Stroupe on the $

[ThePythonicCow]

Re: Stroupe on the $

I don't get it. Where is the money coming from that is being sucked into this black hole? Who owns this money and why are they so ignorant as to sell other assets and lend it to Uncle Sam?

Part of it might be essentially the Treasury extorting the money from the primary dealers, and part of it might be another one of those "everything else sucks worse" schemes.

One of the posts above claims that the Treasury has considerable leverage over the primary dealers. If one of the dealers doesn't buy its share of the weeks offerings, then Treasury can cut that dealer from the (usually quite profitable) action.

As for the second option, we've already seen that happen once, a few months ago, when panic raced through the financial worlds and many were forced to deleverage dollar denominated contracts and race to dollars and treasuries.

This part of the article sounds like another crazy gold bug conspiracy.

Moi? or should I say Moo?

[The Outback Oracle]

Re: Stroupe on the $

I aplogise if this is a simplistic question or observation. No doubt it is dealt with elsewhere here. If so please just point me in the right direction.
I am thinking out loud here and writing as I go. Some may assess I don't think too straight!!!

If Stroupe et al are correct, then what we have is a giant 'Black Hole' that will suck everything else in. Now one response is QE which supplies money to the Black Hole but in doing so feeds the negative or anti-everything energy inside the Black Hole.
So let's take the A$ and the US$. We owe some $700B net in our external account with a big proportion of it in USD. (Actually what currency it is held in will not matter in the end) We have record private debt which has been financed to a large extent by our Banks borrowing on International markets, We have huge Govt debts through our State Governments borrowing and our Fed govt is about to embark on a massive borrowing programne most of which will necessarily have to be raised externally.
So interest rates rise in long UST. This looks to me to have x effects
1. Savings rates in US increase - funding part of the problem. However as I understand it, it is impossible for internally generated savings to fill the void.
2. As a result of (1) your CAD declines or disappears. Since there are no net surpluses for other countries so dollar reserves held by other countries such as China also start to head back to the US.
(Even still there is not enough money to fill the hole but that is another issue) (I think)
Now, the dollars may head back to the US indirectly. i.e. high interest rates cause various of your asset values to tank (even further) and the dollars return via the Chinese et all buying up US assets on the cheap.

So the rise in interest rates is somewhat dependent on the degree 1 & 2 occurs in response to the higher level of interest rates. However the inevitable outcome looks like an increasing USD value vs say A$ (and nearly everyone else). A$ in turn may fare better than Ireland or Spain et al.

Now Aus (both Private and government) is out trying desperately to borrow in the same market. So the interest we pay must start ratcheting up in response. Now multiply this by UK, most of Europe etc. So we all end up back at square one except we all have high interest rates. What is an idea of how high interest rates will go in this scenario? Private borrowing may collapse but governemnt requirements will continue to increase in this environment. Will Governments continue to borrow in the face of their crowding out and destroying their own industry? The last 50 years says "yes"
Then if we are back at square one, then it occurs to me however that the US would still be a favoured destination for money. Hence it is still USD up against most other currencies. Meanwhile interest rates will have sucked the life out of everything.
I find it hard to see rising commodity prices, or rising prices of anything except perhaps food and oil in this scenario.

[ThePythonicCow]

Re: Stroupe on the $

Then if we are back at square one, then it occurs to me however that the US would still be a favoured destination for money. Hence it is still USD up against most other currencies. Meanwhile interest rates will have sucked the life out of everything.
I find it hard to see rising commodity prices, or rising prices of anything except perhaps food and oil in this scenario.

Due to its wider use and reserve status, the US dollar (or US treasuries, not sure which) might hold relative to other paper assets, yes. But the systemic weaknesses that are taking down all paper will start taking down "real" stuff as well. Providing humans with the daily essentials of food, clothing, shelter, energy and communications now depends vastly more on, and is entangled with, the now collapsing paper economy.

The collapse of paper capital will cause collapse of the now capital intensive food and energy industries, initially in fits and starts and isolated events. This will cause supply destruction of essentials. This will cause preferential treatment of these essentials. The market for what is less essential will collapse due to demand destruction. The market for what is more essential will be bid up to higher prices, as too much paper fights for too few goods. Then when people get too angry at the prices for essentials, governments will impose price controls. Of course, price controls don't make more stuff; they just make it harder to profit from what one does make, further destroying supply.

A key lesson we have learned so far in the financial asset markets is that distributing risk does not make the risk go away; it just makes the black swans less frequent, but fatter.

A lesson still to be learned is that we have entangled our world-wide food and energy production in the same capital intensive apparatus. Rather than a thousand little farms, we have a few huge farms half a world away, relying on immense capital intensive infrastructure to shave the last few cents off an ounce of food. Similarly, rather than going out to cut a cord of wood in the nearby woods, we have an awesome infrastructure in place to heat our homes with gooey deposits from under the sands of Arabia.

That capital is now shrinking; that capital market gravely wounded. The shortages, the gas lines and the bare grocery store shelves are coming, to be followed soon after by the price controls and more shortages.

The young adult generation, now in their teens and twenties, will go through hell, as did the Greatest Generation 80 years ago with the Great Depression and the Second World War. They will do us old farts such as myself proud, though few of us old farts will live long enough to witness the outcome.

[touchring]

Re: Stroupe on the $

What happened during the Great Depression? From my understanding, the pound was the reserve currency during that time. Did the pound appreciate?

[ThePythonicCow]

Re: Stroupe on the $

What happened during the Great Depression? From my understanding, the pound was the reserve currency during that time. Did the pound appreciate?

The pound was not "the reserve currency" then. Multiple currencies, including the dollar, pound and franc, were all gold backed and were thereby convertible. That is, the major currencies were on a gold standard then, not a paper dollar standard. Gold appreciated .

When you blow something up, it doesn't necessarily fall apart the same way as a similar demolition in the past. It depends on whether it was constructed the same way. This is the first time in human history we've had a dominant paper reserve currency.

[Slimprofits]

Re: Stroupe on the $

We shall see which thesis proves out. One or two of us are holding on to an ugly-odds bet here which it seems few others wish to approach even with a barge pole.

Wagering on USDX 90, never mind 100, borders on recklessness. There is a line between recklessness and boldness.

Good luck with that.

[The Outback Oracle]

Re: Stroupe on the $

One does not have to wager 100...just UP. You buy (or in your case hold) USD. Not entirely reckless???? That is against other currencies. For mine i'd pick the pound to get another hammering but that is just liitle old me sitting out here in ignorance land. I'm busy trading Aussie for USD to get me through the next few months.

[medved]

Re: Stroupe on the $

The collapse of paper capital will cause collapse of the now capital intensive food and energy industries, initially in fits and starts and isolated events. This will cause supply destruction of essentials. This will cause preferential treatment of these essentials. The market for what is less essential will collapse due to demand destruction. The market for what is more essential will be bid up to higher prices, as too much paper fights for too few goods. Then when people get too angry at the prices for essentials, governments will impose price controls. Of course, price controls don't make more stuff; they just make it harder to profit from what one does make, further destroying supply.

A lesson still to be learned is that we have entangled our world-wide food and energy production in the same capital intensive apparatus. Rather than a thousand little farms, we have a few huge farms half a world away, relying on immense capital intensive infrastructure to shave the last few cents off an ounce of food. Similarly, rather than going out to cut a cord of wood in the nearby woods, we have an awesome infrastructure in place to heat our homes with gooey deposits from under the sands of Arabia.

Indeed, existing globalization bubble will burst and former trade partners will be bickering about exchange rates, tariffs, etc. Global infrastructure will deteriorate and supply lines will dry up. But all this will be replaced by the thousand little farms again. US/Canada/Mexico is a huge trading block with a lot of natural resources and all kinds of labor (both educated and cheap). This block will easily survive without China/Europe/Middle East. Russia will beg us to barter our grain for their oil.

It will not happen right away, only after some period of shortages and severe price controls. Power-thirsty dogooders will have their shot at controlling everything with a predictable result of improving nothing.

A key lesson we have learned so far in the financial asset markets is that distributing risk does not make the risk go away; it just makes the black swans less frequent, but fatter.

The next lesson to learn is, the gov’t can and will eliminate risk from our lives simply because we will posess little to no goods/property and will be getting lousy services after standing in long lines. People that have nothing risk nothing.

Another lesson to learn is, tendency to regulate everything will spread corruption top down. Corrupt officials , politicians, CEOs and other scum will still be there, but little gov’t clerks, policemen, nurses, inspectors etc. will become much more corrupt, than they are now.

That capital is now shrinking; that capital market gravely wounded. The shortages, the gas lines and the bare grocery store shelves are coming, to be followed soon after by the price controls and more shortages. The young adult generation, now in their teens and twenties, will go through hell, as did the Greatest Generation 80 years ago with the Great Depression and the Second World War.

I doubt, it will be hell. I think, this time history will be repeated as farce, not as tragedy. Hell was the USSR of 1925 to 1953. The USSR of 1955 to 199x was less tragic, but still a lousy place to live. IMHO, the latter part is coming to America, but it will not be a total collapse a’la Mr. Orlov. It will rather be a long and boring stagnation.

They will do us old farts such as myself proud, though few of us old farts will live long enough to witness the outcome.

Trust me, you are not missing a lot. It will not be that interesting or that bad. I lived through it and survived.

[touchring]

Re: Stroupe on the $

Indeed, existing globalization bubble will burst and former trade partners will be bickering about exchange rates, tariffs, etc. Global infrastructure will deteriorate and supply lines will dry up. But all this will be replaced by the thousand little farms again. US/Canada/Mexico is a huge trading block with a lot of natural resources and all kinds of labor (both educated and cheap). This block will easily survive without China/Europe/Middle East. Russia will beg us to barter our grain for their oil.

So back to the Middle Ages days when the South Chinese traded with the North Chinese, the Arabs, Persians and Romans traded with the Chinese through the silk route, and the Aztecs were trading... with the Mayans?

[ThePythonicCow]

Re: Stroupe on the $

Very interesting reply, medved. Thank-you.

So ... you suggest that American History does not repeat the Great Depression and Second World War, but rather it rhymes with more recent events in Russia.

Could be, could be.

Those "thousand little farms" won't spring up overnight in America. The industrialization of America's agriculture proceeded agressively in the 1950's and 1960's, and now few Americans know which end of a cow to milk. Going without food for a couple of years is a brief interlude on historical time scales, but surely won't seem brief to those who are waiting in food lines. But reading further, I see you recognize this, stating "It will not happen right away, only after some period of shortages and severe price controls."

Your lessons regarding possessing little and regulating much sound uncomfortably likely to me.

I've been thinking on and off for a year now that I should send away for one of those "Russian mail-order brides" ;) ). They would have better instincts than I would for how to manage in such times.

[ThePythonicCow]

Re: Stroupe on the $

little gov’t clerks, policemen, nurses, inspectors etc. will become much more corrupt, than they are now.

Just last night on the television news, they were telling how the local police here in Austin and Dallas areas of Texas are getting much more aggressive in the last few months collecting money from tickets to auto drivers for every little infraction they can think of.

[Slimprofits]

Re: Stroupe on the $

One does not have to wager 100...just UP. You buy (or in your case hold) USD. Not entirely reckless???? That is against other currencies. For mine i'd pick the pound to get another hammering but that is just liitle old me sitting out here in ignorance land. I'm busy trading Aussie for USD to get me through the next few months.

It's as simple a viewpoint as it gets: USDX didn't breach 90 when the world was collapsing and flooding into the dollar and it won't even if things get worse in Europe. In the U.S.A., I think we're experiencing the eye of the storm in which the winds only seem calm.

[The Outback Oracle]

Re: Stroupe on the $

It's as simple a viewpoint as it gets: USDX didn't breach 90 when the world was collapsing and flooding into the dollar and it won't even if things get worse in Europe. In the U.S.A., I think we're experiencing the eye of the storm in which the winds only seem calm.

Sorry Babbittd I am missing your point and I know you have one!!!
This article by Stroupe seems to indicate a rising USD? Now there is another post quoting Stroupe which seems to contradict this one quoted here. In the alternate post he posits that the action moves to the BRIC economies and USD is gradually abandoned.
My thinking on your 'eye of the storm' would be the calm before the Bond prices start collapsing....meaning interest rates increase suddenly and substantially. Nevertheless, if your Govt is to fund such monstrous deficits, other than by printing, it will suck in all the USD we can think of. Indications currently are that printing will exacerbate the problem...
That's my logic just at this instant but instantly subject to change in the face of a better idea!!:confused:

Then my personal next problem is to figure out how the A$ fares in all this. I'm thinking that based on what happened late last year not too well!!

[johngaltfla]

Re: Stroupe on the $

From my blog:


Primitive, yes. But technically speaking, we have not seen a death cross on the dollar in over 3 1/2 going on 4 plus years if memory serves me right. The dollar might dance above the curve for a day but a failure to recover to the 50 DMA within the next 10-14 days will be fatal and a retest (and violation) of the major lows should occur. This fits with Louise Yamada's analysis of a long term low target in the low 60's, but hey, according to the Bubblemedia, there is "deflation" so let them ride that pony into the fires of hell.

I'll just keep quietly accumulating more real money.

[Southernguy]

Re: Stroupe on the $

I quite not understand all the discussion. Why not Fed printing money and buying bonds?
And that has another collateral advantage, it liquates debt.
Of course, at some point inflation follows.
And the dollar is debased, but all that is less painful and politically unacceptable than the deflationary scenario being painted.