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Thread: A real 'ray of sunshine' from one of last year's most accurate prognosticators ...

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    Default A real 'ray of sunshine' from one of last year's most accurate prognosticators ...

    (snip)"in January of 2008 I predicted a major stock market crash in October. My speech was titled "Derivatives and the Crash of 2008." It came true.

    In October/November I was predicting a market rise into March/April of 2009. We got it.

    I'm going to crawl way out on a limb. A major crash this way cometh.

    The stock markets have gone up for six straight weeks. That's a pretty strong sign of a top. Our financial system continues to come unglued as Goldman Sachs leads the looting of the treasury after a financial coup d'état that has stolen $46,000 from each taxpayer to hand it over to the banks now running the country. After over $13.6 trillion has been poured into the banking system, I cannot see that a person I know has been enriched by even a single cent but each American is now indebted to the tune of an additional $46,000.

    It's going to end badly. We are not at the bottom; we aren't even near the bottom. In terms of the Great Depression, we are in 1931 or so; the bottom is ahead of us. I expect the dollar to default in the next few months after a General Motors and Chrysler bankruptcy convinces everyone that we are truly in a depression.

    US Bonds are on the brink of a collapse. When they do, the dollar will tank and interest rates soar. As measured by John Williams at ShadowStats.com, the real pre-Clinton unemployment rate is above 20%.

    I've called for riots by summer but even I have been startled by the number of mass murders in the United States in the last month or so. It's the economy, stupid.

    It's going to get worse, much worse as the insane financial policies of both political parties over the past fifty years come to their inevitable conclusion. The United States is bankrupt and soon the rest of the world will realize it. The days of writing checks in the firm belief the rest of the world will not cash them are over. The United States has had 89 years of being able to live beyond our means as a result of being the world's reserve currency. It's over and the deconstruction of the United States has begun.

    The risk of World War III being ignited by a US/Israeli attack on Iran has diminished considerably under Obama. However daily pronouncements out of Israel serve to remind us that a Zionist nuclear attack on Iran is still the #1 goal of Israel notwithstanding the 16 US intelligence agencies that all conclude Iran does not have a nuclear weapons program. Israel made it clear under the Clean Break from the Peace Process that they intend to attack anyone who might be a threat to them at some point in the future, no matter how distant.

    Derivatives as measured by the BIS showed as $684 trillion [pdf] as of last June. A more current report will come out in a month. I expect it to show an increase in OTC derivatives. That's insane.

    I saw the danger in the mere size of derivatives in January of 2002. They were out of control then. Now they are seven times larger and growing. And not a single "expert" in the Obama administration understands the danger of a $700 trillion dollar casino with no regulation and everyone playing with monopoly money. It allows companies such as Goldman Sachs to destroy companies, indeed countries with no risk to themselves. After all, the taxpayers of the United States have assumed all the risk of failure."(snip)

    from

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    Default Re: A real 'ray of sunshine' from one of last year's most accurate prognosticators ..

    i really hope that this guy is wrong.

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    Default Re: A real 'ray of sunshine' from one of last year's most accurate prognosticators ..

    ^^^ there's always hope. But there are also facts. And the facts at the bottom of this prediction are that ...

    - an increasing number of individual Americans ( including more and more 'prime' borrowers ) are not able to pay their mortgage / car / credit card loans due to job losses etc., which is devaluing these mortgages / car loans / credit card loans (i.e. the bonds representing the repackaging of these loans).

    - an increasing number of American businesses, from shopping malls to homebuilders to appliance makers to car makers to tourist industries to food service industries, simply aren't able to earn a sustainable profit based on current levels of customer spending and current levels of 'costs of doing business' (i.e. environmental compliance costs, minimum wage labor costs, energy costs, employee benefit costs, business tax costs etc.). At the same time this is devaluing these commercial mortgages, corporate bonds etc.

    - Both 'marginal' consumers and 'marginal' businesses have been able to keep up the appearance that all is well by increasing their levels of debt. However the point has now arrived where this is no longer being permitted. Thus those individuals and businesses must either find a way to 'balance their budgets' or go bankrupt on existing debts. This has led to everything from massive layoffs to record bankruptcies to the US gov't making 'bailout' loans which no private lender in their right mind would approve !

    - The US gov't has entered into commitments that involved unprecedented amounts of gov't spending ... on everything from health care to infrastructure to bank loan guarantees to foreign currency exchange rate guarantees to unemployment / social welfare benefits ... which is being financed by an unprecedented expansion of 'public' debt rather than by increased tax revenues. This new 'public' debt (in the form of treasury bonds) is increasingly difficult to sell to foreign investors, because those investors are increasingly worried that US taxpayers simply don't have the ability to pay off these bonds (in terms of current US dollars, at any rate).

    - The US gov't / fed has therefore embarked on a program of 'monetization' of new 'public' debt ... which basically boils down to the treasury printing up new treasury bonds and the FED printing up the new US dollars required to 'buy' those treasury bonds. One classic outcome of such 'monetization' is the dilution / devaluation of US dollar purchasing power relative to that of other currencies ... which in turn creates resulting US dollar denominated price increases in every world market commodity (i.e. oil / gasoline / food / raw materials / durable goods). Another classic outcome of such 'monetization' is an increase in the interest rates demanded by foreign and domestic investors alike so that their interest earnings will at least equal the rate of US dollar devaluation.

    - As soon as US dollar interest rates rise as the US dollar exchange rate falls, in the absence of genuine economic growth the US dollar is absolute toast from an international investors' standpoint !!! Arguably once this happens, foreign investors will be forced to stop reinvesting their oil / foreign trade surplus dollars in anything that is US dollar based and will be forced to liquidate US dollar denominated assets that they already hold in order to minimize future exchange rate losses. The classic outcome of such a situation is that the US gov't must then either raise taxes big time or cut spending big time (or both) to stabilize the US dollar internationally, or to default on the treasury bond debts owed to foreign investors / foreign governments (i,.e. de-facto bankruptcy) a la Iceland, Argentina, Russia etc.

    ~
    Last edited by Melonie; 04-27-2009 at 01:07 PM.

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    Default Re: A real 'ray of sunshine' from one of last year's most accurate prognosticators ..

    ..........
    Last edited by BonsoirBella; 09-13-2009 at 06:16 PM.

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    Default Re: A real 'ray of sunshine' from one of last year's most accurate prognosticators ..

    I think you are spot-on Melonie...
    ALSO,China is buying up huge amounts of gold and with the possible "pandemic",who knows where the currency-values will end up if trade is cut off.

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    Default Re: A real 'ray of sunshine' from one of last year's most accurate prognosticators ..

    China has a real problem on their hands. They have not been through a recession since Deng's economic liberalization. The do have a vivid memory or the Asian financial crisis of ten years ago. Given that institutional memory and zero experience with a recession, the People's Republic is acting aggressively to shore up their currency. They are buying gold, buying US Treasuries, buying ECU denominated government bonds, Japanese Treasuries, South Korean Treasuries and UK government bonds. Their currency is under no particular threat, but all they remember is the financial crisis of a decade ago. It's called fighting the last war.

    If shoring up the currency was the only thing the PRC was doing, it would be completely wrong. What is needed right now is spending that will put people to work. In China's case, putting Chinese people to work. They have done some of that, though it's not clear if they have done enough. And it is not clear if they are willing to do more.

    The PRC has a huge problem. 800,000,000 people are underemployed at best living on a few dollars a day. 200,000,000 are living on relatively a lot more. The Communist Party has, so far, convinced the 800,000,000 that it is their national duty to struggle while the 200,000,000 get along comparatively well. But, the remittances from the 200,000,000 to the 800,000,000 are slowing down with layoffs along the Chinese pacific coast. If the PRC enters a recession look for real social unrest that all the gold in the world will not solve. (Tanks, guns and bombs maybe, but gold no.) Of course all that gold will allow Hu and his minions a rather comfy retirement in Costa Rica if things get really bad.

    Z

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    Default Re: A real 'ray of sunshine' from one of last year's most accurate prognosticators ..

    well if all else fails, the Chinese have a 'wealth of experience' in controlling an unruly population (i.e. Tiannamin Square). It remains to be seen how the US would deal with an unruly population of its own !!!

    back to the point - the treasury just announced both an ultra-record setting deficit and an ultra-record setting amount of upcoming (freshly printed) treasury bond sales, starting next week. At that point we will find out whether foreign investors are still willing to 'soak up' additional US treasury bonds ( = more debt for American children) or whether the FED will need to print money in order to buy up the additional US treasury bonds that foreigners no longer want ( = devalued US dollar )

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    Default Re: A real 'ray of sunshine' from one of last year's most accurate prognosticators ..

    Quote Originally Posted by Melonie View Post
    well if all else fails, the Chinese have a 'wealth of experience' in controlling an unruly population (i.e. Tiannamin Square). It remains to be seen how the US would deal with an unruly population of its own !!!
    Not a very good example. Tiannamin square was a very small group of elites. Not much of a threat to the Communist Party's rule. What Tiannamin Square did demonstrate is the general lack of experience the Communsit Party has with controlling an unruly population. It has a great wealth of being the unruly population though.

    back to the point - the treasury just announced both an ultra-record setting deficit and an ultra-record setting amount of upcoming (freshly printed) treasury bond sales, starting next week. At that point we will find out whether foreign investors are still willing to 'soak up' additional US treasury bonds ( = more debt for American children) or whether the FED will need to print money in order to buy up the additional US treasury bonds that foreigners no longer want ( = devalued US dollar )

    http://news.yahoo.com/s/ap/20090427/...sury_borrowing
    We can only hope that the treasury auction does not sell out. The problem has been for too long that too many buyers were buying treasuries and not investing in money making and job creating corporate debt and equity.

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    Default Re: A real 'ray of sunshine' from one of last year's most accurate prognosticators ..

    Quote Originally Posted by Melonie View Post
    (snip)"in January of 2008 I predicted a major stock market crash in October. My speech was titled "Derivatives and the Crash of 2008." It came true.
    Um, the peak was October of 2007? (DOW: 13930.01 and 10-yr US TSY fell from a peak of 5.10% in July of 07 to under 4% by October.)

    He "predicted" a crash that was already well under way?
    If you can't win. Make the fellow in front of you break the record.


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    Default Re: A real 'ray of sunshine' from one of last year's most accurate prognosticators ..

    We can only hope that the treasury auction does not sell out. The problem has been for too long that too many buyers were buying treasuries and not investing in money making and job creating corporate debt and equity.
    You might want to think this point all the way through. If the auction fails to sell out, the gov't will not obtain the amount of money it needs to meet current spending requirements. This will immediately force one of two things to happen. The first is for the FED to simply 'print up' additional brand new dollars with which to purchase the remaining new treasury bills ... which is highly inflationary. The second is that the government must raise the interest rate offered to bond buyers at the next auction ... which is also inflationary but would also have massive ripple effects on any individual or business that is carrying 'variable rate' debt.

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    Default Re: A real 'ray of sunshine' from one of last year's most accurate prognosticators ..

    I have thought it through. We have a major problem with too much money flowing into treasuries and not near enough in the corporate debt and commercial paper markets. As for inflation, right now the problem is deflation. Or haven't you heard, unemployment is at almost 10% and still climbing. GDP is off six points. I would love to see some inflationary pressure somewhere.

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    Default Re: A real 'ray of sunshine' from one of last year's most accurate prognosticators ..

    well here you go ...



    this rule change regarding the addition of a 3% 'tax' on failed treasury bond trades should indeed have some significant 'unintended consequences'.


    Again one must draw a distinction between 'inflation' of US / world economic activity (which is -6% = abysmal) and 'inflation' of the US dollar denominated prices of world market commodities (which in turn affects US dollar denominated prices of other goods). The latter is a function of US dollar exchange rate, which at the moment is arguably being supported by 'safe haven' interest in US Treasuries from international investors - and arguably has little or no relationship with the absolute levels of US economic activity. This distinction made possible the 'stagflation' of the Carter years, and history could certainly repeat itself.

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    Default Re: A real 'ray of sunshine' from one of last year's most accurate prognosticators ..

    Quote Originally Posted by Zofia View Post
    I have thought it through. We have a major problem with too much money flowing into treasuries and not near enough in the corporate debt and commercial paper markets. As for inflation, right now the problem is deflation. Or haven't you heard, unemployment is at almost 10% and still climbing. GDP is off six points. I would love to see some inflationary pressure somewhere.
    Bingo. The government has been soaking up all the money in this economy.

    Now that we can actually feel it... man - that's a lotta money.

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    Default Re: A real 'ray of sunshine' from one of last year's most accurate prognosticators ..

    ^^^ there is an alternate theory, which is based on the premise that the 3 billion dollars per day of foreign (re)investment dollars which the US economy depended on for the past several years ... in other words the foreign trade surplus dollars from Saudi, Japan, China, etc. which had been used to purchase US Treasuries ... has now dried up.


    (snip)"China, wary of the troubled US economy, has ‘canceled America’s credit card’ by cutting down purchases of debt, a US congressman says.

    … data from the Treasury Department shows that investors in China have sharply curtailed their purchases of [US Treasury - sic] bonds in January and February.

    “It would appear, quietly and with deference and politeness, that China has canceled America’s credit card,” Kirk told the Committee of 100, a Chinese-American group."(snip)

    from


    as a result, the US FED is now printing up brand new dollar bills with which to purchase newly issues US Treasury bonds that foreign investors are increasingly wary of.

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    Default Re: A real 'ray of sunshine' from one of last year's most accurate prognosticators ..

    Quote Originally Posted by Melonie View Post
    as a result, the US FED is now printing up brand new dollar bills with which to purchase newly issues US Treasury bonds that foreign investors are increasingly wary of.
    If you equate printing money with selling to private investors and governments other than the US, then you might have a point. However, foreign investors, who have never been a majority buyer of US treasuries continue to buy. The People's Republic of China has cut its purchases as their foreign reserves have stopped growing. Rather dramatically stopped growing.

    I have to ask, why do you care? You have left the country. You have taken all your money out of the country. You no longer support it financially. And it appears you seek none of the benefits of being a United States Citizen, beyond the issuance of a passport.

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    Default Re: A real 'ray of sunshine' from one of last year's most accurate prognosticators ..

    If you really want to know ...

    a. while I was personally able to escape much of the consequences of the US recession, as well as (legally) escape most of the upcoming US plan to 'tax the rich' ( which will actually amount to taxing the upper middle class out of existance), the vast majority of my friends and family still live, work, and save / invest in the USA.

    b. I am hoping that, after 4 years of socialist transition occurring at a record pace, there will still be 51 % of US voters who have more to 'lose' from socialist tax and spend policies than they have to gain. This could result in a redux of the Reagan Revolution, at which point I (and many other US expats) would dearly love to return to the USA.

    c. on the average, US higher education and entrepreneur spirit has been responsible for the vast, vast majority of new developments in all fields over the past century. The world will be worse off if this 'golden goose' winds up being cooked by ever increasing US gov't meddling. And that includes my adopted country also being worse off, since it really only has three principal economic 'legs' to its economy ... tourism, carbon credits, and the transit of illegal items !

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    Default Re: A real 'ray of sunshine' from one of last year's most accurate prognosticators ..

    It was the Reagan Revolution that started this mess, with their running up trillions of dollars of debt so they could give the rich massive tax breaks, and their de-regulation of everything. Before Reagan's tax cuts, our country was able to fight two major wars in Asia, build the National Highway System and all of our major airports, and place a man on the moon, without running up any significant debt. Now we can't even afford to maintain the highway system we built or increase our airport capacity to meet demand, and what do we have to show for these tax cuts? $11 trillion of debt. Hopefully the American people will continue to be able to see what a massive failure conservatism has been. Today only approximately 21% of Americans identify with the Republican Party. Hopefully that number will continue to shrink and the Republican Party will become as relevant as the Whig Party is today.

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    Default Re: A real 'ray of sunshine' from one of last year's most accurate prognosticators ..

    The guy, Bob Moriarty, is a gold bug.

    Here's something from wikipedia to ponder:
    The Pareto principle (also known as the 80-20 rule, the law of the vital few and the principle of factor sparsity) states that, for many events, roughly 80% of the effects come from 20% of the causes. Business management thinker Joseph M. Juran suggested the principle and named it after Italian economist Vilfredo Pareto, who observed that 80% of the land in Italy was owned by 20% of the population. It is a common rule of thumb in business; e.g., 80% of your sales come from 20% of your clients [or expenses in the insurance industry].
    I loved going to strip clubs; I actually made some friends there. Now things are different for the clubs and for me. As a result I am not as happy.

    Customers are not entitled to grope, disrespect, or rob strippers. This is their job, not their hobby, and they all need income. Clubs are not just some erotic show for guys to view while drinking.

    NOTE: anything I post here, outside of a direct quote, is my opinion only, which I am entitled to. Take it for what you estimate it is worth.

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    Default Re: A real 'ray of sunshine' from one of last year's most accurate prognosticators ..

    The "Love of Reaganomics" has set the stage for all administrations since (except Clinton's) to turn to spending/debt to solve their problems :
    promises to the electorate,
    • a couple of expensive gulf-area wars,
    • ill-conceived social programs,
    • ill-conceived 'bolstering' of homeland security,
    • pro-rich tax policies (dropping inheritance, capital gains, and dividend taxes),
    • pro-business deregulation (and looking-aside policies), and
    • other not-minding-the-store type actions.
    .
    I loved going to strip clubs; I actually made some friends there. Now things are different for the clubs and for me. As a result I am not as happy.

    Customers are not entitled to grope, disrespect, or rob strippers. This is their job, not their hobby, and they all need income. Clubs are not just some erotic show for guys to view while drinking.

    NOTE: anything I post here, outside of a direct quote, is my opinion only, which I am entitled to. Take it for what you estimate it is worth.

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    Default Re: A real 'ray of sunshine' from one of last year's most accurate prognosticators ..

    What will the value of mortgages become if dollar got devalued?

    Let's say it's devalued by 50%. The cost of food and gas goes up by 50%, and what happens to the value of housing? Home borrowers have easier time to pay off their mortgages then since the mortgages they already carry becomes "cheaper" in real terms?

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    Default Re: A real 'ray of sunshine' from one of last year's most accurate prognosticators ..

    What is failed treasury bond trades? Are they talking about "naked" shorting, shorting bonds that do not exist?

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    Default Re: A real 'ray of sunshine' from one of last year's most accurate prognosticators ..

    Quote Originally Posted by eagle2 View Post
    It was the Reagan Revolution that started this mess, with their running up trillions of dollars of debt so they could give the rich massive tax breaks, and their de-regulation of everything. Before Reagan's tax cuts, our country was able to fight two major wars in Asia, build the National Highway System and all of our major airports, and place a man on the moon, without running up any significant debt. Now we can't even afford to maintain the highway system we built or increase our airport capacity to meet demand, and what do we have to show for these tax cuts? $11 trillion of debt. Hopefully the American people will continue to be able to see what a massive failure conservatism has been. Today only approximately 21% of Americans identify with the Republican Party. Hopefully that number will continue to shrink and the Republican Party will become as relevant as the Whig Party is today.
    lol Blame Reagan for everything.

    Even Clinton had a debt level that was right in line with Reagan/ Bush's.

    The tax cuts for everyone (whoops, everyone that paid taxes) caused greater revenue to fall into the hands of our government.

    De-regulation. Well, when an industry is over regulated, de-regulation makes sense.

    Actually, it was in 1993, when the new administration published the Bottom Up Review (or something like that) when our military capacity was downgraded to a win-hold-win strategy, not a win-win strategy.

    NHS. Who cares if we could build it, we are not maintaining it properly (all admins).

    Airports. Some govt money, mostly bonds and no pay upfront financing.. Same as before.

    The massive failure conservatism has been? lol Put the drink down (or is that the bottle). A major problem is the Democrats want to fund all their little (and big) programs with money that isn't there. We have a spending problem, not a revenue problem.

    ohhh BTW it was Clinton who de-regulated the power industry, look what happened to California. Why aren't you telling us how he is/ was in the hands of the power elite who just wanted to steal from everyone so they could maximize their profits. d'ur
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    Default Re: A real 'ray of sunshine' from one of last year's most accurate prognosticators ..

    Quote Originally Posted by Melonie View Post

    c. on the average, US higher education and entrepreneur spirit has been responsible for the vast, vast majority of new developments in all fields over the past century. The world will be worse off if this 'golden goose' winds up being cooked by ever increasing US gov't meddling. And that includes my adopted country also being worse off, since it really only has three principal economic 'legs' to its economy ... tourism, carbon credits, and the transit of illegal items !
    The US Government has been responsible for a significant number of developments in many fields over the past century. The US government played a significant role in the development of the jet engine in this country, our space program, including satellites, health and medicine, computers, the internet, just to name a few.

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    Default Re: A real 'ray of sunshine' from one of last year's most accurate prognosticators ..

    Quote Originally Posted by glambman View Post
    lol Blame Reagan for everything.
    lol we didn't have massive deficits before Reagan was President.

    Quote Originally Posted by glambman View Post
    Even Clinton had a debt level that was right in line with Reagan/ Bush's.
    Clinton left us with surpluses, not massive deficits.

    Quote Originally Posted by glambman View Post
    The tax cuts for everyone (whoops, everyone that paid taxes) caused greater revenue to fall into the hands of our government.
    Taxes weren't cut for everyone paying taxes. People who only pay payroll taxes did not get a tax cut. They got a tax increase under Reagan.

    Tax revenue decreased after Reagan and Bush cut taxes.

    Quote Originally Posted by glambman View Post
    De-regulation. Well, when an industry is over regulated, de-regulation makes sense.
    When an industry needs to be regulated, such as the banking and financial industries, de-regulation does not make sense. Allowing banks and other institutions to provide any type of mortgage they want, such as no-money down, ARM's, and interest-only mortgages, turned out to be a disaster. Canada kept their financial industry heavily regulated and did not have the foreclosure crisis that we're having here.

    Quote Originally Posted by glambman View Post
    Actually, it was in 1993, when the new administration published the Bottom Up Review (or something like that) when our military capacity was downgraded to a win-hold-win strategy, not a win-win strategy.
    Our military was by far, the most powerful in the world at the end of the Clinton Administration.


    Quote Originally Posted by glambman View Post
    NHS. Who cares if we could build it, we are not maintaining it properly (all admins).
    Because we're not willing to spend the money.

    Quote Originally Posted by glambman View Post
    The massive failure conservatism has been? lol Put the drink down (or is that the bottle). A major problem is the Democrats want to fund all their little (and big) programs with money that isn't there. We have a spending problem, not a revenue problem.
    The Republicans controlled Congress for 12 of the last 14 years, and the White House for the last 8.

    Quote Originally Posted by glambman View Post
    ohhh BTW it was Clinton who de-regulated the power industry, look what happened to California. Why aren't you telling us how he is/ was in the hands of the power elite who just wanted to steal from everyone so they could maximize their profits. d'ur
    Not sure, but I think the power industry was deregulated at the state level.

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    Default Re: A real 'ray of sunshine' from one of last year's most accurate prognosticators ..

    Let's say it's devalued by 50%. The cost of food and gas goes up by 50%, and what happens to the value of housing? Home borrowers have easier time to pay off their mortgages then since the mortgages they already carry becomes "cheaper" in real terms?
    The core issue, which also applies to attempted comparisons of a whole bunch of statistics referred to in this thread, is that the value of the US dollar in terms of 'purchasing power' hasn't been 'constant' since at least 1933. Thus any attempted comparisons between yesterday's dollar, today's dollar and tomorrow's dollar require that one's viewpoint be refocused to capture a moving target.

    In terms of conventional home mortgages from the consumer side, obviously this involves the borrowing of X amount of today's dollars at Y interest rate to purchase a property priced at something slightly higher than X dollars. Thus in an inflationary environment, the constant dollar value of monthly principal and interest payments have traditionally gotten 'easier' to make as the 'purchasing power' of the dollar drops ... well, that's true as long as the home mortgage holder receives pay raises to compensate for the losses in 'purchasing power' while the monthly mortgage payments and interest rate remain the same. In the same inflationary environment, the US dollar resale value of the property usually increases. This increases the 'apparent equity' which the borrower holds, since the dollar amount of outstanding loan principal remains the same while the resale value increases. Essentially, a fixed rate mortgage allows a home buyer to 'lock in' today's dollars for the life of that mortgage.

    However, from the investor side, backing a fixed rate mortgage means committing X dollars at Y interest rate for the life of the mortgage as well. Essentially, for a straight mortgage, this investment has the same properties as purchasing a bond. Specifically, it equates to a 7 year bond since housing sales and refi rates yield an average home mortgage life of 7 years. And as with a 7 year bond, the investor agrees to take a risk on the relative 'purchasing power' of today's dollar versus the future 'purchasing power' 7 years down the road, in exchange for receiving Y rate of interest payments.

    Thus any anticipated moves in the 'purchasing power' of the US dollar act as a two edged sword. In an inflationary environment, indeed for the people who already hold fixed rate mortgages they do get 'easier' to pay off. But for the people who originally put up the investment money for those mortgages, they will be saddled with a losing investment if the rate of inflation exceeds the interest rate being paid on the mortgage investment. However, in terms of 'future' mortgages, investors quickly begin to demand higher and higher interest rates from would-be borrowers. This in turn affects the creditworthiness of would-be future mortgage borrowers, and in turn lowers market pricing of houses because of future qualified buyers, and in turn affects the equity held by existing homeowners.


    What is failed treasury bond trades? Are they talking about "naked" shorting, shorting bonds that do not exist?
    I believe that you are referring to failed treasury bond auctions.



    As any government attempts to borrow large amounts of money for immediate spending which it intends to pay back from future tax revenues over a period of many years, it holds an auction of newly printed treasury bonds ... but with a de-facto maximum interest rate bid cap being set by that gov't. If would-be auction bidders do not think that the relationship between the currency those treasury bonds are denominated in versus the de-facto interest rate cap that is set is a 'good deal', they stop bidding ... thus the gov't fails to sell all of the newly printed treasury bonds and does not obtain the 'cash' it needs to meet immediate spending requirements.

    In order to actually sell the newly printed treasury bonds at the next auction, the gov't must raise the de-facto interest rate cap to the point where bond bidders again feel that the interest rate versus the currency is a fair deal. Obviously doing this makes the total borrowing cost to the gov't increase significantly, and also expands outward into other interest rates. The conventional ways to prevent this are either for the gov't to offer fewer new treasury bonds for sale - which either means reducing gov't spending or increasing gov't tax revenues - or for the gov't to raise the de-facto interest rate cap to the point where investor bids will start coming in again, and in doing so trigger a whole host of economic ripples that are a function of that new official interest rate.

    The unconventional way to prevent this is via 'monetization', wherein the same gov't who needs to offer newly printed treasury bonds for sale essentially buys it's own newly printed treasury bonds using newly printed money !



    (snip)Most historians won't even notice, but yesterday was a big, big day.

    Wednesday, 25 March 2009, was the day the Fed began buying US Treasury bonds. Britain is doing it already. So is Japan. Why shouldn't we? What's a few trillion extra...just between friends?

    The scope of the project is immense.

    Do you remember how it works, dear reader? When you buy a US Treasury bond, you pay for it with real money – or at least, as real as dollars get. Money changes hands. No net increase in the money supply.

    But when the Fed buys a Treasury bond it creates the money to buy it...and thus the money supply increases. It's called "monetizing the debt" – or converting debt into currency. Given the size of upcoming Treasury purchases, the total size of the US monetary base is expected to increase 500% in the months ahead."(snip)

    Essentially, 'monetization' of its own future debt allows a gov't to obtain large amounts of money for immediate spending without having to submit to the market discipline of interest rate determination. Thus via 'monetization' it is possible for a gov't to essentially force its own citizens to loan the gov't their money at an artificially low interest rate when market investors refuse to do so. The 'price' of course is paid by the fact that every dollar held by those citizens is diluted / devalued in proportion to the amount of new money being printed - or put another way the currency experiences an accelerated loss of 'purchasing power'. This makes life easier for those who already owe debts in that currency, but bad for both those who hold debts in that currency, and also for those that hold other investments denominated in that currency, and also for those that hold the currency itself !
    Last edited by Melonie; 05-17-2009 at 02:20 AM.

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