It wont happen in a year or two, but it will happen. Never has a money supply of one country jumped to our current levels in the history of the world without hyperinflation. look at Yugoslavia with Milosevic or Zimbabwe with Mugabe... People think that just because we are a super power it cant happen to us. Exactly for these similar reasons did the Roman Empire fell, USSR and Ottomans as well. They all thought they were indestructible and they were all brought down NOT militarily, but economically. When Rome fell people actually greeted Octavian s because they were miserable. They ruled 500 years. We rule only 60..

 

Million dollar question is, do we end up bringing down the economies of everyone who is heavily invested in us at the same time?

 

That is why dollar has been getting propped up for decades. It should have fallen right after its departure from the gold standard but thanx to Japan it didnt. World is heavily invested in the US, but capital has started to flow away and thats the reason why dollar has been getting weaker and weaker. If their investments are gonna go down thru the forms of inflation or weak dollar, it doesn't really matter. They will go down one way or another.

Vassago, we spent way more than a trillion dollars bringing USSR down, with that in mind, how is this for a scenario:
China holds over 800 billion dollars of our treasuries, they will buy more for sure but after their own economy is on a safe footing and self reliant thru its own consumption and exports to the rest of the world, they dump our bonds on the market. They dont care if they loose that trillion as it would bring them to a #spot overnight and their own currency would explode in value. They are communists, rule of law doesnt apply there and if their people have to suffer because of it, they will.
In the matter of hours dollar would crash and so would the US economy with everything we have ever accomplished and not a single bullet would be fired. People like No_Worries think that if people turn out to buy our debt, its a good thing because it shows the appetite for America. But they fail to see the other side of it just like thay failed to see our current economic troubles.


It is only when the tide goes down, one can see who was actually swimming naked.
Everyone looks good in a boom, its when the bust comes you see the true colors of all of these banks, managers and the country in general.

I dont think their economies will be brought down. People got the taste of being heavily invested in the US during this session of the economic downturn. They can only get smart from now on and look for that exit sign which shines all over Asia...

 

The major flaw I see in that is that we are their biggest customer. We are the biggest importer in the world (3 times as much as #2, which is Germany), and if our economy collapses, so does our importing. We are, however, the #3 exporting country (very close behind China), so frankly I can't see how it would be in their interest to purposely try to destroy us. They'd ultimately be destroying themselves as well. I don't believe China could take that kind of a hit.

 

Rev. what people miss out on that first point of yours is that we have been buying their products with the money that we do not have...credit is not real capital expecialy if it comes from the fed which creates it out of thin air, not savings and surpluses.
Imagine how ,,big'' our economy really is if we hold #3 spot as the worlds exporter, yet run 2 trillion dollar deficit. Thats the window into the US and just how over bloated everything here is. We just spend and consume.....and if we export this much, why is our deficit 2 trillion dollard. It should be zero.

No, i understand that point of view but just the notion that they have us in their arms even though we have bigger military and better tech than them, sends chills down my spine regardless on how you look at it.

China will eventually overtake us as the worlds biggest economy and i hate to see us being in dept up to our ears to them at that time. If they, and they will, stimulate their own consumption, they will not need us to buy their products. They will be self reliant as their own living standard would rise and ours would fail as it should. Fact that they are buying our debt is not a good thing, with it they are buying piece of this country and our elected officials dont seem to think so....

Discussions of this type are healthy and good.

 

Remember what is said here. China will self implode in the future. China cannot sustain it's current system. I predict this will happen in 10-20 years.

 

Oy! Where to begin...

We were a debtor nation in the 70's and we are still a debtor nation today. It's true that our national debt was at its lowest point since 1940 during the Carter administration (roughly 30% of GDP) but we still had substantial debt at that point. In fact, despite the rhetoric, our current debt level, at approximately 75-80% of GDP, is still well below the historical highs of 120%. Consequently, that period preceded one of the most prosperous times in our history. Bretton Woods collapsed in 1971. It's true we had high inflation in '74-'75 and '79-'81. Volker did raise rates to 20%, but they were at 11.2% when he started. That was also during the economic equivalent of Armageddon; stagflation. His primary mandate as Fed chief was to control inflation which he did, bringing it from 13.5 to 3.2 in two years. Of course it sent us into a deep recession, but we recovered and have not sniffed inflation higher than low 6's since.

What happens when you increase the supply of something? That's right, you decrease the value. So, inflation IS caused by a declining dollar. A decline in value can be due to either an increase in supply (your M3) OR a decrease in demand. Your definition relating to M3 is most often attributed to hyperinflation. Other than this extreme case, inflation is more reliably a product of supply and demand of goods. A simple cross analysis of your own chart will show that M3 is not a reliable indicator of inflation. It does coincide at particular points but fails to track the full inflation path. As a final point, there was inflation long before there was a Federal Reserve or currency.

OK, I just can't go back and address everything, so I'll stick with your predictions going forward. Your assertion is that we're headed for economic ruin, i.e. "depressionary hyperinflation" because of a rapidly expanding M3, unprecedented debt, and minimal manufacturing base...correct?

First, let's dispense with the talk of M3. The data is not released anymore so unless you're willing to go mine the various data points to come up with the number, there is no reliable number. Wikipedia is notoriously unreliable and when the chart you get from there is already an estimate, I hesitate to put much stock in it. But, we don't need M3 to predict inflation. Inflation WILL result from a weakening of the dollar due to declining global demand for dollars. Demand for dollars is due primarily to one thing; perceived safety. The reason that the dollar is the de facto reserve currency is because it is seen as safest currency. Will this change? Perhaps. If the World begins to doubt our ability to finance our debt, the chance of default rises and investors will look elsewhere. If you compare debt to income ratios around the developed world, the U.S. is near the top. And China? While the official figure is 17.7%, as with most Chinese government statistics, it is incomplete. Analysts estimate that China's true debt to GDP ratio is closing in on 60%. The Euro? Given their own debt issues and the increasing strain being put on eastern European members due to the highly valued currency, I don't look for the Euro to survive in perpetuity. As for your assertion that most countries aren't employing significant stimulus plans, let's look at the numbers:

China 6.9% of GDP
U.S. 5.5%
Japan 2.3%
France 1.3%
Germany 1.6%
New Zealand 3.7%
Spain 8.1%
Saudi Arabia 3.3%

The U.S. was not alone in launching massive stimulus plans. It's true that ours dwarfed most others in dollar figures, as it should given the relative size of the economies. The bottom line is that our debt level is not at the near bankruptcy level that the doom-and-gloomers and gold bugs would have you believe. The fact that we continue to have high demand for our paper is a testament to this fact. It is still more desirable to own dollars than any other currency for the purpose of reserves. As for China's noise about SDR's, that's old news. They made those statements leading up to some high-level meetings to try and bolster their position during negotiations. There hasn't been a peep about it in months. However, even if the dollar was supplanted at the World's reserve, it doesn't necessarily create a problem. Excess liquidity can be sopped up relatively easily. Like any other borrower, the World will continue to buy dollars so long as they thing they will be paid back. Which takes us into the true heart of the issue, the U.S. economy.

You're absolutely right, we have lost the bulk of our manufacturing base, the long-term absence of which would cause significant problems. However, there are two possible remedies on the horizon. One is the repatriation of industry. There were two primary factors in the massive expatriation of U.S. manufacturing. One was cheap labor, we can't do much about that. The other was cheap transportation. The days of cheap energy are over and with it, cheap transportation. When companies have to pay significantly more to bring their goods back to U.S. markets, many of the cost advantages of being overseas evaporate. We've already begun to see it in the last few years. Look how many foreign automakers now have plants here. The same with the steel industry. I believe we are seeing the beginning of a trend to bring capacity back into close proximity to the end user. Anecdotal evidence for this fact is popping up all over and this in the midst of recession.

It's true that Americans have overconsumed and that debt as grown too high. However, for your predictions to become reality, those patterns would have to continue. We have already seen drastic changes in consumer behavior and regulation is going to put the damper on the unfettered lending we experienced. At the end of the day, this will be one more in the unending string of economic cycles. Rapid growth is ALWAYS followed by a sharp pullback. Consumers, businesses, and governments adjust how things are done and we move forward again.

I'm glad you've made a paper profit on your gold purchase...how will you know when to get out? Me, I got out of the market in February of '07, got back in long enough to pick up 20% in March, and then remained only 30% invested through the Summer. I'm pulling out this week. I'm pretty happy with my returns and they're due to following the principles of the economists you hold in such disdain. As for your editorial comments about my spending and financial habits, you might want to make sure you know what you're talking about before ascribing particular characteristics.

 

We might get a couple of years where the economy stabilizes due to the bailout money, but like Rev stated it is like an unemployed guy living on credit cards. The bills will come due. Most of the tarp money doesn't get spent until 2010 and 2011. At the same time the next two largest waves of mortgage resets also happen at that same time frame. 2009 was actually a lull in the mortgage resets so any semblance of stability in the real estate markets will soon fade next year.

There is no way to know when this ponzi scheme, house of cards will collapse. It all depends somewhat on what no_worries alluded to with everyone in a race to the bottom. They are all devaluing their currency and monetizing their debts because there isn't enough capital to "sop up" all of this debt. The Federal Reserve has now been caught monetizing our debt even after stating they wouldn't do so. The 5 year treasury auction was a failure this week which is surprising since we are pretty sure the Fed has their buyers out there pushing up demand to try and convince everyone that China, Japan, India and others are not going to pull out of our debt markets. It is this 'artificial demand' that is keeping rates down by the Fed's own purchases behind the scenes. Everyone who is following this story knows it so how long do they think they can keep this up before they push everyone out of the markets due to this slimy tactic?

If you want to follow M3 shadowstats has a pretty good take on the M3 money supply... His numbers seem to be pretty close to what is happening, and the money supply has gone to the moon.

It is true that China isn't going to drop all their dollars and run. They will try to make this a gradual shift to preserve as much of their capital as possible. But the signs are becoming much clearer that the plans to run trillion dollar deficits going forward will not be financed on the backs of foreign investors for much longer. So where does that money come from? And what is the ultimate outcome? I see some interesting hypothesis here, and some of the same banter in the media. But does anyone truly know how this will unfold? We aren't the same country we were in the 1920's and don't have the resources we did then.

I have been modeling my data after the great depression era and so far it appears to be tracking, but I do have some concerns going forward. Our country isn't as well off today, and doesn't have the means to pick itself up by it's bootstraps because the resources don't exist today to do it. Debt as a percentage of GDP has only been higher during WWII. We aren't fighting a world war today. Secondly you just have to look at the chart of the exploding debt to see that this thing has gone straight off the charts in the few years. The government is addicted to cheap money, and if rates do go up because there aren't enough morons on the planet to buy that debt the government will not be able to afford to pay it's bills. It is pretty simple really in that regard. We were largely an agrarian society back then and people still knew life skills, how to survive, and how to feed themselves. I don't think we can say that about the general population today. So the potential for much larger scale starvation, sickness, and death is many times magnified today.

I am not completely sure that the near term will be inflationary as the bubble prices for everything based on those debts which cannot be paid are collapsing. The derivatives markets are still completely in chaos with somewhere between 500-800 trillion out there depending on who's numbers your using. Roughly 30% of that market is non-performing(ie trash). So you run the numbers and figure out how many hundreds of trillions of dollars in non-performing assets are collapsing. Then ask yourself what happens next? Does the government keep printing money to try to write off the estimated 200 trillion dollars in bad bets taken by the banks? Who exactly is gong to foot this bill? Our government and others around the world seem to think they can print their way out of this. Through monetization maybe they could pay off the debts by just printing the money, but not in the form of more government debt because most of the governments who have been suckered into this game of chicken are already buried in debt. So the near term is likely to be deflationary until they can throw enough funny money at the system to give it a temporary sugar high. But that money won't last long, and the effects are very temporary. And what about those investors who were buying our debt or the debts of these countries? What do you expect them to do? Just hold onto assets that are growing more worthless each day that the central banksters keep printing money in an effort to save their precious ponzi scheme?

So for those that think that the debt issue is a non-player I think you need to reach for your ears, pull until you hear a loud pop, because many of us have been talking about this for decades, regardless of who is in the White House, or which party thinks they are in charge. If you think about it we really have only been using this fiat money system since 1971, and in less than 40 years and we have bankrupted the nation. Too many people without some standard or measure to keep them in check will run completely out of control and that is exactly what has happened to this country and many others around the world. I am all for a gold standard, oil standard, some sort of limited commodity standard that our currency needs to be pegged against to control the supply of money and to reign in spending. Why there hasn't been a balanced budget amendment and a requirement to pay down the national debt can only be explained by bought and paid for politicians in the pockets of the banks and Wall Street.

So if you trust these economists talking all this smack then good for you. These are the same clowns that were telling us that the economy is fine, and didn't see this coming. Now they are suppose to be the experts you trust? Sadly I only wish we had the ability to pull back from the brink here, to pay down our debts, and restore some sanity regardless of how hard it would be in the near term. I just don't think either of the two political parties have the brains, guts, or tenacity to get it done which is why we keep getting the same nonsense no matter which one is is power. It will require a full fledged, OMG crisis before they will do anything. The only time they talk like they are sane is when they are not in power. As soon as they are elected they start off on mandates and "mission from god" that I don't recall getting much headlines when they were campaigning nor do they line up with the ideas espoused with things like "paygo", and smaller government, and reducing wasteful spending. It is all just a bunch of BS.

The next time your out cheerleading the party in charge for the latest emergency mandate which will cost an insane amount of money how about asking just how it gets paid for, and insist no more debt. Can we afford the latest proposals put out by the current administration? I say no way. But I am also one of those few that has been screaming about the Iraq war and the massive costs there. We cannot afford this nonsense. So put down your partisan mindset and stop defending stupidity. These morons in DC will bankrupt the nation and will be standing there next to these same Wall Street types, banksters, and economists and saying "We just couldn't see it coming". BS, absolute BS.

Stop looking for an angle, a scheme, an easy way out of this and grow up. Make the hard choices, slog through it all, learn the lessons before millions if not billions of people get killed by this corruption laden fraud being played out on a global scale.

It doesn't take a rocket scientist to see the banksters, international corporations, and governments all shuffling the deck chairs on the titanic all the while behind the scenes setting up an even larger global currency market, and even larger ponzi scheme. They will drive everyone to the brink and then offer the new solution as the savior, the answer. They will even try to make it sound sane with some sort of commodity backing, and "assurances". People need to wake up and smell what is being shoveled at us. This is nothing more than a massive power grab on a global scale. Send these guys packing, let them go broke, run off the vampires that are feasting on our stupidity. It is hard to imagine people with this kind of ambition, greed, and power, but it is what is happening.

For those defending the current actions of our Fed and government, were you defending them before the last election? Probably not, wake up, and put down the partisan BS. Our country is on the line here. You can be sheep or Patriots. It is time to demand fiscal sanity, and a serious right sizing of our government. If we don't do it soon, and demand that we pay down our debts, and balance our budgets(oh, and not steal it from Social Security and say the budget is balanced) there won't be a country left.

The so called boom years that have happened the last 10 years has been nothing more than a mirage of debt fueled by cheap easy money sloshing around in the system. Our way of life has probably been altered permanently. Until we get rid of our bubble mind set and start looking at what we have to work with now we are going to continue to make the same dumb mistakes that got us into this mess in the first place. Time to dump bubble brain thinking for sound judgement and thinking no matter how hard it is to swallow.

Transportation was a good leading indicator going into this mess. If we don't see signs of recovery in transportation then where exactly is the economy "recovering"? Until you see signs of life in transporation there is no meaningful recovery coming. Transportation has been the canary in the coal mine and so far it has been accurate. To add more fuel to the fire the consumer is 70% of the economy, please explain how you can have a "jobless" recovery? Stopping the decline, or not getting any worse is not a "recovery". The government thinks they can make up for the lack of spending by the consumer? That should be a neat trick considering the duration it will take for the consumer to dig out of the pile of debts if they even have jobs to pay those bills. Everyone cannot just declare bankruptcy and call it a day... Or can they?

Longsnowsm

 

We had greater fiscal restraints when we were on the "gold standard." In other words, we had hard assets to back up our currency. We have a history of getting into a major war when the economy goes this far south. WWII helped move us out of the last depression. Most of the elements are already in place. When we get into a global conflict it moves many from the private sector and unemployment rolls to the war machine. One major difference between WWII and now is that we produced most of our own food and products. Today, much of our military equipment is manufactured abroad. That could put us in a vulnerable position.