[patience]

Quote: "There will then be a big increase in interest rates (that will further depress the economy, that will reduce government revenue) and as DantesPeak said when the world’s saving pool is exhausted the government will have to do massive deleveraging.

Deleveraging for the government will entail massive cuts in spending. The federal government is now “hoping” to borrow half of the money it is spending. Cuts in spending will mean huge cuts in the number of employees and benefits. The agency infighting might even tear the government totally apart."

At some point in thiis melee, I expect Congress, the Treasury, and the Fed to get together with Helicopter Ben and tell him to do his thing! Without an air drop of money to the dot gov, we have it in a shambles, and they know it. Ben has stated that he is aware Gutenberg's invention, and that we have printing press technology. When govt has a weapon, the temptation to use use it is overwhelming.

Lots of worms in that bucket, so what the result of that printing will be is beyond my ken, but it sure looks like a currency crash to me. Then we do Walter Zevon's song, "Send Lawyers, Guns ,and Money, TS has HTF."

[DantesPeak]

AvailableEnergy

Available energy is a most excellent summary and should be made into a book.

Anyway the Chinese money supply continues to expand rapidly at 26% per year. Obviously China has learned few capitalist tricks from the US - in this case expand the money supply faster to encourage your country to grab resources and energy before the US does with its $2 trillion yearly fiscal deficit.

In 2003, Japan pumped up its monetary base rapidly, only to see that extra money flow to the US economy and stock market - and start off a worldwide commodities price boom. Now in 2008/2009 the US is pumping up its monetary base, only to see China expand its money supply indirectly based upon US dollar reserves held in China.

In the short run then, inflation is a given. However later on, depending on how the next crisis is handled, we in the US will go either to hyperinflation, or less possibly, deflation.

The problem will be the rekindled worldwide competition for energy and resources will strangle what ever slim recovery the US might make in the third quarter 2009 (although it's not clear if the GNP will even turn positive next quarter). The rise in commodity prices and high borrowing demands by the US will set off the next crisis – most likely a bond market crisis but possibly also a dollar crisis. With the credit Panic of 2008 out of the way, the next crisis later in the year will cause the US market to dive temporarily (or longer), and it will not be due to tight liquidity but to higher interest rates caused by the crisis.

With everyone’s attention glued then to financial markets, most will quickly lose sight of the relationship of peak energy to the world’s economy. Already the word speculation is spoken with annoying regularity trying to explain a very real developing shortage of natural resources and food. Most can not accept that the price of energy must by necessity be relatively higher in the post peak oil world to cut down energy demands.

[shortonoil]

DantesPeak said:

The rise in commodity prices and high borrowing demands by the US will set off the next crisis û most likely a bond market crisis but possibly also a dollar crisis. With the credit Panic of 2008 out of the way, the next crisis later in the year will cause the US market to dive temporarily (or longer), and it will not be due to tight liquidity but to higher interest rates caused by the crisis.

Right across the board DP, but let’s not forget about Black Swans. Willie might have spotted one flying right overhead!

Bond Volatility & Interest Rate Swaps
by Jim Willie

The other major threat is to the Interest Rate Swap, those powerful credit derivative contracts that tie together the bond world in complex knitting. The instability of USTreasurys on the long maturity (10-year & 30-year) and on the short maturity (so far just the 2-year) will surely unleash great firestorms of disruption, heavy losses, and raging fires for the big banks. It is next! It will be the greater second chapter to the Credit Default Swap opening salvo. Twice as many IRSwaps exist than CDSwaps, a story that bankers refuse to discuss. (snip)

INTEREST RATE SWAP NIGHTMARE COMES

The IRSwap contracts have been growing tremendous strain. They assure tremendous and possibly catastrophic losses, whose attention will come in the next few months.

A mountain of IRSwaps are traded, even though no counter-party could possibly exist. The reason is simple: to keep interest rates low. Now they are backfiring, and danger rises for major credit derivative accidents twice as great as the CDSwap accidents that killed AIG. The falsification for 15 years of the Consumer Price Index goes hand in hand with falsification of interest rates, both long-term and short-term. The victims list also includes Bear Stearns and Lehman Brothers. The list is sure to grow.

JPMorgan alone has $66 trillion in notional value of Interest Rate Swaps. They must constantly balance this load, in what is called dynamic hedging. That task has been rendered very difficult, if not impossible. The entire hedged position in IRSwaps remarkably exceeds the value of the entire USTreasury Bond market, a fact kept quiet by bank officials. With most IRSwap contracts, fixed net payments are made on a quarterly basis. So the hot fires that burn in big bank basements must be dealt with each quarter, as loss damages are assessed and paid for promptly. JPMorgan in all likelihood just is as insolvent and possibly bankrupt as Citigroup. Toss in the US Federal Reserve. A prickly quote was offered by James Grant of the Grant Interest Rate Observer recently. Grant said, “If the Fed examiners were set upon the Fed’s own documents, unlabeled documents, to pass judgment on the Fed’s capacity to survive the difficulties it faces in credit, it would shut this institution down. The Fed is undercapitalized in a way that Citicorp is undercapitalized.”

IRSwap

Like the little Oniker that Wall Street paraded out to transform trash mortgage paper into triple A bonds (the CDS) Willie’s porker is all dressed up, complete with lipstick, and with eyeshadow carefully applied. If he is right, the IRSwap is the banking industry’s own self made ticking time bomb. It will go off with a bang, scattering pork chops across the land. It will go off in the basement of FED.




AvailableEnergy

[vision-master]

The financial system is now like a snake eating its own tail. At some point it will hit a vital organ; exactly when that will take place is hard to determine. However, in a little over two years it will have eaten its way to the head.

[shortonoil]

JPMorgan alone has $66 trillion in notional value of Interest Rate Swaps. They must constantly balance this load, in what is called dynamic hedging. That task has been rendered very difficult, if not impossible. The entire hedged position in IRSwaps remarkably exceeds the value of the entire USTreasury Bond market, a fact kept quiet by bank officials.

This is all that Willie says about the notional value of IRSwaps. I have read from other sources they are valued somewhere in the area of $270 trillion. Does anyone else have any info on this amount? It seems like info about IRSwaps is kept under lock and key!

[DantesPeak]

JPMorgan alone has $66 trillion in notional value of Interest Rate Swaps. They must constantly balance this load, in what is called dynamic hedging. That task has been rendered very difficult, if not impossible. The entire hedged position in IRSwaps remarkably exceeds the value of the entire USTreasury Bond market, a fact kept quiet by bank officials.

This is all that Willie says about the notional value of IRSwaps. I have read from other sources they are valued somewhere in the area of $270 trillion. Does anyone else have any info on this amount? It seems like info about IRSwaps is kept under lock and key!

This IMF report says there were $400 trillion in notational value of outstanding interest rate derivatives at the end of 2007, which boiled down to a net value of about $7 trillion. It’s not clear how much of that $400 trillion is just swaps, but probably most:

http://www.imf.org/external/pubs/ft/wp/2008/wp08258.pdf

The IMF goes on to say this about the failure of a single large US bank on the derivatives market:

when cascade effects are taken into account, the total loss could rise to over $1,500 billion

!

Who says the IMF is hiding the truth? It appears very clear that our Secretary of Treasury, being from the IMF earlier in his career, realized that the financial system could have melted down. While he is ostensibly not in control of the Fed, I think it became clear that if the Fed didn't do something on the order of creating $1 trillion or more new dollars, there would be a total meltdown.

The Black Swan author himself, Taleb, sees more black swans too. He thinks this will lead to hyperinflation soon. Even though I predicted one year ago the Fed would issue a trillion or more new dollars, Taleb now is in fact more pessimistic than I about the future!

JUNE 1, 2009
Black Swan Fund Makes a Big Bet on Inflation

A hedge fund firm that reaped huge rewards betting against the market last year is about to open a fund premised on another wager: that the massive stimulus efforts of global governments will lead to hyperinflation.
The firm, Universa Investments L.P., is known for its ties to gloomy investor Nassim Nicholas Taleb, author of the 2007 bestseller "The Black Swan," which describes the impact of extreme events on the world and financial markets.
Unlike last year's sudden market implosion, inflation isn't an unimaginable event that few currently anticipate. In fact, many fear inflation right now amid government efforts to goose the economy. Universa's bet, however, is that inflation will reach levels few expect.
The new strategy, designed by Mr. Spitznagel, aims to post big gains if inflation and interest rates take off as they did in the 1970s. Universa will invest in options tied to commodities such as corn, crude oil and copper, as well as options on stocks such as oil drillers and gold miners.
"We think these things are going to see massive volatility," Mr. Taleb said in an interview.
The fund will also bet against Treasury bonds, which tend to weaken in inflationary environments. Last week, Treasury yields shot to their highest level since November as prices fell on inflation concerns. Oil topped $66 a barrel. Gold is creeping nearing $1,000 an ounce.

http://online.wsj.com/article/SB124380234786770027.html

[dohboi]

shortonoil wrote:

"The financial system is now like a snake eating its own tail. At some point it will hit a vital organ; exactly when that will take place is hard to determine. However, in a little over two years it will have eaten its way to the head."

Too bad they aren't taking any suggestions for notable member quotes. This would certainly get my vote.

[DantesPeak]

shortonoil wrote:

"The financial system is now like a snake eating its own tail. At some point it will hit a vital organ; exactly when that will take place is hard to determine. However, in a little over two years it will have eaten its way to the head."

Too bad they aren't taking any suggestions for notable member quotes. This would certainly get my vote.

I second that. Also “available energy” is one of the most important PO topics. I hope someone here can also come to define ‘cliff oil’ as well as shortonoil has defined available energy.

It appears whatever ‘deflation’ people are seeing in the US is being over whelmed by worldwide inflation elsewhere -especially in China

The June Chinese money supply rockets ahead at a rate of 28.5% per year. Also China’s foreign exchange reserves increased by $80 billion. That $80 billion is not sitting idly in some safe, but reinvested in the Chinese and world economy. Credit growth over the past three months in China has been explosive. The credit growth has spilled over into their economy: China made more cars in the second quarter than the US.

[deMolay]

The big FLUSH is coming soon. China has domestic unrest that is not going away, and all shipping into China of resources etc has dropped dead. Expect a major Devaluation of some kind very soon. By Sept at the latest.