Posted on 06/01/2011 2:51:40 PM PDT by frithguild
So last summer we stood peering off the brink, with the markets all set to roll keel over mast before bubbling to the bottom. Then the Fed implemented QE2. I personally think QE 2 was useful in that it propped up risky assets. This pushed us back from the brink a bit, and gave the government time to smell the coffee and begin to make rational economic choices. They have since squandered that opportunity. So here we are again. Same people, same brink, same choices.
A few months ago I got in a big argument with one of my more knowledgeable friends about the likelihood of QE3.
It would be a disaster. he said And may mean the end of the fiat money system. Youre right, I replied, but well get it anyway. No, you dont understand. He said, It would be ineffective and would set the stage for hyperinflation, which might inevitably mean the end of everything. Youre right. I said, But were going to get it anyway.
We went back and forth like that for a while. Him saying what the right thing to do would be and me agreeing, but not believing the people in Washington would do it.
In short, it was my contention that QE3 would always happen. I believed that after QE2 (which ends this month) risky assets would sell off, and make another round of QE more politically viable. What looks crazy with the S&P at 1400 looks absolutely essential with it at 1050, so I always thought the political wind would change. And with falling S&P would come the rising demand for government to do something to save the system. It would be all but universal not the least of all from those seeking reelection.
So the fed would implement QE3 not just because they could, but also because we havent actually done anything to improve our fundamental growth issues. Higher oil prices still kill more jobs than the subsidized windmill and solar panel companies create. The housing market is a wreckage, unemployment remains lofty and the only thing the Keynesian stimulus package actually stimulated was union jobs, union dues, and Democratic campaign contributions.
The only thing thats really different now is that we have a lot more debt. The federal government continues to borrow 40c of every dollar it spends, and the number of dollars spent continues to be astounding, so weve reached our debt limit yet again.
As Ive said, Id be in favor of leaving the debt limit where it is so long as we could be sure the Obama administration would continue to pay all the debt. But to be honest Im unsure that theyll do so. In fact, I dont think Obama is aware of any of the real costs of a default. He sees the political costs to himself of course, but I think he underestimates even those. I think he believes that with some careful spin, even a debt default could be portrayed as his administration standing up to the rich wall street fat cats and making them share the burden.
Remember, Obamas economic worldview is based almost entirely on fantasy. In his world, supply and demand are mutable, and the only real constant in economics is the exploitation of the lower classes by the rich. In his world, hes the only thing that can prevent this exploitation, and if the rich bond holders are hurt by being forced to give up a coupon payment, then that can only mean that the poor will benefit from it in some small way. Im sure he believes he can portray it that way if he has to, and to him a US debt default can become one more populist political piece to move around the chess board.
So if we were to try to estimate the probability of a US debt default we need to consider 2 issues. The first is that we need to guess at the odds that the congress will not get the debt limit raised before the federal government runs out of cash. I personally would put the odds of that event at somewhere between 20% and 40%, but feel free to use your own estimate.
Then we need to multiply that by the odds that lacking the funds to pay for everything they want, the Obama administration will elect to pay for windmill subsidies and AFL-CIO giveaways instead of debt coupon payments. I personally would put the odds of something like that at about 80%. So some rudimentary math shows us that at present, my estimate of a US debt default is a cumulative risk of about 16% to 32%. As much as 1 chance in 3. Those are pretty short odds for an event with such utterly cataclysmic consequences. But the American voter wanted hope and change I would certainly call that a change.
What about the odds of QE3? Id still put them at 100%...the only issue is when. Given todays numbers, Id say the autumn is looking more likely.
They are setting up the crisis needed to get a “deal” on raising the debt. We should be deflating. But they are trying so hard to create inflation it ain’t working.
I liken this to “reverse musical chairs”. Neither party wants to be in the hot seat when the music ends.
Well written and very informative article.
lets hope it comes BEFORE people have to vote
in fact, if you are a good conservative business owner, it might be time to take that nice long vacation that you KNOW you always wished you had time for.
Do it now, while you still have a business, and help defeat the communists BEFORE YOU HAVE NO MORE BUSINESS
GO GALT NOW~!
Those that are too big to fail have the bailout politicians in their pocket so they don't care. The rest of us get screwed either way.
Wall Street, as with the rest of our financial system, is in serious need of correction but as long as these idiots expect and get the Fed and the US government to bailout their collective, idiot-ridden, scamming lamearses, there will be no correction and we the people will forever be screwed beyond our own imaginations......at least until this country financially implodes via a default....and one can only hope such does occur, because as is, a default is exactly what is needed to make the ultimate correction. =.=
It has to be broken before they can fix it . . .
We could have both at the same time.
Anything produced outside of this country will become expensive. Cheap clothes from India will still be poorly made, but they'll cost a lot more. Food grown here will be higher because the rest of the world will buy our food. American's worthless dollars won't be able to compete - food will be expensive.
Labor - people working for each other - cutting hair, flipping burgers etc will become cheaper. Lower wages, lower prices for the service. Having a horrible job that doesn't pay squat will be a status symbol compared to being unemployed with you and the kids bunking in with an older brother... and his wife and four kids...
Then again, this economic can will probably be kicked down a year of so from now with QE3 - which will make things better in the short run - and much worse in the long run. Put in fruit trees...
They wish they could create inflation.
Take away the hyper, and this describes the situation.
Monetary policy seems completely ill equipped to address residential real estate deflation and simultaneous comodity and food inflation. Fiscal policy attacks small business on multiple fronts. The only thing left to do while getting hit from three sides is stay inside and hide. That is what seems to be happening RIGHT NOW.
If the debt cieling is not raised, and the executive branch comits to paying treasury holders first, spending for the rest will have to be cut about 30%. I actually like that idea.
However, Politicians have become so jaded that they laughingly ignore economics and common sense. A poke in the eye to treasury holders ... wow. They are just about stupid enough to do it.
That is the sentiment that concerns me - raised debt cieling or not. A total loss of confidence first by smart money, with everyone else running for shelter not long after. I haven't seen this in my lifetime.
You don’t.
You get hyperinflation followed by a deflationary collapse.
I am not even sure the inflation thing is going to happen this time, the money from the growth in the U.S. money supply is going overseas, not where it can be spent here in the U.S.
It may happen that we go directly to a deflationary collapse from a collapse in the labor market. We are very near that now.
Post 13 depicts the progressives’ “transformation of America”.
That chart, adjusted for inflation, doesn’t look as bad, but still bad. Yours shows the trouble started around 1975, the inflation-adjusted shows it started around 1985. Either way, no president or congress has done anything about it for 25-35 years.
http://www.marktaw.com/culture_and_media/TheNationalDebt.html
I think we are much more likely to have hyperinflation after a deflationary collapse, not before. One reason is the one you cited — the US dollar is really the world’s currency, and increases in money supply get dispersed overseas.
If there is going to be hyperinflation it will be when those dollars start returning home. This would occur if more countries started closing off exports (such as Russia and China have done recently — agriculture and oil, respectively, IIRC), or participated heavily in non-dollar markets. Also, if the US debt continued to go upward, and we started really monetizing that debt (or defaulted), confidence in the dollar would trump both the lack of confidence in other currencies, and the inertia of having international trade conducted in dollars. But all of this would occur after a deflationary collapse.
I do believe that you are right in saying that we are very close to a deflationary collapse (possibly accompanied by increasing prices in commodities). It is not just the labor market. It is real estate, and the horrific conditions on Main Street. And also that the bad debt never left the system. And Europe. And Japan.
There will certainly be more QE. The government’s not going to shrink willingly. Only the climax of the default will do that.
I don't understand why you say this?
Everything I buy has gone up substantially in price. It is obvious to the consumer that the dollar is worth less than a few months ago. Food, fuel, & utilities are all way up in price. Maybe the gov’t inflation indicators say different, but LaLa Land does not pay my bills.
Obama will not default when he has access to the money printing presses.
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