Mish <If you at all think this is plausible, then tell me why the US will be any different.>
UH: Because the US is borrowing over 70% of the worlds savings and this figure is growing. This is the elephant in the room that you are completely ignoring.
Mish: Not at all. What can not be sustained won't be. Therefore the US will stop borrowing 70% of the word's savings, regardless of what interest rates do. The US will not save at 0% regardless of what rates do, and US houses will eventually decline (assuming no massive increase in wages) regardless of what interest rates do. The elephant is indeed in the room. We disagree as to what it will take before something happens. The NAZ crashed pretty much on it own accord in 2000 by exhaustion. Housing will likely do the same, and when it does we will no longer be consuming 70% of the world's savings. It's as simple as that. Money and credit will be destroyed big time along with future demand.
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Mish:<So we take in less tax revenue. Will it matter?
To who?>
UH:I cannot believe you don’t think this is an issue. If the US is taking in less tax revenue, then more money must be borrowed – which causes interest rates to escalate.
Mish: It is an issue in a relative sense. If spending drops more, and more mal-investments are wiped out, and US savings rates go up, and govt expenditures drop, declining tax revenue will not matter ON BALANCE. In a vacuum tax revenue matters. Taking everything into consideration it is meaningless to talk about in isolation. That was what I meant but did not say. Tax reevenues may drop but if spending falls off the cliff, and savings rates goes up, declining revenues will not matter.
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UH: You are assuming a housing bust. We could also have a dollar bust or a combination of the two.
Mish: Yes I am assuming a housing bust. A US$ bust even IF it happened (doubtful IMO as every other central bank will be printing alongside us) might be meaningless in comparison. The US $ needs something to drop against. Tell me what. The Euro, the Yen, the pound? They all suck IMO. Faber has said the same thing BTW.
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MISh:<2) consumer demand falling off the cliff like the UK>
UH: Again, this is the elephant in the room and you are acting as if it isn’t there. If the consumer stops spending, then there is no money being recycled to buy US treasuries. And yet interest rates drop? It doesn’t make sense.
MISH: You are hopelessly wrong on this one. If there is no demand for money, and/or lenders unwilling to lend, interest rates drop. Look at the UK. The first of many rate cuts are coming in spite of huge govt spending and falling consumer spending and falling tax revenues. You are telling me that something can not happen that is currently happening. Please open your eyes.
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MISH:<4) Tariffs are a wild card and consumer spending will drop like a rock if Congress acts like that>
UH: The tariff issue is the desire of the government to devalue the dollar but we can’t as long as China and a few other countries have their currency pegged to the dollar. The US is basically saying we want to devalue our currency and you’re not letting us. Somehow in your twisted logic, interest rates are going to decline even though the dollar is being devalued.
MISH: Read my previous answer. Are interest rates about to drop in the UK or not? Is the pound falling or not? So once again your logic is twisted not mine. You are telling me flat out something can not happen that is currently happening in the UK.
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Mish: <5) No doubt the govt will print but you can take consumers shopping but you can not force them to buy. Recent experience suggests they will keep buying. BUT.... Recent experiences must take into consideration cash out refis and rising home prices. I think the party is over (just like in the UK) once housing slumps.>
UH:I believe if you double everyone’s credit line, their spending will go up.
Mish: You assume two things, both are not likely to be true. Credit lines will go up, spending will go up if the first happens. Right now, credit card companies are raising payments. Consumer credit is dropping right now and as best as I can tell no one has dropped credit lines. I would hazard a guess that spending lines have been increasing over the past few years in Japan. Thus you are starting with poor assumptions that have been disproven in actual practice.
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Mish: <6) Japan printed like mad and it did them no good. Govt spending went up, tax revenues went down (I presume since Japan went from being a huge creditor to being a huge debtor) while interest rates in Japan fell to 0%.>
UH: The Japanese are savers; Americans are spenders. Comparing the two is like believing that a giraffe will enjoy hamburger because a lion did. Plus again you are ignoring the fact that the US is absorbing over 70% of the world’s savings and Japan was a net lender.
Mish: Another poor misintrepretation on your part. Please bear in mind the US was once the worlds largest creditor nation. Spending every dime is a recent phenomenon. You make the classic mistake of projecting current events into the future. Step back in time to when the US was a creditor nation. Look how hopelessly silly you would look projecting that into the future (as in NOW). The US savings rate is now zero. Do you expect it to rise or fall from here? I expect it to rise regardless if what interest rates do. Thus you have not only made poor assumptions, you have projected them into the future.
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Mish: <Thus I conclude that while you have taken a different angle, it is just another dead end as to producing higher interest rates.>
UH: I conclude the exact opposite and my money is where my mouth is as I am short 20 TYU5.
Mish: Good for you. You put your money where your mouth is.
You got lucky today on China repeg. I will take a few of those off your hands if interest rates rise some more.
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UH: The bottom line is that the bottleneck that is going to crunch the economy is not credit creation. There is no limit to the amount of credit that can be created. Especially when a country devalues it's currency which is exactly what the US wants to do. The bottleneck is you can only borrow 100% of the world's savings and our current trajectory has us on a path to do this. Peak Oil could cause the dollar to tank and interest rates to skyrocket too as everyone holding treasuries tries to cash them in for energy.
Mish: what is going to destroy debt and the housing bubble and the credit bubble is indeed not credit creation. It will be the UNWINDING of that credit creation that will do it. Peak oil is irrelevant at best, deflationary at worst (unless wages and jobs go up in response to rising oil). If prices of cars have not gone up and prices of manufactured goods have not gone up with oil rising from $25 to $60 and copper from .80 to $1.60 etc etc etc, you are grasping at straws to assume another $10 or $20 or $80 in oil prices will do damn thing but put more people out of work. More people out of work is deflationary. Less demand for goods. I already explained savings and you once again project into the future as if the US consumer has unlimited funds. Once housing busts watch watch happens to spending. Again I refer you to the UK.
Thus your scenario is totally bogus.
That does not mean you can not make money in the short term on it. Treasury bears have had their asses handed to them. Overstay your welcome and it is likely to happen to you. In the meantime I have stated that I am neutral to bearish on treasuries because of the capitulation of Gross. Once housing busts I will be a treasury bull. Good luck in the meantime. The higher yields get now, the quicker housing busts so I wish you well.
Mish |
