It's hard for me to believe that we and our foreign creditors are all on the same side. The reason is the danger of social unrest. In China for example they know exactly what will happen if 1 billion Chinese get really, really angry at their government. American leaders have forgotten this danger since Americans have become so fat and happy and busy with the suburban good life. But in other countries unrest is just below the surface, and their leaders are keenly aware of this.

So although some foreign creditors may fear an American default, they may fear the social results of inflation even more.

There is the related political question of whom to blame. People in general and politicians in particular love having someone to blame. If countries conspire to reflate in order to hide American insolvency, local politicians would be vulnerable. But if America is allowed to default then the pain can easily be blamed on those greedy, profligate, American hypocrites. Red meat for the propaganda-meisters.

Bottom line, I don't believe that we and our foreign creditors have identical interests. There's no guarantee they will choose the variety of pain we want them to choose.

I would have trouble believing that too! And I didn't say any of that. Of course we don't have "identical interests" with our foreign creditors. Every nation has its own fundamental self-interest, of course. And China is definitely not in the "Club" that's running worldwide finance. Nor is Russia. There's a big difference between the transnational interests who hold the wealth and wield real power and those who are holding the "other end of the stick" like China.
As for blame, America is already castigated for most of the world's ills. If we default, they all lose, and they know it.

Copied over from Breaking:

Another "brick in the inflating wall." This is the path they are going to take, here's a particularly pithy excerpt:

"...As part of the plan, the administration will also call on Congress to raise the national debt limit..."

Here are the first few paragraphs:

http://www.nytimes.com/2008/07/14/washin....

Rescue Sought for Fannie and Freddie

By STEPHEN LABATON
Published: July 14, 2008
WASHINGTON — Alarmed about the sharply eroding confidence in the nation’s two largest mortgage finance companies, the Bush administration will ask Congress to approve a rescue package that would give the government the authority to buy billions of dollars in stock in Fannie Mae and Freddie Mac and also lend to the companies to meet their short-term funding needs, people briefed about the plan said on Sunday.

The plan calls on Congress to give the government the authority over the next two years to buy an unspecified amount of stock in the two companies. Over the same period of time, it would permit the companies to have greater access to the Treasury, by expanding the credit line that each company has from the Treasury. Each company now has a $2.25 billion credit line, set nearly 40 years ago by Congress. At the time, Fannie had only about $15 billion in outstanding debt. It now has total debt of about $800 billion, while Freddie has about $740 billion.

Today the two companies also hold or guarantee mortgages valued at more than $5 trillion.

As part of the plan, the administration will also call on Congress to raise the national debt limit, people briefed on the plan said. And it will ask Congress to give the Federal Reserve a role in setting the rules for how big a capital cushion each company must hold. Giving the Fed a consulting role in the companies’ oversight is seen as yet another way to reassure nervous markets.

Treasury officials declined to comment on the plan but indicated that a statement would be issued later on Sunday. It was described by lawmakers and officials at other agencies that have been briefed on it.

Would it be in china's best strategic interests to float this turd as long as possible, sell us as much useless crap as possible while at the same time building up their infrastructure and increasing our financial dependence, and then once the global situation becomes entirely untennable use those massive treasury obligations as leverage in strategic matters? I think the chinese authoritarian system may be much better suited to deal with the chaos of a global economic collapse than the US system is, and therefore is better able to pull off such a threat IMHO...

Contagion - imo, you ask a lot of interesting questions. (This thread got buried and I forgot about it for awhile - seems ever more timely). The Chinese take a very long term view of things; they are some of the world's most avid racists and nationalists (right up there with the Nipponese). They also are not stupid, and thus know that if they start to play nasty, they will find they are holding "Monopoly money," with the Parker Bros. logo upon it, not the U.S. seal.

So they really won't be able to wield our obligations as leverage - any more than Dillard's can use your revolving account as leverage against you. They can shriek into the phone, basically. As to their authoritarian system, you are onto something there, imo. The Chinese WILL survive whatever is coming. They may lose a quarter of their population, but THEY will survive. They are in fact ideally suited to deal with the coming chaos because they understand (collectively) that they must do what they must do.

This week's events put this back into perspective. After a couple of months, I'm re-reading this thread, and will do so again in a couple more months. Signs are pointing increasingly toward a net inflationary thesis, which is disturbing on many levels. One can hope one is wrong, but I don't see it. They must inflate or it's game over. Simple as that.

>Signs are pointing increasingly toward a net inflationary thesis, which is disturbing on many levels.

I see the same. J6P will be happy to see his IRA going up in dollar terms. He will react violently if it drops in a deflation scenario and politicians know it.

That's been my thesis for some time now that it's simply politically impossible to tell the American people the truth, they're taking it up a notch as George would say.

I've agreed all along it's stupid but I think we're getting hints, BIG hints they're going to try.

It might not work out like they hope either, in any case, brace for impact it's going to get bad.

The massive gap between debt service and income is the problem here. Only a massive devaluation of the dollar and many other currencies could close that gap in time to avoid truly huge numbers of defaults and bankruptcies. This is not the 1970s or anything close to it. Back then, they could lever up a relatively unencumbered asset base. Doing the same thing now makes the gap even larger, even discounting the increase in default risk.

The only way there can be inflation without it going hyper is to devalue while still maintaining confidence in the currency. IMO, there is no way for that to happen as many speculators have already demonstrated a willingness to bet big against the dollar before a possible default is even visible on the horizon.

Sushi,

To me they've achieved what they want for now, the entire economic landscape is being toyed with by using leverage to make it conducive to fixing the problems.

It's very hard to know exactly what their plan is but IMO they've achieved cover for printing by allowing massive deflation to print into so that it's absorbed by the deflation first.

You can't print during inflation without everyone on earth knowing you're doing it, first you must allow some deflation to rage, especially in commodities, which you can get rolling by destroying overextended longs, then your landscape is ripe for the printing that must be done to fill the holes.

They're a smart bunch and talented too, a lesser bunch with more morals couldn't possibly have gotten this far.

Bw, I think we are on the same wavelength here. The recent touch of 80 by the dollar has given the FED room to cut and print, which they must do. I look for a quarter or a half point this week, especially if there's no LEH stick-save to pump the market Monday. Longer term, they have to monetize the debt, which is what they are busy doing.
Not saying it's the right thing to do, just that they will do it. It's that, or total collapse, as said before. Sushi, inflation won't go hyper because the rest of the world is ****ed worse than us, and must follow and support us. The dollar will go down, maybe to 50-60, but they must follow. I'm kind of surprised they've waited this long to start this, but they are an arrogant lot, and want to milk every (good) dollar they can from their debtor base, before accepting debased ones.

We are way past the point of the actual ethics of currency value.

I don't see our debt ever being paid back honestly. We've really got 50+ trillion of unfunded commitments and 10 trillion in loans. Anyone who thinks we can meet that was probably born recently in the "free money" period of American History. That 10 trillion represents the blood, sweat and tears of millions of Americans, Chinese and many other nationalities around the world, money (work) entrusted to us, that we can't possibly pay back.

Eventually the ugly math, the inconvenient truth, will make itself known. Though you as a creditor to the U.S. government may think it's only right you be paid back, the real world says you should have thought twice before lending to an already bankrupt client.

Right is right but facts are facts.

Just pray for cold fusion, oil independence or some other technological break-through. Too bad we incentivized all our best minds to work in finance instead of the sciences & engineering... Doh!

Downrange,

I think that they've wanted to get commodities calmed down first and they've probably got room now they didn't have before. They also have to wait for our deflation to actually catch on in other parts of the world and we're at that part of the curve now, you can only cure deflation by printing once you have it, if you start while you have inflation you'll blow yourself up.

Bozonian,

As someone who's spent almost three years now paying down a paltry sum of money comparatively, I can honestly say that if you put the idea of default or paying to a vote and you honestly portrayed what would be needed to pay and what it would look like in default, even if people knew they'd likely face near starvation they'd default rather than attempt to pay.

The amount of stored work we owe is off the charts, just look at China, so far it has accumulated what almost 2 trillion $ over years of savage trade deficits?

Dear God how long would it take to truly reverse that?

Impossible.

Quote:

Just pray for cold fusion, oil independence or some other technological break-through. Too bad we incentivized all our best minds to work in finance instead of the sciences & engineering... Doh!

A good economist would look at that and see that as a rather huge misallocation of capital and time.

Huge misallocations of capital result in huge reallocations which are a fancy word for economic ****storms.

This isn't a "peak oil thread," but people, imho, need to research that issue and all its implications and stop believing in the "tooth fairy."

misallocation of capital occurs when incentives/prices are skewed.

A price is as close to an indicator as you can get of the value of something - what someone is willing to pay.

With the massive intervention in all kinds of industries via bubble/credit blowing and .gov intervention, prices are misleading and cause bad decisions on how to use "scarce" capital.

Now that capital is becoming much more expensive ie less credit is available, expect reality to return - as long as the .gov gets out of the way.

Man, I hate it when they do exactly what I expect them to...

RIP, the Republic of the United States of America, a nation of laws.

We hardly knew ye...

From the TARP, about to become law -

“SEC. 121. INCREASE IN STATUTORY LIMIT ON THE PUBLIC
DEBT.
Subsection (b) of section 3101 of title 31, United States Code, is amended by striking out the dollar limitation contained in such subsection and inserting

‘‘$11,315,000,000,000’’.”

More grist for thy mills...

Well, it's certainly interesting to revisit this thread...

I think I would have been quite shocked if someone went back in their time machine to three years ago and explained to me what actually has transpired since three summers ago. Looking back now, it seems obvious the banksters would crash the markets and re-inflate them, making profits in both directions, and enabling a known Marxist disciple to install a corporate-philic and liberal fascist regime to use the ensuing crises to tighten the chains of slavery all around.

Of course they must eventually inflate/jubilee/default the debt, or let it collapse. It's just surprising how far they've been able to kick the can down the road already. Here are some recent thoughts and musings that reflect a current perspective after the past three years:

On "Austerity" (from a few months ago, before I realized "they" are doing this deliberately, and won't stop until they have total control over a world of slaves.)

"All the lamentations from the "do the right thing crowd" to the contrary, you cannot "austere" your way out of this. Simply put, it's time for a jubilee - a vast forgiveness of debt at all levels. Choose the form - doesn't really matter. Knock a zero off all debt, or rebate the last five years of personal income taxes paid, so folks can clear those visa cards and HELOCs for a new round of spending. Just issue the green. You really can't cut much of anything without worsening the situation.

"Inflation" is the bugaboo used by the bankster elite to preserve their debt stranglehold and their profits. Don't be afraid of it - the economy will only grow if there is capital there to support it. Debt chokes it, and we are turning blue here. Historically, there has ALWAYS been a jubilee. Open the damn spigot. The debts will eventually be paid off ten cents on the dollar.
Yes, this will***** off the banksters, which is why it's being resisted by all available means. The tea party is playing right into their hands with all their "austerity" and the "cut everything" mantra. Won't work. Every penny you cut is someone's paycheck. That contracts the economy further, and... it's a vicious cycle.

It's hard to grok that the thing you have to do is INCREASE, not decrease spending. But that's exactly what will have to happen, in one way or another. It's kind of like managing an aircraft stall - gotta get more airspeed to get lift, so gravity is your only means - open it up - hope the ground isn't too close! The longer they dicker and politicize this, the closer terra firma gets.

The biggest disaster possible would be the election of more politically ambitious austerity freaks. Their message may have been great a hundred years ago; unfortunately, we've devolved into a completely different economic world, lost any semblance of a sound currency, and abdicated control of our monetary system to a powerful global elite interested only in furthering their control and hegemony, while destroying the middle class and creating an enormous slave class. The only real hope is they see the need for jubilee too. Yes they hurt short term (well, not really - but that's another story), but their game gets to continue."

And, just today, in reaction to yet another post about "cutting":

"What exactly do people think would happen if even a fraction of these proposed cuts should actually occur? The entire economy shrinks instantly by some multiplier of that cut. That multiplier is greater than 1.0. Let's say we "cut Federal salaries and benefits in half." You've just devalued every (already devalued) house in the DC area by more than 50 per cent. And that's just one small facet of the contraction. The ramifications spread throughout every corner of the world, though, not just DC, as all that air is sucked out of the economic system. But that doesn't matter, right? Those people deserve it - let them dig ditches.

Just admit that what you're calling for then is DEFLATION. CONTRACTION. STAGNATION. DEATH.

Then all those who sacrificed and didn't get their kids the latest toys and gadgets over the past decade will take their nest eggs out and buy everything they've foregone for a dime on the dollar, or less (for awhile, until there are NO MORE NEW TOYS, because there's no venture capital from selling the last ones made).

And that's basically what happened in the last GD, when my own grandfather sucked up a dozen vacated houses on a fireman's salary. This is the wet dream of the modern day economic Calvinists. But they don't get the fact that the only way the next generation of (insert product name here) gets produced, is by selling the previous generation to one to a public with the money to buy it. Everyone who bought their way up the computer paradigm from Commodore 64 to 286, 386, ... Pentium... should understand how this works.

Don't people see that you really can't cut anything? Every penny is someone's salary. To quote a movie hero of mine: "The accounting is meticulous." In fact, what really needs to happen is a debt jubilee. There are several ways that can occur - rebate the last five years of income taxes (I really like this one, as it rewards the more productive class), add a zero to people's accounts and salaries, knock a zero off the debt balances - but you get the drift. But to do this would really upset the banksters, who are raking in enormous profits on that existing debt (and creating a world of owners and slaves). They would **** bricks if John Q Public was able to write a check to pay off that mortgage and those visa cards with some of the money sucked out of his paychecks during the past five years!

But the economy would soar. Yes, there would be "inflation." Just like we inflate our lungs when we take a big, deep breath in preparation to lift a heavy object. But the release of the economic speed brakes would foster enormous growth in every sector of the economy. So, a burger and fries is ten dollars at Hardees. Salaries rise with the tide of productivity. The last time this was allowed was in the seventies (on a smaller scale than what is needed now, of course, as we've been getting raped for several decades), and many people benefited enormously from the "inflation." But the banksters jumped in with 20 per cent interest rates to rein in the "expansion," and restore "order" in the economic (slave) world.

Print some trillions and get things going. Spending for war is the only way we got out of the last depression, and spending is the only way we're going to get out of this one. Put money in the hands of those who will spend it. Why isn't this happening? Because the banks are in charge of everything, and all this austerity talk is music to their ears, as it plays directly into their hands. As everything contracts, people are asked to do more with less, and the meme everywhere is "cut, cut, cut." The chains of slavery are shackled tighter.

I'm astonished that more people aren't on this (although there were quite a few economic commentators using the "jubilee" meme just a couple of years ago - interesting that they've mostly lost their voice recently), rather than all this austerity talk that is contracting the financial universe. The banksters got their jubilee, where's ours? But no (bankster) ever lost any money overestimating the intelligence of their public. And the economic Calvinists love this milieu, as they entertain fantasies of buying that devalued pleasure yacht for pennies on the dollar with what they've saved by deferring all that pleasure for so long."

Final thoughts for now: people like Tom Baugh understand what's happening, imo. We are in a very literal stranglehold here. They will continue to choke out the productive at the expense of the FSA, until they own everything, and we are all slaves. Going Galt would be a great option, if it were possible. In reality it's not, as "they've" got nearly full control now (where do you set up your "Gulch" that's outside big sister's electronic gaze?). Barring a debt jubilee of some kind, this WILL implode, and we will see that giant boot stomp across the face of humanity, forever.

Alternatively, (perhaps some other universe?), "they" will give up their stranglehold, jubilee existing debt, and move forward with trillions of printed dollars to revive industry and the national infrastructure, and put millions to work doing the necessary productive activity that moves us into a new world. I'm not holding my breath.

My theory is, average prices vs. average income determine quality of life (in a consumer society, as a gross metric).

So whatever you do to the money supply, the ratio of price to average income is what's important (if you care about your population).

Controlled inflation has the upside of preventing a domino collapse. The money issuing authority just "buys up", with printed money (including covert printing like Quantitative Easing) any asset that is about to be defaulted. The downside is, fiscal discipline is never restored and eventually this leads to hyperinflation as it emboldens the monetary issuer to solve all the problems this way (we've been doing it for over 20 years).

The original rant was pretty much totally wrong. Wrong on gold. Wrong on wage inflation. Wrong on housing. Slightly correct on inflation.

Overall, I give it a grade of D.

Quote:

where do you set up your "Gulch" that's outside big sister's electronic gaze?

That's the only part of Atlas Shrugged than Rand got wrong.

You don't need a "Gulch". Just retire. Work and shop local only. With all your new free time, get involved in local politics to remove restrictions/zoning/cut government and lower property taxes. What, are "they" going to "make" you work ? Hardly - join the FSA. Make only enough to cover property taxes and a few other items. Ride your bike, garden, raise meat animals, gather wood for cooking and heat, shop at thrift stores or freecycle. Trade work for food, services and other items. File your 1040 for EITC and other freebies. Help crash the system by overloading it - it's not just the leftie radicals who can do this .

The things you have to work out to escape the system:
shelter - cheap and safe
transportation - cheap and durable
food - free (grow own, glean, forage, barter)
heat/cooking - free (rocket stove, masonry oven other)
work - for barter or cash

That's really all there is to it.

Good stuff, Tesla, and mirrored on Baugh's site (taxated series). Not possible for everyone at a given point in their lives, but a worthwhile goal to move towards this lifestyle, as it's really a win-win, no matter what happens.
Also, develop/acquire/maintain a skill set that fits in a barter-trade environment by providing original value, yes.

The only way things will change is if the FSA disappears.

We can't afford to feed them any longer. It will be us versus them, and they have the Government on their side due to the number of votes they represent.

This is going to end in civil war.

My Wise Friend Tesla wrote..

You don't need a "Gulch". Just retire. Work and shop local only. With all your new free time, get involved in local politics to remove restrictions/zoning/cut government and lower property taxes. What, are "they" going to "make" you work ? Hardly - join the FSA. Make only enough to cover property taxes and a few other items. Ride your bike, garden, raise meat animals, gather wood for cooking and heat, shop at thrift stores or freecycle. Trade work for food, services and other items. File your 1040 for EITC and other freebies. Help crash the system by overloading it - it's not just the leftie radicals who can do this smiley.

The things you have to work out to escape the system:
shelter - cheap and safe
transportation - cheap and durable
food - free (grow own, glean, forage, barter)
heat/cooking - free (rocket stove, masonry oven other)
work - for barter or cash

That's really all there is to it.

Print that out and post it on your refrigerator. Read it EVERY DAY until you're doing EXACTLY what is suggested here.

Nail, meet hammer.