back just

ONE

of those Trillion dollars.

@ $1 Million a day: 2,739 Years
@ $10 Million a day: 274 Years

@ $100 Million a day: 27.4 Years

@ $ 1000 Million a day: 2.74 Years

Official national debt of the US is of now is at least TEN Trillion dollars

(maybe 11.5 Trillion).

Unofficial national debt of the US is $56 Trillion.

$56 Trillion repaid @ $1 Million a day: 15,000 Years

(give or take a few hundred years).

If the Bank is on fire you can’t put the fire out with money.

You get the idea… Bye bye dollar.

Hey Jack…What’s a Quadrillion ?

What is the value of the derivatives traded annually in US ?

In excess of 1 quadrillion…..notional amount……..unless…….they all go bad then…..it’s back to one quadrillion…..OWED!!

Assuming the average Yankee FRN is .06 mm thick then when stacked one upon the other would reach 2/3rds of the way to the sun.

Assuming that if they are that close to the sun then, maybe the yankee dollar caught fire!!

The fuse has been lit….and is headed for earth at the speed of light.

Better stock up and head for the hills.

http://money.cnn.com/video/#/video/news/2008/10/02/news.romans.100208.cnnmoney

I have been watching the current account and balance of trade for the last 30 years.

I recently found relevant data on the RBA website.

The files are excel files and I have plotted some graphs. I am trying to work out how to make them accessible from this blog.

The CAD is currently rising exponentially with a natural time constant of about five years while the GDP is is rising exponentially with a natural time constant of about 15years. It had to hit the wall soon.

As I understand it the CAD must be covered by overseas “investment” in the form of either debt (written in a foreign currency or $AU), or equity (sale of Australian assets. The accumulated CAD over this period exceeds $1trillion but the debt is at about $620 billion
or 56% of GDP. This appears to have been multiplied by bank “securitisation” into the wider community.

I figure we now need at least $32billion per year to service this, that is if we can find $32billion of assets to flog . The banks borrow the debt and they have been feeding this into the various Ponzi schemes poisoning not only real estate but also our superannuation. Now just as the US has, we have also run out of people to pay the interest bill.

The Neos have been saying for years that because it is “private debt” it is not a problem. The governments (both parties) has been taking tax off of us and not spending it to keep the Neos happy (fiscal surpluses). Now the Neos want the government to take over the bad debt to solve the problem?? They must be stupid and they must think that we are stupid.

It was because of the high CAD that Paul Keating made the “Banana Republic” speech, the CAD was then 7% of GDP. The CAD is now 8% of GDP and going hyperbolic. No one mentions it now! More lies!

Some details are on the following report from earlier this year.

http://www.news.com.au/business/story/0,23636,23322662-462,00.html

I will post the graphs soon.

Here is the link to the article explaining the deposit insurance. http://www.news.com.au/business/money/story/0,25479,24375006-5013952,00.html

It’s good news to hear that the ASX is getting a short-able housing index, though I wonder if there are more ways to profit from the housing deflation than just to short securities and an index.

I don’t know if there has been performed any economist research on the issue you mention. One of the best pieces of research done so far is by Nigel Stapledon, former chief economist at Westpac, and economics lecturer at UNSW. In his recently finished PhD thesis, he constructs a housing index, like Robert Shiller of Yale has done. Whether they are comparable, I don’t know. Either way, his thesis provides a plethora of statistics and housing analysis that you may find interesting, although it is a tough read. http://unsworks.unsw.edu.au/vital/access/manager/Repository/unsworks:1435

One of the worst things politicians have done with our taxpayer funds is the homeowner grants. These days $AUD7000-14000 is a tiny fraction of the price of housing these days, requiring that owners mortgage themselves to the hilt. This reminds me of the Howard baby bonus of $AUD3,000, a political stunt which may make it more likely that young, poor women have babies which will end up being a greater burden on our social welfare in the end anyway.

Throwing more money onto housing now is just trying to delay the day of reckoning.

No doubt that Swan and Rudd want to keep the housing party going as smoothly as possible, but in the end they can’t defy the inevitable collapse due to the bursting of the housing bubble. No doubt their reactions will be like that in the U.S.: “we didn’t see it”, “how could we know”, etc.

BrightSpark,

Can you explain the forex situation as it currently stands? If you have any links to articles, papers, etc, that would be appreciated.

“but probably not until the next election when they discover economic rationalism.”

What do you mean by this? Do you mean economic opinion which is rational, or Economic Rationalism which I believe is based on Neo-classical garbage?

A few other observations

I have read little about the foreign borrowing situation. This is needed by Oz and the US just to keep the rest of the economics going. This means we need to borrow more than $32Billion per year if we can. If we cant we have depression and astronomical unemployment. Surely this is also part of the housing bubble problem.

The $4billion bail out seems to have been preceded by other repo financing by the RBA.

All I can see is a control system which is totally out of control. The pilots are back in the cockpit they have turned of the alarm and are now panicking. The ground is approaching rapidly.

I can’t remember the source, but, apparently we are getting a housing index next year to be traded on the ASX that will be short-able.

I just hope it is in time before the deflation starts so I can place my bets!

Can you explain the $20,000 deposit insurance?

The other thing that will be interesting will be the impact of the first home savers accounts. Once money goes in there, you can’t touch it for four years and then when you do touch it, it can only be to buy a house.

My guess is that this will take money out of housing as well, thereby deflating the pool of money for purchasing housing just as the first home owners grant increased it. A lot of people will jump on board this policy. I imagine by next year the rules will change and they will allow people to take the money out before the four years is up. Does anyone know if any economists have done any research into the impacts of this?

The government could put price floors into place once the debt de-leveraging and housing deflation takes place, but this would just be an insane and desperate action.

The U.S. housing bubble created $US8 trillion in paper wealth at its peak, and now $US4-5 trillion has been lost due to its current and continuing deflation. The crime is that the prices of houses were able to climb the way it did without the government and Fed officials noticing it and putting a stop to it. It is not beyond the ability of Harvard/MIT/Chicago educated economists to realize that a housing bubble was in place, and its eventual deflation would have severe consequences, as Keen has outlined for at least two to three years.

From the research that has been performed on Australia’s housing bubble, it is comparatively larger in size than the U.S.’s, in relative terms. While Australia has less subprime or low-doc mortgages than the U.S., the average size of mortgages is much larger in Australia.

True to form, RBA and Treasury economists (including the vast majority of economists) have missed (and dismissed) the housing bubble. Once again, I find it difficult that economists trained at ANU/Melbourne/Sydney Unis, etc would have missed this, but they have.

One would think that given the disaster unfolding in the U.S. at the moment, economists would perhaps question the economic theory that markets are based upon. I wonder how long it will take for neoclassicism to be thrown into the intellectual rubbish bin.

The debt de-leveraging and falling asset prices will devalue the AUD, aggregate demand will fall dramatically, unemployment will rise, government will go into debt by attempting to pump-prime, and individual/household/business bankruptcies will climb. Wages may also stagnate. Some banking and financial institutions are likely to go bankrupt as well. Deposits in these institutions are not guaranteed by the government. If a bank/credit union goes under, the average depositor will be lucky to get anything (as the big depositors tend to get their way first).

On the upside, rents and property prices will fall, hopefully temporarily overshooting long-term averages (CPI) which may be a prime time to buy. The RBA will predictably lower interest rates in an attempt to stimulate the economy, which allows the prudent Australian to take on a mortgage to purchase a property, at much lower interest rates and interest burden. Furthermore, Rudd and Swan are talking about bringing in deposit insurance of up to $AUD20,000 per deposit.

The Treasurer Wayne Swan has repeatedly stated that Australia’s economic fundamentals are strong, yet this was the song sung by Paulson and Bernanke. If Swan doesn’t know about the coming housing deflation, he is incompetent. If he knows, but doesn’t speak up about it for reasons of state, he is a liar. Either way, it is not a good position for any politician to be in.

I wonder if there is any way to profit from the housing deflation, but to my knowledge, Australia doesn’t have a housing property index that can be shorted, such as the U.S.’s ABX. John Paulson, a U.S. hedge fund CEO who “earned” $US3.5 billion in compensation last year, made a fortune by shorting the ABX index. He was a rare figure inside the Wall Street establishment who saw that subprime mortgages and RMBSs were going to become near worthless.

In short, there is little that politicians can do, especially when they are advised by economists who are educated in the religion of neoclassicism.

The interesting thing going forward will be the demand for credit as Steven points out in his slides. If the demand is weak, then asset prices cannot keep moving up because the buy side simply won’t be there. In this case, while the banks remain solvent, that money is likely to just go into treasuries, or, carry trades. The real suffering will be on main street if the US dollar drops and asset prices decline.

It will be very interesting to see how this plays out for Australia. With global demand weakening, I can’t see how we will continue on with our excellent terms of trade. Then our dollar drops and we are left with the highest house prices in the world as well as the highest personal debt levels. Scary times ahead for Oz one would think.

Steven, I would be interested to hear what you would propose as some of Australia’s policies going forward. I think our politicians are going to need some help going forward. I would be keen to know if you think we can sustain historically abnormal house prices (Labor looks a little mixed on whether they are trying to defend the asset prices or not) and if you think we should try to support them by giving out more credit and keeping the party going.

I see management of this as a massive balancing act. Try to keep the economy “wonderful” and it will eventually break with both high public and private debt. If the government isn’t prepared to spend money then it will break big time. The problem for the Americans is they already have huge public debt so expansion is limited, except that foreign governments seem prepared to purchase $US even though they know the Americans are going to devalue them by printing more.

The major aspect the Americans seem to be missing is the need to fix the intrinsic problems in their economy but after the election is over maybe that will change, but probably not until the next election when they discover economic rationalism.

Recommended reading: P.J. O’Rourke “Parliament of Whores: A Lone Humorist Attempts to Explain the Entire U.S. Government”

Issuing Treasury means borrowing from the private sector i.e. government selling Treasury to private sector. This will drain out money from the financial system.

‘Printing’ money means the government sells Treasury to the Fed. The Fed will create money out of thin air to buy it from the government. This will inject money into the system.