Generational Dynamics Forum - New Site

Dear Isaac,

isaac wrote: > So if a dollar collapse is not what happens when the US defaults
> on its loans, what does happen? If the dollar is only backed by
> faith in the US government and the US government defaults,
> wouldn't that make people reluctant to take US dollars? No one
> wants Iceland's currency right now for example and the result is
> that they can not import. It seems if we can't import than prices
> on goods go up because there are less of them available.

What do you mean by "dollar collapse"? Hyperinflation? If so, then
which of the above three categories of money would you expect to
hyperinflate?

Sincerely,

John

So, the current bailout should not have any effect at all on the
deflationary spiral. It only means that the US government will go
bankrupt more quickly than it would have otherwise.

I appreciate your explanation. My simplistic way of looking at it is:

The bailouts simply transfer debt from Wall Street to the taxpayer. As you point out the result is to postpone a default and transfer it to the Gov. Again, as you point out money as debt is disappearing faster than the Gov can replace or transfer. Hence, deflation.

The debt must eventually come out of the system, and the only way is default -- sooner or later.

Thanks for your work.

Bill

isaac wrote:So if a dollar collapse is not what happens when the US defaults on its loans

Please explain how loans backed by dollars (which is what treasuries are), which in turn are backed by nothing, can go into default by the US government which can create any amount of dollars at any time, with the stroke of a pen (as we've seen in unprecedented fashion over the last decade but especially in the last couple weeks). This is why all the hysteria about FDIC not being able to pay claims in the future was so completely ridiculous. I'm not sure why so many people have such a hard time grasping this concept. We haven't been on a gold standard in decades, and yet people act and talk like we're still on it.

From the Philadelphia Fed's publication called "The National Debt" (page 8) (as cited in How Money is Created):
"The Federal Government, with the cooperation of the Federal Reserve, has the inherent power to create money - almost any amount of it. This power makes technical bankruptcy out of the question."

John wrote:Dear Isaac,

isaac wrote: > So if a dollar collapse is not what happens when the US defaults
> on its loans, what does happen? .

john wrote: What do you mean by "dollar collapse"? Hyperinflation? If so, then
which of the above three categories of money would you expect to
hyperinflate?

Sincerely,

John

OK then what does happen wehn the US defaults. Something must happens. And can the US really default if they can just print money any time they want too. I guess if they print money then that would be the first category since no one will take the second category anymore. They don't really need 7000 Million hundred dollar bills. They just need seven million $100,000 bills. I bet they could print those in jiffy. They probably wouldn't be worth the paper they were printed on.
Isaac

-- Market Summary, Wednesday morning, October 15, 2008

Wall Street indexes fell sharply at the open, and have continued to
fall. At present, the indexes have lost 3-5%.

The market seems to be springing back from the drunken orgy on
Monday, where the market went up 11%, following the incredible
worldwide fantasy bailout over the weekend. Now, the market seems to
have resumed its path for the preceding three weeks, where the market
fell 25%.

A major problem is that interest rates are not falling fast enough.
This was apparent yesterday from the quote from Rick Santelli that I
posted yesterday.

The news services are trying to put the best face on it. Here's a
Bloomberg story from this morning:

> Libor for Dollars Drops as Central Banks Offer Unlimited Cash

> By Gavin Finch and Nate Hosoda

> Oct. 15 (Bloomberg) -- Dollar money-market rates fell after the
> European Central Bank, Bank of England and Swiss National Bank
> offered lenders unlimited U.S. currency for the first time in a
> coordinated effort to unlock credit markets.

> The London interbank offered rate, or Libor, that banks charge
> each other for three-month dollar loans dropped for a third day,
> its longest sequence of declines in seven weeks, according to the
> British Bankers' Association. It slid 9 basis points to 4.55
> percent today. The comparable euro rate declined to 5.18 percent.
> Asian rates also decreased.
> http://www.bloomberg.com/apps/news?pid= ... refer=home

That sounds pretty good, until you read several paragraphs later:

> While the cost of three-month dollar loans has dropped in the wake
> of the measures, it's still 305 basis points more than the Fed's
> target rate. The difference was a record 332 basis points on Oct.
> 10. It was 82 basis points on Sept. 15, the day Lehman Brothers
> Holdings Inc. filed for bankruptcy and 11 basis points on July 31,
> 2007, just before the start of the credit squeeze.

In other words, if you look at interest rate spreads in the past
(where 100 basis points equals 1%):

Date Basis points
--------------------- ------------
July 31, 2007 11
Sept 15, 2008 82
Oct 10 332
Oct 15 305

In other words, the Libor spread has fallen a tiny amount, compared
to where it was even just a month ago.

Unless this changes, then the latest massive bailout will have failed
completely. Paul Krugman, at least, is still hopeful.

Sincerely,

John

John wrote: Date Basis points
--------------------- ------------
July 31, 2007 11
Sept 15, 2008 82
Oct 10 332
Oct 15 305

Well, let's say that trend continues and the LIBOR falls 30 points per week. A dumbass linear extrapolation would suggest that the LIBOR will not reach 80 points (pre-Lehman) until Christmas and "normal" values around Inauguration Day. Meanwhile, the market is dropping 3-5% a day. How far would two months of a bear market like this take us? A 3% fall per day for two months takes the market to 30% of its current value - Dow 2800. However, it's likely that as LIBOR falls, so does the rate of the bear market, so let's say 3% for three weeks, then 2% for three weeks, then 1% for three weeks. That takes us to:

[(.97)^15] * [(.98)^15] * [(.99)^15] = .4022, or Dow 3500.

This suggests that while the current fall is enough to stop the world from starving, it's not enough to stop the market crash. Dow 3500 would be a 75% loss from peak.

Remember that Obama does not have to actually fix the economy to be hailed as FDR's reincarnation. He only has to stop the bleeding. By Inauguration Day, Wall Street may be sufficiently prone to accept whatever the new Administration wants... the true "capitulation" that the current traders are still having trouble imagining.

Ben Bernanke's speech triggered a further fall in market indexes to
the 5.5-6.5% range.

27 stocks are falling for every one rising, making this the broadest
decline in the last year.

Volume is very high.

John

From a web site reader:



http://images.salon.com/comics/boll/200 ... /story.gif

From a web site reader:

> Dear John, I want to get in on the banking business too! I just
> roared on the Brooklyn Bridge idea ! There is my conspiracy self
> that sometimes questions ? Was all this planned to do what it is
> doing ? I have read so many times, "If you see it they want you
> to. If you hear it they want you to. Nothing that happen's is
> just by chance out of Washington,it's all planned. !" Are there
> "Winner's" in a "Greater Depression" ?

> This site is just the best! I read everyday,and the "laugh's"
> balance the idiocy of the Economic Follies!

I think I can safely say that nobody planned this disaster. I doubt
that there'll be any "winners," though there will be survivors.

John

From a web site reader:

> I find your web logs fascinating, and I think you are really onto
> to something with generational dynamics. My question is about
> gold. We are clearly in a deflationary spiral. Analysts from
> Goldman Sachs and Merrill Lynch are predicting $50 for a barrel of
> oil. So was the price of Gold inflated and overvalued, and do you
> see the price of Gold decreasing or increasing in the next four
> years?

Read through the following thread:

Inflation, deflation, gold and currencies
http://generationaldynamics.com/forum/v ... ?f=14&t=12

John