Ya, my brain doesn’t like thinking about derivatives of the financial variety either. Knowing what $43T of mortgage CDS can do is enough for me.

At the beginning of the year I had convinced myself that the $50T in US personal net worth would be adequate to cover reduced foreign investment in treasuries. Then Chairman Ben announced $300B in QE and unconvinced me. Now I think we will be doing more of that to cover any gap in US plus foriegn investment. The dollar lost 5% immediatly on that announcement. The thing is, US exports/corporate profitability did rather well when the dollar index was 70 (80 now). So this is a part of the cure, provided we don’t get into a global game of competitive de-vals, which has started to occur already. And it has some implication on oil prices, once OPEC gets some pricing power again. (what we see now is speculator driven)

But too much of a good thing can be bad, so you never know, maybe as the treasury has to roll over the entire public debt in 4 years now, we will find no takers for the new deficits, or the re-financing of the old debt.

Followthemoney: I think we get what we always get. Life will slowly grind down our expectations, and the government will keep telling us that they care, and are here to help.

But I also think they may try putting punitive import tarrifs on countries that refuse to play along with the global warming mantra. It would be a clever way of disguising protectionism and calling it saving the planet. It’s so tempting I’d almost bet money on it.

I must admit that I’m not near intelligent enough to understand derivatives and all their implications – so I can’t get my arms (brain) around that issue. But I’m worried that the notional, net-zero sum might not turn out to be net-zero if these things crash in a time and way the experts haven’t considered. 400-500 trillion $ is a pretty scary sum even if a very small percentage, say 3% to maybe 5% of these instruments crash without being nulled out by their antimatter complements.

But getting back to the implications of this post, I’m still wondering quite a bit about the implications of such a deterioration in the U.S. NIIP. How does this play regarding official foreign vs private domestic financing of the U.S. Treasury?

the problem i have is that there is no real framework to when the spending is going to end. already hearing suggestions about “Stimulus II”
that is why i fear we’re on the path to have severe inflation problem and/or dollar devaluation down the line (years out). And it’s not like there’s going to be any public warnings. none of rating agencies DARE challenge the credit rating of the U.S….for if they did, they’d probably be toast over night. At least in my opinion.

we need to get to the root of the crisis, the global imbalances and it’s very hard for leaders to confront this problem. Majority of people i talk to have no idea what’s going on. They have no idea how great the imbalances in our world are, and the dangers that come with them. Very few people even know of this informative blog (but they sure should). Now is it up to the people to learn independently, or is up to our government to educate??

Maybe a solution to crisis would be more informative layout of the readjustment we must face. It’d be great to have Obama explain where we are and the structural changes needed. Unfortunately i’d say less than 1% of all citizens understand the true root of the crisis, and if we can’t understand the root, then how can we all work together to repair? We need mass-education to address the problem, and mass education to address the solution.

I think the short answer is we can’t…we are stuck between a rock and a hard place. The threat of debt deflation/financial meltdown and knockon effect to the real economy and employment, which feeds back to the financial side, hasn’t really gone away yet.

I liked Greenspan’s article posted above. I think he pretty much hits the nail on the head with all his points. It’s amazing how clear headed people can get when not holding an important government office.

Tho I do think Obama and friends are a bit spendthrift in the handling of all the crisis that fell on them at once. But there wasn’t a whole lot of time to consider other ways of doing things. Then again, they are planning to spend huge amounts on reforming health care. And dumping this fuzzy idea of cap&trade&tax on us, in the name of saving the planet, which includes China and India. So taken all together, when we voted for “change”, it looks to me like we tossed out all the old Republican baggage, and moved in all the old Democrat baggage.

It’s just that we seem like maybe we really can’t afford to do all these things. Maybe Santa Clause needs to take a few years off.

Why is this so difficult? Is the corporate influence, is the administration refusing the accept the facts? Or is just complete denial?

In my view, the NY FED is very aware of the root of the crisis, but they’re finding a difficult campaign to notify the great people of this great country that we need to restructure our way, and our perception of life.

I’d encourage both the Fed and the Obama Administration to look at PR and study groups of readjusting America. Obviously the readjustment will be very difficult, corporate profits will come down, but this will need to happen much sooner than most expect. The Fed, in my view, can no longer buy the 10-20-30 year notes. They need to start contracting the money supply, if not we’re headed toward full force dollar devaluation and severe inflation.

Look around what’s happened last 2-3 months, prices of all consumer necessities have gone through the roof. Especially food and energy.

The consumer is simply out of action, high food and energy prices simply don’t mix well with the current level of the projected consumer S&P earnings.

Unemployment is probably closer to the teens in percent, the market is not reflecting the “real economy”, nor is it truly “forward looking”. The market should be grateful for the good graces of “government intervention”, however the big question is how LONG can this continue?

Additionally, I also worry that the FED will probably keep rates at 0-.25% for at least the next 12 months. I’m a bit concerned, of the U.S. debt levels, both private and now public. This is not good. STOP THE BORROWING!

Greenspan should know. In the entire history of the Fed, they have never raised interest rates until employment numbers start to increase. If they try to do it this time (if you think such a thought would cross Gentle Ben’s mind)we would have the White House, Congress and Wall Street screaming bloody murder.

The new problem we have is $150 trillion plus in interest rate derivatives. The derivosphere could catch fire and end the financial world as we know it, just when we thought we put that problem behind us.

Lately our students of the Great Depression are reminding us of “The Big Mistake of ‘38″. This was when the USG took the punch bowl away too soon, and the party never got started.

I’m sure we won’t screw up like that again. So we just need to figure out where the money comes from.

Here’s a good article talking about how the savings rate is calculated. It’s from 2005, so the data is old, but the historical charts are good to see. The latest official number from BEA was 6.9%. I read elsewhere that it does include pension plan contributions, but not 401k contributions. I think only 8% of the workforce gets the traditional pension plan anymore, and you can go up to 10% of pretax income into a 401k. So that adds some doubt to the data.

Whether that is a meaningful number is a good question. It’s like saying the average household size is 2.75 people, then you can’t find the average household anywhere.

I’ve always thought it should be graphed by age. If you are a young worker buying a first house, it’s very normal that your debt to income ratio is 3:1 and you have no savings. But if we are a country of retired millionaires, then we would have probably a negative savings rate. Both scenarios are economically ok.

However, the article does reference the 2005 Greenspan/Kennedy study that said there was $435B of HEW each year from 2001 thru 2004. I remember later reports that it increased to $600B-$700B a year in the following years, until collapsing and then, voila, the recession arrived.

http://www.frbsf.org/publications/economics/letter/2005/el2005-30.html

I think the US consumer will try and increase the personal savings rate, but will be frustrated by tax increases at federal, state and local levels. So any reduction in consumption will be caped&traded&taxed away.

Which would lead us to how the national savings rate is calculated. In this one they throw in the fiscal deficit. For some reason they think it matters.

There’s no sign of inflation yet, ha! ha! – so say many at present. But it’s way, way too early to declare that U.S. finances and monetary policies aren’t going to lead to inflation down the road. Greenspan worries that political constraints (cowardice) will lead to keeping dangerous policies in place, or even kicking such policies into high gear and inflation will return with a vengeance. This mirrors the concerns of CBs and I think helps to explain reluctance to significantly deepen their exposure to the dollar. As Roubini said just the other day, the CBs are seriously worried, and they’re not simply going to sit idly by and watch Treasuries, the dollar and their huge holdings wither. While there may not yet be a tangible sign of reaching a full turning point as respects their appetite for the dollar, we’re surely nearing it.