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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (29395)	3/25/2005 5:38:21 PM
From: orkrious	Respond to of 110194

Can you tell me against what the $ crashes? quite possibly gold, as everyone realizes paper is worthless

To: mishedlo who wrote (29395)	3/25/2005 5:38:55 PM
From: russwinter	Read Replies (4) \| Respond to of 110194

Tipping Toward Hyperinflation by Arthur Radley, Friday March 25 2005 wallstreetexaminer.com Here's a little 'back of the envelope' exercise for you debt abusers. The Fed's 4Q 2004 'Flow of Funds' report shows almost $37 trillion (with a 'T') in credit market debt. That includes gov't, corporate and household, short-term and long-term. No weighted interest rate is stated, but let's assume a conservatively low 5%. Then annual debt service will be $1.85 trillion. Just for comparison, corporate profits (which of course are net after interest expense) were under $1.2 trillion last year. Now, the GDP of the US economy for 2004 was $11.7 trillion. So, we're estimating that debt service was 15.8% of GDP. I'm sorry, but that's wacko. Debt service is reaching, or may already have exceeded, the amount of free cash flow available to service it, from all sources -- individual discretionary income, corporate profits, and government surpluses (if any). At that point, the private sector (individuals and corporations) has to stop accumulating debt, or default on it. But federal govt has the unique ability to print currency to meet its obligations -- not just the debt service, but ALL of its spending. This is being done at a limited rate now -- the Federal Reserve is adding about $50 billion a year to its balance sheet (which has a multiplier effect), and the GSEs are busy monetizing residential real estate. However, the point is approaching -- as debt service exceeds available cash flow -- that the rate of monetization will have to be accelerated. Mathematically, that function goes exponential pretty quickly. Not only the first derivative (velocity) but the second derivative (rate of acceleration) get locked into a self-reinforcing uptrend until the equation blows up. In the real world, it's called 'hyperinflationary burnout.' To anticipate deflationists' objections, this process has nothing to do with wages, economic growth, or retail demand. Even with a drastic drop in employment and collapsing retail sales, a large government that pays its bills with freshly-printed fiat currency can and will produce inflation, which is merely currency depreciation. Socially, we're all locked into a scheme which we know is going to fail, but everyone's incentive is to keep playing the game until it ends. A few of the authorities probably recognize the late stage of the process, but are powerless to prevent it. Greenspan spoke of 'irrational exuberance' in 1996, but then proceeded to monetize Bubble I's advance. Tremendous cultural blame will attach to whomever gets tagged with popping the Bubble and killing the prosperity. So the few observant officials who perceive what's happening will go on record with very oblique statements, useful for personal exoneration in the future. But no one's going to get out front like Paul Volcker and say "let's crush this runaway asset inflation now." Since official action will not be taken, nature will have to run its course via a hyperinflationary episode and subsequent burnout. Probable timing for this social tragedy is the next half dozen years, 2006 to 2012. It wasn't anyone's fault, you know. It just happened. And we were all involved. But some more than others. posted Friday March 25, 03 17 PM ET