Wednesday, April 15, 2009

Something's gotta give

This post is about much more than the stock market. For many months now I've been reluctant to openly speculate on our future, but now I'm compelled to drop a few hints.

Most of us are familiar with the landscape by now:
  • Trillions of dollars of new public debt marketed as a cure for a nation with too much private debt.
  • Massive loans from foreign governments (treasury sales), followed by equally massive printing of new dollars, effectively reneging on part of our debt payments.
  • The rise of newly hostile nations like Venezuela along with a military resurgence of old bad guys like Russia, Iran, N. Korea, and even African pirates(!) - just at the time that our politicians are talking about cutting missile defense and reducing the military budget.
  • A widening divide between two irreconcilable political camps in our own country (conservative vs. liberal).
  • Record ammunition sales to private citizens.
  • Increasing government control of corporations and the economy.
I can't predict exactly when or what event will trigger the next wave of massive changes to our country, because I'm not an historian and I'm not wise enough to choose from numerous possible scenarios. However, I wouldn't be surprised if a fed-up China did something drastic with its two trillion dollars of U.S. Treasury bills. Nor would I be surprised if China, Iran and N. Korea took advantage of perceived weakness to move on Taiwan, Israel, and S. Korea, respectively. Finally, I'm not surprised that Texas is making noises about state sovereignty and the right to secede from an increasingly cowboy-hostile Washington D.C.

The bottom line is that the world is starting to ponder the possibility of a bankrupt yet power-hungry U.S. federal government. China doesn't want to get stuck with worthless T-bills; states would rather be free from both federal control and the federal debt; and enemy nations are licking their chops at the prospect of mothballed U.S. aircraft carriers and shelved missile shields. Even if all of these details are wrong, there's little doubt in my mind that the world is in store for even more painful upheaval. We can't trick hostile foreign governments into funding our gargantuan federal budget forever, nor do our own citizens have infinite patience for a fiscally irresponsible and meddlesome federal government.

Something's gotta give.


Tim said...

You left out the fact that US banks are essentially insolvent

Anonymous said...

In a previous post, you indicated that if the S&P 500 closes in the vicinity of 850, then the bear market is over. (At least, that was my understanding.) The S&P 500 closed just over 850 several days ago. Could you elaborate on this? Thank you.

Jody Wilson said...

Anonymous: You'll know as soon as I know.

Jody Wilson said...


Yes, all of these things are in addition to the unresolved tangle of derivatives, a new round of mortgage resets and foreclosures coming up, the growing improbability of paying for an ever-increasing federal budget, and the possibility of high inflation.

Anonymous said...

Ah. I was hoping you'd be posting soon.

I recently listened to a Youtube Nov. 2008 Conversations With History featuring Niall Ferguson. He wrote The Ascent of Money and apparently had seen the latest down-turn coming.

It's worth a listen. He agrees that all bets are off if China loses interest in supporting our debt.

Aside from that, Spring is here and let us not forget to enjoy the remarkable cycle of nature on this always interesting planet.

Catherine W.

Anonymous said...

My retired-banker neighbor is talking about backhoeing his backyard where he would then bury jars of money and plant a Victory garden on top! He's a really mild-mannered nice guy and as far as I know has no history of psychosis. Sign of the times.


Jim Driscoll said...

I used to think China would stop supporting our debt deliberately, to destroy a competitor.

After all, the Pound Sterling stopped being the world reserve currency because of the Great Depression - there's no reason to think that US Dollar will survive the New Depression as a reserve currency...

But I don't think that anymore - you, as I was, are looking at the world through a US Centric lens.

Try this on for size, instead: What will happen to China when growth falls further, from the current 6%, down to 2%? Or if it goes negative? My conjecture: They'll get desperate, and sell their bonds, hoping to buy another 6 months time. Devil take the US, for all they'll care.

Which, in my understanding, is exactly how the Sterling crashed.

Sure, China wants Taiwan, and may want an external enemy to take the people's mind off their backsliding poverty, but it's more likely they'll pick a fight with a small neighbor: they're cheaper to fight. Burma, Vietnam, and Tibet all spring to mind.

North Korea is a no-op, they're a crazy guy on a street corner with a gun. Dangerous, worth watching, but unlikely to suddenly attack South Korea without China's approval. Six months without food imports, and the North becomes completely depopulated. War would stop food imports, possibly even from China.

Iran may go after Israel, but to do so would require a fly over of a neutral country, or US controlled airspace. A nuclear terrorist attack would be answered by Israel with their whole arsenal. No, I don't think that that's going to happen soon.

Iran is going broke, as is Russia, and China, and they'll be unpredictable as a result, but it's unlikely they'll do anything too stupid. They're all run by smart, ruthless bureaucracies.

In the US, it's hard to see a sudden Whiskey Rebellion - but the US Army is more than happy to shoot rebels, and they have better guns. Even Great Depression desperation didn't bring that out in large numbers, there's no reason to think that now is any different - other than a better social safety net, set up to help prevent rebellions in the last Depression. And yes, folks had lots of ammo then, as well as two polarized political parties in the 30s - they also had what they thought was a viable third way - communism, now discredited. Nope, don't see it.