Fed Going Nuclear - Will the PP get radiation poisoning?

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D1984
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Re: Fed Going Nuclear - Will the PP get radiation poisoning?

Post by D1984 » Wed Mar 25, 2020 12:06 am

CT-Scott wrote:
Wed Mar 25, 2020 12:00 am

Final thoughts...correct me if I'm wrong, but hasn't Ron Paul suggested in the past that perhaps the US could/should consider defaulting on its debt, "take its medicine", and "move on"? What would the result of that be?
Nothing good. It would make 2008-09 look like a picnic in the park by comparison.
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Re: Fed Going Nuclear - Will the PP get radiation poisoning?

Post by CT-Scott » Wed Mar 25, 2020 12:08 am

D1984 wrote:
Wed Mar 25, 2020 12:06 am
Nothing good. It would make 2008-09 look like a picnic in the park by comparison.
Can you elaborate? Would anyone / certain holdings be in a particularly bad/good position?
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Re: Fed Going Nuclear - Will the PP get radiation poisoning?

Post by D1984 » Wed Mar 25, 2020 1:59 am

CT-Scott wrote:
Wed Mar 25, 2020 12:08 am
D1984 wrote:
Wed Mar 25, 2020 12:06 am
Nothing good. It would make 2008-09 look like a picnic in the park by comparison.
Can you elaborate? Would anyone / certain holdings be in a particularly bad/good position?
Yes. At least in 2008 the financial system didn't totally come apart (banks still functioned, money transfers still happened, ATMs still worked, the SIPC and FDIC were still functional and doing their jobs, etc). Now imagine what would happen if:

A. The issuer of the world's reserve currency defaulted on its debt (not because it couldn't pay it but simply because it up and said "screw this, I'm not paying" like some 3rd world tinpot banana republic), and,

B. The assets that people thought were the "safest and soundest" in the world suddenly became worthless pieces of paper (and/or worthless digital 1s and 0s).

US Treasuries pretty much underlie the world's financial system. The T-bill rate literally IS the "risk-free rate". Banks own huge quantities of explicitly Federally backed paper (T-bills/bonds/notes, plus GNMAs, plus agency securities) plus huge amounts of implicitly Federally-backed paper (FNMAs, mostly). If the government defaults on all these, the US (and much of the rest of the world's) financial system turns effectively to ashes in 2-3 days (at most). Also, what do you think will happen when the gov't defaults on its obligations and suddenly the FDIC/SIPC's "full faith and credit of the US government" backing bank deposits becomes no more of a credible promise than "the full faith and credit of you ne'er-do-well cousin Leroy who swears THIS time he'll pay you back if you lend him that $100, I promise"? The mother of all bank runs...which banks can't meet because they can't sell their Treasury/agency holdings (or almost anything else they invested in/hold as loans) on the open market for nearly anything because those holdings are now worth as little (or less) than CCC rated junk bonds. On top of this, the money markets will seize up because people will figure "if you can't even trust Uncle Sam, who CAN you trust?" and no one will be willing to lend short-term money to or buy commercial paper (or short-term repo paper) from companies (there was a run on money-market funds in 2008 which the Federal government stopped by agreeing to backstop said funds....the Federal government can't agree to backstop such funds, though, when it itself just defaulted on its own debt and no one would trust its backstop any further than they could spit); this would within a week or two lead to a bankruptcy or failure of probably a third or more of major companies (which through classic demand-side domino effects would in turn lead to failure of dozens more each week after that).

It would likely just get worse from there. Think 2008 several times over. Think 1929-1933. Think of the collapse of Russian GDP-per-capita and social indicators from 1990 to 1998 as the entire Soviet command economy had to start from scratch into a free-market one. Now think of something just as bad if not worse.

Trust me....you don't want what is considered to be the issuer of the ultimate safe and secure investment to default on its debt. Any problem we have now it would just make worse at LEAST for the next 5-10 years after the default (and likely for far longer than that).
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Re: Fed Going Nuclear - Will the PP get radiation poisoning?

Post by D1984 » Wed Mar 25, 2020 2:09 am

CT-Scott wrote:
Wed Mar 25, 2020 12:08 am
Would anyone / certain holdings be in a particularly bad/good position?
If I was trying to be wry and funny I'd say beans, bullets, band-aids, Bibles, and bunkers....LOL.

But to seriously answer your question:

Gold would likely soar but good luck finding a way to sell any large quantity of your now much-appreciated in value gold holdings to meet your expenses....what with no functional banking system and all.

VIX futures (and ETF/ETN products based on them) would shoot to the moon as well....but good luck cashing in on this when your brokerage account with said investments in them no longer exists because the custodian went under and the SIPC no longer backs anything. Go ahead and get in line with the other unsecured creditors of whatever brokerage firm you were using...maybe if you're lucky you'll get--in a few years-- five or the cents on the dollar for the money you had in your account.

Credit default swaps on government debt--and almost any other debt--would skyrocket in value but see as above for VIX futures...plus, even if your brokerage or bank somehow magically survived, good luck enforcing any CDS contract against your likely now bankrupt and broke counterparty; you can't squeeze blood from a stone.

Pretty much any investment you don't own directly and that doesn't have an immediate productive non-monetary value (say a personally owned small business, or a home to live in, or farmland to grow food) would be all but useless in the immediate aftermath of such a default.
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Re: Fed Going Nuclear - Will the PP get radiation poisoning?

Post by shekels » Wed Mar 25, 2020 6:46 pm

From The Aleph Blog.
Too Much Debt
Posted on 24 March 2020 by David Merkel

Photo Credit: Steve Rotman || As Simon and Garfunkel sang, “The words of the prophets are written on the subway walls…”

Debt-based economies are unstable. Economies with a lot of short-term debt are more unstable. The Fed is like Johnny One-Note, or Fat Freddie with a hammer. They only know one tool, and it will solve all problems.

Are there problems from too much debt? More debt will solve the problem. Shift debts from the private to the public sector. Don’t let the private market solve this on its own.

Though the bed debt is not in the same place as the last crisis, we are once again trying to play favorites through the Federal Reserve and rescue entities that took too much risk.

My view is let them fail. The whole system is not at risk, and the COVID-19 crisis will pass in two weeks. The great risk is not from the disease, but from the ham-handed response from policymakers who are short-sighted, and highly risk averse to the point of not wanting to cross the street for fear of dying.

Have we become like the Chinese, who bail out their banks and non-banks regularly? Who can’t bear to see any significant institution fail?

(Yes, I know they are getting more willing to see entities fail in China, but why are we getting less that way in the US? Let market discipline teach companies to not have so much debt.)

Here are three things to consider:

Bond ETFs Flash Warning Signs of Growing Mismatch — The Fed now think its purview extends to managing the discounts of bond ETFs? Let the system work, and let profit seeking institutions and individuals benefit from artificially high yields. Let insurance companies do what I did: purchase a cheap package of bonds in an ETF, and convert it into the constituent bonds, and sell those that you don’t want for a profit. (Losses from ETFs premiums and discounts are normal, and it is why the dollar weighted returns are lower than the time-weighted returns.)
The same applies to repo markets. As I have said before, the accounting rules need to be changed. Repo transactions should not be treated as a short-term asset, but as a long asset with a short-term liability, because that is what it is. With Residential Mortgage-Backed SecurIties in trouble, the market should be allowed to fail, to teach those who take too much risk to not do that. This failure will not cascade.
The same applies to the crony of Donald Trump — Tom Barrack. He pleads his own interest, seeking for the Fed or the Treasury to bail him out, and those who are like him. Let him fail, and those who are like him.

Market participants need to know that they are responsible for their own actions, particularly in a small and short-lived crisis as this one. COVID-19 as a systemic crisis will be gone within weeks.

My statement to all of those listening is “When will we set up a more rational system that discourages debt?” We could made dividends tax-exempt, and deny interest deductions for non-financial corporations, including financial subsidiaries of non-financial corporations. Of course we would grandfather prior obligations.

Are we going to wait for the grand crisis, where the Fed will continue to extend credit amid roaring inflation, or where extend no credit amid a tanking economy? This is what eventually faces us — there is no free lunch. The Fed can’t create prosperity via loose monetary policy, and Congress cannot create prosperity via loose fiscal policy.

The bills eventually come due. The USA might get the bill last after the failure of China, Japan, and the EU, but it will eventually get the bill.

As such, consider what you will do as governments can’t deal with the economic and political costs of financing the losses of the financial system.
¯\_(ツ)_/¯
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Re: Fed Going Nuclear - Will the PP get radiation poisoning?

Post by Maddy » Thu Mar 26, 2020 12:23 pm

Has anyone here given any great thought to hard assets other than metals and real estate? 22LR seems like a pretty solid, easily liquidated choice. What else?
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Re: Fed Going Nuclear - Will the PP get radiation poisoning?

Post by pmward » Thu Mar 26, 2020 12:46 pm

Maddy wrote:
Thu Mar 26, 2020 12:23 pm
Has anyone here given any great thought to hard assets other than metals and real estate? 22LR seems like a pretty solid, easily liquidated choice. What else?
Eventually oil has to go back up. It cannot stay at $20 forever. Oil is not something to buy and hold forever though. It's more of a VP speculation.
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Re: Fed Going Nuclear - Will the PP get radiation poisoning?

Post by Kriegsspiel » Thu Mar 26, 2020 8:44 pm

Maddy wrote:
Thu Mar 26, 2020 12:23 pm
Has anyone here given any great thought to hard assets other than metals and real estate? 22LR seems like a pretty solid, easily liquidated choice. What else?
Garlic is very easy to grow and stores well. I read that something like 80% of the worlds' garlic was grown in China.
You there, Ephialtes. May you live forever.
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Re: Fed Going Nuclear - Will the PP get radiation poisoning?

Post by drumminj » Thu Mar 26, 2020 8:49 pm

Kriegsspiel wrote:
Thu Mar 26, 2020 8:44 pm
Garlic is very easy to grow and stores well
I tried once and failed -- thanks for making me feel bad! :P

Not sure what happened, but it grew a green shoot up, but didn't actually grow the garlic cloves. Haven't tried since!
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Re: Fed Going Nuclear - Will the PP get radiation poisoning?

Post by shekels » Thu Mar 26, 2020 8:50 pm

Maddy wrote:
Thu Mar 26, 2020 12:23 pm
Has anyone here given any great thought to hard assets other than metals and real estate? 22LR seems like a pretty solid, easily liquidated choice. What else?
Maybe 10/20 acres with chickens,cows in a low tax county.
With good neighbors
Wyoming sounds good, but it's cold.
¯\_(ツ)_/¯
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Re: Fed Going Nuclear - Will the PP get radiation poisoning?

Post by Kriegsspiel » Thu Mar 26, 2020 8:57 pm

drumminj wrote:
Thu Mar 26, 2020 8:49 pm
Kriegsspiel wrote:
Thu Mar 26, 2020 8:44 pm
Garlic is very easy to grow and stores well
I tried once and failed -- thanks for making me feel bad! :P

Not sure what happened, but it grew a green shoot up, but didn't actually grow the garlic cloves. Haven't tried since!
HAH. Maybe you just didn't let them finish developing? You have to wait until the leaves turn brown and tip over, usually in early summer.
You there, Ephialtes. May you live forever.
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Re: Fed Going Nuclear - Will the PP get radiation poisoning?

Post by dualstow » Thu Mar 26, 2020 9:39 pm

The most successful garlic I ever planted was under a gutter. It was huge.
RIP Marcello Gandini
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Re: Fed Going Nuclear - Will the PP get radiation poisoning?

Post by dualstow » Thu Mar 26, 2020 10:37 pm

Simonjester wrote:
Maddy wrote:
Thu Mar 26, 2020 12:23 pm
Has anyone here given any great thought to hard assets other than metals and real estate? 22LR seems like a pretty solid, easily liquidated choice. What else?
the ability to brew and distill alcohol... >:D


Someone has to say it: liquid assets.
RIP Marcello Gandini
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