Coyote Blog

This is why gold, barbarous relic that it is, is a good hedge right now. Gold (and to a lesser extent other precious metals an commodities) does not go up in value; it maintains relatively constant value over the long term versus other things (i.e. paper money) that go down in value. The deflation argument is that these trillions of dollars in debt destruction will overwhelm any money printing. But I think the bottom line is that our monetary and fiscal policy will continue to be extremely loose until inflation sets in. Inflation is not a side effect of the US monetary and fiscal policy, it is the GOAL. They will maintain their inflationary policies until they work, and then, uh oh. Just keep in mind we have 0% Fed funds rate right now. That is not long-term sustainable. What happens when our debt-based economy gets crushed with 10%+ interest rates? Unlike 1980, we are not a creditor nation, we are the biggest debtor nation. Debtors don't like 10% interest rates....

Good analysis. Proves the point that China and other foreigners won't be buying our debt ... they're not in a position to do so, even if they wanted to. Further, they fear where Obama's spending will take us, so the last thing they'd do is double down on the dollar. There may be some interesting things said at G-20.

Thus, our deficits will have to be self-financed. That leaves taxes and/or printing press. The Fed has already ballooned its balance sheet. Treasury has an alphabet soup of programs. Even the FDIC is getting in on the act ... they're guaranteeing new debt issued by the big banks so they can raise billions at rates like 2.25% ... even GE is in on this.

If this was all, I'd expect we'd have some kind of recovery into 2010.

The Stimulus Bill and Obama's budget are the problem. It's all bullsh*t spending ... they give pork a bad name. They won't help in 2009 ... they'll just be fuel to the fire in 2010. They'll have to be paid for eventually, which will drag things down and kill growth. One concern is that 2010 may feel good, so voters won't worry about the inevitable train wreck that will happen. If -- as I expect -- the economy stalls sometime after 2010 ... it won't be pretty. But it may not be an issue in 2010.

Wasteful spending can be a big issue in 2010.

peter murphy's debt analysis is simplified to the point where it misses an important factor. bi-lateral current account figures matter with our trading partners, not their aggregate figures. for example, japan may slip to a current account deficit. but if they still have a current account surplus with the US, they will likely still be buyers of our bonds. to repatriate that money instead would have significant impact on the yen exchange rate, and as an export driven economy, a stronger yen harms their competitiveness. this is also true of the oil exporters and of china. they have little choice but to keep trading with us. we are too large a portion of their GDP's.

the real question is "at what rate will they lend"? the prices of our bonds are much too high (yields too low). the fed asinine program to buy them is nothing short of market manipulation and running the printing press. the fed's profits at the end of the year go into the treasury anyway, so this is literally taking money out of one pocket and putting it into another and pretending you still have it in both.

consider the terrible position this put you in as a country running a trade surplus with us. pull your money out, and lose competitiveness. leave it here, and take interest rates held artificially low by fed intervention in bond markets. worse, if you back off and let the fed take down piles of bonds (raising money supply) you devalue (from a forex standpoint) the bonds you already own and can't sell without hurting competitiveness. i can certainly see why the chinese are upset about this and are looking for reassurance that we will not radically devalue the dollar.

but even with all these caveats, there is no way we sterilize all this money.

my greatest fear is stagflation as prices soar but growth remains elusive as government crowds out and punishes private industry. if this mess is successfully (and erroneously) blamed on capitalism, we could go down this wrong road for a long time. recall how many ties the failing new deal programs of FDR were voted back in.

the chance that the nation becomes an 18th century patient being bled white by a doctor and purged with calomel is very real. every time the "cure" makes us worse, the doctor will say "you should have come sooner" or "we need to increase the treatment".

it's a good time to seek out non $ assets. to my great surprise, much of continental europe is resisting the cal to a new new deal and massive government intervention.