The Downfall of Keynesian Economics and the U.S. (Part 3 of 3)
In the first two parts of this series, we identified fundamental economic weaknesses that running a Keynesian based economy have brought us. So the next question is figuring out when the critical point will be, and what it will look like. In short, we’re looking at it as we speak.
Let’s start with the ‘when’ of the equation. To put it in its simplest form, the critical point our Keynesian economy will be at is when the U.S. completely lacks the ability to sell any of its debt, and consumers are unable to take on any more debt.
Using the three farmer analysis in reference to foreign holdings of U.S. treasuries; Remember that when $100 left the farmers' economy, there was only $200 to repay $330 worth of debt. This situation is unfolding as we speak, but a day will come when the answer to the above equation (treasury sales – capital outflow) will be negative by a very drastic amount. That will be the melting point.
So what will this situation look like? First off, remember that in the Vietnam era, there was a glut of savings. This allowed for banks to continue making loans even if some went bad. With that in mind, things are much different today. With not just some, but a large number of loans going bad, banks just don’t have the capital to make loans like they used to. Compile that with a negative savings rate, and the only other solution is to increase the monetary base in order to keep the train rolling
I’m sure some of you have noticed a fundamental flaw in the above mentioned reasoning. Well, maybe ‘flaw’ isn’t the best word here.
This argument refers to the question we hear about on a daily basis. It is the question of whether we will experience inflation or deflation here in the U.S.
Now back to the question of the flaw mentioned. If the equation is based on treasury sales, what happens if the government creates the treasuries and the Federal Reserve prints the money to buy them (monetization)? The answer is hyperinflation, and that is most likely the course that the Federal Reserve will take. This is the last step before the edge of a cliff in a Keynesian economy, and the Fed will do everything in their power to avoid a collapse in their economy.
Going back to the very beginning of the solutions to how the third farmer is going to pay, you have either more loans or more money. We are seeing this at a level that is unique to our history. This is the equivalent to a chicken running around with its head cut off before it finally keels over to die. Have a look at these charts.
The whole goal is to save the Keynesian economy. The ironic thing is that this was doomed from the start. Really the two solutions that keep the farmers running are the two paths to the inevitable end. That end is the collapse in faith of the U.S. dollar and its banking system.
Aftermath of Keynesian Meltdown
The signs of the boiling point have reared their ugly heads. Those signs come in the form of negative net sales of U.S. treasuries by foreigners, credit crunch making new loans more and more unavailable, and the deflation seen in financial markets. The U.S. government and Federal Reserve will fight this with every tool they have, resulting in an end game of hyperinflation. This process has began, but it will get more extreme
First let’s look at the question of ‘does this predicament have a remedy?’ The answer is not really. If Paul Volcker stepped onto the scene today and raised rates to 20%, we might see another ‘save’ of the banking system, but there is absolutely no one that would be allowed in office today with such a policy. Even if this was the desired goal, and I’m not saying it is or it isn’t, this would result in deflation that would dwarf that seen in the Great Depression.
Remember, there is a very significant difference between the Vietnam era and the economy today: savings. When Volcker came into office, Americans actually had savings. Even though his actions caused a tremendous amount of bankruptcies and financial turmoil, the situation was remediable because of the savings rates.
That is not the case today. Americans have had a negative savings rate for some period of time now, and a gigantic rise in interest rates would put have this economy with negative double digit economic numbers for years to come. Anyone holding adjustable rate lending instruments, or anyone who requires access to short term lending facilities (that’s includes ALL of corporate America) would be simply done for.
So you’ve heard me mention a collapse in the U.S. dollar as well as the U.S. banking system. Am I being a little extreme? Absolutely not; I call it how I see it, and for the above mentioned reasons; do you really think that there will be any faith in the dollar or the banking system?
Some people look at me as a guy who sees the cup half empty. That’s not the case at all. I’m a “that same cup is going to cost you a $1000 before this is all said and done, and that’s if the store clerk is still accepting U.S. dollars” kind of guy.
This economy is simply the result of over 70 years of Keynesian economic theory beginning to exhaust itself. These are not only the theories practiced by our economic leaders, but these are also the theories taught in the economics courses offered by our college courses…the same college courses I took. We had a near implosion as a result of these theories in the early 1980’s, but it is my firm belief that we won’t be so lucky this time.
Disclosure: None.
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This article has 41 comments:
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poor boomer
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5 Comments
Nov 21 07:39 AM-
This Game is So Rigged
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10 Comments
Nov 21 08:01 AM-
patio
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93 Comments
Nov 21 08:10 AM-
archman82011
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133 Comments
Nov 21 08:11 AMThe dollar going up is NOT a flight to "quality".
The dollar going up IS a flight to "quantity"
Over the coming 5 years look for the dollar to make new lows. Most other countries have had it with our phony, consumerism economy, and they are now verbally letting us know this. The rest of the world will be in no rush to finance america's debt in the coming years and are starting to realize that they will never be paid back for all the money they lent us in the past.
Other than a very few select US stocks that make most of their money overseas, the average investor should not own US stocks. They should own foreign stocks that trade directly on the exchanges in which the companies belong, for both capital appreciation, income, and currency appreciation against what will be a falling dollar.
Don't expect this to happen right away.
These things take time.
It is going to happen.
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sbenard
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237 Comments
My Website
Nov 21 08:38 AMThis morning, I heard a professor on CNBC say that Obama needs to stimulate to the tune of $10 trillion to avoid a depression. Is he kidding? He wants to double the national debt in one year to avoid a depression!? This debt will NEVER be repaid!
Yesterday, I thought Rick Santelli said it best. When Steve Liesman quoted Treas Sec Paulson when he said that without the $700 billion bailout package, the American People would have paid a very heavy price for a collapse in the financial system, Rick Santelli replied that the American People are paying that very heavy price anyway. Indeed, we are! Are we're only just beginning!
One of my friend told me something insightful a few months back. He reminded me that there is no international bankruptcy court. There is no such thing as national bankruptcy. Instead, governments use hyperinflation. When everyone heads for the U.S. government debt exits, the only thing that will have value will be hard assets -- commodities and real estate. Paper assets, including bonds, stocks, and currency, will be worthless.
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archman82011
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133 Comments
Nov 21 08:49 AMAgreed.
Other than PM, the other 9 stocks that make up my portfolio are non US listed stocks or REITS, that to this day, have been reporting great earnings and are not affected by the credit crisis or the global slowdown. 2 of those stocks are somewhat commodity related names that are down right now, however will bounce back big time once the rest of the world is back on it's feet.
During that time the US will be struggling to even get back on its knees with all its debt and failed consumerism policies of growth.
Over the coming decade the rest of the world, or atleast those parts of the world that have room to grow multifold, are going to realize that they never needed the small 300 millions american consumers to fund their growth. Their own populations of "billions" are going to do it for them.
I love our country, and I am an American, but we as a country have dug our own grave and now we have to lay it in.
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BS Detector
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292 Comments
Nov 21 08:58 AMNow, specific problems:
1. If the banker is aware that there is only $300 in the monetary base, and he has it all, he won't be a banker. Why would he lend out money if there isn't any money to repay as interest?
2. "The answer is hyperinflation, and that is most likely the course that the Federal Reserve will take." Most likely based on what?
3. You show the scary monetary base chart, which takes off higher in the end. What you don't show is the actions of banks in the last year, while they have been deleveraging like mad to raise their capital levels. This IS a decrease in the overall money supply (which we used to measure - M3), and the fed's recent actions are meant to counteract this hugely deflationary action by the banking industry.
4. "Those signs come in the form of negative net sales of U.S. treasuries by foreigners..." Really? Why then is the dollar appreciating against all currencies except the Yen and why then are treasuries currently trading at historically low yields?
5. "...credit crunch making new loans more and more unavailable..." Which is because the banks have had to deleverage in response to much greater potential losses than previously expected.
6. "...and the deflation seen in financial markets." And commodity markets. And all other markets EXCEPT for US Treasury securities, which are seen by the market as SAFER THAN ANYTHING ELSE.
7. "The U.S. government and Federal Reserve will fight this with every tool they have, resulting in an end game of hyperinflation." Hogwash. The preferred share investments by the TARP aer structured such that as the banks regain their footing, take their losses, and start to function normally again, they will have a strong incentive to pay off the loans (reducing the monetary base) as they increase to normal levels their leverage (increasing the monetary base). The Fed and Treasury are well aware that in normal times their actions would be highly inflationary. These are not normal times.
8. More worthless, unsupported attacks on Keynesianism. And then: "We had a near implosion as a result of these theories in the early 1980’s." Without even a mention of the oil shocks of the early 1970s, which sent inflation rippling through the economy, or of the institution and repeal of wage and price controls, which, like a coiled spring, sent prices much higher. These had nothing to do with Keynes, and had much more impact on prices in the late 1970s than anything related to theory specific to Keynes'.
9. Let us not forget that Ronald Reagan's huge deficit spending (well, at least at first, during the recessions) fell nicely into line with Keynesian theory.
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the weakonomist
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8 Comments
My Website
Nov 21 09:05 AM2) Maybe I paid someone in China, but that is hardly saying it disappeared from our economy. China is kind a a big investor here.
3) Your first chart in Part III only illustrates money is moving through the economy faster. So?
4) Gold and Oil have tanked
5) Low interest rates also means the govt is borrowing on the cheap from those Chinese.
6) This recession only proves that hedge funds don't really hedge, real estate is not a risk free investment, and we're all motivated by our own greed. Like the great depression, you'll see the emergence of a generation of conservative money savers.
I know we're in trouble, but the end of Keynes Economics spells the end of capitalism. The end of capitalism spells the age of The United Federation of Planets. I don't see any Vulcans.
Go buy your gold and sit in an a-bomb shelter grandpa, I'll be at work.
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SW Richmond
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388 Comments
Nov 21 09:15 AMThe courts are a joke, justice is for sale. The money is a joke, as anyone can see from a chart of the USDX. The regulatory state is a joke, as it protects no one other than rent-seekers and insiders.
The whole system is completely corrupt. Keynes just gave them an academic reason to do what they always wanted to do anyway.
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Alex Trias
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20 Comments
Nov 21 09:31 AMI see some cold comfort, however, in the following respects:
1) As the private sector delevers, the public sector has taken the debt onto its balance sheet at discounted prices (averaging yields in the 10% to 15% range). Short term treasuries are trading at negative interest rates, enabling the public sector to pocket an enormous spread. We see comparable developments with respect to foreign governments as well. So long as the public sector can arbitrage its own borrowing rate with that of the public sector, this arbitrage will back any currency issued by the government in question. Panic, in a very real sense, creates value in the hands of those positioned to own undesired assets, and in the case of a government, forms the basis for printed money. Alternatively, the government may opt not to print more money, but rather, to effectively "save" the difference between the rate at which it can borrow and the rate of return available on private debt that it can purchase. This form of "savings" is, effectively, no different from private "savings". I'd argue that in terms of potential wealth available for the government to deploy, we're in a better position today than during the 1970s, when private citizens saved more than the government. The reason why is that during the 1970s, the US had to raise taxes (in some cases, as high as 90 percent) in order to transfer private savings into government savings, and these taxes crimped economic activity severely. This time around, raising taxes is not necessary so long as private debt holders are prepared to sell a $1000 loan at 15% to the Treasury in exchange for a $1000 T Bill paying 1%.
2) Assuming the Fed and Treasury opt to flood the system with currency in an effort to stave off a deflationary spiral, this article concludes that hyperinflation is an inevitable result. Fortunately not. Hyperinflation results when a government can only borrow at HIGHER rates than the private sector. In a highly risk averse market environment, like today, that's not where we are at. The test will be how quickly the Fed and Treasury can turn off the spigot when risk appetite returns.
3) Really the bottom line here is what should an investor do. I suggest that the outcomes described in this article are possible. If so, then investors should pour everything they've got into equities immediately. Many companies will go bankrupt, but those remaining will represent the only "real" value remaining in the economy - that is to say, products, and the means of production. Debt and currency will be nearly worthless, and by debt I mean any contract. Put options, indeed, any derivative security, will be as worthless as government or private debt in this scenario. In addition to owning corporate shares, investors who believe this scenario is likely should also accumulate canned food and weapons which could be exchanged on the black markets that will come to dominate the economy.
Those investors who feel that the scenario I paint is more likely should take a more balanced approach, owning a mix of short and long positions in all asset categories if possible. Basically - they should go about their business.
We live in terrible times. It is easy to feel pessimistic if you've made a ton of money this year shorting bank stocks, or if you've lost a lot of money investing in the SP500. It all happened so quickly, too, it's been like a commet hit Wall Street. My real advice for anyone reading this comment of mine is this. You can analyze the economy and banking system any way you wish and come to any conclusion you are disposed to come to. The truth is, both are so complicated, not even Ben Bernanke or George Soros understands them (as they will admit in private). In fact, understanding is not required, strictly speaking, because in the end, the future remains uncertain. So, decide whether you are happy being an optimist, or happy being a pessimist, and act accordingly. The best investment advice I ever heard was at the Wat Pho Temple in Thailand. A monk told me that when you cannot change your fate, change your attitude.
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iThinkBig
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1048 Comments
My Website
Nov 21 09:42 AM1) U.S. will have a depression. W shaped, recession brief respite and strong bear rally and then hyperinflation, then depression.
2) Voter revolution will occur in 2012. The citizens take about four years to get off the couch and do research into whom the corrupt are in Washington.
3) Expect formation of the next bull in 2013.
To Alex's point I always have three months of food, medicines, water supply, have weapons and ammo. Every American should always have this even in strong economic times. When you have this life insurance policy covered for your family then you'll find you'll go about your business with less fear. To many online in the last year, I have always encouraged people to think what the absolute worst case scenerio is. That would be the population on wheat pasta and other such rations. The upside? We would remove the corrupt from office in a damn quick hurry and restore our Republic. Take care of each other during this time. I have already began enjoying new friends in my neighbors I have helped and they return the favor in other forms of trade.
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James Wilson
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133 Comments
Nov 21 09:52 AMWhen the life blood of your economy has been taken over by the Corporations and trade becomes that life blood all it take is for forgien countries to say no !
ALL THEY HAVE TO DO IS REFUSE TO TRADE AND THEY CONQURE THE USA WITHOUT FIRING A SHOT. T
he U.S. Dollar has no value until someone takes on debt. Debt Dollars.
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CJJ
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19 Comments
Nov 21 09:56 AMChina is in good shape because it is an emerging country which is now building and buying goods which was not the case in the past. Great, what do they do in 30-50 years? Their population numbers is going to breed trouble on a grand scale. Hopefully they still have the US paying them interest on debt.
Also why in the world would China(who all of these economists think are "smarter" about economics than the US, which I think they have just seen the errs of the past and been able to sidestep those for their benefit), cut off the United States. China would never and I repeat never ask for the US to pay its debt off or dump all US dollars. It would be the dumbest move ever. Its like if you have a bar patron who comes into your bar all the time. He has a running tab with you but only pays you 10% every month of the total. Just because the total tab keeps getting bigger you are still getting more money and a steady stream from the guy paying you the interest. This guys 10% payment is still more than the people who pay you 115% coming in once a month. It would only make sense to call the debt if you were about to go bankrupt, which China is not.
If China did call the debt of the US it would lead to(which I think will occur anyway) a really tough period in the US, but it will quicken the pace of the period as the US would become very isolated and US manufactoring returning to the US. China would lose out on its cash cow. It would probably lead to war, again not something I think China particularly wants or needs, and in the long run make the US stronger and more united against China. Also the debt would not be repaid.
Hyperinflation is another assumption. It very well could occur, it is not a certainty. Wiping out all but the rich in the country via hyperinflation would created a top heavy lower class of people on the order of 80-85% in the US, while anyone with wealth would be moving out of the country. All for what cause? To draw down debt?
Deflation of prices, which gets a bad rap as it is equated to deflation, should be embraced. If credit debt at all levels was guaranteed prior to creation, ie. individuals who don't pay of their credit cards would have their paychecks auto garnished, lenders would be on the hook for half the amount, etc. this problem would be minature to what it is now. The rules of the game are either not out there, being bent to the point of being worthless, etc.
Applying all of this to an economic model is simplistic and open to enough interpretation I could drive a truck through it, but thanks for the 3 part thesis.
I have a thesis, people will start to stockpile and breed cockroaches. They'll always be around(like gold), except you can each cockroaches(unlike gold).
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Gem Hudson
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22 Comments
Nov 21 10:31 AM-
Tony Daltorio
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33 Comments
My Website
Nov 21 10:53 AMOn Nov 21 08:58 AM BS Detector wrote:
> Once again, the author fails in his stated attempt to lay blame for
> our ills at the feet of John Maynard Keynes. The discussions here
> have very little to do with Keynesian theory at all.
>
> Now, specific problems:
>
> 1. If the banker is aware that there is only $300 in the monetary
> base, and he has it all, he won't be a banker. Why would he lend
> out money if there isn't any money to repay as interest?
>
> 2. "The answer is hyperinflation, and that is most likely the course
> that the Federal Reserve will take." Most likely based on what?
>
>
> 3. You show the scary monetary base chart, which takes off higher
> in the end. What you don't show is the actions of banks in the last
> year, while they have been deleveraging like mad to raise their capital
> levels. This IS a decrease in the overall money supply (which we
> used to measure - M3), and the fed's recent actions are meant to
> counteract this hugely deflationary action by the banking industry.
>
>
> 4. "Those signs come in the form of negative net sales of U.S. treasuries
> by foreigners..." Really? Why then is the dollar appreciating against
> all currencies except the Yen and why then are treasuries currently
> trading at historically low yields?
>
> 5. "...credit crunch making new loans more and more unavailable..."
> Which is because the banks have had to deleverage in response to
> much greater potential losses than previously expected.
>
> 6. "...and the deflation seen in financial markets." And commodity
> markets. And all other markets EXCEPT for US Treasury securities,
> which are seen by the market as SAFER THAN ANYTHING ELSE.
>
> 7. "The U.S. government and Federal Reserve will fight this with
> every tool they have, resulting in an end game of hyperinflation."
> Hogwash. The preferred share investments by the TARP aer structured
> such that as the banks regain their footing, take their losses, and
> start to function normally again, they will have a strong incentive
> to pay off the loans (reducing the monetary base) as they increase
> to normal levels their leverage (increasing the monetary base). The
> Fed and Treasury are well aware that in normal times their actions
> would be highly inflationary. These are not normal times.
>
> 8. More worthless, unsupported attacks on Keynesianism. And then:
> "We had a near implosion as a result of these theories in the early
> 1980’s." Without even a mention of the oil shocks of the early 1970s,
> which sent inflation rippling through the economy, or of the institution
> and repeal of wage and price controls, which, like a coiled spring,
> sent prices much higher. These had nothing to do with Keynes, and
> had much more impact on prices in the late 1970s than anything related
> to theory specific to Keynes'.
>
> 9. Let us not forget that Ronald Reagan's huge deficit spending (well,
> at least at first, during the recessions) fell nicely into line with
> Keynesian theory.
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secmaven
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297 Comments
Nov 21 12:07 PMThe US is going to follow the Japanese model. And the debt the government does not monetized will be purchased by the financial community with money borrowed at 1% or less from the Fed. The resulting spread will restore the balance sheets of the survivors in that industry to viability.
Only if civil unrest and disorder appears on the streets of the US of A will this plan not work. The Democrats realize this and will use a large part of the monetized and circular debt proceeds to help the sheeple.
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SusanGrisanti
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7 Comments
My Website
Nov 21 12:13 PM-
R JENSEN
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42 Comments
Nov 21 12:37 PMWhen the cup has doo-doo in it, it doesn't make much of a difference whether you view it half-filled or half-empty.
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closed
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27 Comments
Nov 21 12:43 PMWe're leaving an administration which is totally bankrupt. It's created a greater mess than any U.S. Presidency in recent record. The situation's almost hopeless. We're now in the terminal phase of the existing international monetary system: This monetary system will not exist much longer. I'm talking about weeks, as a probable case. You probably will have, as of the middle of January, you might have a peep out of France from the President of France; so far, I don't think he's made up his mind exactly what he's going to do, but he might do something. Otherwise, from Western and Central Europe, you can't expect much of an initiative. You certainly will not get anything useful out of the United Kingdom at this time.
What is probable, and what is possible--but it's a big question mark--is, what is going to happen with the incoming administration in the United States. It's a very complicated question. Because there are deals, there are interests, there are arrangements, and I don't think any of these plans are going to work. I think this is a period in which most of the plans that people are making in government are going to fail, because the system is going to change very rapidly, and very profoundly.
We are in the end-phase of a general breakdown crisis, of the international monetary system. There has been nothing comparable to this in European history, since the 14th-century new dark age. We are going to have a total collapse of the system.
Now, the system's failure is complicated by the fact that governments have been lying. The crisis is not caused by some breakdown in some mortgage crisis inside the United States, or something in England as well. The crisis comes from the top down: The crisis comes from a long-term trend since 1968, which is the beginning of the problem. Which led into what the Nixon Administration did in canceling the Bretton Woods system. This opened a period of instability, which was aggravated by the creation of the expanded spot market for petroleum, 1973 and so forth, and so on.
So suddenly you had a fundamental change in the characteristic of the world monetary system, and this went through a phase. It went through a phase of de-industrialization of Europe and the United States, especially following the developments of 1989-1990, and so forth. So we have gone through a fundamental change.
In point of fact, the United States has had no net growth, in terms of physical standards, since the Fiscal Year 1967-68. There has been absolutely no physical expansion in the United States. We've had a comparable situation in Europe, which became worse, after the fall of the Wall, when the conditions were put in by Margaret Thatcher, Francois Mitterrand--then the President of France--and George Bush, the father, then. These conditionality sent Europe into a spin: Germany has been shrunken, actually, in net effect, as a result of these conditions. And from now, Europe--essentially Western and Central Continental Europe--are essentially impotent; Britain is going heavily into a crisis.
Therefore, the only remedy, in this crisis, because of the nature of the breakdown of the system, is creating a new international system, to replace the present monetary system, while putting the old monetary system into bankruptcy. Remember, most of you know that the United States, constitutionally, is not monetary system. The United States is unlike any nation of Europe: That our system is a credit system, not a monetary system. All other countries in Europe, some with more or less independence, are participants in an international monetary system, which is not controlled by any government. Even though the monetary system has agreements with governments, it is not controlled by them; whereas under the U.S. Constitution the creation of currency, or related credit, can only be done by consent of Congress, and by action of the Executive branch. Therefore, our currency--when our law is enforced--is entirely a credit currency; it's a currency of the U.S. government, the currency of the U.S. people. Whereas the other countries have monetary systems, where they participate by agreements with governments at a central monetary system, or a group of central monetary systems.
Therefore, the European system is essentially an imperialist system, in the sense that Europe is dominated by a monetary system, which belongs to no country, although each country has agreements with the monetary system. This is a continuation of the old Venetian system, under which an imperial power, in the old times, since about 1000 A.D., in the old times, the Venetian interests, the financier interests, control the credit and currency of the world. And functioned like an empire. This financial empire made agreements with governments, or controlled governments entirely. That was the system that crashed in the great crash, the great breakdown crisis in the 14th Century. Since that time, there has been no fundamental change: Europe still operates on the basis of monetary systems, which are based on supranational monetary systems which have contracts with governments.
But the United States is unique among leading governments, even though de Gaulle wanted to go in the same direction, but unique in the sense that our Constitution, means that our government in its credit system is the system of the United States.
Now: Since we have a world monetary system, the so-called IMF system today, this system is hopelessly bankrupt. The cause of the problem is not some mortgage crisis. The cause of the crisis, which broke out in July of 2007, was a result of an increase of an expansion of derivatives expansion, which now totals to obligations in excess of quadrillions of dollars! The greatest amount of this expansion occurred under the administration of the former head of the Federal Reserve System, Alan Greenspan. And we have now quadrillions of dollars of obligations, so denominated, which are self-expanding obligations. This hyper-inflationary monster is eating the world, and the only thing we can do is put it out of its misery: Put it into bankruptcy by governments, by agreements of governments, and create a new international system, which is based on credit systems, such as the Constitution of the United States provides.
What we have to have, also, is a fixed-exchange-rate system, like the one that Roosevelt intended, when he was still President. So, what we will have to do, is, we're going to have to put the entire system into bankruptcy reorganization, by decisions by the sovereign governments.
Now, to do this, there are four sovereign governments on the planet, who are absolutely crucial in launching something which can then be participated in by other governments. These are, the United States, and include Russia, China, and India. If these four countries enter into an agreement to reform the monetary system, and replace it with a credit system, we can get out of this mess alive, and safely. Because, if these four powers agree, and this represents a margin of power absolutely required to force through the reform, then Japan will automatically join; it's in its interest to do so. Korea will join; it's in its interest to do so. Other weaker countries will join; it's in their interests to do so. On that basis, we can create a fixed-exchange-rate system, to do what the original fixed-exchange-rate system was intended to do. We can use the credit system, based on this agreement, to reorganize the bankrupt monetary system, make sure that the immediate agreements that have to be reached can be settled. We can start to expand production, solve some of these problems, and postpone settlement of some of the other matters into the future, as you often do in a general bankruptcy reorganization.
It's the only chance, right now. And it depends upon good diplomacy, among the United States, Russia, China, and India, knowing that other countries will gladly join such a union, once it's started. And it will have to lead to a fixed-exchange-rate system, because we're going to have to launch long-term credit agreements, for large projects, especially in areas such as Asia, where you have whole regions, 70% of the population is extremely poor, and underdeveloped; Africa, which is potentially a large food-growing area, but is not able to do so, because of the present conditions.
We must create those conditions. This means, large-scale infrastructure development of things like power systems, sanitation systems, and so forth, to enable Africa to get on its own feet again. So these kind of projects will be necessary, and these are long-term projects. They need two generations of investment, or longer, in mass transportation, power and so forth. And we can come out of this.
But we're at the point, that this kind of agreement and discussion among nations is absolutely indispensable: There is {no way}, that you can make a compromise with the existing system, and survive. All attempts at compromise will fail! Because they will lead immediately to disaster: You have quadrillions of dollars of obligations, all of a short-term nature, coming down on the whole system! And there's no way you can postpone that thing. You come to the point, and say, "We are not going to honor derivatives obligations! We're going to freeze them, first. We're going to defend the economies, first. We're going to have a bankruptcy reorganization, which is in the general interest, first, the general interest of the nations and their peoples.
And this requires power to push it through, because the powers that are imposing this crash upon us, do have a lot of power. Therefore, you need a combination of power strong enough to break the will of that opposition. With that combination, we can succeed.
And that's the kind of crisis we face.
Now, we have a new President of the United States coming in, a President-elect--if somebody doesn't kill him, because you're in a kind of period where those things happen, in times of crises like these, highly unstable. And the trick is, to get this Presidency, of the United States, by one way or another, to enter into this agreement, with Russia, China, and India, that I've indicated; and bringing in other nations who are informed of what this is all about, into this agreement. But the basic thing, is we need a power bloc, which is powerful enough to break the back of the opposition to a reform. And that's where I think we stand right now. Everything flows from that.
So it's a very interesting period. And the month of January is going to be extremely interesting, if we don't have a complete blow-out before the end of this year. That's the kind of world we're living in. It had to come to this. We've been insane for a long time; we've been doing insane things for a long time. And now somebody came up and just presented the bill to us, for what the costs of this insanity were. And so, the time is, we just have to act like governments, take our responsibility seriously, come to agreements, agreements of reform, and adopt a perspective which is fair to all concerned. Which I think we can do fairly easily, if reasonable governments realize how serious the danger is, right now
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still renting
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144 Comments
Nov 21 12:54 PMwww.bloomberg.com/mark...
Scroll down and check it out for yourself. As I type this it is up about $55 for the day.
It was nice while it lasted...
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BS Detector
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292 Comments
Nov 21 01:33 PMYou make several questionable assumptions:
1. "the government needs to fund untold trillions of dollars over the next few years" How many is "untold"? One? Two? Three maybe? In an economy of 14 trillion dollars (well, maybe 13 trillion now), this is hardly unprecedented.
2. "none of the regular foreign buyers show up because they are too busy funding the needs in their own troubled economies" If the world's economy is in such bad shape, US treasuries will continue to be the safest place to keep money. And, believe it or not, there will still be money.
3. "The last remaining bubbles of American finance - Treasuries and the US Dollar - will burst and like all burst bubbles,it will be a mess." The dollar's value has increased during this crisis from historically low levels. The dollar is less valuable now than it was in more valuable now, in terms of foreign currencies, than it was between 1996 and 2006. Where's the bubble? And as for Treasuries - you think speculation is driving the price of Treasuries up? Seriously? Do you know what a bubble is?
4. "Or do you arrogantly assume that foreigners will let their own people starve just to save arrogant Americans like you??" You assume that I'm arrogant, likely because I pointed out (correctly) that US Treasuries are currently viewed worldwide as the safest place to keep money. Evidence: 30 year treasuries traded at all-time low yields yesterday. 30 YEAR Treasuries. Chew on that for a while. Now, I may be arrogant, but describing US debt that way is no indication of it.
Oh, you also assume for some reason that one question mark isn't sufficient.
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SW Richmond
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388 Comments
Nov 21 02:56 PMWhile some of us, myself included, are amazed at the time required for learning to occur, we fully expect it to occur. Remember, a year ago the average investor still believed that this was going to be "the stock buying opportunity of a lifetime". Only later did the average "sophisticated&qu... investor realize that he'd been taken to the cleaners in stocks. So where does he hide? In the safe haven of record, US Treasuries. Soon enough he will learn that this, too, is a "trap laid out for him, with a bait so richly wrapped."
Treasury rates will probably stay low right up until the time the Treasury market collapses, kept that way by Fed "monetizing the long end", as they have announced several times their willingness to do. Circular finance looks great on paper, but then it's just paper, isn't it? It works until it doesn't, when faith dissolves. In the meantime, crowding out is the name of the game, as government indulges itself in one final act of self-preservation. If you're a real, producing company that wants to borrow money, tough luck.
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johnbee
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28 Comments
Nov 21 03:05 PM