Friday, October 09, 2009
Yes, the U.S. stock market has rallied aggressively since March, but if you live off a currency other than the dollar the story is very different. The world is heavily discounting the American future.
ZeroHedge and The Market Ticker have been covering this analysis for a few months. In short, America is bankrupt and our only choices are to explictly default on our debt or to implicitly default by devaluing our currency. Obviously, we're choosing the latter.
The collapse of the credit bubble is causing widespread deflation in both assets and income across our economy. We are experiencing a classic deflationary contraction in our economy: asset values dropping, incomes dropping, unemployment rising, international trade collapsing. It's 1930 all over again.
This deflation has left virtually all our major financial institutions insolvent, and we haven't even begun to absorb the coming write-downs from commercial real estate and the second wave of mortgage defaults. Banks are being kept afloat only by "regulatory forbearance" (i.e., relaxation of mark-to-market accounting), direct federal cash infusions, and low interest (or negative interest) rate borrowing on reserves from the Fed. In a nutshell, our financial system is bust.
States and local governments are in a similar financial bind. Collapsing tax receipts have left states unable to finance current operations and pension obligations. California is leading the pack here, but the rest of the states will eventually follow--2010 will be a disaster for states.
All these obligations are denominated in fiat dollars. The only way to bring the debt obligations underlying our financial institutions and state governments back into balance with cash flows is to reflate the bubble. Since it can't be reflated in real terms, it must be reflated in nominal terms by devaluing the dollar. This has already begun--gold is up, the dollar is down.
A default on some portion of the U.S. debt will provide a temporary solution to the Federal government's debt problems, but it will do nothing to address the structural debt issues which plague the rest of our economy. Only inflation will bring cash flows and debt obligation back into balance.
The Fed will continue to print money until inflation rebalances the system. Look for the dollar to lose roughly half it's value in the next few years.
"The Fed will continue to print money until inflation rebalances the system. Look for the dollar to lose roughly half it's value in the next few years"
What a great time to undermine the GDP by reformatting healthcare!