U.S. TO DEFAULT ON ITS DEBT – SUMMER 2009

[Arraya]

You will have contraction of money supply along with the value decrease of each individual dollar. Hyper-inflation would be the lowering of value of each individual dollar by creating more of them and adding to the supply.

To put another way: A decrease in quantity and value as opposed to increase in quantity and decrease in value.

This is about as bad as it gets because not only is the dollar worth less there is a lot less in circulation.

The part that people don’t understand is the unique relationship that the US dollar has with other currencies. In simplest terms the value of the dollar is propped up by other currencies however this weakens other currencies in the process. Normally the amount of debt we have combined with are massive trade imbalance would crush our currency.

So basically they are getting together this weekend to discuss how the financial management of the US is screwing up the world economies on many levels. One of the things they will discuss is kicking the dollar to the side, which, unfortunately for people in the US is the best thing to do for the world.

I think this maybe a first time in the history of financial crises phenomena, pretty cool. But then again we have been the only reserve currency in history. Isn’t fiat money fun. Weee!

[kewp]

Can someone paint a similarly concrete scenario that illustrates a plausible deflation situation?

A million hedge funds holding a quadrillion dollars in bad derivatives all begin defaulting.

And this is going on as we speak. *Everything* is dropping in prices across the board as over-leveraged hedgies have to unwind positions to make margin calls. This is vacuuming dollars out of the world market much faster than they are being replaced by printing. And is deflationary, of course.

If you lend me $5 and I reach into a Monopoly game set, pull out one of the game 5 bills, give it to you and say “We’re square now”, you would feel like I ripped you off.

Not if I lent you $5 in Monopoly money in the first place. And I hate to break it to you, but fiat currencies *are* Monopoly money.

A better example would be if the Fed lent me $5, I lend it to you and you eat it. This is also deflationary as the total pool of $5 bills is reduced.

If I’m a bank and enough people are eating the $5 dollar bills I lend them then I might just sit on what $5 bills I have left. This is also deflationary, but of a different sort than dollar destruction. You eating the money deflates M; me stopping lending deflates V.

The simple fix for this is for the Fed to replace at least enough of the $5 bills to get me lending again. Hopefully not to any more money-eaters, of course!

All the problems you are referring to as apocalyptic are in reality simply a fundamental results of domestic over-consumption across the board. Fighting a war in Iraq with borrowed money is an example of this. Having $500k in mortgage debt with $50k a year income is another. This is where our trade imbalance comes from.

The solution in both cases is put an end to over-consumption. This will be a bitter pill to swallow for many, but for those of us that have always lived within our means we will enjoy cheaper products and services as a result.

[kewp]

Can someone paint a similarly concrete scenario that illustrates a plausible deflation situation?

A million hedge funds holding a quadrillion dollars in bad derivatives all begin defaulting.

And this is going on as we speak. *Everything* is dropping in prices across the board as over-leveraged hedgies have to unwind positions to make margin calls. This is vacuuming dollars out of the world market much faster than they are being replaced by printing. And is deflationary, of course.

If you lend me $5 and I reach into a Monopoly game set, pull out one of the game 5 bills, give it to you and say “We’re square now”, you would feel like I ripped you off.

Not if I lent you $5 in Monopoly money in the first place. And I hate to break it to you, but fiat currencies *are* Monopoly money.

A better example would be if the Fed lent me $5, I lend it to you and you eat it. This is also deflationary as the total pool of $5 bills is reduced.

If I’m a bank and enough people are eating the $5 dollar bills I lend them then I might just sit on what $5 bills I have left. This is also deflationary, but of a different sort than dollar destruction. You eating the money deflates M; me stopping lending deflates V.

The simple fix for this is for the Fed to replace at least enough of the $5 bills to get me lending again. Hopefully not to any more money-eaters, of course!

All the problems you are referring to as apocalyptic are in reality simply a fundamental results of domestic over-consumption across the board. Fighting a war in Iraq with borrowed money is an example of this. Having $500k in mortgage debt with $50k a year income is another. This is where our trade imbalance comes from.

The solution in both cases is put an end to over-consumption. This will be a bitter pill to swallow for many, but for those of us that have always lived within our means we will enjoy cheaper products and services as a result.

[kewp]

Can someone paint a similarly concrete scenario that illustrates a plausible deflation situation?

A million hedge funds holding a quadrillion dollars in bad derivatives all begin defaulting.

And this is going on as we speak. *Everything* is dropping in prices across the board as over-leveraged hedgies have to unwind positions to make margin calls. This is vacuuming dollars out of the world market much faster than they are being replaced by printing. And is deflationary, of course.

If you lend me $5 and I reach into a Monopoly game set, pull out one of the game 5 bills, give it to you and say “We’re square now”, you would feel like I ripped you off.

Not if I lent you $5 in Monopoly money in the first place. And I hate to break it to you, but fiat currencies *are* Monopoly money.

A better example would be if the Fed lent me $5, I lend it to you and you eat it. This is also deflationary as the total pool of $5 bills is reduced.

If I’m a bank and enough people are eating the $5 dollar bills I lend them then I might just sit on what $5 bills I have left. This is also deflationary, but of a different sort than dollar destruction. You eating the money deflates M; me stopping lending deflates V.

The simple fix for this is for the Fed to replace at least enough of the $5 bills to get me lending again. Hopefully not to any more money-eaters, of course!

All the problems you are referring to as apocalyptic are in reality simply a fundamental results of domestic over-consumption across the board. Fighting a war in Iraq with borrowed money is an example of this. Having $500k in mortgage debt with $50k a year income is another. This is where our trade imbalance comes from.

The solution in both cases is put an end to over-consumption. This will be a bitter pill to swallow for many, but for those of us that have always lived within our means we will enjoy cheaper products and services as a result.

[kewp]

Can someone paint a similarly concrete scenario that illustrates a plausible deflation situation?

A million hedge funds holding a quadrillion dollars in bad derivatives all begin defaulting.

And this is going on as we speak. *Everything* is dropping in prices across the board as over-leveraged hedgies have to unwind positions to make margin calls. This is vacuuming dollars out of the world market much faster than they are being replaced by printing. And is deflationary, of course.

If you lend me $5 and I reach into a Monopoly game set, pull out one of the game 5 bills, give it to you and say “We’re square now”, you would feel like I ripped you off.

Not if I lent you $5 in Monopoly money in the first place. And I hate to break it to you, but fiat currencies *are* Monopoly money.

A better example would be if the Fed lent me $5, I lend it to you and you eat it. This is also deflationary as the total pool of $5 bills is reduced.

If I’m a bank and enough people are eating the $5 dollar bills I lend them then I might just sit on what $5 bills I have left. This is also deflationary, but of a different sort than dollar destruction. You eating the money deflates M; me stopping lending deflates V.

The simple fix for this is for the Fed to replace at least enough of the $5 bills to get me lending again. Hopefully not to any more money-eaters, of course!

All the problems you are referring to as apocalyptic are in reality simply a fundamental results of domestic over-consumption across the board. Fighting a war in Iraq with borrowed money is an example of this. Having $500k in mortgage debt with $50k a year income is another. This is where our trade imbalance comes from.

The solution in both cases is put an end to over-consumption. This will be a bitter pill to swallow for many, but for those of us that have always lived within our means we will enjoy cheaper products and services as a result.

[kewp]

Can someone paint a similarly concrete scenario that illustrates a plausible deflation situation?

A million hedge funds holding a quadrillion dollars in bad derivatives all begin defaulting.

And this is going on as we speak. *Everything* is dropping in prices across the board as over-leveraged hedgies have to unwind positions to make margin calls. This is vacuuming dollars out of the world market much faster than they are being replaced by printing. And is deflationary, of course.

If you lend me $5 and I reach into a Monopoly game set, pull out one of the game 5 bills, give it to you and say “We’re square now”, you would feel like I ripped you off.

Not if I lent you $5 in Monopoly money in the first place. And I hate to break it to you, but fiat currencies *are* Monopoly money.

A better example would be if the Fed lent me $5, I lend it to you and you eat it. This is also deflationary as the total pool of $5 bills is reduced.

If I’m a bank and enough people are eating the $5 dollar bills I lend them then I might just sit on what $5 bills I have left. This is also deflationary, but of a different sort than dollar destruction. You eating the money deflates M; me stopping lending deflates V.

The simple fix for this is for the Fed to replace at least enough of the $5 bills to get me lending again. Hopefully not to any more money-eaters, of course!

All the problems you are referring to as apocalyptic are in reality simply a fundamental results of domestic over-consumption across the board. Fighting a war in Iraq with borrowed money is an example of this. Having $500k in mortgage debt with $50k a year income is another. This is where our trade imbalance comes from.

The solution in both cases is put an end to over-consumption. This will be a bitter pill to swallow for many, but for those of us that have always lived within our means we will enjoy cheaper products and services as a result.

[HereWeGo]

I pretty much agree with all of kewp’s last post. Let me throw in a tangential point to consider, given the seeming abundance of all those bill eaters: Has the aggregate credit rating of US citizens and US businesses been irrevocably damaged, and if so, to what degree? What are the consequences of that drop in credit worthiness?

And maybe the second question: how much of the counterparty fear associated with the “credit crunch” is valid, and how much is invalid? There seems to be a conventional wisdom that the fear is mostly invalid, but I’m not sure that’s the case.

[HereWeGo]

I pretty much agree with all of kewp’s last post. Let me throw in a tangential point to consider, given the seeming abundance of all those bill eaters: Has the aggregate credit rating of US citizens and US businesses been irrevocably damaged, and if so, to what degree? What are the consequences of that drop in credit worthiness?

And maybe the second question: how much of the counterparty fear associated with the “credit crunch” is valid, and how much is invalid? There seems to be a conventional wisdom that the fear is mostly invalid, but I’m not sure that’s the case.

[HereWeGo]

I pretty much agree with all of kewp’s last post. Let me throw in a tangential point to consider, given the seeming abundance of all those bill eaters: Has the aggregate credit rating of US citizens and US businesses been irrevocably damaged, and if so, to what degree? What are the consequences of that drop in credit worthiness?

And maybe the second question: how much of the counterparty fear associated with the “credit crunch” is valid, and how much is invalid? There seems to be a conventional wisdom that the fear is mostly invalid, but I’m not sure that’s the case.

[HereWeGo]

I pretty much agree with all of kewp’s last post. Let me throw in a tangential point to consider, given the seeming abundance of all those bill eaters: Has the aggregate credit rating of US citizens and US businesses been irrevocably damaged, and if so, to what degree? What are the consequences of that drop in credit worthiness?

And maybe the second question: how much of the counterparty fear associated with the “credit crunch” is valid, and how much is invalid? There seems to be a conventional wisdom that the fear is mostly invalid, but I’m not sure that’s the case.

[HereWeGo]

I pretty much agree with all of kewp’s last post. Let me throw in a tangential point to consider, given the seeming abundance of all those bill eaters: Has the aggregate credit rating of US citizens and US businesses been irrevocably damaged, and if so, to what degree? What are the consequences of that drop in credit worthiness?

And maybe the second question: how much of the counterparty fear associated with the “credit crunch” is valid, and how much is invalid? There seems to be a conventional wisdom that the fear is mostly invalid, but I’m not sure that’s the case.

[jficquette]

You can’t default on debt when you control the value and the amount of what its denominated in.

[jficquette]

You can’t default on debt when you control the value and the amount of what its denominated in.

[jficquette]

You can’t default on debt when you control the value and the amount of what its denominated in.

[jficquette]

You can’t default on debt when you control the value and the amount of what its denominated in.

[Author]

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