An economic sea change - starting today

[nmap]

We have entered into a new and unexplored territory under the leadership of the Fed, the Treasury, and Chairman Bernanke. In its efforts to fight inflation, the Fed has pulled out all the stops. In my opinion, the U.S. has entered a period that may prove as challenging as any in our history - one which none of us will be immune to.

Here's why:

First, the Fed has started creating large sums of money out of nothing. The fancy term is quantitative easing; in essence, the printing presses are now churning out currency.

WASHINGTON — The Federal Reserve sharply stepped up its efforts to bolster the economy on Wednesday, announcing that it would pump an extra $1 trillion into the financial system by purchasing Treasury bonds and mortgage securities.

Having already reduced the key interest rate it controls nearly to zero, the central bank has increasingly turned to alternatives like buying securities as a way of getting more dollars into the economy, a tactic that amounts to creating vast new sums of money out of thin air. But the moves on Wednesday were its biggest yet, almost doubling all of the Fed’s measures in the last year.

(Excerpted)


LINK

Now, let us look at the well-nigh immediate consequences:

MOSCOW, March 19 (Reuters) - China and other emerging nations back Russia's call for a discussion on how to replace the dollar as the world's primary reserve currency, a senior Russian government source said on Thursday. Russia has proposed the creation of a new reserve currency, to be issued by international financial institutions, among other measures in the text of its proposals to the April G20 summit published last Monday.

Calls for a rethink of the dollar's status as world's sole benchmark currency come amid concerns about its long-term value as the U.S. Federal Reserve moved to pump more than a trillion dollars of new cash into the ailing economy late Wednesday.



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If the dollar loses its reserve status, then the U.S. is faced with the problem of living within its means - moreover, we must do so as tax revenues decline due to the current recession.

Let us consider the budget:

We'll spend about $3 trillion dollars this year. You can see the breakdown HERE

Now notice that the deficit, as announced today, will increase to $1.75 Trillion dollars for the year.

President Obama is expected to receive bad news on the budget front on Friday as the nonpartisan Congressional Budget Office releases what sources say will be a grim assessment of his $3.6 trillion budget's affect on the nation's deficit, a $1 trillion increase above previous projections.

The staggering figures will include the recently-passed $787 billion stimulus bill and the $410 billion omnibus spending package, both adding directly to the deficit, and to members' concerns that Obama is trying to do too much, too fast.

Obama has projected an historically-high federal deficit of $1.75 trillion this year, but he expects to cut that down to $533 billion by 2013.


LINK

So if the U.S. were to lose the ability to borrow more money, every program - including Social Security, Medicare, Medicaid, and Defense - would face an immediate loss of 50% of its budget.

Will that happen? I certainly hope not. And matters often muddle through in something better than a worst case scenario. I expect economic challenges to continue, and perhaps to worsen. On the good side, even though we as a nation have some financial problems, most other nations are in worse shape. This may make our debt a safe-haven, at least for a time.

[csquare]

nmap,
Sir, I learn plenty after reading your posts, I think I may just start selling pencils and paper on the corner sooner then later.

[2charlie]

Sadly, the Fed was given this ability when our currency was taken off the gold standard. Our currency is backed by nothing, so it means nothing to print more. Except massive inflation and the host of other possible issues listed by nmap. Maybe we can just print so much cash that the piddly little deficit won't look so bad.


-2charlie

[Dozer523]

Those cookies are going to taste REALLY bad!

[Red Flag 1]

Originally Posted by csquare

nmap,
Sir, I learn plenty after reading your posts, I think I may just start selling pencils and paper on the corner sooner then later.

Think I'll open a tavern!

I know I will need one....cheaper than a trip to the movies, and we'll all feel better in the end!

Is there any good news today????



RF 1

[Sigaba]

Originally Posted by Dozer523

Those cookies are going to taste REALLY bad!

Dozer--

Your cookie metaphor is as funny as it is painfully instructive.

[nmap]

On the one hand, I, too, think the cookies are going to be pretty awful. I've attached a copy of Russell's newsletter, and he seems to have a similar view.

But on the other hand, I contend that a combination of information and some appropriate mental abilities will protect us from the fate of selling pencils on the corner. Now it may be that our houses will be a little smaller, and the mass of people may not have big-screen flat panel televisions. Perhaps we will have to make do with hamburger instead of fillet mignon. But there are other pleasures to be had.

If the Fed's policies lead to high interest rates, many will be hurt. On the other hand, those with money to put in the bank may start getting a decent yield. If prices crash, then those who have kept cash reserves have a once-in-a-lifetime opportunity coming up.

Example - prior to my birth, my parents lived in a modest little house in Wichita Falls, Texas. It was worth all of $600 - this was circa 1947, if I remember the story. A few years later, lots in small towns in Arkansas - towns like Bull Shoals - were available for $20. Had they had the foresight to purchase such things, I would now be disgustingly wealthy. If only.

The point is, current developments may make similar opportunities available to us. So the point of the post is not to cause despair; no, present developments are just the prelude to opportunity. It may be a while - years, perhaps - but patience can deliver rewards, IMO.

[Surf n Turf]

Originally Posted by nmap

(Excerpted)
the U.S. has entered a period that may prove as challenging as any in our history - one which none of us will be immune to.
“the Fed has started creating large sums of money out of nothing. Reduced the key interest rate it controls nearly to zero.
Russia has proposed the creation of a new reserve currency, to be issued by international financial institutions –
Calls for a rethink of the dollar's status as world's sole benchmark currency come amid concerns about its long-term value as the U.S. Federal Reserve moved to pump more than a trillion dollars of new cash into the ailing economy.

Nmap,
It appears that the FED has about fired most of it’s ammo, But Ben Shalom Bernanke has to fight the current “deflation” by injecting some “inflation” into the economy.( I would suggest that a trillion is a tad much). It appears he is more concerned with balancing the cycles than restoring confidence in the monetary system.
Russia, China, and India can call for a “world currency” all they want, but what would it be based on – and unless it was backed by Gold, would anyone, anywhere trust it for commerce. The idea of a Central Bank was to keep politics out of the monetary system , and we see how well that has worked in America. Imagine what it would look like if current Global politics set the monetary rules. (Maybe BASEL I & II never happened, and there’s no Bank for International Settlements (BIS)).

Originally Posted by nmap

If the dollar loses its reserve status, then the U.S. is faced with the problem of living within its means - moreover, we must do so as tax revenues decline due to the current recession.

Don’t think this could / would happen, but sounds like a wonderful idea to me, where do I sign up. Of course, I would have to pay my own way, and we as a country would have to cut spending, and do some things to actually increase revenue to the Federal Treasury. Like eliminating Mark to Market, Sarbanes-Oxley, decreasing / eliminating Capital Gains Tax, increasing investment tax credits, Increasing R&D Credits, eliminating taxes on savings and canceling the $787 billion stimulus bill and the $410 billion omnibus spending package, Re-clawing back TARP funds, and freezing federal spending at current levels.
Sounds like a plan

Originally Posted by nmap

So if the U.S. were to lose the ability to borrow more money, every program - including Social Security, Medicare, Medicaid, and Defense - would face an immediate loss of 50% of its budget.

Sounds scary, but the alternative of living in a Socialist Totalitarianism state is probably much worse. “A government big enough to give you everything you want, is big enough to take away everything you have” -- Thomas Jefferson

Originally Posted by nmap

On the good side, even though we as a nation have some financial problems, most other nations are in worse shape. This may make our debt a safe-haven, at least for a time.

Isn’t that a bit like saying – My date is a two bagger, but yours is coyote ugly.
Enjoy you posts immensely,
SnT

[Surf n Turf]

nmap

Originally Posted by nmap

On the one hand, I, too, think the cookies are going to be pretty awful. I've attached a copy of Russell's newsletter, and he seems to have a similar view.

As I was reading your post, I was just unpacking two boxes from Hannes Tulving. I believe Russell and I are on exactly the same page, and have been for years. A Genius is someone who agrees with you.

Originally Posted by nmap

If the Fed's policies lead to high interest rates, many will be hurt. On the other hand, those with money to put in the bank may start getting a decent yield. If prices crash, then those who have kept cash reserves have a once-in-a-lifetime opportunity coming up.

You are correct, Sir. I just wish I had better insight as to how high interest rates will go, and how much inflation will accompany the higher rates.

Originally Posted by nmap

The point is, current developments may make similar opportunities available to us. So the point of the post is not to cause despair; no, present developments are just the prelude to opportunity. It may be a while - years, perhaps - but patience can deliver rewards, IMO.

Namp,
I really enjoy your insight into the financial markets. I know you are spot-on with your analysis that the coming times offer opportunities, just as were available in the early 80’s (after Carter). My big concern is that Øbama is an ideologue that doesn’t care if he crashes the economy.

SnT
"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered." Thomas Jefferson 1802:

[nmap]

Originally Posted by Surf n Turf

My big concern is that Øbama is an ideologue that doesn’t care if he crashes the economy.

Thank you for the kind words.

As the dreadful economic news piles up, President Barack Obama challenged the nation Saturday to not just hang in there but rather to see the hard times as a chance to "discover great opportunity in the midst of great crisis."

LINK

Doesn't care? Or does care, and desires the opportunity for instituting profound change?

An affluent people with savings and secure jobs will avoid socialism. But what of a suddenly poor people, one which is afraid? Will they embrace socialism? I wonder.

[ZonieDiver]

Originally Posted by nmap

Thank you for the kind words.

As the dreadful economic news piles up, President Barack Obama challenged the nation Saturday to not just hang in there but rather to see the hard times as a chance to "discover great opportunity in the midst of great crisis."

LINK

Doesn't care? Or does care, and desires the opportunity for instituting profound change?
An affluent people with savings and secure jobs will avoid socialism. But what of a suddenly poor people, one which is afraid? Will they embrace socialism? I wonder.

I think you are spot on here, nmap (as usual)! He wants to be a latter-day FDR and sees this as his opportunity. IF the economy recovers quickly, that won't be possible. We will have to plunge into the depths to allow what he really wants to do to take place.

I pray I am wrong, but fear I am not.

[nmap]

I came across an interesting bit of rumor today. It is pure speculation, not verified, and perhaps not verifiable. However, it appears to make sense. I'll summarize, then provide a link.

GM has lots of debt, including bonds.

It is possible to buy insurance against default on such bonds, using Credit Default Swaps (CDS).

AIG has offered lots of CDS.

The U.S. government continues to support AIG, including the payoffs of CDS.

So...let's suppose someone has some GM bonds. GM seeks to negotiate away part of the debt. If a holder of the bonds is insured against default, he has no reason to accept. He can simply refuse, force the company into bankruptcy, then collect full value for the bonds. He can then sell the bonds for some small amount and get even more money. Bottom line - for the big bond holders, this is a can't lose deal. Notice that a GM bankruptcy is more profitable than if GM continues as a going concern. One way, the bond holder gets the entire amount of principle, plus the residual value of the bonds. The other way, the holder must wait until the bonds mature. Therefore, a GM bankruptcy is the best outcome from the bondholders' perspective.

Thus, the large bond holders have every reason to force a GM bankruptcy, and none to prevent it.

Does this help the large investment houses, while sticking the taxpayers with yet another large bill?

Rhetorical question: Why? Why would the federal government follow such a path?

Anyway, see what you think. Apply suitable amounts of salt.

LINK

[2charlie]

It would be interesting to know who the major CDS holders are, maybe even how many lobbyist they have working DC. My favorite quote from that article:
"Get ready America - you're about to get it in BOTH holes this time."
These are the types of plots you see in James Bond movies, like when the guy bought put contracts and tried to blow up the airplane..... Only it's not the put writer thats getting screwed.

[nmap]

I came across a series of charts, published on a blog with a fairly good reputation. The charts originate with the St. Louis branch of the Federal Reserve.

Here's what's interesting - in more than 20 different areas, the official numbers show substantial deterioration in the underlying numbers for our economy. That isn't good, although an argument can be made that they represent past numbers and hence perhaps matters will improve. However, there is also the issue of volatility - it's hard to do any sort of business when tomorrow is filled with uncertainty. For example, why hire an employee if the fundamentals of the business environment could change radically. Notice how these charts incorporate radical change in a short period of time.

LINK

[Paslode]

Originally Posted by nmap

But on the other hand, I contend that a combination of information and some appropriate mental abilities will protect us from the fate of selling pencils on the corner. Now it may be that our houses will be a little smaller, and the mass of people may not have big-screen flat panel televisions. Perhaps we will have to make do with hamburger instead of fillet mignon. But there are other pleasures to be had.

Wonderful point of view nmap. My Aunt raised 12 kids in Southern, MO. with 3 bedrooms, 1 bath, a fire place, a kitchen and a big table. Christmas wasn't toys, it clothes and essentials........regardless they all smiled ear to ear.

A lot of love, making the most of what you have and some hard work will get you through anything and will buy you more than money ever can.