Friday, October 17, 2008

Does the United States Have a Debt Chandrasekhar Limit?

The comments section was very active on the last post. I really like it when readers leave ideas and comments, it is one of the best things about doing this blog. I hate to bring it up, but it is already 40 degrees tonight and falling. I do not think I have ever told you readers that I HATE THE COLD. I really mean it.

Real American, True Patriot, Father of the New Revolution
This story is going to be all over the world by tonight, but I was so pumped by it I had to include it here as well!

It seems there was a Hedge Fund manager that had the insight, balls, and cash to make huge bets against the entire mortgage industry. Of course the fund did spectacular, returning 866%. Yes, you read that right. This man named Andrew Lahde is now my hero. It is not because he made big bucks on the mortgage fiasco, it is for two other reasons:
1. Mr. Lahde is hanging it up after his windfall to pursue more meaningful things in life, I wish him all the best.
2. He wrote the single best letter to his investors ever written!

The Farewell letter is so amazing, so precise, so cutting that you simply must read the entire piece. I saw it on the Big Picture blog first, so I will link to that page:

Scathing excerpt:
"Dear Investor:
Today I write not to gloat. Given the pain that nearly everyone is experiencing, that would be entirely inappropriate. Nor am I writing to make further predictions, as most of my forecasts in previous letters have unfolded or are in the process of unfolding. Instead, I am writing to say goodbye.

Recently, on the front page of Section C of the Wall Street Journal, a hedge fund manager who was also closing up shop (a $300 million fund), was quoted as saying, “What I have learned about the hedge fund business is that I hate it.” I could not agree more with that statement. I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.

There are far too many people for me to sincerely thank for my success. However, I do not want to sound like a Hollywood actor accepting an award. The money was reward enough. Furthermore, the endless list those deserving thanks know who they are."

Many things that I think and see are fully reflected in this letter. In the Biotech field there are plenty of people that think an education at some big time school makes them better at science. That is not the case. There are so many foolish people in government and positions of power in the financial world that are no smarter than you or I, and often much less so. The evidence speaks for itself; an economy built on selling houses at ever higher prices was deemed a swell idea by those "in the know". There can be no other explanation than pure ignorance. Economic Disconnect salutes Andrew Lahde!

Does the United States Have a Debt Chandrasekhar Limit?
The entire financial mess that has engulfed the world is really quite easy to fix. I have seen many economists, bloggers, and others make the same argument over the past week that seems to be universal in its appeal. From Paul Krugman, to Nouriel Roubini and even the clearest heads at Minyanville all seem to have arrived at the same solution. Here it is in one sentence:

Have the US Treasury spend whatever it has to to fix the entire world.

Now some have various wrinkles to this plan, but they all boil down to the same thing. There is a growing consensus as bailout after bailout falls flat and a TARP Plan cannot even begin to cover the problem that wild spending is both desireable and harmless. Krugman himself penned an article today for the Times that says "Do not worry about budget deficits!" Give that man another Nobel Prize! Brilliant!

Now as I am one of the sorry uneducated masses, my question for Roubini, Krugman, et al is simple:
Does the United States Have a Debt Chandrasekhar Limit?

The Chandrasekhar Limit is defined as:
"For main-sequence stars with a mass below approximately 8 solar masses, the mass of this core will remain below the Chandrasekhar limit, and they will eventually lose mass (as planetary nebulae) until only the core, which becomes a white dwarf, remains. Stars with higher mass will develop a degenerate core whose mass will grow until it exceeds the limit. At this point the star will explode in a core-collapse supernova, leaving behind either a neutron star or a black hole.".

What I am asking is whether there is a limit on the amount of debt the US can generate before a total implosion occurs (the end result of a supernova). Is there a limit? It seems Iceland could not print or generate enough debt to save itself. Zimbabwe has the market cornered in the 10 Billion dollar note market as they print away. How come the US can make all the money they want?

I realize I am being a bit sarcastic here, but the question is a serious one. At present the US has around 3 Trillion dollars committed to this "rescue" effort. Is 6 trillion too much? 9 Trillion? 30 Trillion? At what point will the system break down and go supernova? Like the FED thinks they know what interest rates have to be in exact percentage points, do economists know how far we can push the debt envelope? I invite any and all to leave their answer in the comments section, or to vote in the new poll question along these lines.

If the US can just make all the money they need, why not make every US citizen a Billionaire? How about making the illegal immigrants millionaires? Why not? It is semantics to say the US can take on another 3-6 Trillion in deficit that will never be paid back but not 30 Trillion as that would be too much. It is not an intellectually honest argument. We will wait for an answer. It may be a while.

Friday Night Entertainment
After a weeks hiatus, the good old fun blog is back on the attack.

Book Excerpt
Tonights book passage comes from a great Star Wars novel that I really love.
"Peace is a lie. There is only passion.
Through passion, I gain strength.
Through strength, I gain power.
Through power, I gain victory.
Through victory my chains are broken."

The Sith Code from "Darth Bane: Path of Destruction" by Drew Karpyshyn

Film Clip
This clip is from a TV series actually. "The Highlander" series was the best television show ever made, I know you all agree. One of the best sword fights was the final conflict between the lead character Duncan McCloud and his arch nemesis Kalas. They fight their final fight atop the Eiffel Tower, and it is a real battle (from season 3, tiled "Finale"):

Musical Interlude
Some tunes to start your weekend off right.

By popular request, as well as my own favorite Filter song, take a listen to "Hey, Man Nice Shot":

Full disclosure; I wanted to marry Stevie Nicks for most of my life so I am biased! Take a listen to "Stand Back":

Want to get rocking? Want to get rolling? Get jacked up with Motley Crue and "Kickstart My Heart":

You may or may not have ever seen the classic film "Flash Gordon", well I liked it. Queen did the entire soundtrack and the music was great. Here is the theme song:

Have a good night.


watchtower said...

Don't tell my wife but Stevie Nicks gives me that butterfly feeling :) plus I love that song "Landslide" that she sings.

GYSC said:
"At what point will the system break down and go supernova?"

I'm going with sometime in the year 2010. Don't know if a "black swan" will set it off or what but that is my answer and I'm sticking to it :)

Welcome to Banana Republic 2.0, I hope we all enjoy living "in a van down by the river".

getyourselfconnected said...

Glad we share a common desire in Stevie Nicks! She was once one of the top sexiest women alive in my book.
I can only argue that the US financial system will not need a Black Swan event, as that connotates a rare event. Anytime a system is generating as much debt and useless application of capital, it will lose.
Glad to see you as always!

watchtower said...

I'm probably revealing too much, but Scarlett Johansson kind of puts out that same "vibe" as Stevie Nicks to me.
Both incredibly beautiful women that have that something extra, at least in my book (perhaps that something extra is talent, I don't know).

Well it's one of those perfect fall days here where I live, guess I'd better get the mountain bike out and go for a ride through the woods :)

Life can be good.

Anonymous said...

re: Lahde

Well of course he hung 'em up. What the f--- was he gonna do for an encore? By the end of 2010, he'd have been watching his clients chasing the latest hot idea of some other manager. But kudos to him for quitting before that happened.

The rest of his silly rant sounds like a bunch of sour grapes. As an Ivy Leaguer myself (from about a gazillion years ago) I can assure you that it was usually the not-so-bright legacies who meandered into B-school.

If you can locate a copy of 'The Official Preppy Handbook' from the early eighties, you'll find this 'quote:' "Trading bonds is the most fun you can have with your clothes on"

'nuff said.