This isn’t me, I’m not mechanical

But I truly feel like a robot sometimes. This blog now has over 1000 posts. Yupp, that’s a lot.

What are most of them about? The coming financial collapse of the United States, and the hazards of government control and central banking. I believe that these two things, the central bank and the government, are the things responsible for the world not being a better place than it is. They solve one problem by creating a million new ones. Their only solution is more manipulation, never less. They are the ultimate product of the mob-rule democraty that we have in the Western World. When did it become right to tax people to death? When did it become right to squander peoples wealth on whatever the government deems appropriate? When did it become right do debase currency to pay for the governments deficits? Do you know why we need an inflation-rate of say 2-5% annually. Milton Friedman discovered this, but he failed to name the cause. The reason is – otherwise we get a government fiscal crisis, where the government either cannot pay its expenses, or it strangles the economy.

Because the government is completely unable to control its spending. Always has been. Always will be. Governments are the drunken bums who don’t stop drinking until they accidentally wobble out into the street and get hit by a bus. Then, temporarily, as their broken bones get to heal in the hospital – they stop the madness. But as soon as they are once again able to walk, they run out of the hospital into the nearest liquor store, and start gulping down like there is no tomorrow.

From Chris Martenson, we learn the following today :

• The state of New York will be broke before Christmas
• The state of New Jersey is considering declaring “financial emergency” in the same way that they might declare “natural disaster emergency”
• $4.8 billion of the projected additional $9 billion of US Federal debt for the coming decade will be interest rate. The penalty for the Federal governments PAST crimes. Even if by some completely magic way the US Federal Government made it for another decade – imagine what the US would pay for its debt the decade after that.

Some sobering facts : It is calculated that the US government will have to pay an additional $80 million annually for each percent the interest rate goes up (I know, I know, there are many interest rates but I’m trying to keep it simple. Just pretend that all US government debt has the same interest). That means with 5% higher interest rates (which isn’t at all unlikely), interest payments become $400 billion more expensive. In the case of a 70’s disaster, you may see close to 10% higher interest rates. That means an additional $800 billion in interest payments. Now, last time I checked, total receipts of the US Federal Governmetn was somewhere around $2.5 trillion, right? Most of which is entitlements including Medicare and Social Security? This would mean, that unless the US debt go spiralling towards a debt default, ALL government spending aside from Social Security and Medicare will ahve to be halted – including the military, all department of this or that, etc. And even then – it is not likely that the US will be able to manage its budget. Because Medicare and Social Security are both going to cost more and more money – and at no later than 2017 the Social Security fund is guaranteed to revert – which means an additional few trillions in debt that the Federal Government has to pony up.

DO YOU SEE THE PROBLEM HERE? In the marvellous socialist state of Sweden, we have a debt level of ~35% of GDP, all the retirement money is invested in stocks and bonds by HUGE pension fund management companies, we don’t need Medicare because health-care is payed directly from taxes, etc. Do I like the system? Nope – not one bit. The total tax pressure is around 65% if you include income tax, capital gains tax, VAT tax and a myriad of other taxes (lottery ticket tax, anyone?). It’s a veritable socialist dream utopia – where we are all expected to conform to the grey, mediocre taxpaying masses. But the system has one key benefit over the system in the US.

It’s sustainable, meaning that IT IS NOT A BIG PONZI SCHEME LIE! We may be taxed to death, but so help me god I’d rather have that then a government that marches proudly into fiscal hell and wipes out the entire middle-class because they cannot for the mercy of them understand that there is a limit to how much you can spend, and you have to save for future obligations.

End rant.

1 Senate Vote = $300 billion

…and while that may seem expensive, the US Federal Reserve is on the case. Yeah. Maybe you haven’t noticed, but there is less talk about how the economy is magically recovering, and more talk about how long the “extra-ordinary measures” will have to be maintained throughout the next year. Here’s your daily checklist, folks :

1. There is NO recovery
2. There are no new jobs
3. The US Federal Government is hemorraging money at a worse pace then your average banana republic
4. The health-care bill doesn’t matter – at this rate there won’t be any health-care, except possibly at the level of Albania.
5. The progressive socialist nudge-fascism is now becoming standard operating procedure in a government that is completely out of touch with everyone except european socialist cheerleaders, the norwegian nobel-price commity, and the “gimme gimme I demand”-generation of Obamanites (who by the looks of it will get a real taste of poverty real soon)
6. The middle-class has always been what prevents social unrest. Without a middle-class, there is no organized society, only mob-rule and violence
7. The US Federal Reserve cannot raise interest rates, nor can they keep them at this level. Moment 22 was when the interest rates were lowered beneath the point of no return. The choice will not be inflation, high unemployment or both. It will be catastrophic inflation, catastrophic employment, or if they wait long enough – both.
8. Given enough price inflation, the entire US population will become poor, and they will all be in the highest tax bracket.
9. For Obamanites, read (8) again. And again. And again. Yes – socialism can make everyone rich – assuming rich means poor and redistribution means fighting over the remains of society.
10. The lives of US citizens have efficiently, by a wonderful combination of Bush-Obama policies, been sold into poverty. There will be no more warnings.

So, when the US has either defaulted on its debt, or reached the state of “oh, my god look out for the inflation!”, a senate seat will either be worthless, or $300 billion will.

The future of the US republic

Brace yourselves. In California, a proposed 32% hike in student tuition at UCLA caused a 500-people demonstration that almost turned violent.

This is the prelude. This is the micro-version of what is coming. Imagine when these people get their health-care cut, their benefits cut, food prices skyrocket, energy prices skyrocket, day-care centers close, hospital wings close, public libraries close, bus/subway shuts down. Prisoners released. Imagine how bad the riots will be then.

What do you think will happen when the generation that was taught that they could have it all, and not pay for it realize that they’ve been conned? When the borrowed money is no longer available, when public service no longer exists. When all they have are a few foodstamps and unemployment. When taxes are through the roof, but it doesn’t help. God better bless the US republic, it’s going to need it. California has a budget shortfall of 49%.

(HT@EPJ)

Game Over (pt. IV)

If the Federal Government bails out any of the states, it’s over. The US will then officially be ruled by unelected politrucks in Washington. The irresponsible states will devour the responsible. Not to mention the fact that the US Federal Government is bankrupt already.

The state of the union

Trade deficit game over

For all who thinks that the trade deficit is irrelevant to a countries prospering, here is your proof : The only way to maintain a trade deficit is if you have massive capital inflows to support your currency, something that by the very nature is paradoxal, since a trade deficit nation is producing too LITTLE, and money should seek its way elsewhere.

From ZeroHedge (click image to go to post) :

Game over

Dollar destruction imminent?!?

Okay, I admit – I hate people who use these kinds of headlines to attract readers. But things are looking ACCELERATINGLY BAD.

The US dollar index just cracked the 76.00 level, which has been in the works for quite a while. I don’t see what is to keep it from reaching 72 (previous all-time low) and then keep on falling. Secondly – gold is making all-time highs over and over again. The chart-pattern is becoming increasingly unlogical – we are FAR outside the regular spans of normal trading, meaning that this is not a technical move, not a seasonal pattern, and not a regular supply-demand shift. There is something BIG going on. Thirdly, the Asian countries are now seeing such a large problem with the dollar depreciation (and their currencies appreciation against it) that they are now actively intervening in currency markets. To quote Robert Wenzel at EPJ

“Things are really bad when the Philippines is propping up the dollar. The Philippines!”

There is probably only one thing that can save the US dollar, because it seems that the mainstream has caught on and the US dollar “faith” premium is going to hit below zero territory. Paul Volcker style intervention. What will destroy the US economy – interest rates or hyperinflation? We may be getting an answer faster than we think. In the end, time may have shown that those buying gold fared better than the rest.

Dilbert : Strategic options

No sugar-coating

Dilbert.com (HT @ The Big Picture)

Japan says thanks, but no thanks.

Okay, I know I’ve been ranting about the confetti that will be the dollar. But from now on, I’m just sitting back watching and waiting for either a failed Treasury auction or massive inflation. Who is going to buy US government debt?

- China has clearly explained that they won’t.

- Japan just went out and said that they now support a “strong-yen” policy, where the currency should reflect the fundamentals of the economy. I’m starting to think that maybe this party change will turn Japan around. You never know. But what is NOT part of this plan is propping up the dollar.

- Foreign central banks will soon be out of Agency/MBS debt to swap for Treasuries

- The last large buyer, UK, is going broke. Unless they are going to pay US Treasuries with UK gilts (and what on earth would the US Treasury do with those?), I fail to see how they will be able to support US debt except by further deprecating their own currency.

I’m short the dollar and the pound, and I am counting on making money on those bets.

Countdown has officially started.

Intermission

So, an avid observer might note – none of my predictions have come true. Basically I’m just one of the fearmongering idiot-crowd.

I would disagree, and I would like to explain why. Right now, we are in the “intermission” phase. Fiscal stimulus policies have but a floor under the market, along with unprecedented central bank policies. What would have been surprising is if these measures had no impact at all. Admittedly they did. So, green shoots and slow recovery ahead, then? Actually, no.

Which parts of the economy has been doing better? The stimulated ones. All other, not so good. The Detroit Auto Companies were rehiring workers recently because of the surge in demand due to the “Cash for Clunkers”-program. It will turn out very ironic, when they have to fire the same people a second time in less than a year. Because thanks to the government clunk-show, american consumers have now bought up a large part of the cars they were planning to buy the coming year or so. Car sales will plummet during the end of the year, and 2010.

Central banks have been doing no worse – interest rates worldwide are at ridiculous levels, and quantative easing is the new modus operandi. And admittedly – this has probably prevented a lot of bankrupcies, a lot of painful scaling back and effectivisation of business. But what happens from here on? Everyone knows that consumer price inflation cometh, although not how much, and when. But when it does, there is only one remedy – tightening up policy.

Remember how interest rates looked before the financial collapse? That was how high they had to push them to contain consumer price inflation (which failed – it was 4-5% in many parts of the Western World) after the 2001-2002 recession. And despite Alan Greenspans interest rate management being horrific, he has done nothing compared to mr. Bernanke. If interest rates were kept at 1%, and then gradually prodded upwards until 2008, where 5.25% wasn’t enough to contain price inflation – what will happen this time?

0-0.25% interest rates + 1.3 trillion dollars in quantative easing. Assuming rollback started at the same pace as after 2001-2002, where do you think interest rates have to go to contain price inflation? A fair guess would be 7-10%. There’s only one problem : 7-10% interest rates will strangle any economic recovery and make the US Federal Government insolvent. So, with this option off the table, a more realistic possibility is that interest rates are nudged up towards 3-4%, while price inflation soars. If it hit 4-5% last time, 10+% isn’t at all unlikely for the coming years. And then cometh the problem again – with that kind of price inflation interest rates HAVE TO be raised for loans to be profitable for the creditor. And thus, we end up with the federal US government insolvent once again, and a US economy that keeps balancing on the edge of the cliff.

This is where you shut off the television, pull the covers over your head and mumble “Game over”. Beware of the monetary storm.

Game Over (pt. III)

Just when I start to doubt my own judgement, thinking that the pessimism may be somewhat unfounded, and that maybe I should try and find more logic in the arguments of those less pessimistic – I get slammed. I have a few signs for you that made me turn over the top pessimistic again.

1 ) China has made it’s second statement

China rarely makes statements about the outside world, unless it has a direct effect on their political interests. Many were shocked when China made it’s statement that they are worried about the future value of their foreign currency reserves, mostly the US dollars. The chinese have now stepped it up a notch, and openly said that they fear worldwide inflation. Remember that China is one of the countries that stand very much to lose from worldwide inflation, so they have probably done their math. And I do not think they are being scare-mongerers, quite the opposite.

2 ) The stock market has begun what may be a sign of “the fake boom”

Now, I said this from the beginning (even on my previous, not-so-long-lived Swedish blog), that assuming lowered interest rates and money-printing brings the US and the world out of this crisis – do you really want to see the NEXT crisis? There has been something like a pattern forming, where it seems that ever more aggresive monetary policies are used in response to economic recessions, which leads to ever more aggressive recessions. What may happen this time is going to strike the world with the same disbelief that the Keynesians had when they saw “stagflation”, because inflation and unemployment were not supposed to be able to rise simultaneously. What may happen this time is even more frightening – inflation may strike, and raising interest rates may not stop it. There is no magic behind this, of course, the simple reason for this is that the floodgates were opened so wide that the FED is unable to suck the money back out of the system, unless they want the economy to break in half when central interest rates hit more than double-digits instantly. The bonds that they overbought will not sop up enough money when they sell them, the capital injections in the banks cannot easily be removed, and the “toxic assets” that the FED buys will not find any buyers. In short – we get the next crisis before this one is solved, and its a monetary crisis, the result of which may be the collapse of the US dollar, the complete nationalization of the entire US banking system – and in the end the rise of one, if not many, new currencies. This will be a devestating blow to an already week economy. But it can be survived, of course. It all depends on what politicians do – and that is what we should fear most.

3 ) Bond rates are continuing upwards – despite FED promises to buy anything that moves

One of the most devestating moments was probably when economists decided that “bringing down the longer interest rates”, was a purpose in itself. In their minds, this would definitively get the mortgage markets back on its feet, and get long-term credit-driven growth moving again. What they didn’t realize was what measures they would have to take to get there – and how these measures are long-term counter-productive. The bond rates took a brief dive when the Federal Reserve announced they were going to buy big loads of them. That downturn has now turned into an upturn, and there seems to be a very bad pattern forming. While this may not be the time to remind everyone that Paul Krugman went bonkers when he saw the TIPS-spread showing deflation creeping close – I will do so anyways Everyone knows that deflation can ALWAYS be solved by simply printing money. If necessary buy a bigger printing press. And that’s basically all she wrote – the FED has been creating more and more “printing power” through all their programmes, but what they failed to realize is that some of these transactions are non-reversible. I have long said that there is a critical point where either interest rates are raised – or it’s too late. I cannot proclaim to know where that point is – and if we have already passed it, or will soon do so. But I know that logically it does exist, which is extremely frightening.

US Treasury Long Bond Rates

Worth noticing is that the “Inflation Secured Treasuries” are also moving upwards, which logically means one of two things

A ) The bond market is oversold, which means that regardless of if the bonds are inflation secured or not, there is not enough demand for them

B ) People do not trust government CPI measurements (duh)

I predict that by July, we will have reached pre-crash levels of bond rates, but I see no reason why they would stop there. I don’t think we will have pre-crash market conditions in July.

…

However, there is one positive sign – Peter Schiff just announced via his video blog that he is in fact seriously considering running for senate, and promises to give a definitive answer within the next few weeks. Holy cow, that’s all I have to say.