th, 2009 This article concludes, as did my recent post Spiraling to Bankruptcy. that the bankruptcy of the United States is now inevitable. Porter Stansberry approaches the topic from a different angle, using cash flows and borrowing capacity, to support his conclusion.
Stansberry has a great sense of urgency believing “the odds are very high you’ll be wiped out over the next 12 months.” Whether he is correct in this prediction, only time will tell. Timing is impossible to predict with any degree of reasonableness. Bankruptcy could happen this week or not for many years.
The bankruptcy of the United States is now certain
Tuesday, November 24, 2009
From Porter Stansberry in the S&A Digest:
It’s one of those numbers that’s so unbelievable you have to actually think about it for a while… Within the next 12 months, the U.S. Treasury will have to refinance $2 trillion in short-term debt. And that’s not counting any additional deficit spending, which is estimated to be around $1.5 trillion. Put the two numbers together. Then ask yourself, how in the world can the Treasury borrow $3.5 trillion in only one year? That’s an amount equal to nearly 30% of our entire GDP. And we’re the world’s biggest economy. Where will the money come from?
How did we end up with so much short-term debt? Like most entities that have far too much debt – whether subprime borrowers, GM, Fannie, or GE – the U.S. Treasury has tried to minimize its interest burden by borrowing for
Continue reading Stansberry: Bankruptcy of the US is Now Certain
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By Monty Pelerin, on November 28th, 2009 If the Government confiscated everything, the social programs would still be $50 trillion short and the Government would still be bankrupt. Furthermore, no company or individual would be left with anything.
The economy is in bad shape. Some say it is worse than any time since the Great Depression. I believe it is actually worse than the Great Depression because of the level of debt. At the time of the Depression, neither governments nor individuals were deeply in debt. We were a nation of savers. Now we are a nation of spenders, living beyond our means. Individuals and governments at all levels are over their heads in debt, some literally drowning.
The debt problem is intractable. This conclusion is not economic but mathematical. It literally is mathematically impossible to get out from under the level of existing debt. To demonstrate, only the Federal Government will be dealt with. Such a focus greatly understates the actual problem, because it ignores personal debt and lower-level government debt. States and municipalities have grown well beyond sustainable levels and are running large deficits. Some defaults have already occurred. Individual bankruptcy filings are soaring as are foreclosures.
Promises Beyond Reality: The Federal Government admits to over $12 Trillion dollars in debt. In reality, its obligations are multiples of that figure. The unfunded promises from Social Security and Medicare total around $100 trillion. That is, to properly fund the forecasted future deficits in Social Security and Medicare,
Continue reading Spiraling to Bankruptcy
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By Monty Pelerin, on October 9th, 2009 A Deflation Story
by Bill Bonner
London, England
“It was at Rome, on the 15th of October, 1764, as I sat musing amidst
the ruins of the Capitol, while the barefooted friars were singing
vespers in the Temple of Jupiter, that the idea of writing the decline
and fall of the city first started to my mind.”
- Edward Gibbon
Warren Buffett famously says that people do not make money by betting
against the US economy. But two years ago we decided to take a chance.
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Friedrich von Hayek
Friedrich von Hayek founded the Mont Pelerin Society.
“Monty Pelerin” is a pseudonym chosen by this blogger to convey general agreement with the philosophy, goals and spirit of the Mont Pelerin Society. No other connection exists between the blogger and the Society.
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