Monday, July 11, 2011

The Morning After (Musical Tribute)

July 11, 2011
Stocks sink on fresh fears about global economy

NEW YORK (AP) -- Stocks fell sharply Monday as investors feared that Europe's debt crisis would spread.

I thought that all the subprime problems had been contained. Who knew!

I do have some good news.

To the delight of my readers, my
last post has finally been replaced. MaxedOutMama hoped that I "replaced the top post" because "that graph hurts the eyes and the mind behind them." Watchtower said that a "feel-good soundtrack song is probably not going to be enough this time."

Mission accomplished! Two birds! One stone! Woohoo!

By comparison, this post has all the biscuits, gravy, and free lunches one can stomach. Enjoy!

And lastly, just look at those real yields (TIPS) today. Their death continues. This has definitely been one of my better calls of the last decade. 1.59% on the 30-year TIPS? Seriously? As Yogi Berra would say, "it's deja vu all over again." Thank you stock market bulls for allowing me to get 2.19% in February's auction. I'll be holding until maturity more than likely. That's how confident I am about our long-term future. Sigh.


dearieme said...

There was an equivalent of TIPS in the 30s. FDR defaulted on them.

Stagflationary Mark said...


Got a link to it?

Stagflationary Mark said...

As a side note, I don't see why they would need to default on TIPS.

If inflation became high enough then the taxes on the inflationary gains would create the equivalent of a default.

Mr Slippery said...


I've been thinking through the mechanics of the debt ceiling mess and Treasury should be able to roll all bills and bonds with the 3 day settlement window. They do a refunding auction 2-3 days before the issue is due and it won't hit the limit until after settlement for a net zero change in the debt.

OTOH, some bills will not be paid. Roughly 40% of bills due in August including Social Security and Medicare can't be paid. Treasury will have to prioritize and I"m not sure their systems will allow for that gracefully.

Well, we don't need the debt ceiling to blow up the world. Europe is on the edge with Spain and Italy bond yields going vertical. The raw numbers are still within reason, just under 6% on the 10 year, but the rate of change is alarming. If Spain and Italy end up at 10%, they may not be able to handle new issues and Euro goes tilt.

dearieme said...

The best link I had was to a paper on Jim Grant's site, but they took it down. Here's a less good one

Here's a quotation from a pdf:

Following the inflation during the Civil War, almost all long-term financial contracts in
the U.S. came to include a “gold clause” which effectively indexed to gold the value of the
payments to creditors. This clause protected creditors against devaluation of the dollar since theycould demand payment in gold or the equivalent value of gold in nominal dollars if the price of
gold were to rise during the life of the contract. On June 5, 1933, Congress passed a Joint
Resolution nullifying gold clauses in both private and public debt contracts. ....The abrogation of gold clauses was ..tantamount to a debt jubilee.

Randall S. Kroszner
University of Chicago GSB
and N. B.E.R.

According to Grant, this action was referred to as The American Default.

dearieme said...

A bit more:

While gold clauses have been used around the world, they were much more common in
long-term contracts in the U.S. than elsewhere. The Greenback inflation ....led gold clauses to become ubiquitous in mortgages and bonds, both public and private. Liberty Loan bonds issued during WWI were required by statute to
include a gold clause, and all other long-term government debt issued until 1933 included gold
clauses. Gold clauses became standard in long-term corporate bonds in the late nineteenth and
early twentieth centuries, and virtually all long-term corporate debt outstanding in the early 1930s
contained gold clauses...In the sample ofcorporate bonds trading on the New York Stock Exchange in 1935 that I describe below, all
contained the gold clause. Mortgage instruments often included such clauses but they were not as frequent as in long-term bonds. Of the roughly $168 billion of public and private debt
outstanding in the 1933 to 1935 period, estimates were that more than $100 billion (par value) of
these obligations contained gold clauses ...
Prior to the 1930s, courts in the U.S. had consistently upheld the validity and enforceability of the gold clause...

dearieme said...

In 2001 and 2002, the actions of the Argentine government to “pesofy” debt contracts during the crisis are almost exactly parallel to what the US did during the Great Depression. In December of 2001, Argentina broke its
“currency board” arrangement that maintained a one-to-one link between the peso and the dollar,
The legality of this across-the-board abrogation of debt contracts was challenged, and in 2003 the Argentine Supreme Court declared the“pesofication” illegal. The remedy is still under negotiation.

Whereas in the US:

When the constitutionality of the Joint Resolution was challenged, there was great uncertainty about what the Supreme Court’s decision would be. The announcement of the
landmark 5-4 decision upholding the government’s ability to abrogate these clauses had a large
impact on the markets.

So would the Supreme Court back a government attempt to abrogate Index-Linking? Are you feeling lucky, puk?

dearieme said...

oops, "punk".

Troy said...

I love how we're teetering at the pre-crash level of 1H08. Maybe I can play the crash twice.

Idiot Republicans. This is just a total gift to the Dems.

Assuming the electorate has the brainpower of turnip or better.

Stagflationary Mark said...


It would have been difficult to honor a real gold yield (in the 1930s) at the same time gold was being confiscated no doubt.

As for index-linking, that doesn't really concern me. As Bernanke said, they have a printing press that can operate at essentially no cost and they could simply increase the tax on the inflationary gains that TIPS provide. There would therefore be no need for a "brave" politician to default outright.

In other words, there is very little I can do to protect myself from government taxation. That's just as true in the future as it is now. Sigh.

Stagflationary Mark said...

Mr Slippery,

It certainly is hard for us to have a currency crisis when our crappy dollar smells at least as good as many of the other dung currencies.

Stagflationary Mark said...


Maybe I can play the crash twice.

I continue to wonder if TPTB will manage to resurrect my ongoing Rubicon joke. I would not rule it out.

Watchtower said...


Stagflationary Mark said...

Rubikhan! ;)