The Coming Global-Debt Supercycle End-Game?

[Riddick]

World Debt Comparison -

The Global Debt Clock

Excerpts from John Mauldin's The Sovereign Debt Supercycle Will Keep Getting Worse Until Something Breaks

"I have been writing about The End Game for some time now...When I mention The End Game, you'll immediately want to know what is ending. What I think is ending for a significant number of countries in the 'developed' world is the Debt Supercycle.
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Essentially, the Debt Supercycle is the decades-long growth of debt from small and easily-dealt-with levels, to a point where bond markets rebel and the debt has to be restructured or reduced or a program of austerity must be undertaken to bring the debt back to manageable proportions.
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we are nowhere near the end, as the government is stepping in where private debtors are cutting back. We have just shifted the focus of where the debt is coming from...

And yet, and yet... While the Debt Supercycle may not yet have ended, I think we can begin to see a clear case that, like the sandwich-board-wearing cartoon prophet warning, 'The End is Nigh!' Greece is the harbinger of fundamental change. Spain and Portugal are pointing to the same outcome, as their cost of debt keeps rising. And Ireland? The Baltics?

There is a limit to how much debt you can pile on. But as the work of Reinhart and Rogoff points out (This Time Is Different), there is not a fixed limit or some certain percentage of GNP. Rather, the limit is all about confidence... Everything goes along well, and then "Boom!" it doesn't...

The limit is different for every nation. For Russia in the 1990s, it was a rather minor total debt-to-GDP ratio of around 12%. Japan will soon have a debt-to-GDP ratio of 230%! The difference? Local savers bought government debt in Japan and did not in Russia."

[Riddick]

'Fiscal Rectitude' : The Economic "Muddle-Of-The-Road" Path

"The end of the Debt Supercycle does not have to mean calamity for each country, depending on how far down the road they are. Yes, if you are Greece your choices are between very, very bad and disastrous. Japan is a bug in search of a windshield. Each country has its own dynamics.

Take the US. We are some ways off from the end. We have time to adjust. But let's be under no illusions, we cannot run deficits of 10% of GDP forever. At some point the Fed will either have to monetize the debt or the bond market will simply demand an ever-higher interest rate.
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And it is not just the US. Take a look at the chart of G-7 debt...That is one ugly and unsustainable chart...


For most countries with debt problems, The End Game is a binary-path-dependent future. Countries can elect to get their fiscal houses in order over time, getting the fiscal deficits below the growth of nominal GDP. That is not without consequence, as it will mean slower growth in the short term (less than one year), but cutting deficits year after year, even gradually, will mean a very slow-growth, Muddle Through economy for a sustained period.
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It's all well and good to say that you want fiscal rectitude. It's another thing when it is hitting budgets near and dear to you. And to get back to a remotely sustainable deficit is going to take pain in every corner. It is going to hit near you, gentle reader. Some will get hit harder than others.

And this is the case in every country running large and out-of-control deficits. It is not just a US problem. The Irish are in what can only be called a depression, along with the Baltic states and Hungary. Greece will soon be there, once they have to meet market rates for their debt, or force their labor markets to endure a very serious deflation to make themselves more competitive."

[Riddick]

A Rising Inflationary Tide - The 'Money-Laundering' Wave of the Future?



"So, can we know how The End Game will turn out? The short answer is no. Each country will have to make its own political choices. Could we see hyperinflation in the US on Britain or Japan? It is possible, with bad policy decisions. I doubt that it gets to that. But could we see inflation? The answer is yes.

That has been the traditional method of default for many countries over the years. Instead of outright default, they simply inflate away debt. And the logic is compelling. If you have 5% inflation along with 3% real growth, you get a nominal growth rate of 8%. That means in nine years the economy is twice the size in dollar terms, but only about 35% bigger in inflation-adjusted terms. If somewhere along the way you can get your deficits down to 'just' 3%, then you can reduce your debt-to-GDP ratio by 5% a year.

In less than ten years, you cut your debt-to-GDP ratio in half. Sounds good, right?

Of course, you have destroyed the purchasing power of your currency, given a real hit to the incomes of the middle class, defrauded those who bought your debt, and in all likelihood you did not hold inflation to just 5%. Think the '70s.
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All of the developed countries that are in trouble have hard decisions to make. To pretend that we know exactly what that involves requires a fair degree of hubris. But we can see the various paths. In most cases, the number of paths is quite limited, because bad choices were made that have brought us to our current set of choices. As we attempt to sort out those paths, we will find there are signposts along the way telling us which path we are taking...

And even for countries that, relatively speaking, have kept their act together, we are talking about a large part of world GDP at risk. It is an interesting world in which we live."

[Psychicwolf]

A Rising Inflationary Tide - The 'Money-Laundering' Wave of the Future?



"So, can we know how The End Game will turn out? The short answer is no. Each country will have to make its own political choices. Could we see hyperinflation in the US on Britain or Japan? It is possible, with bad policy decisions. I doubt that it gets to that. But could we see inflation? The answer is yes.

That has been the traditional method of default for many countries over the years. Instead of outright default, they simply inflate away debt. And the logic is compelling. If you have 5% inflation along with 3% real growth, you get a nominal growth rate of 8%. That means in nine years the economy is twice the size in dollar terms, but only about 35% bigger in inflation-adjusted terms. If somewhere along the way you can get your deficits down to 'just' 3%, then you can reduce your debt-to-GDP ratio by 5% a year.

In less than ten years, you cut your debt-to-GDP ratio in half. Sounds good, right?

Of course, you have destroyed the purchasing power of your currency, given a real hit to the incomes of the middle class, defrauded those who bought your debt, and in all likelihood you did not hold inflation to just 5%. Think the '70s.

Come Wednesday, Benny tries again.

http://www.youtube.com/watch?v=StbxgDD9 ... r_embedded

[Psychicwolf]

If the global bubble blows up and requires 10% + interest rates on mid-long-US bonds, just think about what this will do to the US budget (and long-term debt) when the short notes roll over...
it could consume the entire federal budget just for debt service.

Do you suppose those most of those morons standing for election tomorrow even understand this??????

Joke's on you, 'Mericans.

[Psychicwolf]

Come Wednesday, Benny tries again.

http://www.youtube.com/watch?v=StbxgDD9 ... r_embedded

As expected...
QE2 (Quantitative Easing, round 2) was about what was expected.
The announced amount ($600 billion) was slightly higher than expected, but it was spread over a somewhat longer time frame (through the end of Q2 2011).

http://www.federalreserve.gov/newsevent ... 01103a.htm

Goldman Sachs (shadow government) believes that the FOMC will announce additional purchases throughout 2011 and probably into 2012 totalling about $2 trillion for QE2. (not counting reinvestment).

What was the current price of gold?????? The dollar did what?????

[Psychicwolf]

Why I Did It By Benny Bernanke

(short version)
"And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion."

http://www.businessinsider.com/ben-bern ... MoneyGame+(The+Money+Game)

[Riddick]

Excerpted from Ron Paul vows renewed Fed audit push next year at sify.com

U.S. Republican Representative Ron Paul on Thursday said he will push to examine the Federal Reserve's monetary policy decisions if he takes control of the congressional subcommittee that oversees the central bank as expected in January.

"I think they're way too independent. They just shouldn't have this power," Paul, a longtime Fed critic, said in an interview with Reuters. "Up until recently it has been modest but now it's totally out of control."

Paul is currently the top Republican on the House of Representatives subcommittee that oversees domestic monetary policy, and is likely to head the panel when Republicans take control of the chamber in January.

That could create a giant headache for the Fed, which earlier this year fended off an effort headed by Paul to open up its internal deliberations on interest rates and monetary easing to congressional scrutiny.
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Paul said his subcommittee would also push to examine the country's gold reserves and highlight the views of economists who believe that economic downturns are caused by bad monetary policy, not the vagaries of the free market.

Global organizations like the International Monetary Fund also will come under scrutiny, he said.

Imagine it, folks! Might we at last see a FULL AUDIT of the Fed?
Might all the backroom dealing be revealed for the world to see?
Might we finally get ACCOUNTABILITY & JUSTICE once & for all?


Why is everybody laughing... Did I say something funny?

[Riddick]

Meanwhile, back at the ranch...

Excerpted from Federal Reserve Risks Ruining Reserve Currency at standeyo.com

The Telegraph's Ambrose Evans-Pritchard is warning that the Fed's quantitative easing plan "risks" a "currency war" that may accelerate "the demise of the dollar-based currency system, perhaps leading to an unstable tripod with the euro and yuan, or a hybrid gold standard."

The problem facing the world is that the global economy is trapped in stalling speed. Most of the regular tools used by central banks have been exhausted...All that is left for national economies is to try to gain export market share at the expense of their neighbors.

To do this, nations are attempting to devalue their currencies to make their exports less expensive and imports more expensive. The risk, as Evans-Pritchard points out, is trade war. Relations between China and America are especially strained...And the war is spreading. The Telegraph reports (emphasis ours throughout):
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Taiwan intervened on Monday to cap the rise of its currency, while Korea's central bank chief said his country is eyeing capital controls as part of its "toolkit" to stem the flood of Fed-created money leaking out of the U.S. and sloshing into Asia.
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"It is becoming harder to mop up the liquidity flowing into these countries," said Neil Mellor of the Bank of New York Mellon. "We fully expect more central banks to impose capital controls over the next couple of months. That is the world we live in," he said. Globalisation is unravelling before our eyes.

Additionally, foreign nations are beginning to wonder if the Federal Reserve's money printing isn't designed to just lower the value of the dollar and increase exports, but also to monetize the debt. Is the Fed printing money so as to cheat its creditors and make debt payment easier for Americans?

In 2009, the Federal Reserve created money to finance 80 percent of the U.S. budget. Depending on the outcome of the Federal Reserve's announcement on Wednesday, this year's money-printing may approach similar magnitude.
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Money printing of this scale cannot go on indefinitely - it is Zimbabwe policy. It will inevitably lead to the world adopting a new reserve currency; one that is a stable store of wealth and one that cannot be created with the click of a computer button. The Telegraph continues:
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a chorus of Chinese officials and advisers is demanding that China switch reserves into gold or forms of oil. As this anti-dollar revolt gathers momentum worldwide, the U.S. risks losing its "exorbitant privilege" of currency hegemony—to use the term of Charles de Gaulle.
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If China abandons the dollar, it could set off a mass exodus. Will a Federal Reserve decision to devalue the dollar be the catalyst?...As the Trumpet wrote in April 2006,
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One day soon, foreign nations will not have the motivation to support the dollar and America's massive deficits, because to do so simply will not benefit them any longer. When that day comes, it will come as a giant knockout blow for the dollar...

Time is running out. The world is watching.

[kbot]

Excerpted from Ron Paul vows renewed Fed audit push next year at sify.com

Imagine it, folks! Might we at last see a FULL AUDIT of the Fed?
Might all the backroom dealing be revealed for the world to see?
Might we finally get ACCOUNTABILITY & JUSTICE once & for all?


Why is everybody laughing... Did I say something funny?

Yes, you did.........I cannot possibly forsee that day when The Fed is audited. Possibly, after the total collapse of the American economy and government, and even then, so much evidence will have vanished to make even a cursory inquiry meaningless........ I would welcome an audit, but it will never happen.

[Riddick]

Excerpted from Ben Bernanke's QE2 is misguided at guardian.co.uk

Starting this month, and continuing up until mid-2011, the Fed intends to buy 0bn of US treasury bonds in the open market. This programme will be known as "quantitative easing 2" or QE2; its express intention being to tackle unemployment.
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But while the motivation for QE2 remains sound, that it is now the only tool left standing is a sad indictment of current economic policy. We should remember this policy encapsulates the same thinking that helped create this economic mess in the first place.

So how is QE2 meant to work? As America's central bank, the Federal Reserve has the power to create "high-powered" money, ie notes and coins, as well as "digital" money, which it can credit to the private banks when it purchases assets from them. The Fed is hoping that when the banks receive this freshly created money, they will start lending it out.
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But trying to get banks to lend is only one part of what QE2 is designed to achieve, for it is not just banks that will sell their bonds to the Fed: many other investors will end up selling their bonds, too. And these investors will use their cash to buy other tradable assets, such as corporate bonds and shares in the stock market. Indeed, the 80% plus rise in American share prices since the low reflects, in part, that money from QE1 found its way into the stock market, and that everyone knows that QE2 is coming soon.

And, just in case you wondered, this is entirely part of the plan. For as Bernanke himself said: "Higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion."

Of course, there is something deeply unsettling about an economic policy based on boosting the wealth of the rich asset-heavy... Indeed, John Maynard Keynes would be wondering why on earth policymakers are going through the middleman at all... I suspect he would have found the idea that central banks were increasing the wealth of the rich in the hope that they might spend some of it slightly odd – a rather roundabout and complex route to get to the nub of the matter, unemployment.
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But this is how far economic policy has come...Most pour scorn on the idea of government intervention in the real economy, while ignoring the fact that the Fed continues to create billions of dollars so that the balance sheets of the wealthy remain healthy.

History tells us that printing money to make jobs is a dangerous inflationary game. History also tells us that there are unique periods of time when these kinds of policies work. I doubt that we are at that point yet...At some point western governments might well find themselves utilising Keynes's more radical ideas. For the time being though, it seems as if governments are determined to tighten their belts and let central banks attempt to reignite the consumer boom.

[Riddick]

Excerpted from Fed Risks Its Credibility on a Bowlful of Mush at bloomberg.com

Either the Fed is operating under a misconception about how QE2 will reduce unemployment and raise inflation, or it has failed to communicate the transmission mechanism to the public. Neither is a plus.

About the best thing anyone can say about the well-advertised and anticipated QE2 is that it won’t do much good. The worst thing is that it will inflate asset prices, which we don’t call inflation.

Because Fed chief Ben Bernanke has been unwilling to admit the role low interest rates played in puffing up the housing bubble, he sees little risk from further easing, according to Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut.

At the same time, the Fed’s output gap models, which measure the difference between actual and potential growth and were "violently wrong in 2003 and 2004," reinforce the majority view that deflation is the real threat, Stanley says.
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Then there’s the Fed’s stated tactic of raising inflation expectations to lower real interest rates, a flawed concept even though it has succeeded splendidly in the short term.
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So taken is the Fed with the notion that higher inflation expectations are the route to salvation that it has commissioned research on the subject. Last month, three Fed Board economists published a paper claiming that with overnight rates near zero, an oil price shock would be a plus for growth....If you believe the research, we should be rooting for one of those old-fashioned oil shocks, circa 1973 and 1979, to fix what ails the U.S. economy!
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"Credibility against deflation is tied to credibility against inflation," says Marvin Goodfriend, professor of economics at Carnegie Mellon University’s Tepper School of Business in Pittsburgh.

What Goodfriend means is, the Fed has "the independence and operational capacity" to fight inflation and deflation via its control over bank reserves. What it doesn’t have is the luxury of overshooting to fight deflation, producing more inflation in the short run, when expectations have been manipulated higher.
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Almost two years have elapsed since the central bank pushed the funds rate to near zero. In that time, policy makers have failed to explain the framework for fighting deflation, Goodfriend says. Without that framework, it has to take risks with policy.
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If the Fed has failed to communicate its framework for fighting deflation, as Goodfriend says, and if expectations aren’t your cup of tea, no wonder you’re nervous. Bernanke is headed into uncharted waters with no compass, no radar, and no stars to guide him.

The good news is he’s got plenty of fuel. The bad news: His only rations are gruel.

[Riddick]

Excerpted from Flaw in Fed's ideological repositioning on asset prices at ft.com

There has been a quantum increase in demand for government bonds. Commercial bankers claim that they would love to lend but in the absence of demand they have no choice but to park the deposits of risk-averse customers in Treasury securities (though some analysts believe the sequence is the reverse).

The banks are encouraged to do so as players in a game that is essentially rigged. That's because governments have decided that they themselves are far more creditworthy than any company or individual and therefore banks needn't set capital against their holdings of government paper. (A proposition that looks less defensible by the day.)

But the largest part of the buying comes from the central banks themselves. With massive purchases of Treasuries, the distinction between fiscal policy and monetary policy is becoming blurred. Central banks become ever more complicit in politics.

Senior central bank officials concede that this is the case. They don't believe in the policies they have adopted but don't dare speak out against them. They believe that to warn of incipient bubbles in the market for sovereign debt is tantamount to saying that governments are essentially untrustworthy.

Meanwhile, many economists believe that zero interest rate policies actually discourage spending since individuals have to save all the more, given paltry returns. That in turn undermines the policies the central bank wishes to support.
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Worryingly, it becomes increasingly harder to exit from these policies down the road. To raise interest rates even slightly means a rise in the debt servicing burden of indebted companies and can tip them under, increasing the jobless rate. Once the Fed announces the end of asset price support, bankers fear the announcement may bring down the market.

Today, the credit markets are making judgments that on first glance seem rather curious. Lebanon, for example, trades more favourably than Portugal, according to data from JPMorgan. Some of the more gloomy market players believe it is only a matter of time before the US trades more like Portugal.