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How Will The U.S. Finance Itself?
An interesting piece from Barrons: Uncle Sam’s Credit Line Running Out?
The Treasury is set to borrow $550 billion in the current quarter alone and $368 billion in the first quarter of 2009. "Near-term pressures on Treasury finances are much more intense than we had thought," Goldman Sachs economists commented when the government announced its borrowing projections last week.
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Backshall is not alone in this dire assessment. Scott Minerd, the chief investment officer for fixed income at Guggenheim Partners, a Los Angeles money manager, estimates that total Treasury borrowing for fiscal 2009 will total $1.5 trillion-$2 trillion. That was based on $700 billion for TARP, a $500 billion-$750 billion "cyclical deficit," an additional $500 billion stimulus program and some uncertain amount for the Federal Deposit Insurance Corp.
Minerd doubts that private savings in the U.S. and foreign purchases of Treasury debt will be sufficient to meet those government cash. That leaves the Fed to take up the slack; that is, monetization of the debt.
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Cutting through the technical jargon, the yield curve and the credit-default swaps market both indicate the markets are exacting a greater cost to lend to Uncle Sam. And it’s not because of anticipated recovery, which would reduce, not increase, the cost of insuring Treasury debt against default.
All of which suggests America’s credit line has its limits.
Every credit-card has a limit, and the U.S. has stretched its own for some years now. Overdrawn credit cards tend to to require higher interest payments.
Printing money and inducing high inflation is a possible way out of the debt. But there are consequences. If the U.S. inflates too much, the status of the U.S. Dollar as the dominant currency in the world would come into doubt. If that happens people would sell the dollar which could move an inflation scenario into a hyperinflation one and leave, in the end, no other way out than default.
This would somewhat be consistent with GAEB’s prediction that the U.S. will default on its debt in 2009. (Can someone please send me the full GAEP report?).
Is this likely? I do not yet think so. But it is now a genuine possibility. To discuss such, or even a serious inflation scenario, would have been seen as pretty much out of wack by the mainstream just a few month ago. But today Barrons, one of the leading Wall Street papers, is printing the above.
Even with a decent background in economics I have now too little trust in the various models to predict the outcome of this crisis. There are myriad factors to consider. The yield curve and CDS spreads the Barrons piece emphasizes are more the result of opinions than of efficient markets and they may be quite wrong.
No model I know of fits anymore. Depression, deflation, stagflation, inflation, hyperinflation, default – all seem possible now.
What are you expecting?
Gravity. Remember gravity?
Suppose you fall out of an airplane, with all kinds of baggage. A lot of things seem to be happening at once. Shoes, toiletries, books, suits, and underwear all over the sky, all of them trending in a generally Earth-ish direction.
Never mind the confusion. Just step back a few, mentally, and look for the laws that govern such situations. You will be able to predict what is coming. Things tend to organize themselves around whatever Newtonian laws apply. Gravity will soon enough indicate to you that all is well, and all will be well.
Until that sudden stop that’s coming steadily closer, more and more in focus.
Our economy is like that. What’s immutable in all the talk of deflation, inflation, recession, recovery, bailout, flim flam, and fraud flying every which way including into the fan is this —
our currency is worth 3% of what it was when the Federal Reserve was founded in 1913. The work of the Fed has been to create money out of thin air by issuing loans, by issuing new debt instruments called dollars.
This taking of value out of the dollar is relentless. Every new dollar issued (above and beyond replacing worn out bills) makes all previously issued dollars worth a tiny bit less. Trillions of tiny bites add up after decades.
This printing of money that has no basis in real production or real assets, that is tied to nothing whatsoever except imagination, is what the Fed does for our economy, and it has increased in the past 8 years to seven levels beyond mind-boggling. It is increasing this fall of 2008 at eleven levels beyond mind-boggling. One trillion dollars was imagined into existence, and loaned out to financial institutions on Paulson’s List, in just 23 days during October.
Like gravity acting on a falling body, this dilution of buying power in the world’s reserve currency will organize the American dollar more and more precisely around complete worthlessness — which is that sudden stop that is coming along relentlessly.
So, never mind the confusion out there. Just watch things settle out.
There will be a bit of wild volatility in the stock market, and in asset prices, as people chase a parking place for value, but relentlessly and inevitably value will leave off the dollar entirely, moving instead to real things like land, buildings, machinery, tangible commodities actually in hand, valued skills, and any means of production in your neighborhood.
Americans will find, within five years, that about five thousand individuals own virtually everything valuable in America, and many of those five thousand are not even Americans. This is where all the value in our currency will go to. The current winners of the capital collecting game will use the dying dollar to buy every damned thing in sight.
Maybe the American people will take every damned thing back, and throw the five thousand out onto the street with the American people.
Prolly not. Sheep are often revolting, but do surprisingly little actual revolting.
Americans will have a new currency in a year or two, probably a mix of Canadian, US, and Mexican buying power called the Amero, and it will be issued at some small fraction of the last dollar in existence, on its last day. Ten bucks for one Amero. Twenty? It will hardly matter. When the dollar has turned to toilet paper, you won’t really care.
You can’t fall out of an airplane without hitting the ground. The parachute you have or do not have is mere detail. You will hit the ground at some speed or another.
You can’t print money not based on real things, fiat money, imagined money, and keep your currency. You will lose your currency, at some speed or another.
The historical path of fiat currency is always the same — it looks like a hockey stick viewed on its side. A long handle sloping gently upward, followed by a sudden nearly right angle turn straight up. This sudden tangent is the final few percent of perceived value suddenly departing the currency. It is the point where compound interest suddenly goes into hyperdrive.
Try it. Put one grain of rice on one square of a chess board. Put two on the next one, four on the next one, eight on the next one, and keep doubling like that to square 64. You won’t believe how the pile gets out of hand in just the last few squares.
That’s where the dollar is now. Square fifty-nine. Hyperinflation is as inevitable as the ground rushing up below a parachute-less parachutist.
Posted by: Antifa | Nov 12 2008 2:58 utc | 20
Rick @ 16:
I would appreciate any MOA’s reader’s comment on this article about gold/precious metals.
IMO, very very speculative and highly dubious. For those expecting the worst and hunkering down accordingly, I’m sure some of this stuff is going on. However… at least as I see it, w/post election circumstances there is enormous opportunity to redirect US focus, human energy & expertise and material resources to very much needed development which “the market” has entirely ignored (another foundation of Reaganomics proved false BTW).
I think this plays out as response to BO’s econ initiatives or lack thereof. Personally, I wish BO would get off the pot.
I also think there is WS push to try and survive this through another round of insular bubble wrap. I’ve read/watched all kinds of utterances from various hedge & fund managers suggesting moving paper around, writing off debt and clearing balance sheets will solve everything. Charlie Rose did interview last night with Bill Ackman | Pershing
Square Capital Management (video not up as of now) which reinforced this notion. He thinks we’ve got plenty of equity on US shores, a notion I’ve heard from others in his position. Incredibly (at least to me) he cited US gov’s +/- 33% equity in US economy as “reserve”, the source of which is taxes.
For me anyway, the absurdity of this position needs no explanation. I mean, please… we’re now down to dependence on US taxpayer as last resort equity source?
I think his entire premise is a mirage.
Prior to congressional break/election, I watched a ton of C-SPAN hearings on various aspects of all this. If anything stood out, it’s fact that very few lawmakers understand width/breadth/scope of our financial mess, much less reasoned appropriate responses.
Whatever underlying, baseline value/equity exists (or not) on our shores, I think of more concern is vapid lack of critical mass intellectual capacity… at least in the positions of power/influence that moves things along.
I mean, lets face it… we’re broke. And I see this morning lawmakers (Sen Baucus) now rolling out plans to finance univ health care. Really, what are they thinking?
Hmmm… maybe if I went out and bought a new Ferrari it would make me feel better through this troubled time, no?
Anyway, if gold becomes currency of the day, it’s probably going to follow a $USD collapse IMO. If you read Roubini regularly, he’s sure worried about it… and he’s not alone.
I’m still hoping we can turn things around the right way before that happens… I think it can be done. But needed action not evident anywhere that I see.
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b @ 29:
With the US’ budget deficit likely to be 4% of GDP in 2008 and an astonishing 6% of GDP in 2009 — without counting the bailout costs — it may have to issue USD 3 trillion of new papers into the Treasury market.
I’m curious where you’re getting these #s. I’m also very curious… what are their US GDP estimates for ’09? What kind of contraction do they forecast? I think % of GDP likely considerably higher than that given major econ slowdown.
I’m on road ’till Saturday or so (my bookmarks on this @ home), but some pretty good econ bloggers have made the case from which I posit this notion.
If the market cannot absorb this, and the Fed steps in to buy, it is equivalent to printing money to fund fiscal spending.
What’s new about that? AFAIC, that’s all they’ve been doing since (at least) ’05. It’s just accelerating now, and (finally) becoming transparent/visible to Joe-The-Credit-Card-Holder now that all their bubbles have burst.
Well, at least Junior has made the world safer & we’re winning the war on ‘terra… we are safer, aren’t we?
Posted by: jdmckay | Nov 12 2008 15:46 utc | 33
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