Kr

Historically, when an economy gets to this point in the cycle, the .gov will start deficit spending as fast as they can pass the appropriations.

The pressure this increased demand puts on the decreasing supply to the debt market drives the cost of all debt, .gov and private sector, to very high levels.

These high costs of debt completely crush the remaining private sector economy.

Eventually the falling tax cash flow to .gov from the private sector reduces money available for debt service, and the .gov deficit spending is brought to a halt.

Then, due to lack of demand, the cost of all debt, private sector and .gov rapidly falls to zero, or negative, in the recent case of Japan.

Will this happen, possibly on a global basis??? It remains to be seen.

Nothing

How quickly do you think this cycle will take? I understand there is no way to know, but am interested in your opinion. I ask because I am inclined to go all cash, but I don't know when I should and am making good money on my long positions now. I picked good companies, no momo stuff and avoided all financials and housing related stuff since last December. Personally, I think it will be like driving over a mountain pass with a hidden cliff about 3 months down from the summit. Just enough time for everyone to relax a bit before freefall.

Krz: don't think for one minute that the Fed setting interest rates near 0% will mean cheap cheap cheap fixed-rate loans becoming available at the local B of A. Just the opposite, probably.

Fatllama, Your are probably right. I still can't figure out why Capital One keeps lowering my rates though. My C1 CC is now down to a fixed 5.9% and I have another with GE Money bank with fixed 4.9%.

Kr

Hard to say...the deficit spending is just staring ramp, with the talk of the .gov acting to slow the RRE market meltdown, the commercial RE market crash just coming up on the radar screen, that, and the related service sector unemployment going forward will put huge pressure on the .gov to bail as fast as they can.

I think 3 months at the outside, before the reality of FED Target cuts, being due to a doomed private sector, sinks in and all markets are sold off.

When the cost of private sector debt continues to rise and .gov debt (Treasury rates) start to ramp...there will be no doubt where the global economy is going.

Nothing,

Thank you for taking the time to answer my questions and for all the time you spend informing everyone here. While I'm at, thank you KD for the board. I don't trust myself to trade, short, and buy options without losing my butt, but the overall economic information here is helping a lot of people make prudent life decisions for what looks to be a long overdue day of reckoning for our irresponsible finances.

Kr

Should have said...

When the FED continues dropping the FFT as .gov and PS debt costs are rising, there will be no doubt.

Kr

Thank you for the opportunity

hmm. I've been following all the discussions on this (inflation, deflation, biflation, PM's great, PM's no good, etc....) and I realize I actually have one thought to contribute I haven't seen any of the very bright people here mention yet... maybe because it is a stupid thought, but let me trot it out and let's see:


...the markets have clearly been manipulated by the government making it difficult to make rational investment decisions... because they keep making the markets do irrational things. Considering this is the government's attitude, that the "invisible" hand, foot, elbow or whatever will always be there doing its thing, won't the government have a plan for deflation? Seeing as how trying to pay the national debt would become an unbearable burden (Weimar Germany's war indemnities anyone?)

If I were a market-manipulating federal government official, I'd have fired up the printing presses back when the problem became apparent, certainly by this past August I'd be running them 24 hours a day and even printing very high denominations... 500, 1000, 5000, 10,000... I'd have mountains of the stuff already distributed in warehouses across the country, ready to "inject" into the economy when the financial shtf. I would have already come up with a plan on HOW to get it into the economy.

Hey, if all else fails, (as cramer seems to suggest...) just directly buy all the crappy debt vehicles from the banks... WITH CASH! Wouldn't that essentially be a wash, since debt-money dissapears from the economy and is replaced with the same amount of cash? Having tons of cash in the vaults ought to fend off any runs on the bank... Once the government owns all the mortgages, they can do what they want with them... forclose, re-set them at a lower fixed rate, whatever.

I'm not saying I ADVOCATE any of this, just putting it out there as an example, my point just being, have we considered the limits of how much the government would intervene? (are there any?) I'm sure people here can come up with better examples/scenerios than I can...

I still can't figure out why Capital One keeps lowering my rates though. My C1 CC is now down to a fixed 5.9% and I have another with GE Money bank with fixed 4.9%.

Really interesting. Are they facing increased competition in keeping their best (solvent) customers?

Joe-bob,

I'm no expert, but what you describe is the hyper-inflationary scenario that a lot of people are banking on. If you believe this will happen, you ought to buy commodities and perhaps foreign currency now, yes?

The alternative scenario that many on this board are coming to believe (and I am slowly working through myself) is that since fewer powerful people would benefit from such a devaluation of the USD we are going to get a deflationary spiral instead. Creditors will stop originating new loans (effectively shutting down the really important printing presses). Debt-backed assets will either lose their market or be sold at a loss. Sure, the Fed can lower interest rates, but in a recession it becomes more important to preserve capital than find new investment opportunities.

Fatllama, You may be right, I don't know. The last time C1 lowered my rate was when I got mad at them. They changed their billing cycle and my payment was 1 day late. I'm sure they sent me a letter telling me, but i probly threw it away as junk mail. Anyway, when they charged me a late fee I called complaining and when I told them to close my account they gave me the late fee credit and lowered my rate to %5.9. The cards have no annual fee and are paid off each month. They are making no money from me, so I don't know why they want me as a customer. In fact, I earn miles on the C1 card and have used the miles for plane tickets twice, so they are actually losing money.

Krz: "Sold to them" I guess.

Joe

If that is your POV on money going forward...you should be positioning now, by buying all the asset classes, equities, commodities, collectables you can get your hands on, using as much leveraged debt as they will give you.

Under your scenario, the DOW is not going to stop at 36K, houses will go well past 1.5M median etc. etc. and you will be able to pay it all off with virtually free money.

woah I have no thesis to convince anyone of, nor am I saying I have a set position I'm putting out there.

...I'm just saying, I think it is an important question, how much meddling will the government try, how much is it actually capable of doing, what will the effects be of their trying, what will be the effects if their efforts succeed?

..and of course, hoping wiser heads than mine have some thoughts about it all ;)

Joe bob that's like asking:

"Well I lost money in a vegas casino, but this guy next to me has money, so I stabbed him and I took his chips. I lost it again. There's though another guy on the other side of the table. Will I stab him? Yes. I skull****ed him in fact. Is 25 to life enough incentive for me to stop now? May be. Maybe not."

Joe - my grasp on this is nothing compared to Nothing's, but I think the general idea is that we cannot afford to devalue the USD any more than we already have. Sure, under your scenario, banks would survive the run. But, would foreign producers continue to buy and hold dollars whose value is collapsing? Would they continue to finance our deficit? Would wages really increase along with the inflation? Would banks really continue to originate loans to citizens and other banks in a recessionary environment?


Edit: MtgSpy -- wtf?

Joe

Well, it's going to be either one or the other...it has gone way too far this time, there will be no "muddle through", "stagflation", middle ground to hide in.

In fact, historically, "stagflation" has proven to be only a transition period between debt/currency devaluation ("inflation") or debt/currency revaluation ("deflation").

I advise anyone who sees "inflation/hyperinflation" as the path going forward to do what I outlined above as soon as possible.

...and add truckloads of precious metals, bought with all debt and cash, to that list.

Quote:

I advise anyone who sees "inflation/hyperinflation" as the path going forward to do what I outlined above as soon as possible.

...and add truckloads of precious metals, bought with all debt and cash to that list.

sold to me! (waitaminute... aw crap...) :P

Fat

You have to think globally...this is a global debt debacle.

All that is standing in the way of a global hyperinflation windfall are the global Bankers.

The last time there was serious attempt to end run the debt merchants (Bankers), by printing money, was the Weimar Republic...the Bankers said;"**** You, you're not devaluing our debt and money"...they cut off debt origination, external trade, and all debt redemptions immediately...the hyperinflation collapsed in 7 months, debt and money was reset, and every one inside Germany were back where they were before the "printing" started.

>>The last time there was serious attempt to end run the debt merchants (Bankers), by printing money, was the Weimar Republic...the Bankers said;"**** You", you're not devaluing our debt and money...they cut off debt origination, external trade, and all debt redemptions immediately...the hyperinflation collapsed in 7 months, debt and money was reset, and every one inside Germany were back where they were before the "printing" started. <<

Except for the middle class savers of course. Their life's savings were spent on a loaf of bread at the height of the hyperinflation. And thus began the conspiracy theory inside Germany that French and British bankers (aka Jews) were attempting to destroy and take over Europe.

Mo

True on both counts

There were folks, at the time, who saw what was coming and were saying, get out of cash, it was the less informed that got thrown under the bus.

and Herr Adolph played that .gov political card all the way to the Chancellorship in '33.

Actually, gold did better in the deflation of the 30s. Gold entered the Great Depression at a fixed price of $20.67 and the Treasury acted to outlaw hoarding of gold and fixed the price at $35, which stayed in place for the next 40 years. Homestake Mining Co. was up 396% from 1929 to 1934.

Can someone assail this notion factually?

See the link below:

http://www.thelongwaveanalyst.ca/

Great point sellnrun - people will hoard hard assets - according to Fekete, the lowest point and lowest risk on the invert pyramid is gold and gold can be used to acquire FR notes

The Fed Reserve will attempt to inflate us out of this problem with every tool it has in its arsenal - this will create short term inflationary pressures - they will fail in the longer range - but again this will occur in phases.