Tuesday, October 21, 2008

Debt Chandrasekhar Limit Further Explored

The local weatherman says that higher elevations may see some light snow overnight. Light snow. Tonight. Snow. It is October. Enough said.

Hank Paulson - Rock Star
I was home today as the new couch was being delivered. I had CNBC on most of the day. What I saw today was an obscenity. It seems that Hank Paulson had some free time and decided to take a walk along the main trading floor of the NYSE. While I can imagine that the Treasury head should have better things to do with his time, it is a free country.

The response on the floor was silly. Traders were trying to shake Paulson's hand. Many were high fiving each other. Paulson muttered something to a trader about "doing whatever is necessary". Doing whatever to accomplish just what was not covered. CNBC reporter Bob Pisani was almost moved to tears of joy as Hanky made the rounds. Disgusting stuff. The Treasury head is viewed by Wall Street as to be looking out for them, while his real responsibility is to look out for the taxpayer. Once again we see how our tax money will be spent on bailouts: More cash for the traders at the NYSE to waste and lose, all at our expense. It is obvious that Pauslon is viewed as a buddy by traders, and that is very dangerous.

Debt Chandrasekhar Limit Further Explored
Last Friday night I asked if the US has a debt Chandrasekhar Limit, meaning is there a point at which the US will incur so much debt that it will go supernova and explode. This question was attacked at another angle by Mike "Mish" Shedlock in a post tonight:
http://globaleconomicanalysis.blogspot.com/2008/10/something-for-nothing-vs-paradox-of.html

Mish goes into great detail about the problems with Keynesian economic philosophy. He also goes after Krugman, Roubini, et all with their call for never ending spending binges. The piece is a must read, as Mish's attention to detail and thorough analysis is far superior to anything I can do. I think his piece is a good companion for mine.

In looking at what Bernanke and other economists are saying about the current debacle, I cannot help but think they are making a serious logical thinking error. They are viewing the financial system as a sort of mathematical equation instead of a living, breathing animal.

By this I mean that one cannot view the debt destruction and consumer spending pull back as if it exists in an alternate dimension where everything is great except for a little credit hiccup. I am sure there is some fancy algorithm that can model a "credit crunch". I am sure that this equation is telling Bernanke and crew that they must flood the system with money to make things the way they want it. This is exactly the kind of academic solution that has no mooring in the real world.

Any model that ignores the reality of the overstretched American consumer, disregards the reality of a housing bubble, excludes the total lack of real savings in the US, and cannot calculate the effect of the shadow banking system is by definition useless. One cannot assume facts not in evidence about the economy when applying their models. What may be a textbook fix for the current credit mess only applies if the parameters you are basing the comparison on are good. They are not.

There seems to be a real sense out there that things are getting better. Many bearish types are making turns to a more bullish bent. All the talk today was about the "thawing of the credit markets". I will end asking the same question I always ask:
To whom and for what will the banks be lending money to going forward?

I have yet to get a reasonable answer.

Have a good night.

10 comments:

watchtower said...

I checked out Mish's post and also his comment section, I haven't read Mish enough to know how he thinks.
Does Mish think the dollar is going to strengthen into a bastion of hope while the economy goes into a deflationary tail spin?

Anybody out there read Mish enough to know the answer to that?

Anonymous said...

I think everyone should watch this quick 5 part video on youtube:

http://www.youtube.com/watch?v=iLnDPntfNFw&feature=related
http://www.youtube.com/watch?v=VPnAPzeIB8s&feature=related
http://www.youtube.com/watch?v=hCX-6rmBA4I&feature=related
http://www.youtube.com/watch?v=xbZzW1lIc_g&feature=related
http://www.youtube.com/watch?v=-hzN6HFqMQk&feature=related

Watch the part where the big bankers walked across the floor. Doesn't that sound similar to having Paulson walk the floor as well? (CONFIDENCE)

Also there is a big difference this time as to how THEY are trying to bail it all out.

1. Previous depression crash - Tried to bail it out with big deep pockets of rich single individuals/BANKS.
2. Current possible depression crash. The system is being bailed out by the GOVERNMENT using our currency which is debt all AMERICAN CITIZENS will be responsible for.

THIS NEW YEARS YOU BETTER PARTY LIKE THERE IS NO TOMORROW.

BECAUSE THERE IS NO TOMORROW.

Worse part is how it's not just the poor investor schmuck getting fleeced but how everyone who is working their ass off being put in the same arena. Guys seriously better take what you can put it on wheels and move it out of the way of this depression freight train.

G

PS: Financial sense is putting out some eye opening audio work on what been going on.

Anonymous said...

G

"Financial sense is putting out some eye opening audio work on what been going on."

I wonder how much money people that have been listening to Puplava have lost so far. Gold is going to 650 looks like to me at least in the paper market and I wouldn't be surprised to see 7.5 silver in the paper market either. Central fund of Canada got the shit kicked out of it today along with all the mining stocks.

Kevin

Anonymous said...

Kevin,

You are quite right! There is major deflation going around to everything at this point!

BUT.....

If you think about the following there is only one safe place for your wealth. Physical possession without any compromise.

1. If you can find any of the major 4 metals at spot price let me know. So far everyone is paying massive premiums.
2. Anything paper runs the risk of devaluation virtually over night. Do you really think the USD$ is now correctly valued at the mid 80 support levels? Look at how the values dropped with each interest rate cut and now we have strength in the dollar? From what Bush/Paulson/Benacky pep talks?
3. Stocks.... are in the krappa. Nuff said.

It's like watching a train wreck in slow motion from my point of view.

Each day it gets worse and worse.

Remember a controlled fall is still a fall... or better yet a nuclear test is still a nuclear explosion.

G

PS: Keep buying preps and reduce the % of your paychecks going into the system. Keep cash on hand.

Anonymous said...

G

I see the prices falling and in a deflationary spiral EVERYTHING gets sold even the PM's. Now while sooner or latter our illustrious leaders are going to no doubt default on the debt, prices of everything one needs to survive will skyrocket, food will probably be a far better investment as gold and silver will be dumped for debased dollars to feed ones self. The selling in all assert classes around the world is a de-leveraging flight from risk. Say I didn't have any dollars and no income but I still had to eat what do you think I would have to do? Sell what ever even the PM's to get dollars to buy some or steal the food. Right now a lot of people have decided they want to eat. Now if one lived in any country other then the US or Japan where the currency is actually falling gold might be sky rocketing and protecting ones purchasing power which also would mean the less would be getting bought as the price was a lot higher. One thing that is misunderstood by the gold bugs about the great depression is why gold held it's value. That is because the government guaranteed the price. It was therefor a safe haven from falling in value.

Kevin

watchtower said...

It's no secret that I like Jim Puplava but I have heard that being early is the same as being wrong.
I didn't invest any money with Jim but I sure thought about it.
At this point in time am I glad I didn't? You betcha, but I wouldn't be surprised in the least if the jr's he is always touting winds up doing a "moon shot" in the near future and I'm once again pulling my crying towel out.
But it's like Kevin said to me one time, "those are live rounds the're firing out there".

I am once again looking for a place to jump in the physical PM's market though.

I just can't see this ending well.

Just too much debt, both public and private.

Anonymous said...

Hopefully we can all agree that this is some bad juju.

Prep for a CAT 5 financial storm.

Another interesting read for tonight.

http://tinyurl.com/5d2a4b

I know I can't eat gold.
I know gold's value during highly erratic times will be volatile.
But an oz is an oz.
Paper might only be useful in two ways.

1. to wipe with
2. for BTUs

G

Anonymous said...

Watchtower

Ok lets say you bought CDE the largest US silver producer at 5 in June it is now .70, now if somehow on gods green earth it got back to 5 that would be a moon shot. What I see more the likely is a bk as they are issuing more stock diluting existing shareholders kind of like the banks were doing because they ain't got no money and too much frigging debt.
I would recommend staying away from the miners unless your a good trader after this ass beating it will take some time to base out after they stop falling.
Don't be a falling knife catcher it leave scars most of the time.
Kevin

watchtower said...

Point well taken about the falling knifes Kevin, I personally can't afford to be cut too severely.

GM temporarily suspending matching 401k contributions starting 11/1/08

That can't be good.

http://tinyurl.com/6olfsf

Anonymous said...

Watchtower,

I agree it's best to let the knife hit the floor and stop bouncing before attempting to pick it up.

I was just looking at a chart of platinum from a high a few months ago of 2180 it is now 800 about a 62% decline. If the whole Greenspn bubble unwinds which basically drove up all asset prices it isn't unconceivable that it will fall back to the 2001 low. I think all assets face the same risk right now as the hedge fund industry is simply going to disappear deflating everyting with it.

http://www.kitco.com/scripts/hist_charts/yearly_graphs.plx
Kevin