Thursday, February 11, 2010

Like a Meteor Streaming in the Wind

Him the Almighty Power
Hurld headlong flaming
                  from th' Ethereal Skie
With hideous ruine and combustion down
To bottomless perdition, there to dwell
In Adamantine Chains and penal Fire,
Who durst defie th' Omnipotent to Arms.

John Milton, Paradise Lost, Book I

Don't try to defy the capital markets.  Added to the likes of Marc Faber, Nissim Taleb, and Nouriel Roubini, we now have predictions of U.S. hyperinflation and/or debt default from Niall Ferguson, the Harvard economics professor and author of The Ascent of Money

Niall Ferguson

As reported in Zero Hedge, Ferguson took note of an environment that he thinks will remain positive for the dollar for a number of months: 
For the world’s biggest economy, the US, the day of reckoning still seems reassuringly remote. The worse things get in the eurozone, the more the US dollar rallies as nervous investors park their cash in the “safe haven” of American government debt. This effect may persist for some months, just as the dollar and Treasuries rallied in the depths of the banking panic in late 2008.
As we know, however, the situation is deteriorating:
Even according to the White House’s new budget projections, the gross federal debt in public hands will exceed 100 per cent of GDP in just two years’ time. This year, like last year, the federal deficit will be around 10 per cent of GDP. The long-run projections of the Congressional Budget Office suggest that the US will never again run a balanced budget. That’s right, never.
Because those are long run projections, it seems that Ferguson is talking about fiscal trends that may take years to play out.  These are the kinds of trends discussed in a book that I have written about often here, This Time Is Different, a study of eight centuries of financial crisis by Carmen Reinhart and Kenneth Rogoff.  The current fiscal situation looks likes it fits the pattern.  Higher bond yields have so far been avoided through the purchase of Treasury securities by the Federal Reserve and the Peoples Republic of China, but that situation is about to change:
Explosions of public debt hurt economies in the following way, as numerous empirical studies have shown. By raising fears of default and/or currency depreciation ahead of actual inflation, they push up real interest rates. Higher real rates, in turn, act as drag on growth, especially when the private sector is also heavily indebted – as is the case in most western economies, not least the US.
Ferguson argues that GDP growth and inflation will lead to a situation in which the debt load will eventually become unsupportable.
But now the Fed is phasing out such purchases and is expected to wind up quantitative easing. Meanwhile, the Chinese have sharply reduced their purchases of Treasuries from around 47 per cent of new issuance in 2006 to 20 per cent in 2008 to an estimated 5 per cent last year. Small wonder Morgan Stanley assumes that 10-year yields will rise from around 3.5 per cent to 5.5 per cent this year. On a gross federal debt fast approaching $1,500bn, that implies up to $300bn of extra interest payments – and you get up there pretty quickly with the average maturity of the debt now below 50 months.

The Elite Will "Preserve" the System

Ever the optimist, Zero Hedge commented "our political and financial leaders will do everything in their power, even sacrifice the population, to prevent the collapse of the system."  There are lots of indirect ways of sacrificing the population fiscally and monetarily, but a direct way would be to confiscate 401k accounts in order to support Treasury securities.  To do this, as some speculate, the contents of 401k accounts would be forcibly converted into annunities.  Annuities backed by what?  Why, by Treasuries, which a bankrupt federal government would have in unending abundance.  After punishing savers with low interest rates, and saddling everyone with a monstrous national debt, why not?

Marc Faber

While discussing catastrophic predictions, we might as well hear from a cheery "Dr Doom" interview on CNBC, U.S.-Europe Will All Default on Their Debt: Marc Faber.  He said, in fact, that the governments of every developed economy will eventually "all have to print money before they default", citing as reasons for his prediction both unfunded future liabilities and current debt-to-GDP ratios.  The U.S. will reach this state "within ten years."

Faber isn't totally pessimistic, because he is "relatively optimistic" about stocks going up, and he referred to stocks and gold as two as the best safe havens.


In Paradise Lost the "meteor streaming in the wind" is the glittering ensign of the fallen angels, Satan's unrepentant pride.  Perhaps in its pride America too will remain fiscally unrepentant and defy the markets until they hurl the dollar down to hideous ruin and combustion.