Sunday, January 20, 2013

It Looks Safe. For Now.

Yesterday's post clarified quite a few things that had been murky in my mind for a long time. To me, the world is in a very unstable condition, right on the edge of financial chaos. Taking Japan as an example, they owe more than they can ever repay. It's pure fantasy to think their bonds are worth anything in the long term. Dittos for Europe. You are guaranteed that within 10 years, European and Japanese bonds will be worth nothing because they are insolvent and bankrupt, thanks to progressive policies.

Knowing this leads to a bunker mentality. Hunker down, because the storm is coming. But when? How will you know the storm is nigh? Yesterday's post answered it for me. Inflation will be the telltale sign. Here's how I came to that conclusion.
  1. Debts and deficits are not in themselves the problem. As the video I linked to yesterday said, bond vigilantes, those who will sell bonds, driving up rates, have been completely defanged by the central banks. Any and all excess government debt will be bought by central banks by printing money.
  2. Low interest rates will continue on for the foreseeable future. For years now, the US has been borrowing huge amounts of money at low rates, some of it in short term debt. The instant rates rise, the government budget is blown. That means the Fed, which has become codependent with the debt-addicted federal government, will continue to enable them with low interest rates as long as they can and probably even longer.
  3. The trigger for deficits, debt and government budgets to all blow sky-high will be inflation. It will trigger a cascade of bond selling, higher interest rates, deficits far in excess of what we have now and the arrival of the Four Horsemen of the Apocalypse.
The good news is that inflation doesn't show up instantly. It grows over time. I'd say that until inflation starts to show some growth, we can all relax.
We're not there yet. Source.
Interestingly, this is the linchpin of the arguments made by our favorite fascist economic charlatans, Paul Krugman and Robert Reich. Inflation hasn't happened yet and so we should keep borrowing and spending like crazy. What they don't admit is that borrowing more is like making the atomic bomb of upcoming fiscal collapse larger and larger and larger. If we keep borrowing a trillion dollars a year, that bomb is going to trigger events that none of us can foresee.

For now, however, I'm going to chill out.


Doo Doo Econ said...

You are on the right path, but here is the bend in the road. Govt inflation numbers include real estate which has been negative for the last few years, offsetting other factors. Additionally, food and energy are not counted by the govt.

We are hearing that home prices are rising, and that should be your rough inflation number. Reduce the NAR and CAR home price number by about 50% because these are real estate salespeople. These numbers just began to exclude bank owned sales (REO) and there is a waiver that flippers can apply for to make their home purchase price unreported.

So by this rough estimate, inflation is growing rapidly and stands at between 9% and 11.5% in San Diego.

K T Cat said...

Counter-argument: The only inflation numbers that the central banks will react to will be the government numbers. You are indeed correct that the government has distorted the inflation numbers, but over time, the things they removed will act indirectly to drive the government numbers up. Until then, the water is fine.

What say ye?