The Past as Prologue

The "big" snowstorm slated for this afternoon for the northeast was a no show here in Massachusetts for the most part. Only about an inch or two as of right now on the ground. Everyone was so scared about the storm that my work closed today at 12 noon. I will take the half day! Short on time again this evening so I wanted to take a comment from the comments section last post and set up a new post that will probably get done tomorrow. I have stepped up my boxing training and I am having a bit of trouble keeping my arms up over the keyboard tonight!

The Past as Prologue
Reader Watchtower submits:
As you can see this is the 'Total Credit Market Debt as a % of GDP' chart.
In Oct of 08 you wrote:
"At what point will the system break down and go supernova?"
Here is the chart for review:

From the comments:

"Which was from your post titled:
"Does The United States Have a Debt Chandrasekhar Limit?"

OK, now that we have that established, my question is:
Does the debt to GDP chart have a correlation to your 'Chandrasekhar Limit' question you posed back then?

The second question is:
You see where the spike did the cliff dive around 1934 in the first big run up in the chart?
What caused it back then, and is it 'different' this time around?
I guess what I'm saying is that chart is one scary a## chart if it actually means anything anymore.
Of course the Greece thing has me thinking about our nation and this kind of stuff again.
Any thoughts?

I do welcome questions and Watchtower picks out one of my favorite posts of all time!

I do have some thoughts along these lines and I think it relates very much to what we are seeing today. As I am short on time and lacking control of my arms I will repost the article in question and I hope to have a write up tomorrow night. Enjoy!

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.

Have a good night.

Money Printing Nirvana

Rain and mist all day today. Same story for some time now. Rumor has it the Sun will be out tomorrow and it will be north of 80 degrees. I hope my skin does not burst into flames when the light actually hits it again. Hopefully my melanocyte recruitment cascade pathway is still working after almost 10 days of darkness! Wow, that was kind of geeky.

Blog Notes
With the return of the Sun, I am going to hope for a real start to the summer. What this means is the dreaded "summer posting" type schedule. Right before and then after July 4th it is my fishing season. This usually run into late September, though the NFL takes over then to a large extent. I also will be playing some more tennis more frequently. Add to this my brand new back deck and new front lawn and I think I am going to have a fun and busy summer.

What this all adds up to is less frequent posts. I would say every day will be out for sure, but not once or twice a week either. Friday night is always my favorite blog of the week. Maybe weekend wrap ups as well will be added. Yours truly does have a life outside or writing and the summer time is the right time. I know all the loyal readers understand, and I am sure their blog reading time goes down in the summer months as well. Never fear, I will be here.

FOMC Day
Today had all the drama of watching paint dry. A basic rerun of the same statement from last meeting, though the FED did leave out the actual term "deflation" as not to scare anyone. As usual, the real fun is in the stories that are run after the statement and today was no exception.

Consider this AP story (via Yahoo Finance) which open with an absurd jump of logic, but of course just leaves it on the table as is:

Fed says recession easing, inflation is tame
WASHINGTON (AP) -- The Federal Reserve signaled Wednesday that the weak economy likely will keep prices in check despite growing concerns that the trillions it's pumping into the financial system will ignite inflation.
Fed Chairman Ben Bernanke and his colleagues held a key bank lending rate at a record low of between zero and 0.25 percent. And they pledged again to keep it there for "an extended period" to help brace the economy.
The Fed is sending the message that the economy is making progress toward a path of recovery, that the credit markets appear to be healing and inflation is not going to be a problem," said economist Lynn Reaser, vice president of the National Association for Business Economics. "The bogeyman of deflation also was removed from the Fed's primary risk list," she added.
The Fed in March launched a $1.2 trillion effort to drive down interest rates to try to revive lending and get Americans to spend more freely again. It said it would spend up to $300 billion to buy long-term government bonds over six months and boost its purchases of mortgage securities. So far, the Fed has bought about $177.5 billion in Treasury bonds.
The Fed is on track to buy up to $1.25 trillion worth of securities issued by Fannie Mae and Freddie Mac by the end of this year. Nearly $456 billion worth of those securities have been purchased.

There is a lot of stuff here, so lets start with the smaller items;

-The FED has made it clear that a rate hike is off the table. I will now accept apologies form all those saying the FED would be raising rates in August. You were all dreamers and you are all now proven wrong. The rates will be zero for an "extended" period of time. So unless you cannot read that means ZIRP just got treated with ExtenZe and so knock off the "rate hike" and "exit strategy" talk.

-The FED is truly all powerful as both inflation and deflation are pronounced dead as of today by the FED. They only said inflation was "well contained" (uh oh!) and they did not bother to even mention deflation (uh oh!). The FED has engineered a perfect outcome and one they are in total control of, if you read just this article that is.

Money Printing Nirvana
My last point is the major one. Reread that first line:
"...the weak economy likely will keep prices in check despite growing concerns that the trillions it's pumping into the financial system will ignite inflation."

The FED feels that because wages are static or going lower and the price of an XBox is static or going lower they can create money unabated with no consequence.

Now, Economic Disconnect, you might say "all that money is not going into new credit, hence there is no velocity of money, thus no inflation as it can only cover debt destruction". And of course you are correct and the next step is deflation.

To this I would ask;
-If wages could be kept low (by economic factors or edict)
-If consumer prices could be kept low (by lack of demand or edict)
-If banks will not lend out money, but instead use it to write off debt (this may well be what is going on)

Then would it not be nirvana to simply print enough money to cover all debt, call it "cancelled out" by all the new paper, and start all over again?

Indeed, this seems so devilishly simple I would wonder why every nation in the history of the world has not had this as their economic centerpiece.

And I think this leads me to my "inflation" predisposition. You may define inflation as an increase in the money supply, but I could define it as de facto devaluation. If the US prints say 10 trillion dollars to absorb mortgage losses, credit card losses, commercial real estate losses and other losses not yet known then yes, that money never enters the money supply as new capital. But it was used to pay for the debt that was taken on and could not be paid back in real money. As a creditor you just got paid back with printed money that came from nowhere. At this point the currency has no moorings in reality (not that it does now, but if kept as a slow process the world accepts this as a cost of doing business) and thus any creditor will want either MORE of the dollars, or they will not want them at all and demand payment by other means.

This is the danger of the "printing press", not hyperinflation because of a sea of money, but inflation due to limited desire for a particular money or a lack of belief in a particular money form.

Now I understand that because this has not happened as of yet to the US, nor in it's history many think this will never happen. I also have respect for the "other currencies are worse off, so the dollar will always be strong" argument for what it attempts to imply.

It reminds me of the old line:
"When you owe the bank $100 that is YOUR problem; When you owe the bank 100 Million it is the BANKS problem".
(Aside: this joke needs to be corrected for today's dollars!)

The US owes so much money that indeed it is in the best interests of most of our creditors to play pretend and allow the US to do what it is doing with the money creation. I have discussed the possibility of a debt "Chandrasekhar limit" many times. I think we finally get an answer to that question.

Have a good night.

Debt Chandrasekhar Limit Repost Due to Inclement Weather

Heavy wet snow and tons of ice from the most recent storm. I arrived home late due to traffic and I have to go out and try and clear some of the ice before a big freeze. Did I ever mention how much I love the winter?

Article from October 17, 2008
I was putting together some thoughts today about all the stimulus talk and even more calls for crazy government spending. I arrived at the conclusion that a post from October 17th captured my thinking exactly. Old link here. I am reprinting the entire post section because I think it says everything I want to put into words.

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 desirable 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.

Have a good night.

Unheeded Warnings

I checked the ratings website for economic blogs after their latest report, and Economic Disconnect still sits at #105. I will continue to try and break the top 100!

Corrupt US Officials Give Away Our Money While They Pad Their Pockets
The disgusting news out today concerns the Governor of Illinois and highlights how far gone the US Government is. Governor Rod Blagojevich has been nailed trying to sell the Senate seat held by Barrack Obama for all kinds of payments and kickbacks. What is both funny and sad, Mr. Blagojevich won the office by replacing his predecessor who is now serving jail time for the same kind of corruption. Quite the state good old Illinois! Do not worry Mr. Blagojevich does not intend to resign until he is being walked out of court on the way to jail. Hang in there buddy!

What this puts into my mind is the sickness that is the US Congress voting on things like the TARP bill and an automaker bailout. While our elected officials decide whether to hand over countless billions to Citi, AIG, Fannie/Freddie, Bank of America etc they are at the same time taking some off the table for themselves. Very disturbing. It does matter who you vote for and we missed another chance to send a bunch of clowns packing in the last election. Keep the same people in Washington and we will get more of the same.

Unheeded Warnings
There are some danger signs flashing bright red concerning things economic. While the markets are getting ready for a year end monster move up (up 20% from the lows=technical BULL MARKET) other indicators are screaming warnings.

From the always fun site LOLFed, I found this story on General Growth Properties which shows the coming commercial real estate bust is both here and very big indeed. Full story here.

GGP was a $40 stock and is now in the 40 cent range. Too many acquisitions and too many loans made on "future rent estimates" ie liar loans were the killers when the retail side of things went bust. Banks have enormous exposure to commercial real estate and now that worm is turning. This fits well into the treasury yield debacle that is going on right now.

The latest Treasury auction went off great on the demand side as record numbers of bidders gobbled up US debt with the awesome yield rate of, ZERO PERCENT! (from Bloomberg)

Treasury Bills Trade at Negative Rates as Haven Demand SurgesDec. 9 (Bloomberg) -- Treasuries rose, pushing rates on the three-month bill negative for the first time, as investors gravitate toward the safety of U.S. government debt amid the worst financial crisis since the Great Depression.
The Treasury sold $27 billion of three-month bills yesterday at a discount rate of 0.005 percent, the lowest since it starting auctioning the securities in 1929. The U.S. also sold $30 billion of four-week bills today at zero percent for the first time since it began selling the debt in 2001.

The short term 1 and 3 month T-bills are going yield negative or already are there. Why would any player want to park money in a vehicle that will even lose a bit of it for them? This question has many possible answers and makes commentary on some of the major issues going on today.

Banks Will Not Lend Money
There has been tons of talk about how "banks will not lend money", even the TARP cash that was supposed to be for that very purpose. This has caused consternation among the Congress and the FED/Treasury. The ultra low yield on T-bills gives us a glimpse of an answer.

Suppose you were a bank (perish the thought) and you were able to swap with the FED 50 Billion dollars in garbage MBS paper and get cash in return. You then roll that money into short term T-bills getting little or even negative yield. Why would you do that?
1. Any lending vehicle available cannot beat that zero return, be it residential or commercial real estate loans, consumer credit card debt, or any other debt. There exists no reasonable alternative for that cash. Why this is possible is that the models that the banks use must be telling them bad things as far as loan losses go. Which leads to number.....
2. This cash will be required to meet reserve limits when more loan losses are realized going forward. Remember that GGP story above? Do you think that company made all those acquisitions and issued that many loans with cash it had on hand? Nope. It was all borrowed and leveraged up money and it has gone poof. If you are a bank on the other end you will need the FED money to cover that loss and many more like it.

So here we are. The disastrous losses on mortgages and consumer credit has hamstrung the banks into hoarding cash. They are doing this either because there is no profitable use for the money and/or they need to cover losses going forward. The bond market says things are on the edge of disaster, the stock market says things are on the edge of recovery.

Bernanke's conundrum is going to be how to get this resolved. He is faced with a two front problem. The first is that if the banks communicate that the loan environment is too risky to put money to work in Bernanke looks like a fool for shoveling cash to nowhere. If the banks come clean about how poor their balance sheets are, there will be risk of a panic. I mean it is one thing to be insolvent and another to admit it on all levels.

Also wrapped up in this mess is why on earth any foreign country would be piling into Treasuries right now. While we in the US appreciate foreign funding of our never ending debt pile, the motivation to do so is lost on me. Some argue that the fortunes of many countries (Japan and China especially) are tied to the US too much to allow any calamity to occur. I can see that, but all things have limits. Where is the limit here? (see US Debt Chandrasekhar Limit for more on this topic)

There are warning bells ringing loudly. The Treasury and the FED need to stop playing games and address the real underlying issues. All their meddling has accomplished nothing but extended the duration of uncertainty. The treasury bill problem demands an answer. We deserve to get one.

Have a good night.