Monday, July 6, 2009

There’s a big lump starting to form under the carpet.

US lurching towards 'debt explosion' with long-term interest rates on course to double

The US economy is lurching towards crisis with long-term interest rates on course to double, crippling the country’s ability to pay its debts and potentially plunging it into another recession, according to a study by the US’s own central bank

Posted by flintster1994 @ 06:51 AM (1222 views)
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13 thoughts on “There’s a big lump starting to form under the carpet.

  • US should prepare itself well to face these kinds of uncertainties in future. If another blow comes for the economy, then it’ll be very tough for Fed to get back the economy on track!
    http://www.lendingstream.co.uk

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  • Imminent_plunge says:

    Long-term interest rates on course to double, so from 0.25% to 0.50%?

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  • Another reason why the dollar is toast.

    There is no way out for the dollar, it may have moments of strength which is only hyped by analysis from banks and parties that have an interest in the currency, but they will be short lived as the truth of the matter won’t go away, “guilty”

    Imagine the mind of those who travelled on trumbils to paris to die under the guillotine, “how can I escape” – this is what it must be like for the dollar on the path to execution, trying to worm it’s way out here and there, knowing full well that it will meet the same destiny as it’s predecessors,

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  • debtfree,

    The UK is in a similar boat, indeed, in some important respects; our ship has more holes below the waterline than the American one.

    One of the great teases of the moment, is that while schoolboy maths tells us that increasing the money supply will result in inflation (and, therefore, raised bond yields and interest rates) it is very hard to prove conclusively that it will actually happen, or to make predictions as to when and by how much that inflation will kick in.

    The same applies to rapidly growing public debt. We know it’s not a good thing, but predicting the scale and timing of the consequent pain is extremely difficult.

    The bottom line is that the UK and US are treading on very thin ice, making us very susceptible to unforseeable events.

    Events happen, so the chances of avoiding inflation and expensive borrowing seem minimal.

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  • stillthinking says:

    We should never have bailed out the banks.

    I had this thought about inflation. If the population (and the economy), doubled, and also money doubled, then we would not notice any change in inflation.

    The UK economy has just shrunk 2.4% . So presumably even if we have deflation at <2.4%, it is still running behind the shrinkage of the economy and even though we are in the middle of rapid deflation, we should be able to see very small inflation in prices. Which is what we do see.

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  • refusetobuy says:

    Just a thought. I used to think that the government would just let inflation rip and all would be fine (from their indebted point of view).
    But I’ve realised that if they do that then they won’t be able to borrow any more money, well not at a nice low interest rate.
    They could use QE to buy those gilts, but if we are in an inflationary environment then the excuse isn’t there any more, and hyper inflation will result from currency devaluation.

    The government needs to borrow in the future so interest rates have to go up.

    Anyone want to play devils advocate against me?

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  • refusetobuy says:

    P.S. Interst rates up will cause a wave of private defaults, reduce the money supply, give deflation & deepen the recession.

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  • refusetobuy says:

    @stillthinking

    Don’t forget about the velocity of money. That’s what has fallen of a cliff (in the US anyway, not sure about data for UK).

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  • refusetobuy,

    I think the issue you are identifying is the likelihood that QE will become addictive, that having started on this road, it will be very difficult to stop without a powerful economic recovery.

    Around 20% of UK GDP (possibly more) was the sole product of above inflation debt growth, aided and abetted by a severe balance of payments deficit; ie the product of unsustainable factors. The economy has therefore got further to contract.

    It follows that the recovery needed to wean us off QE is nowhere in sight, leading us to the prospect of more and more rounds of QE.

    You are correct when you identify that people will no longer want to lend to us – which is what happened to Zimbabwe..

    The solution is to reduce and re-focus public spending, concentrating on keeping people working, and working constructively.

    Every bureaucratic process must be laid open to scrutiny, and subjected to the test of whether or not it provides a material and substantive benefit to society, with dis-interested parties making the decision – if in doubt, throw it out.

    Europe needs to be told (politely) not to interfere, with a Sovereignty Act to make it clear that the buck stops at Westminster.

    The compensation culture needs to be kicked into touch, with deterrent penalties for those caught making false or exaggerated claims.

    Criminals must be treated as such, and not as ‘clients’. If prison is hell, there will be less crime and fewer prisoners to house..

    The way ahead is not soft and easy, but it will be less painful if the nettle is grasped sooner rather than later.

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  • Debtfree @ 3. I disagree with your view on the Greenback. Why? well all i am willing to say at this stage is to quote Joe Granville – “if its obvious its obviously wrong”. As for how long it will appreciate that depends ;-).

    Eventually you may well be right $ destruction BUT that wont IMO happen until all those who think it will have tried to prove it and lost out a number of times.

    Its a funny old game you know.

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  • @10 techieman,

    The dollar may not cease to exist, but IMO, it will be replaced as the worlds reserve currency within a few years.

    We shall see ;o)

    @ 4 uncle tom

    yep, the UK is in a bad way, 2nd in the table for debt that was recently published with Ireland in top position.

    but, the big difference is the reserve currency status. can the dollar hold on to this title?

    IMO don’t think it will and that’s the hand I’m prepared to play with.

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  • debtfree – ” a few years” – oh ok i now see what you mean i thought your timescales were a lot shorter. As i said “Eventually you may well be right $ destruction” [as for the reserve currency im not even sure there will be such a thing].

    I think i might have been bancrupted betting against the dollar, long before a long term short bears fruit. Then again….

    http://www.housepricecrash.co.uk/newsblog/2009/07/blog-global-currency-24169.php – points 7 & particularly 9 for my short to “medium” view.

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  • “but, the big difference is the reserve currency status. can the dollar hold on to this title?”

    Reserve currency status does not require one currency to be supreme, to the exclusion of all others; you can have more than one.

    Many of the world’s poorest countries use dollars as their currency, or have currencies that are not taken very seriously by their own populations, so they use dollars instead; or have currencies that are rigidly pegged to the dollar.

    I doubt that state of affairs will change at all quickly, and I don’t expect the dollar to lose reserve status any time soon, even if it is substantially de-valued.

    Ultimately, the USA is too big for its currency to be dismissed as an also-ran. Although its halo may become very tarnished, its reserve status is likely to endure.

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