Till Debt Do Us Apart—Be Careful Mother of all Bubbles on Cards in US!!!

Economy recovering…. the bull phase will be on within a year from now….. is what is we are listening everyday in our news . 600 economists sample was taken and they believe that the stimulus packages are working by looking at the Goldman Sachs profit figures. Obama administration is also happy with the performance of the economy and what they are not embarking is that this stimuluses are working and insisting that the only worry is the federal debt shooting upward. This is just like an individual who borrowed $1 trillion and saying “I am happy but the only worry is the debts should come down”.
Yes, definitely recession is over but the depression has started …
Maybe Obama administration is also believing that the recession is over and they are also not saying that the prosperity in the economy has begun so hence they do not want to say it to the general populace.
Unfortunately, the federal debt which is raised by the US government is already 100% of the US GDP and the thing is already the US economy is in recession (negative growth) and if the growth is to be achieved then it should come from the export sector and internal savings (invested). Unless this happens the economy is not going to recover and the US economy will continue to be in negative growth territory . On top of that if we add social security, Medicare and Medicaid payments for baby boomers in the coming years along with the negative growth prevailing it will be a huge burden on the federal reserve and hence fed have no other option but to monetize the debt. Hence, there will be hyperinflation scenario persisting in the system. The government has no option to increase the supply of goods and services hence they opt for the monetary policy tuning. So, they have to raise the interest rates to double digits to attract the foreign investors otherwise there will not be any buyers for the American treasury bonds hence the monetization of debt will again take place and the fed workers have to run the press overtime to meet the obligations .
On the other hand, if monetization of debt and double digit inflation occurs then the existing bonds which are issued by the US government will collapse because when interest rates rises from (0.50% to 10%) then definitely the existing treasury bond prices in the market will collapse and most of the other countries foreign exchange reserves will be wiped out with ease (esp. China’s $2 trillion foreign exchange reserves). Also, if any country backs the weakening US dollar (Inflation eats away the currency’s purchasing power)they have to suffer by losing their sovereign assets as well. This will again put pressure on the world’s growth rate (even in emerging countries). This problem of hyperinflation and monetary tuning will seriously put pressure on the Bond prices and also people in the country will lose confidence on the bonds and will stop buying the bonds . After this loss of confidence in the bond market,the fed will be forced to print more money and thereby making the dollar lose its purchasing power (already 95% pp is lost i.e, now a person should pay 20 times extra amount when compared to 1930’s) even more. Whilst, creating an unprecedented bubble in the United States and this will be the mother of all bubbles and also called the bailout bubble which will persist over a long period of time.
So, hence this bond bubble will be a next bubble which will be on cards and don’t trust the soft spoken words from Obama’s administration and this time around it will be Greenspangeddon and Bernankegeddon. Nevertheless it is high time, to pull out your money from American Treasury bonds and other American paper money which will be of no real use to the American bourgeoisie and other lower classes of people.

Disclaimer: The views expressed here are of the author and the readers are advised to consult their own financial advisors before taking any financial decisions or whatsoever.

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7 Responses to “Till Debt Do Us Apart—Be Careful Mother of all Bubbles on Cards in US!!!”

  1. Bharani Says:

    Excellent commentary !!! Can’t really comment as I am rarely into the news of global economy ???

  2. Sundar Srinivasan Says:

    Good article. A debt that equals 100% of GDP is certainly bad. But the problem is that the US cannot go back to contraction now. But never bother. The US debt-to-GDP ratio was nearly 70% in mid-nineties. The Fed will not increase the interest rate to 10% all of a sudden. Even if nominal interest rate goes to 1%, it’s way higher than the real rates, now. People of America are just keeping the money in money-market and that’s what they will be doing for a while. So when nobody spends, the economy is a zombie. So the only one who can spend now is the government – even if it means borrowing money.

    Hyperinflation – I don’t expect anything like that soon. There has been talks about hyperinflation since last April. It never happened. We have to be wary about it once we are out of this trap. But for now, I would actually welcome some inflation.

    Weakening of dollar – It’s actually good for America if dollar weakens a little bit now (just like inflation :-)). But don’t worry, it will not fall down fast making the US look like Indonesia or Argentina of nineties.

    Many of your fears are uncalled for – like hyperinflation, value of dollar rolling to the bottom. I mean it all may happen if we mess up during the recovery. But if we start worrying about them now, we will get contraction and deflation which is that last thing we want now. We should have worried about the deficit 5 years ago – not now.

    • mharishkumar Says:

      Hello, I am really pleased to see you commenting on my blog and would appreciate if you can continuoulsy do it on the articles the same way….

      Coming on to your comments, the federal debt is already at 100% of gdp and it may go to as high as 300% of gdp in a couple of years from now because of the Bush bailout package($800b can create $10 trillion in an economy) and Obama’s cash for clunkers program which will affect the economic activity drastically in US. On top of that , this $10 trillion dollars + medicare and medicaid expenses which are obligatory for US govt. can really fuel hyperinflation in the system. Already at this moment , the dollar has already lost 95% of purchasing power compared to 1930’s during depression. So, it means that now in 2009 we are supposed to pay 20times more when compared to 1930.

      Becoz of bad performance in business concerns and increasing unemployment the govt. needs to raise taxes in the economy and hyperinflation+taxes will give lower growth.

      On top of that the dollar will be affected due to hyperinflation and it should be devalued and which makes America incompetent in the global sphere and also america is also a largest debtor nation in the world.So, the americans dependent on emerging markets like China, India, etc, to buy their tresury bonds. So, for these countries to buy these bonds they will expect higher interest rates to prevail and this higher interest rates will ruin the complete economic activity and debt market as a whole.So, the moment this happens the crisis will be prevailed and once that happens people start losing confidence and when this happen this will turn out to be a catastrophic incident and inturn will be a mother of all bubbles.
      So, already the damage is done in the way of housing bubble and when you want to save a broken mirror you can only do it for certain period and ultimately the mirror will be broken so need to get a new mirror. So, in the same way, americans need to rebuild a new system right from the scratch so that it can help them come out very soon.

      If your kind of system is good for the economy(spending and borrowing ) then there should not be scarcity of resources on this planet unless we have scarcity of resources on this planet we need to follow the same old fundamentals and not simply coming up with theories like “Debts are good” and “Spend more and Save less” will not work in any country for that matter.
      We cannot save america from capital flight issues and the upcoming depression
      My dear friend, the subject of economics only arise when are filled with so much of scarcity and every top economist is forgetting the fundamentals of economics…

  3. Anand Says:

    the article emphasizes on the gross need for capitalists to be pseudo, the notion utres magis valeat quampareat which means ‘ it is better for a thing to have effect rather go void’… I personally find the personification of financial models to be beyond Frederic Bastiat and Joan Robbinson, \

    Anand Shivashankaran
    Ex DSE Economics Hons

    • mharishkumar Says:

      I am extremely pleased by the way you have commented on the article.But, the major thing about your comment is it has many interpretations onto the reader. Also,when it comes to the article, it never emphasized the need for capitalists to be pseudo and also capitalism never talks government intervention in between the markets. So, always in capitalism the incompetent will always fail. For eg: If a teacher makes a student pass in one of the examination just because the intelligent student who is supposed to sit in front of him is absent. It would be just be foolish and always the incompetent will fail. So, according to your comment instead of going it void if you want it get into effect (bailout packages) there would be so many repercussions which are to be faced in the form of increase in the federal debt, monetization of debt,etc,

      Harish Kumar
      (@mharishkumar-twitter)

  4. Priya Ravichandran Says:

    Well, the manufacturing indices have increased, France and UK are out of recession and Chinese and Japanese banking norms have lauded the financial system, i think your article is pretty old and does not take into consideration the dynamic forces we see today, bernanke will help this system, although i lost my job workin for Freddie Mac in the US after my economics stint in the US, i am presently a Volunteer, there is a reason to cheer, although the consumption patters have greatly changed, i only wish, that the economy bounces back, its been 8 months, i am unemployed,

    • mharishkumar Says:

      The manufacturing indices are improving because of immense amount of stimulus money which are being given by the various governments, and this stimulus and monetary measures can increase the national debt which is already 100% of the GDP of US and also in Uk is it close to 100% of their GDP. So, unless the real interest rates are high I dont feel people would be interested to buy 5 year, 10 year and 30 year longterm bonds. Even now if you believe that Bernanke can help the system you can go ahead and start buying US Bonds at 2%,3% yields for 10 yr and 30 yr bonds. And in this scenerio when there is excessive amount of pressure on commodities and commodities carry trade because of almost zero interest rates. Any person who wants to buy american bonds would seems to foolish and hence the moment people start neglecting US bonds again bad news starts slowly creeping in. So, now the bad news will start coming is in the form of commercial realty because the commercial property rates are slowly coming down and also this is a sector which is highly leveraged commercial real estate sector. So, by the time this commercial realty recovers the problem of debt starts creeping and also commodities pressure which can affect the margins of companies and inturn the tax revenues of the government. Hence, this is a repeat of great depression and no country can come of this for atleast 2-4 years time.

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