One of the principal differences between you and me appears to be that you are not aware of your limitations. Not that you are necessarily less capable by any stretch, just that you're not nearly as prescient or omniscient as you seem to think you are. If you are as learned as you would have us believe, then history would have told you the difficulty and uncertainty of prediction, even of the low grade variety. But when you start dealing with joint projected outcomes, and the associated joint probabilities, which you cannot even begin to accurately quantify individually let alone jointly, then you start running into the kind of uncertainty that you apparently choose to ignore. Bottom line, you're smart (and very probably fairly young, judging by your overconfidence), but not nearly as smart as you think you are. I guess we'll just have to wait and see. In the meantime, any shorter term predictions you'd like to tie yourself to?
The myth that Obama saved us from the great depression
- Thread starter Max E.
- Start date
Will we crack due to 130% Debt-GDP? Or will we crack due to 6% interest? Even Greece could maintain at 2.5%. But then, it is self-fulfilling to a certain degree.
IMO, we are already on a course toward higher rates. Even at current debt levels, a 6% rate gets heavy, though we likely wouldn't see that for at least a few years. Unless.....
That is where the self-fulfilling part comes in. When rates begin to rise due to inflation, our debt burden increases. This increases investor anxiety, which causes rates to rise further. This increases our debt ratio as we are already paying with borrowed money.
The inevitable result appears to be 130% Debt:GDP and 7%+ rates. That seems to be the cracking point, and is likely 3-5 years off.
Unless we miraculously increase GDP or figure out a way not to accumulate debt every year.
IMO, we are already on a course toward higher rates. Even at current debt levels, a 6% rate gets heavy, though we likely wouldn't see that for at least a few years. Unless.....
That is where the self-fulfilling part comes in. When rates begin to rise due to inflation, our debt burden increases. This increases investor anxiety, which causes rates to rise further. This increases our debt ratio as we are already paying with borrowed money.
The inevitable result appears to be 130% Debt:GDP and 7%+ rates. That seems to be the cracking point, and is likely 3-5 years off.
Unless we miraculously increase GDP or figure out a way not to accumulate debt every year.
I think you are making this more complicated than it really is. It is obvious that our current situation cannot hold into the distant future.
But judging from experience, things can hold on for a lot longer than I usually expect. Thus, in my trading I never position myself to depend on Armageddon. Rather, I simply position myself not to be hurt by it. The rest takes care of itself.
Again, you hang your hat on the notion that *I* alone make these predictions, with no evidence or research to back my claims. No. That's incorrect. Reinhart and Rogoff. Please read their study, or one of their many articles. Believe it or not, this is not uncharted territory. Sovereigns, like individuals, have gotten themselves over-indebted for thousands of years, and predictably, according to Reinhart and Rogoff, when they hit 120% debt to GDP, they default or inflate. That has massive consequences. I'm not sure why you're so resistant to the notion when it's a well-worn historical fact, a recent fact (Argentina, Mexico and Russia), and in fact! happening right before our very eyes in Iceland, Greece, Portugal, and to a lesser extent Italy. As for compounding probabilities, yes, I'm well aware. But in order to duck this bullet we're going to need something on the order of free energy, a 100 mile per gallon catalytic converter, or the hoverboard from back to the future, in the next couple years, to dig ourselves out of this. And to your surprise, I believe the US Gov already has that technology locked away, from one it's blackprojects its spent hundreds of billions on, over the past 50 years. But we're not getting that, are we? This isn't some far gone future I'm looking at. This is a few years away. Anyway. instead of arguing with me, could you argue the conclusions of the two authors below? I'd be very interested to hear exactly how and why they are wrong.
http://www.bloomberg.com/news/2011-...t-grow-commentary-by-reinhart-and-rogoff.html
I recall seeing a chart the other day showing govenment expenditures at 25% of GDP not 10%.
Anyway, I don't necessarily disagree with what you see coming. I just see that we could still avoid going over the cliffs and that the time frame is very hard to pin down. I also think that this country is blessed with more alternatives to avoid disasters such as those discussed than any other country in history.
I'm not saying don't be prepared for what you see coming but I am saying to also be prepared to be wrong, especially with your timing.
Exactly. I don't discuss the otherside of the equation, as you mentioned here, because the assumption, in my mind, when investors push back from the table, like they did in Greece, Portugal, Italy, Ireland etc, the FED steps in to monetize the difference. There's a couple of sticking points. The first, is half the US debt rolls over on an ultra-short maturity. Something like 24 months. In that case, if the debt was allowed to roll over to something like 6-7%, US Taxpayers would be looking at a 500-800$ billion dollar HIKE in interest payments, alone. Out of a 2.2 Trillion dollar budget, that's around 25-30%. Pure jokes. Second, the riskless rate of return is set by Treasuries, and the private lending market keys off that rate + sector + individual risk when loaning private. So if and when Treasuries are allowed to go to 6 or 7%, mortgages, business lines of credit, student loans, corporate debt, muni and state debt, the whole fucking private lending market would be looking at rates at, or around, 10%. 10 percent. At that level, the economy (and stock market)(and real estate market)(and banks)(and insurers), would take a gigantic dive. I mentioned this earlier in the thread. That's why I *assume* helicopter Ben - who has many times sworn upon the alter of God Himself to never allow a second Great D - will in fact, man the helicopter (himself, if he has too), and make up the shortfall in the Treasury market to "stabilize" the financial system. At which point, it will force those left holding treasuries out, and out of US dollars to protect their purchasing power, making the FED the majority owner of the US Debt stock. What happens to the dollar when the FED monetizes over 6 Trillion in debt (from the 1.8 Trillion now)? Anyway, it's all pretty elementary. The Government has already floated nationalization of pensions into US Treasury debt. Why? Why would one think? That's what Argentina did after the Peso collapsed. It's meant to force capital loans to Government, at their expense. Tie up real capital in assets the Government depreciates through inflation. Otherwise, capital flight ensues and the stock of money to debase dwindles, accelerating inflation.
The deficit is 10%. Expenditures are around 25% (3.6 Trillion in expenditures / GDP = ~14 Trillion).
Timing, sure. Nobody knows. But I'd rather be prepared, and soon, than long and wrong. Everyone keeps holding their breath for Japan. It ain't Japan, bro. There's a hundred other examples where Japan *didn't* happen. Anyway.
If you can afford to be prepared great , just don't be dependent upon your scenario working out.
I just wonder if you remember the disaster that happened as a result of y2k?
Black swans happen but the one's that get you are not the one's you've prepared for.
Thanks, but I already have the book. Admittedly I only read portions of it, and yes, it is sobering. And I have no doubt that we are in for some discomfort, but I just don't place too much stock in all-else-being-equal-qualified predictions and projections, because they simply almost never are, regardless of who made them or who buys into them. I don't buy into anything but the most simple and readily accessible of concepts when considering the future, especially as it relates to economics.
I agree that rates will go up, since they are artificially far too low, and that will cause some hardship, but it will also help to prop up the dollar, "all else being equal."
There will be cuts in spending, because there will simply have to be, but there will also be effective increases in taxes, presumably focused on the upper echelons, who have had a sweet ride for the last decade or so. And I don't care whether Obama is at the helm (which he will be), or Romney, taxes are going to go up. As with spending cuts, there is no other way. And because it will be done, I don't think the economy will go over the cliff. It will likely, however, embark on an inevitable bumpy ride. It helps that a lot of economies depend on the US. Bookmark it here: my bumpy ride vs. your cliff.As for predicting a chain of events, one after another, clairvoyance is not in my wheelhouse. (I dislike that idiom, don't you?)