Generational Dynamics Forum - New Site

There are some very good points being made here.

Declines can be gradual or sudden.

When there is a run on banks and the major banks fail that has the effect of the economy dropping off a cliff.

An example of that would be the major bank failures in Europe in the early 1930s and the final round of bank failures in the United States at the same time.

Those events led to the "World Wide Great Depression".

The results of a World War between China and it's allies and the United States and it's allies would also have sudden, unpredictable results.

Even without such events a slower decline of the west is predictable.

The United States government will either reach unsustainable government debt levels in the next few years or it will implement massive government spending cuts.

Either way a major double dip recession of long duration is the best outcome one can hope for in the United States.

Southern Europe and Ireland are already at unsustainable levels of government debt. Great Britain and France are not far behind. Government spending cutbacks, bank re-capitalization and/or limited bank failures will cause, at best, a long recession in all of Europe.

With both Europe and the United States in a major recession a world-wide major recession is unavoidable.

Sustainable government debt levels in most countries will become unsustainable during a world-wide major recession.

Europe, so far, has rejected the United States model of the government ( in the form of the United States Federal Reservere ) just printing Trillions of new U.S. dollars out of thin air and the United States government ( in the form of the United States Federal Reserve Bank ) using Trillions of printed dollars to buy the United States' own bonds on the secondary Market.

Europe is instead attempting a muti-track approach:

1. Pretend that a democratic country can continue growing with a government debt load of between 120% and 160% of GDP.

2. Pretend that such growth can continue while the country introduces sever cuts in government spending at a time when a huge portion of the economy is government spending, and,

3. Pretend that such growth can continue while the country imposes new taxes on it's businesses and citizens to pay interest on the government debt, and,

4. Force the banks to accept a "voluntary" 50% loss on all debts they are owed by the country in debt crisis.

5. Tax countries not yet in a debt crisis to provide partial compensation to the banks and the citizens of the country in debt crisis for the losses they are suffering as a result of tracks 1 through 4.

The jury is still out on both the United States and European plans to solve their debt crisis.

Deflation occurs when demand dries up.

Europe and the United States are driving demand world wide.

One of two events is likely to cause demand to dry up.

Wide spread austerity measures in Europe or the United States or both, which will reduce jobs, reduce business activity and massively reduce demand, or,

Wide spread bank failures, which will trigger wide spread business failures ( due to lack of loans for businesses), and wide spread job losses, and massively reduce demand.

It is also quite possible that one and then the other will occur.

These may be quite different events than the political decision to default, or to take actions which the bond rating agencies and the bond holders consider the same as default.

Default can be caused by internal political decisions within the United States, or by external investor decisions, or by a combination of the two.

Default just means the U.S. is universally perceived to not be doing what they promised to do when they borrowed the money.

How could current events make it any clearer to everyone that the Dollar is and will remain the world reserve currency, until ... as jdcpapa said, War. And not the GWOT type but the Crisis type, where everyone uses every offensive and defensive measure they have and starts inventing new ones.

At that point its useless to speculate over stocks, bonds, commodities and even inflation and deflation, as overnight we will return to 1950 if not 1850. Do you realize that it takes one, ONE well placed HEMP of the correct type to completely cripple ALL electronics AND the entire American electrical grid. At that point, if you can't get your hands on it, you don't own it, and if you can't keep your hands on it, you won't own it long. That is what the missile defense program that the liberals try to block at every turn is aimed at preventing.

We've seen what slowing mortgage loans did to the real estate market. Imagine what going back to cash and check supported by manual calculation will do to every market; and that's when you can physically get to the bank and when they have cash or will accept your checks. How do you prove you hold stocks and bonds? Then once you prove it, how do get reimbursed? Don't worry John Corzine and his buddies will take care of you and your money.

OLD1953 wrote:Myself, I don't think US bonds will become worthless, so I've not really considered the question. But bonds and money aren't the same thing, therefore it would be possible for one to lose value while the other retains value.

Theoretically true. But central banks around the world hold their dollars as Treasuries. If the US defaults on Treasuries then the central banks will suddenly no longer be holding dollars. So as soon as the US defaults, it stops being the world reserve currency. Right?

Myself, I don't think US bonds will become worthless, so I've not really considered the question. But bonds and money aren't the same thing, therefore it would be possible for one to lose value while the other retains value.

I'm seeing the world right now as in a game of chicken, with dozens of simeltaneous players. The first one to crash or flinch will lose. Right now, it appears that Greece is about to crash directly into Europe. China is in the process of crashing, but it's an early stage. The US had a wheel fall off, but got it patched (poorly) and is back in the game.

What happens if Greece defaults, France leaves the EURO and the Italians start yelling for help, which they will by next June? European bonds of all sorts become the kiss of death for an investment firm, and they already are as MF Global found out, so they'll be buying their own bonds or dissolve the EURO. In either case, assuming the US holds together through that period, we become the investment of last resort. Unless, of course, you assume people quit investing and just stuff mattresses.

We have a large population retiring now, and I'd bet their recent experiences in the market, coupled with a new market crash will cause a lot of money to run to US bonds. We really are going down the Japanese path.

jdcpapa wrote:

vincecate wrote: Do other people agree with that if the US defaults, then central banks all around the world have worthless US Treasuries, which they toss in the trash, and the US dollar is no longer the world reserve currency? So the one thing that makes it harder for the US to get hyperinflation, that it is the world reserve currency, goes away the moment they default, right?

War.

It seems a real possibility. But the dollar would no longer be the world reserve currency because the central banks would no longer have dollars because their treasuries became trash.

vincecate wrote:

vincecate wrote:Please explain your thinking on this.

If John won't bite, is there anyone else who can explain why I am wrong or why John is right?

Do other people agree with that if the US defaults, then central banks all around the world have worthless US Treasuries, which they toss in the trash, and the US dollar is no longer the world reserve currency? So the one thing that makes it harder for the US to get hyperinflation, that it is the world reserve currency, goes away the moment they default, right?

War.

vincecate wrote:Please explain your thinking on this.

If John won't bite, is there anyone else who can explain why I am wrong or why John is right?

Do other people agree that if the US defaults, then central banks all around the world have worthless US Treasuries, which they toss in the trash, and the US dollar is no longer the world reserve currency? So the one thing that makes it harder for the US to get hyperinflation, that it is the world reserve currency, goes away the moment they default, right?

The situation is getting worse by the week, we'll have to wait and see if they can prolong the agony in Europe much longer, or if it is going to go down the drain immediately.

Bonds and foreign holdings of US bonds are a terribly complex issue, I doubt this is the last word on the subject. I do wonder if they are selling bonds in Europe to buy junk from Greece to keep them propped up. Much will depend on how fast the situation goes bad. If banks and countries start to default at rapid rates, the US bond may well survive as the last place to store money without vault fees. This is very much a standoff situation where the first person to blink may lose.

It should be kept in mind that Europe wants the US to do all fighting for it, they don't even like peacekeeping missions. If you want that kind of service, you have to pay for it.

Don't forget that the people fleeing violence in the Caucasus will put further strains on the Russian social services network. Demands for compensation may result, and cause further government breakdown in the region.