Learn from the fall of Rome, US warned
this is perfect manufactured consent for the next New Deal. prepare for flat rates, then higher rates my friends...
http://www.ft.com/cms/s/80fa0a2c-49ef-11dc-9ffe-0000779fd2ac.html
http://www.ft.com/cms/s/80fa0a2c-49ef-11dc-9ffe-0000779fd2ac.html
posted by Nomad-amus at
11:51 PM
7 Comments:
The argument here is that rates will have to rise to continue the debt for foreign funds game to finance our increasing funding needs aka the war in iraq, afghanastan, soon Iran, all our bases around the world, increasing amounts of gov't programs, accelerating health care costs, HUGE infrastructure replacement spending needs, & increasing amounts of environmental spending needs.
I mean rates should rise simply to bring the fisher equation back into equilibrium as real rates have been negative since January 2001 when the Fed cut rates by 100bps within one month down from 6.50%. While one may argue that CPI actually reflects inflation, which as most people know I think is GROSSLY understated as John Williams recalculation based on the pre-Clinton CPI methodology says that CPI actually is 8%, I believe that the fact that the fed funds rate opened up at 6% the other day - the highest in over 6yrs - tells me that others realize that current rates are way too low. However, if we forget about David Brown finance / economic theory for a second, I think everyone needs to realize that the reason foreigners continue to buy not only all our new debt but the debt that the private holders are selling, which is implied by the fact that the Q107 flow of funds report reported that foreigners bought 200% of our debt in the first quarter of 2007, is b/c the US still offers the best yied of all major stable industrialized nations. However, if rates suddenly drop to 3% to 4%, like the Fed Funds market implies currently, I believe that the situation will change materially in a bad way for the US. First, I am confident that if rates fall, as the equity market & most of Wall St. seems so sure will happen to save the country from disgusting deflation, that the incremental demand from foreigners for our new debt issues will go away, which is really scary as the same comptroller from the article Paul posted indicated that the US currently needs roughly $3bn of financing every day to maintain the current system (assuming funding needs simply maintain vs. accelerate as is the likely case) that we run in the country. The incremental demand falloff will likely mean that either we will need to cut spending (i.e. end the war, cut gov't programs & the jobs associated, & likely cut the health care benefits / social security benefits that legions of americans grew up believing would be there for them will actually not be there) or we will need to raise rates to attract new demand for our debt (what is called for by simple economics as lower demand will follow lower price of $ & the only way to increase demand is to increase the price / rate that foreigners will earn on their investments). I don't know about you, but I don't think the spineless people in DC have the balls or political will to cut spending (jobs & benefits) & so the only option left is for either higher taxes or higher rates, and I am confident that no one will get elected on a tax raising campaign. So what we will we do given that we have $59 trillion in debt that can never feasibly be paid off? We will likely need to either lower rates & maintain reserve requirements or maintain rates & lower the reserve requirements to drive up the money multiplier, both of which equate to even higher inflation, a much lower dollar, & possibly the worst case scenario. The worst case scenario is not only will the lower rates / reserve requirement scenario drive a decrease in incremental demand but may trigger a massive sell off of dollar denominated assets, which will crush the financial markets as it will drive much higher rates on the long end of the yield curve. Higher long rates is something that will drive higher mortgage rates & equity discount rates (i.e. huge systemic multiple contraction) which will both serve to absolutely crush the equity & property markets.
The argument against the worst case scenario is that everyone else (aka China) has its economic fate completely tied to the health of the US consumer / economy, which will act as a major deterrant to huge dollar selling by foreign central banks.
While that argument does hold up, it only holds in the ST as it is not sustainable - eventually these banks will not sit around & watch their investment assets be de-valued as the US dollar crashes and will sell US dollar assets in favor of investments elsewhere in the world in places that offer superior debt & earnings yields.
So how does it end? Good question Silver Dollar! I have always been in the hawkish camp but now believe that the Fed / Washington DC politicians do not have the backbone to crush the global economy by doing what a responsible Paul Volcker type would do meaning that lower rates / reserve requirements are invevitable unless you believe the one unspoken scenario that Swenson & I believe will happen but do not verbally express.
The scenario I am talking about is something that has precedent and is totally in line with the doctrine, & forecasts by anti-elitist / establishment "Conspiracy Theorists", that calls for a complete totalitarian socialist society that is completely reliant on the gov't for its well being. Specifically, the scenario I am talking about is that the Fed & other banks will raise rates & cut liquidity causing a massive contraction in asset prices (aka removal of all the inflation created by the egregious credit expansion of the last 12 years) and complete destruction of the US economy that will lead to a Great Depression event that will make the Great Depression of the 1930s look like a trip to Hawaii and lead to a New Deal type plan to employ the legions of underskilled / under educated / newly poor US citizens to re-build the infrastructure in the country for a much much lower cost relative to what it would be if we approached this plan under the current environment where wages & constructions costs would be 5 to 10 fold higher than in the New Deal scenario. In addition, by bankrupting the majority of society by stealing the only savings people have now aka increased foreclosures on their homes & enormous losses in their personal & 401k portfolios, the gov't will leave the underskilled citizens that now have negative wealth, as most will either be in enormous debt as filing bankrupcty is now significantly more difficult or bankrupt & cut off from the credit system altogether, with no choice other than to take the only avialable jobs that will likely be positions in the military (which is in dire need of new bodies & will be increasingly important in order to maintain our world emperor position) or grossly underpayiing jobs for New Deal infrastructure rebuilding projects.
So, while I think that lower rates / increased liquidity is the likely case as the Fed has No Balls - a stance that is backed up by my long 96 EDZ08 futures position - I FIRMLY BELIEVE THAT THE HIGHER RATES SCENARIO MAY BE WHAT ACTUALLY MATERIALIZES. Unfortunately, either scenario is really bad as the higher rates scenario will lead to an unprecented depression and lower rates will result in the end of the US dollar & a $3000+ gold price, which is really unfortunate b/c it means that US citizens will likely be cut off from travelling to foreign countries as the $2 pound, $1.40 euro, & $1 even CAD rates will likely all double making travelling abroad only an option for people like us & the very upper class.
So, right now Mr. Ben Bernanke has found himself in a horrible position not due to anything he has done but rather the irresponsible actions of his predecessor Alan "The Devil Himself, also known as The Worst Person Who Ever Lived" Greenspan. Maybe the most likely scenario is that the Fed Funds rate continues to stay put at 5.25% & increased volatility in long rates driven by incremental data points & market pyschology / perceptions.
So while the arguments for both scenarios are both very valid, the one thing that I am very confident in is that its great to be in the markets right now as we are currently facing a market that lacks precedent & will ultimately result in ENORMOUS opportunities for keen investors like the alumni of ASAP 2006. I am not sure about all of you guys, but I for one am very excited to be entering the market in a time where strong analysis & good stock picking is what will drive success ... not just no brainer high beta bullish calls that have so many experienced PMs & analysts thinking they are really good when in fact most of them simply benefited & created unjustifiably high standards of living by riding the Wave of Liquidity.
Well said Mr. Silver!! Empire of Debt!!! I'm actually turn on after reading this.
The great thing about history is that everyone can have a differing opinion and it is damn near impossible to prove anyone wrong.
Oro, I am grateful you shared the article from the Financial Times about comparing Rome to the US and at the same time I found the article thoroughly laughable. Anytime someone starts talking about the decline of the US being attributable to moral decay you know they are some christian coalition, right wing crackpot who on sunday condemns gays and immigrants and on monday hires latino yard workers and discreetly visits gay hookers. Although I dont know for certain, I suspect Mr. Walker might be a Bush political hack who was hired on idealogy rather than competance.
I'll post a more response actually discussing the issues later when I get a chance.
Actually Toppe, I believe that you are wrong...again. (J/K). But i do disagree with you on the moral decay issue.
If you compare our society's acceptance of violence, drugs, foul language, and sex as well as the complete disrespect for marriage (50%+ now end in divorce) and for our own well being (we work harder than ever & take more stimulants than ever to just keep up with the wealth erosion going on from the massive inflation) I think that you definitely can make an argument that our society has morally decayed relative to the 1950s when we at our peak strength.
The 1950s were a time when people saved money, worked hard, we were the world economic producer with a trade surplus (vs. massive deficit), & our nation had a very stable inflation rate, low leverage levels, & much more general respect for others.
While I have studied each major religion & feel I have a good grip on the basic tenets behind each mind control scheme (aka religion), I do not think that you can simply play off a comment on how our society has lower morals by claiming that this guy is a religious nut. The truth is that the US society truly has become desensitized to things like drugs, sex, vulgar language, cheating to get ahead, etc. How you define morals is up to you, but to me I definitely think there is a strong argument especially relative to the period in the 1950s when I believe our nation peaked.
Toppe, btw I hope you realize you can't compare today's market vs. any period in the past. The CDO / CDS markets were non-existent in 1998, in addition the real estate market & associated outstanding debt is not even close to comparable. Finally, I dont think there was global bull market going on in every asset class that was driven by liquidity.
Morality in the 1950's. LOL!!!! You've been watching too many Andy Griffith and Leave It to Beaver reruns. Let's talk about Jim Crowe laws in the south. There's a reason why Malcom X came about. We were luckly Martin Luther King was so charasmatic because there could have been violence much, much worse than the riots in the 60's. Lets talk about the lack of rights for women where if the the husband comes home, beats his wife with a lead pipe and then holds her down while sticking his dick up her ass she has no recourse. No divorce, no criminal charges, no restraining order. Nothing except to wait for the next beating or get a gun. Individual rights were routinely trampled on by the government. Illegal wiretapping, stacked criminal justice system, and indeterminate sentences for "mental health" (you'd have to be crazy to disagree with the government, right?) are just of few of the things to consider. Lake Erie started on fire from all the pollution. Started on fire!!! Actually that may have been the 60's but the pollution started long before then. Great place to live. Great place to live if you are a socially conforming WASP whose father got you an upwardly mobile job at AT&T or Coca-Cola. Anyone else, forget it. At best the 50's were largely a myth based on nostolgia and at worst it was a repressive society that was either bound to reform or turn tolitarian. Moral peak - no way in hell.
Regarding the comparability of 1998 to now, my primary points are that liquidity in the credit markets dried up then just as it has now and that the current level of risk in the markets or economy is not unprecedented. I think any intelligent analyst can draw his/her own conclusions regarding the limits of the comparison. And, as I said previously, maybe I am numb to the risk after going through the events from 1997-2002. More to come on Rome and moral decay.
ok, I dont have the energy to do a long post on Rome so I am going to make this quick. Where the comparison to Rome ends:
1) Rome's decline happened over 300 years. So we have 250 to go?
2) Rome's economy was based on slave labor. What's the incentive to innovate when you have cheap inputs? It's the basis of my The South/Latin America hypothesis that you can ask Swenson about if you are curious. Innovation drives economic growth and was prevalent when Rome was at its height. We are the most innovative country in the world right now. Rome also ran out of slaves but not before they lost their interest in innovation.
3) Rome had massive depopulation over the last 150 years. Declining birth rates contributed but so did several widespread outbreaks of the plague. Our population is stable. If bird flu comes along, a conspiracy by the Chinese, and wipes out a third of our population, I will revisit the thesis.
4) The last 100 years Rome was repeatedly attacked by barbarian tribes, the most notable being Attilla the Hun. These tribes sacked several cities and extorted the government by threatening to destroy more of them. Until San Francisco goes up in a mushroom cloud from a North Korean nuke, no comparison.
5) 500 years of inbreeding led to some less than desirable, crazy Emperors. Until Chelsea and the next Bush hook up, we're ok.
6) Rome split into two empires in the 4th century, the eastern half becoming the Byzantine empire which lasted until 1453. When California or Texas bolts, we have an issue. Otherwise, no comparison.
7) Finally, unbeknownst to the Mr Walker, it is generally accepted that many Romans understood that their empire was in serious decline for a good 50 - 100 years. As I said earlier, Rome's decline was a slow and steady. He should open history book before he spouts off refuted dogma, particularly the moral decay part.
In sum, as of 2007, the United States does not resemble Rome in anyway shape or form other than we were/are the most powerful at the respective points in time. That was longer than I expected.
FYI, the Chinese conspiracy about bird flu was a joke.
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