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Thanks to increasing leverage (debt) in the system, it takes smaller and smaller rises in interest rates to force a recession.
Let's assume that "toxic assets" require an interest rate environment that continually decays, so as not to cause a financial meltdown and extreme deflationary fallout. What might a chart of that look like? Glad you asked!
You know, that's a pretty darned good fit if I say so myself.
This model approaches 0% interest rates. It takes an infinite amount of time to actually reach 0% though. This is really good news.
At 0% interest rates, we would be able to take on infinite debt. Just look at Japan's attempts. That seems to be our current plan too. Fortunately, this model seems 100% sustainable well into the distant future. Oh happy days!
So what might go wrong? What external factor could cause a containment breach and leak our "toxic assets" out into the real world?
OIL FUTURES: Crude Shoots To New '09 High On Demand Hopes
"If current oil prices move up very fast in a spike, then it could have an impact on economic recovery," IEA head Nobuo Tanaka said Monday.
Oh oh. Once more unto the breach, dear friends, once more. You know what? I think I'll remain bearish if you don't mind.
This post inspired by Kevin.
11 comments:
Nice.
DCRogers,
Thanks!
For those pondering Japan's situation and what extreme debt can do to a system...
http://illusionofprosperity.blogspot.com/2007/09/let-them-eat-cake.html
"In 2000, then-BOJ Governor Masaru Hayami was widely derided for raising rates from zero to 0.25 percent. Pundits called him Japan's answer to Herbert Hoover. Yet Hayami was trying to force Japan Inc. to implement structural reforms. It didn't work and rates returned to zero in March 2001." - William Pesek, 2007
Now tack on rising oil prices. Ouch.
Mark, gas prices here increased 11% in the past 2 weeks and at that rate I don't think getting 0% on bonds is gonna cut it for long before I'd be hooves up. Most of this rise is probably due to everyone front running Benny's inflation monster that is still a couple of hills and valley's off in the distance. 70's stagflation down the road perhaps but where are the wages increases, and jobs going to come from short term, and what would a good stagflation be without price controls although I guess the O-man's health care project might be just that but I don't think it is gonna be very cheap when they get done with that fiasco.
I'm still in both of my Hussman funds so I do have an exposure to TIPS, I also have the physical gold bullion I bought in 03 at about 350 an oz and 3/4 of the silver bullion I bought at 4 and change and also threw my Prudent Bear funds although I clipped off about a 1/3 of what I had in those in March. My newest adventure in the unsure world is in GRZZX but I am taking a hit on that at least for now until the heard wakes up and finds that companies stock prices are based on earnings and not market manipulation, hype and hope but that can runner longer the one might think just look at the housing bubble which in CA was clear to me in mid 04 and ran almost another 3 years.
Volcano - Jimmy Buffett
http://tinyurl.com/ku4ajp
Kevin
Kevin,
"...just look at the housing bubble which in CA was clear to me in mid 04 and ran almost another 3 years."
Mid 04 was the turning point for me, August to be precise. Using hindsight, I am thankful that my mailbox was flooded with sleazy mortgage offers. I was especially concerned by the fine print in one nagative amortization offer. 7.5% payment increases each year for the next 5 years, as a minimum? Good grief.
I sold all my stocks and had this uneasy feeling that inflation would be "fueled" by insanely low interest rates. Oil was an afterthought at best. Gold and silver treated me well, not as good as they treated you but I can hardly complain.
In hindsight, overall inflation has not been as bad as I would have guessed given that oil spiked to $140+. For that I am thankful.
So here I sit, hoping the next shoe drops slowly. It's been 5 years since I turned bearish, Based on my life expectancy, 30+ years to go. If we must decline (which is not guaranteed), here's hoping we can at least track the long decline of the Roman Empire.
Mark
We have the bread and circus of Rome and looking at the British which a just about now toast I think you'll get your 30 years but that's just a guess a slow slog down into the murky debts.
Kevin
Kevin,
I'm also using a self regulating nest egg technology to ensure my savings last.
The faster the decline, the higher the stress. The higher the stress, the lower the life expectancy. The lower the life expectancy, the less nest egg I'll need! Hahaha! ;)
I love gallows humor! Oh oh. I felt my stress level fall. Not sure I can afford it. Better turn on CNBC.
Mark, maybe you could patent that SR-NET you have there and make a killing selling it to greater fools. This country seems to have plenty of them so it may be worth a shot. Heck the acronym even has NET in it look at you go.
Lol
Kevin
Kevin,
SR-NET?
LOL!
Perhaps I could provide an actual sevice.
LOGAN-SR-UN-NET
"If your nest egg ever goes terminal, you will too! Guaranteed!"
Stag,
If oil keeps rising in price, workers will demand higher wages. Not!
We've broken the dreaded wage push inflation cycle. Hooray! Unfortunately, we've also broken our eCONomy. Boo!
http://research.stlouisfed.org/fred2/graph/?chart_type=line&s[1][id]=AHETPI&s[1][transformation]=pc1
These reflations are doing wonders for the majority. Needless to say, I'm expecting big things from the present reflation attempt.
mab,
Your chart shows average annual wage increases in the 1970s was roughly 7.5% per year, peaking at about 9%.
Meanwhile, inflation was averaging closer to 9% per year, peaking at 15%.
http://research.stlouisfed.org/fred2/graph/?chart_type=line&s[1][id]=CPIAUCSL&s[1][transformation]=pc1
Some wage-price spiral that was. Wages did not keep up.
In my opinion, it should have been called a price-wage spiral at best.
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