Thursday, June 18, 2009

The Debts of the Spenders: The Obama Years and American Winter

What happens when no one is allowed to default (declare bankruptcy) and people are still allowed to buy homes w/no money down (through FHA crediting of first time buyer home tax credits)?

Not a pretty picture. The author believes we will see the following in no particular order:

  1. Early withdrawls from pension plans will be prevented and almost all pension plans will eventually default
  2. We will see a systemic banking crisis that will result in bank runs and the loss of savings
  3. We are headed eventually for a bond market dislocation where nominal interest rates will shoot up into the double digits
  4. Real interest rates will be even higher (the nominal rate minus negative inflation)
  5. Cash hoarding will continue to reduce the velocity of money, amplifying the effect of deflation
  6. The US dollar will continue to rise for quite a while on a flight to safety and as dollar-denominated debt deflates
  7. Eventually the dollar will collapse, but that time is not now (and a falling dollar does not mean an expanding money supply, ie inflation)

Can you feel the cold?
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