After the recent upbeat posts and optimistic comments, it's good to have some PDP ( Proper Doomer Porn ).
What would be the effect of US States becoming effectively, or practically, bankrupt? or USGOV unable to service international debt? How would this effect the UK?
Excellent article. Thanks for sharing your insight. I have a related question that hopefully someone in the oil drilling industry can answer. I saw a recent article in which the EIA stated that even if offshore drilling was allowed, there would be no production from those areas until 2017. That seems like an extremely long time frame. Does it really take that long?
I regularly participate in bloggers calls with the American Petroleum Institute, and this has been discussed. I think the problems is that there are a lot of delays built into the system. As I understand it, the company first bids on the new property. It then has to try to explore the new property, to see if there is any oil. This takes several years--lining up people and equipment, and if things look promising, drilling one or more test wells. Drilling rigs are in very short supply, and there can be very long (1 year +) waits for these. Permits of various types are required and this adds to the process.
If it looks like there is oil and or gas there, someone has to design a plan for extracting this resource. Once the plan is drawn up, the equipment must be obtained, and workers must be located. If oil is in a challenging area, there may need to be new specialized equipment designed and specially built for the purpose. If an oil platform is required, this may need to be built.
Pipeline for transporting the oil and associated gas will typically be needed. If the well is 200 miles out in the ocean, typically both oil and gas pipelines will be needed to extend to the new location. There may be a need to extend land pipelines as well, to connect with the new pipelines into the ocean.
If we were dealing with a standardized process with off the shelf products and without government permits required, the process would take a lot less time.
The length of time I remember hearing is seven to ten years, but I expect that ten is probably pretty typical.
It's hard to imagine you get anything else done with all the effort you put in on TOD. Much appreciated. I suspect you're familiar with Chaos Theory and Complex Adaptive Systems. I'm just a novice on the subject but it's easy to the possibilities you describe fitting into such a format. Given the proximaty and uniqueness of PO even stochastic,or "look back" modeling, might offer not offer a very clear vision of the future.
As much as I appreciate your efforts it is a little overwhelming to see all the weak points of our economy stacked up in one spot.
More approach is more to look at what I see as links, and try to see what happens in some sample cases.
I am concerned that there is a fairly close link between electrical availability and petroleum products availability. For example, if we can't get coal because of a lack of petroleum products, then there is likely to be a drop in electricity available. If electricity is lacking in certain parts of the country, this could be a major problem.
Gail, congrats on a truly remarkable article. You really separated out what is important and made it all to easily understood <--That is NOT easy to do. BRAVO!
Your concern of electricity is one that I share. IF we have a hard time getting oil, delivering oil, etc. then people will switch to electric heat, electric cars (doing this already), and our grid does not have extra capacity to replace the lost value of oil based energy. This is clearly overlooked by the MSM. I think you are dead on that this will be another crisis mixed in with the others that will hit.
You also hit on "never to be sold homes". yeegads!
I think you have done a masterful job of outlining the coming collapse with plenty of real "signals" that will be obvious if you care to look.
I keep thinking that the differences in types of mortgages might mean that the US is more likely to follow an hyperinflationary bail-out program than the UK. Although I still think the UK will inflate the money supply in propping some organisations up, and will face a rapidly weakening currency, making most of the goods we purchase as imports much more expensive. Sadly this now includes the most important things, like food and energy.
As I understand it, negative equity is less financially disruptive in the UK, as mortgagers can't so easily just hand back their house keys and walk away, free of debt (as they can in the US).
Another influencing factor though is that defaulting is much more complicated politically, and technically than monetizing debt to pay obligations. Defaults trigger events in credit derivatives markets, which may cascade out of control. Inflating/bailing is easier in the short term and the impact takes longer to be felt, so it's harder for people to know who to blame. Not sure this makes it inevitable, but seems more likely to me - in debtor nations anyway.
It seems like countries will try to inflate their problems away, as long as they can. Once they run into to many barriers, they may have no option but let nature take its course.
What kind of barriers do you foresee? Do you think they will be forced to stop by foreign creditors withdrawing funding? This might be the case, but I can easily imagine hyperinflation first, what do you think?
I think that the amount of debt defaulting will just become overwhelming. There will be bank defaults that cannot be covered by FDIC and FSLIC assets. There will be the big auto makers and the airlines. At some point, the State of California may default on its debt.
Before it comes to this point, there may very well be problems with creditors withdrawing funding, interest rates rising, and the exercise of balancing the budget becoming totally impossible. There may even be the problems with oil availability that I mentioned, and keeping the pipelines running. If folks at the ends of the pipelines were to get left out, this could be a very bad situation.
I suppose hyperinflation is a possibility, but with all of the defaulting debt, it seems like it would be difficult to maintain for very long.
"I suppose hyperinflation is a possibility, but with all of the defaulting debt, it seems like it would be difficult to maintain for very long."
This situation has me totally perplexed. We are going to do bailouts- that we can foresee, but is that money going to evaporate somehow? I just can't get my head wrapped around this one. It seems like a transfer of increasingly worthless money to the wealthy but they too will be dragged down. Like killing the goose who lays the golden eggs.
Money is created when people / businesses / government obtain loans and spend the proceeds. The amount of these loans looks like it will be dropping precipitously, as the various borrowers default on loans and lenders become increasingly wary of making new loans.
The government may try to bail out lenders, but even with all of this new money, it will be difficult to replace what has recently been available.
DelusionaL,
I have read that using the Case-Schiller numbers so far, about 1.3 trillion dollars of 'hallucinated wealth' (hat tip to JHK) in the form of US residential housing equity have evaporated already. Mish Shedlock, Enrico Orlandini, and other respected analysts believe that the deflationary cascade will overwhelm the capacity of the US gov't credit rating to bail out.
It is difficult to understand how and when the inflation will change over to deflation. For one thing, it happens simultaneously. (Food and energy prices have been rising while suburban real estate equity has been vanishing.)
The thing to keep in mind is that most of our assets only have full value if we're not all trying to sell them at the same time.
Another key point is that as state budgets go into deficits, they will likely choose to defund pension plans and sell off assets at bargain basement prices.
For starters, everyone should check out Chris Martenson's Crash Course. Just google:
"What would be the effect of US States becoming effectively, or practically, bankrupt? or USGOV unable to service international debt? How would this effect the UK?"
If the US goes into catastrophic bankruptcy and continues bailout/intervention + an inability to honor international debt, you can expect more strain on banks worldwide (first Europe then spreading around the world), the increased likelihood of hyperinflation worldwide through all dollar based currencies (read export markets to US) as the treasury prints money to prop up banks and service debt, and a trainwreck of export goods to the US as the dollar falls.
I don't know if things will likely move rapidly to this kind of scenario. Right now, it looks like a slow burn.
I would think so. This is one reason I think that others would be happy to squeeze us out. Who needs an oil buyer who takes 24% of the world's oil for 4% of the world's population, and can't pay for it?
This reminds me of an interview with Chris Skrebowski on global public media back in June, where he says that the US hasn't been in control of demand due to it's stagnant economy for months versus Asia/China.
We appear to be at a unique point in history. The US isn't driving demand for once, therefore it can't set the price with its current stagnation from the international market to lower prices significantly. It would have to take a drastic usage drop to lower prices.
So let's say for every 2% oil usage drop the slack is taken up elsewhere. The price therefore remains the same or rises. As long as there is oil around needed for growth, price won't go down. There would have to be an excessive decline in that 24%. I'm sure it's possible, but wouldn't that mean deep recession/depression levels? What is a depression level usage of oil in the US?
However this plays, excess will just go to growing economies, and those who can afford it, re: not Europe or N.A. Therefore China et al are setting prices, and our analysis would seem to require a shift to a worldwide view as well if we wish to remain kept in the loop.
I am sure you have read about the collapse of the World Trade Organization talks at Doha. I am sure a big piece of this is the new power of the countries with growing oil usage, as discussed in this WSJ article. The US has been able to dictate how trade would operate for many years, but this power is going away.
Before getting too carried away, it's important to note that this is (for all practical purposes) impossible. As a sovereign issuer of currency, the U.S. Gov. can always pay it's debts, since it doesn't have to obtain dollars from any external source (note that this doesn't apply to countries like Argentina that owed large debts denominated in other currencies). The only way the U.S. could cease to honer its obligations is if the U.S. congress decided not to cash U.S. treasury checks - not inconceivable, but highly unlikely.
If our dollars aren't worth very much, our lenders won't be very happy when paid back in inflated money. Also, we have a lot of debt to roll over, and new interest rates won't be very favorable, in this scenario.
You still are not understanding the world from the point of view of an issuer of currency. The U.S. gov. (or any other sovereign issuer of currency) does not have "lenders" in the proper sense. As a matter of operational reality, the U.S. government must first spend money into existence in order for it to be available to be "borrowed". In reality, the only reason for the U.S. to exchange interest bearing instruments for non-interest-bearing currency is to support a non-zero interest rate. Japan ran deficits over 9% of GDP for years during the 90's, ended up with a debt-to-GDP ratio of over 150%, and still had interest rates of roughly 0%. Again, this is not magic - it is the operational reality of a currency issuer in a non-fixed rate regime.
I'm not saying there aren't real problems with the real economy. But to float words like "bankruptcy" that simply don't apply is to fog the real issues.
Ah the dreaded Japan analogies that will not die. Japan has always run strong trade surpluses, unlike the USA. If you think the USA can just print paper indefinitely and foreign suppliers will be content to accept such paper in return for valuable goods (even though the USA does not have comparable dollar value goods to sell in exchange) you are probably surprised that the housing bubble "that never was" blew up. It is fun though-just print up magic paper, provide nothing and get everything.
taking the analogy of paying for energy with 'paper' further, the US has WAY more energy than does Japan, and this disparity largens on a per capita per square mile basis. So in the end, we have endogenous fossil energy sources (though not as much as we 'need') and Japan does not. They have just been more thrifty in how they spend their energy (i.e. no military to speak of)
Japan definitely has energy issues, but my point is that, as you state, Japan is not the USA. The USA has been borrowing from foreigners for many years now as a means of propping up the consumption economy, which is just another artificial bubble. The question is what is the longer term actual value of the US dollar, i.e. the value at which the country no longer needs to run trade deficits. This value appears to be very low-probably the strongest offset would be dramatically higher food prices. This is one part of the ethanol (corn and otherwise) story that is seldom quantified.
I agree that the statement "bankrupt" is extreme, but as BrianT says it is not just as easy as printing money.
States most certainly do have lenders Jimbo and it is called the international bond market.
There are many debt markets for every country. First, is the domestic private debt market--the rate that banks charge each other for overnight loans known as the Fed Funds rate in the United States. This market was not backed by the Treasury until Paulson crossed the Rubicon and the final nationalization of the United States banking system by Bush signing the housing bill. Second, is the domestic governmental debt market known as state and municipal bonds in the United States--these are backed by the state or local government--usually the federal governmental will try to intervene rather than one of these fail.
Third, and most importantly, is the actual international bond market.
Japan was a "good" country that the international finance system supported (for a price) during its housing bubble burst in 1990. In that case, the government propped up banks with government funds because otherwise they would have collapsed as they could not have maintained reserves upon writing down assets and the entire thing would have went down. In effect, the private banking system became public as public money provided the financing for the private banking system. Thus, when the government took all this private debt onto its balance sheet in the 1990's we saw governmental debt rates rise, while the Bank Of Japan rates drop to zero or lower. Look at the growth in JGB and the rates paid from 1990 onward:
The international bond market provided funds to Japan in JGBs (at higher rates) so that the national banking sector could keep giving loans to consumers for almost nothing so the economy did not completely shut down. But they had a lost decade because the expense of paying those rates weighed on the real ecomony, foreign capital did not want to invest in such a slow economy and capital fled the Nikkei, and the Yen strengthened as the rates on JGB increased similar to when Volker raised rates in the early 1980's to high levels and this hurt their exporting business as their cars, electronics, etc. were not as "cheap" as before reducing their trade surplus further slowing the economy.
Now what happens if you are not a "good" country and the international bond market abandons you? Zimbabwe had public debt that their trading partners required be paid or they would cease trade. Zimbabwe was viewed as a "bad" country, I have no opinion on good or bad here I'm simply trying to visualize structure, and the international bond market stopped providing financing. Therefore, to continue to receive goods from trading partners they needed to pay their debts and the only way to do so was to print currency and the hyperinflationary spiral began.
The same thing happened in Argentina, and since capital fled, there was no money in the banks and access to the banks had to be restricted.
As to America, I am of the opinion that it is considered a good country even if not well liked right now in the world and will get financing. In addition, like it or not, America is the police of the world and I don't think any country really wants to see America collapse into nothing. Also, the exit tax is designed to prevent the wealthy from renoucing citizenship and fleeing with their capital without paying large amounts of taxes on their wealth hindering capital flight. And the U.S. has the muscle to back such a law. I could be wrong.
The increased activity between the European Central Bank and the Federal Reserve, such as accepting covered bonds as collateral and currency swaps, leads me to believe they have joined ranks and therefore the value of the dollar will be a function of the differential between the Federal Funds Rate, the ECB bank rate, and the strength of the Yuan. The ECB can issue currency and swap for dollars and put them on the shelf reducing supply to support the value along with the Chinese. I think they want the dollar weak--but just not too weak--cheap to buy our assets, increases our exports, and increases the cost of oil curbing consumption.
As to future speculation, the following is extrodinarily rampant, totally imaginary and perhaps connecting dots where there is absolutely no basis for doing so, but its my current flight of fancy:
Everyone knows that London and Zurich are absolute centers of finance and Sterling and the Swiss Franc did not join under the Euro. Everyone knows the housing situation in Britian is worse than here and the bad thing for many British banks is that they hold the bloated mortgages on their books--they can't dump them to private equity like covered bonds or CDOs. This could require more Northern Rocks and eventually the Bank of England could be sunk as its not clear how the international bond market would treat Britian.
The Fed will have a derivative clearing house created by December 31 as security in the event a major market maker fails:
Market maker as in a primary dealer? Or market maker as the Bank of England? Perhaps the Old Lady of Threadneedle has become too old. The top banks are leaving the square mile of London:
Again, all crazy speculation but I quite enjoy trying to figure out the events of the day and the possible interconnections between them. This discussion makes me think of one of my favorite movie lines:
Godfather 3:
Vincent Mancini: Don Lucchesi, you are a man of finance and politics. These things I don't understand.
Don Lucchesi: You understand guns?
Vincent Mancini: Yes.
Don Lucchesi: Finance is a gun. Politics is knowing when to pull the trigger.
Ben Bernanke, you have studied the Great Depression your entire career. Please take the stage.
Remember this is massive speculation on the order of Bob Shaw. The reality of these words actually occuring are about as much as a Huber-Lynch oil field where I can raise Unicorns. I am simply taking a flight of fancy.
The Bank of England has always been very powerful, in fact, in my opinion it is the most powerful central bank even more than the Federal Reserve because of the LIBOR:
In the past, the Federal Funds Rate and the LIBOR were almost always identical and one could say connected to other. The connection is that they are both dollar rates--the LIBOR determines the amount of Eurodollars on deposit for foreign central banks in the major banking houses in London and is the primary currency used to settle international transactions. Fed Funds are for domestic dollars.
We all know the dollar is the world reserve currency, and Eurodollar simply means the reserves held outside the US. As Uncle Sam runs a trade deficit, the world is flooded with Eurodollars:
The deficit next year is expected to explode. The LIBOR rises as Fed Funds stay the same since massive amount of dollars are moving out of country. A rising LIBOR (London Interbank Rate) damages London Banks as the cost of their financing increase (at the very same time they want to lower rates since their housing market is collapsing).
The Bank of England has taken direct measures to try and influence LIBOR down by pumping Sterling into the market but it hasn't been too successful:
In addition, the Bank of England now wants to cut rates to save its housing market.
On the other side, to dampen inflation from Eurodollars, the ECB raises rates and performs currency swaps increasing its float to prevent complete collapse of the dollar, along with the Yuan buying up dollars. In addition, the ECB raises rates--England is at 5%, ECB is at 4%, and Fed at 2%. If ECB is equal or higher than England then capital will flee from the Bank of England into the ECB. And the housing bust will be getting worse as the LIBOR rises.
At that point, England will likely have more Northern Rocks. And like where the US is now, will need the international bond market to fund their banks or they collapse subjecting them to the world marketplace for both finance and oil--a position they have never been in before. Will someone save them? And if so, on what terms?
The result would be the death of the LIBOR, perhaps the pound Sterling, and a major shift of power in finance away from the Bank of England.
These are scary times. I am certainly frightened. Power is shifting in a major way. I'm not sure what actions might be taken. People get violent. I don't know how long or when but things are certainly changing. The nationalization of the US banking industry is absolutely historical.
What does this have to do with oil, you ask?
Everything. Once the North Sea collapsed London was vulnerable--they would soon become an importer. Also, the international oil companies such as BP, Shell, Exxon were losing production meaning a loss in leverage concerning OPEC as Non-OPEC started to peak except Russia who is not exactly buddy-buddy with the West. The Middle East was the prize. France & Germany (members of the ECB) had contracts with Saddam Hussien for oil lined up prior to the invasion and if you remember were the countries attempting to block London and the US in the UN prior to the invasion.
London & the US went alone over the objection of the UN. Perhaps they could break OPEC open up new markets and keep financial power. But the war was not successful (maybe the amount of oil found wasn't so much) but the Pentagon needed a secure supply that was obtained in Iraq and I'm sure nobody really wanted to see Saddam stay in power. Cheney pushed to attack Iran and expand the theatre but was stopped by the Pentagon and the intelligence community. Cheney talked to Saudi king maybe pushing to attack Iran and Saudi rejected.
Not that Iran is a good state by any means, but the UN prefers crippling sanctions to war.
In my opinion, we are seeing gigantic shifts in power right now. My sincere hope is that war and violence is not used by those attempting to cling to power.
The only way the U.S. could cease to honer its obligations is if the U.S. congress decided not to cash U.S. treasury checks - not inconceivable, but highly unlikely.
You are mistaken. Should China and OPEC cease buying US debt, or conversely start unloading US debt, the dollar would collapse. Nouriel Roubini has been speculating that the end of Bretton Woods II may be near. In that case, the US would have no option but default. It is anything but unlikely. The world's central banks are getting tired of propping up the US by recycling its increasingly worthless dollars that are now causing hyperinflation in their nations.
That is why it helps to be the World's (capital W) reserve currency. What are you going to replace it with, the Euro, a recognized failed currency (links available)?
a good video you might like is Robert Newman's A brief history of oil...
He muses about Euros becoming the new reserve currency. All OPEC has to do is stop using US Dollars and use Euros instead. All those dollars would go back to the US and the US would have to exchange Dollars to Euros, flushing the market and devaluing the Dollar.. Thus the Dollar currency would crash, even more so. That all oil transactions occur in USD is probably the only thing keeping it up?
Agree with energyblog. Another thing propping up the dollar, in spite of the shambled US financial situation, is the huge amount of dollars and US investments held by Japan and Middle Eastern countries. None of these countries want to see a catastrophic decline in the dollar and probably do not dare demand other currency to replace the same because of the triggering effect this would have on further decline of the dollar. It is a catch 22 situation for those countries.
the US has major problems but the Eurozone has worse. As credit crisis continues (and we are not even half way IMO, though it may SEEM that we are - definitionally 5 standard deviation events go 2 standard deviations further than anyone expects before the fact), there will be several countries in Euro that can't pay bills without cash infusions and central banks will be forced to act - however they will have to act in unison according to charter, and in times of
Brill article Gail.
After the recent upbeat posts and optimistic comments, it's good to have some PDP ( Proper Doomer Porn ).
What would be the effect of US States becoming effectively, or practically, bankrupt? or USGOV unable to service international debt? How would this effect the UK?
I am sure there would be international repercussions. London with all of its financial industry would be especially hard hit.
There is a lot more that could be written about the subject. I want to think through the ramifications carefully before making any firm projections.
Excellent article. Thanks for sharing your insight. I have a related question that hopefully someone in the oil drilling industry can answer. I saw a recent article in which the EIA stated that even if offshore drilling was allowed, there would be no production from those areas until 2017. That seems like an extremely long time frame. Does it really take that long?
I regularly participate in bloggers calls with the American Petroleum Institute, and this has been discussed. I think the problems is that there are a lot of delays built into the system. As I understand it, the company first bids on the new property. It then has to try to explore the new property, to see if there is any oil. This takes several years--lining up people and equipment, and if things look promising, drilling one or more test wells. Drilling rigs are in very short supply, and there can be very long (1 year +) waits for these. Permits of various types are required and this adds to the process.
If it looks like there is oil and or gas there, someone has to design a plan for extracting this resource. Once the plan is drawn up, the equipment must be obtained, and workers must be located. If oil is in a challenging area, there may need to be new specialized equipment designed and specially built for the purpose. If an oil platform is required, this may need to be built.
Pipeline for transporting the oil and associated gas will typically be needed. If the well is 200 miles out in the ocean, typically both oil and gas pipelines will be needed to extend to the new location. There may be a need to extend land pipelines as well, to connect with the new pipelines into the ocean.
If we were dealing with a standardized process with off the shelf products and without government permits required, the process would take a lot less time.
The length of time I remember hearing is seven to ten years, but I expect that ten is probably pretty typical.
Gail,
It's hard to imagine you get anything else done with all the effort you put in on TOD. Much appreciated. I suspect you're familiar with Chaos Theory and Complex Adaptive Systems. I'm just a novice on the subject but it's easy to the possibilities you describe fitting into such a format. Given the proximaty and uniqueness of PO even stochastic,or "look back" modeling, might offer not offer a very clear vision of the future.
As much as I appreciate your efforts it is a little overwhelming to see all the weak points of our economy stacked up in one spot.
More approach is more to look at what I see as links, and try to see what happens in some sample cases.
I am concerned that there is a fairly close link between electrical availability and petroleum products availability. For example, if we can't get coal because of a lack of petroleum products, then there is likely to be a drop in electricity available. If electricity is lacking in certain parts of the country, this could be a major problem.
Gail, congrats on a truly remarkable article. You really separated out what is important and made it all to easily understood <--That is NOT easy to do. BRAVO!
Your concern of electricity is one that I share. IF we have a hard time getting oil, delivering oil, etc. then people will switch to electric heat, electric cars (doing this already), and our grid does not have extra capacity to replace the lost value of oil based energy. This is clearly overlooked by the MSM. I think you are dead on that this will be another crisis mixed in with the others that will hit.
You also hit on "never to be sold homes". yeegads!
I think you have done a masterful job of outlining the coming collapse with plenty of real "signals" that will be obvious if you care to look.
A job well done.
D
It's also clearly overlooked by many promoting techno fixes on this site.
Thanks!
I keep thinking that the differences in types of mortgages might mean that the US is more likely to follow an hyperinflationary bail-out program than the UK. Although I still think the UK will inflate the money supply in propping some organisations up, and will face a rapidly weakening currency, making most of the goods we purchase as imports much more expensive. Sadly this now includes the most important things, like food and energy.
As I understand it, negative equity is less financially disruptive in the UK, as mortgagers can't so easily just hand back their house keys and walk away, free of debt (as they can in the US).
Another influencing factor though is that defaulting is much more complicated politically, and technically than monetizing debt to pay obligations. Defaults trigger events in credit derivatives markets, which may cascade out of control. Inflating/bailing is easier in the short term and the impact takes longer to be felt, so it's harder for people to know who to blame. Not sure this makes it inevitable, but seems more likely to me - in debtor nations anyway.
It seems like countries will try to inflate their problems away, as long as they can. Once they run into to many barriers, they may have no option but let nature take its course.
What kind of barriers do you foresee? Do you think they will be forced to stop by foreign creditors withdrawing funding? This might be the case, but I can easily imagine hyperinflation first, what do you think?
I think that the amount of debt defaulting will just become overwhelming. There will be bank defaults that cannot be covered by FDIC and FSLIC assets. There will be the big auto makers and the airlines. At some point, the State of California may default on its debt.
Before it comes to this point, there may very well be problems with creditors withdrawing funding, interest rates rising, and the exercise of balancing the budget becoming totally impossible. There may even be the problems with oil availability that I mentioned, and keeping the pipelines running. If folks at the ends of the pipelines were to get left out, this could be a very bad situation.
I suppose hyperinflation is a possibility, but with all of the defaulting debt, it seems like it would be difficult to maintain for very long.
"I suppose hyperinflation is a possibility, but with all of the defaulting debt, it seems like it would be difficult to maintain for very long."
This situation has me totally perplexed. We are going to do bailouts- that we can foresee, but is that money going to evaporate somehow? I just can't get my head wrapped around this one. It seems like a transfer of increasingly worthless money to the wealthy but they too will be dragged down. Like killing the goose who lays the golden eggs.
Comments?
D
Money is created when people / businesses / government obtain loans and spend the proceeds. The amount of these loans looks like it will be dropping precipitously, as the various borrowers default on loans and lenders become increasingly wary of making new loans.
The government may try to bail out lenders, but even with all of this new money, it will be difficult to replace what has recently been available.
DelusionaL,
I have read that using the Case-Schiller numbers so far, about 1.3 trillion dollars of 'hallucinated wealth' (hat tip to JHK) in the form of US residential housing equity have evaporated already. Mish Shedlock, Enrico Orlandini, and other respected analysts believe that the deflationary cascade will overwhelm the capacity of the US gov't credit rating to bail out.
We shall see.
Errol in Miami
It is difficult to understand how and when the inflation will change over to deflation. For one thing, it happens simultaneously. (Food and energy prices have been rising while suburban real estate equity has been vanishing.)
The thing to keep in mind is that most of our assets only have full value if we're not all trying to sell them at the same time.
Another key point is that as state budgets go into deficits, they will likely choose to defund pension plans and sell off assets at bargain basement prices.
For starters, everyone should check out Chris Martenson's Crash Course. Just google:
end of money crash course
"What would be the effect of US States becoming effectively, or practically, bankrupt? or USGOV unable to service international debt? How would this effect the UK?"
If the US goes into catastrophic bankruptcy and continues bailout/intervention + an inability to honor international debt, you can expect more strain on banks worldwide (first Europe then spreading around the world), the increased likelihood of hyperinflation worldwide through all dollar based currencies (read export markets to US) as the treasury prints money to prop up banks and service debt, and a trainwreck of export goods to the US as the dollar falls.
I don't know if things will likely move rapidly to this kind of scenario. Right now, it looks like a slow burn.
If US goes into a fast decline wont they free up oil for the rest of the world?
I would think so. This is one reason I think that others would be happy to squeeze us out. Who needs an oil buyer who takes 24% of the world's oil for 4% of the world's population, and can't pay for it?
This reminds me of an interview with Chris Skrebowski on global public media back in June, where he says that the US hasn't been in control of demand due to it's stagnant economy for months versus Asia/China.
We appear to be at a unique point in history. The US isn't driving demand for once, therefore it can't set the price with its current stagnation from the international market to lower prices significantly. It would have to take a drastic usage drop to lower prices.
So let's say for every 2% oil usage drop the slack is taken up elsewhere. The price therefore remains the same or rises. As long as there is oil around needed for growth, price won't go down. There would have to be an excessive decline in that 24%. I'm sure it's possible, but wouldn't that mean deep recession/depression levels? What is a depression level usage of oil in the US?
However this plays, excess will just go to growing economies, and those who can afford it, re: not Europe or N.A. Therefore China et al are setting prices, and our analysis would seem to require a shift to a worldwide view as well if we wish to remain kept in the loop.
I am sure you have read about the collapse of the World Trade Organization talks at Doha. I am sure a big piece of this is the new power of the countries with growing oil usage, as discussed in this WSJ article. The US has been able to dictate how trade would operate for many years, but this power is going away.
Before getting too carried away, it's important to note that this is (for all practical purposes) impossible. As a sovereign issuer of currency, the U.S. Gov. can always pay it's debts, since it doesn't have to obtain dollars from any external source (note that this doesn't apply to countries like Argentina that owed large debts denominated in other currencies). The only way the U.S. could cease to honer its obligations is if the U.S. congress decided not to cash U.S. treasury checks - not inconceivable, but highly unlikely.
And what would be the value of said currency?
If our dollars aren't worth very much, our lenders won't be very happy when paid back in inflated money. Also, we have a lot of debt to roll over, and new interest rates won't be very favorable, in this scenario.
You still are not understanding the world from the point of view of an issuer of currency. The U.S. gov. (or any other sovereign issuer of currency) does not have "lenders" in the proper sense. As a matter of operational reality, the U.S. government must first spend money into existence in order for it to be available to be "borrowed". In reality, the only reason for the U.S. to exchange interest bearing instruments for non-interest-bearing currency is to support a non-zero interest rate. Japan ran deficits over 9% of GDP for years during the 90's, ended up with a debt-to-GDP ratio of over 150%, and still had interest rates of roughly 0%. Again, this is not magic - it is the operational reality of a currency issuer in a non-fixed rate regime.
I'm not saying there aren't real problems with the real economy. But to float words like "bankruptcy" that simply don't apply is to fog the real issues.
Ah the dreaded Japan analogies that will not die. Japan has always run strong trade surpluses, unlike the USA. If you think the USA can just print paper indefinitely and foreign suppliers will be content to accept such paper in return for valuable goods (even though the USA does not have comparable dollar value goods to sell in exchange) you are probably surprised that the housing bubble "that never was" blew up. It is fun though-just print up magic paper, provide nothing and get everything.
taking the analogy of paying for energy with 'paper' further, the US has WAY more energy than does Japan, and this disparity largens on a per capita per square mile basis. So in the end, we have endogenous fossil energy sources (though not as much as we 'need') and Japan does not. They have just been more thrifty in how they spend their energy (i.e. no military to speak of)
Japan definitely has energy issues, but my point is that, as you state, Japan is not the USA. The USA has been borrowing from foreigners for many years now as a means of propping up the consumption economy, which is just another artificial bubble. The question is what is the longer term actual value of the US dollar, i.e. the value at which the country no longer needs to run trade deficits. This value appears to be very low-probably the strongest offset would be dramatically higher food prices. This is one part of the ethanol (corn and otherwise) story that is seldom quantified.
BrianT & Jimbo,
I agree that the statement "bankrupt" is extreme, but as BrianT says it is not just as easy as printing money.
States most certainly do have lenders Jimbo and it is called the international bond market.
There are many debt markets for every country. First, is the domestic private debt market--the rate that banks charge each other for overnight loans known as the Fed Funds rate in the United States. This market was not backed by the Treasury until Paulson crossed the Rubicon and the final nationalization of the United States banking system by Bush signing the housing bill. Second, is the domestic governmental debt market known as state and municipal bonds in the United States--these are backed by the state or local government--usually the federal governmental will try to intervene rather than one of these fail.
Third, and most importantly, is the actual international bond market.
Japan was a "good" country that the international finance system supported (for a price) during its housing bubble burst in 1990. In that case, the government propped up banks with government funds because otherwise they would have collapsed as they could not have maintained reserves upon writing down assets and the entire thing would have went down. In effect, the private banking system became public as public money provided the financing for the private banking system. Thus, when the government took all this private debt onto its balance sheet in the 1990's we saw governmental debt rates rise, while the Bank Of Japan rates drop to zero or lower. Look at the growth in JGB and the rates paid from 1990 onward:
https://www.mof.go.jp/english/bonds/saimukanri/2004/saimu02b_04_e.pdf
The international bond market provided funds to Japan in JGBs (at higher rates) so that the national banking sector could keep giving loans to consumers for almost nothing so the economy did not completely shut down. But they had a lost decade because the expense of paying those rates weighed on the real ecomony, foreign capital did not want to invest in such a slow economy and capital fled the Nikkei, and the Yen strengthened as the rates on JGB increased similar to when Volker raised rates in the early 1980's to high levels and this hurt their exporting business as their cars, electronics, etc. were not as "cheap" as before reducing their trade surplus further slowing the economy.
Now what happens if you are not a "good" country and the international bond market abandons you? Zimbabwe had public debt that their trading partners required be paid or they would cease trade. Zimbabwe was viewed as a "bad" country, I have no opinion on good or bad here I'm simply trying to visualize structure, and the international bond market stopped providing financing. Therefore, to continue to receive goods from trading partners they needed to pay their debts and the only way to do so was to print currency and the hyperinflationary spiral began.
The same thing happened in Argentina, and since capital fled, there was no money in the banks and access to the banks had to be restricted.
As to America, I am of the opinion that it is considered a good country even if not well liked right now in the world and will get financing. In addition, like it or not, America is the police of the world and I don't think any country really wants to see America collapse into nothing. Also, the exit tax is designed to prevent the wealthy from renoucing citizenship and fleeing with their capital without paying large amounts of taxes on their wealth hindering capital flight. And the U.S. has the muscle to back such a law. I could be wrong.
The increased activity between the European Central Bank and the Federal Reserve, such as accepting covered bonds as collateral and currency swaps, leads me to believe they have joined ranks and therefore the value of the dollar will be a function of the differential between the Federal Funds Rate, the ECB bank rate, and the strength of the Yuan. The ECB can issue currency and swap for dollars and put them on the shelf reducing supply to support the value along with the Chinese. I think they want the dollar weak--but just not too weak--cheap to buy our assets, increases our exports, and increases the cost of oil curbing consumption.
As to future speculation, the following is extrodinarily rampant, totally imaginary and perhaps connecting dots where there is absolutely no basis for doing so, but its my current flight of fancy:
Everyone knows that London and Zurich are absolute centers of finance and Sterling and the Swiss Franc did not join under the Euro. Everyone knows the housing situation in Britian is worse than here and the bad thing for many British banks is that they hold the bloated mortgages on their books--they can't dump them to private equity like covered bonds or CDOs. This could require more Northern Rocks and eventually the Bank of England could be sunk as its not clear how the international bond market would treat Britian.
The Fed will have a derivative clearing house created by December 31 as security in the event a major market maker fails:
http://www.bloomberg.com/apps/news?pid=20601087&sid=a.66zDrlc08c&refer=h...
Market maker as in a primary dealer? Or market maker as the Bank of England? Perhaps the Old Lady of Threadneedle has become too old. The top banks are leaving the square mile of London:
http://www.marketwatch.com/news/story/jpmorgan-chase-eyes-londons-canary...
Perhaps the sun does set on the British Empire?
Again, all crazy speculation but I quite enjoy trying to figure out the events of the day and the possible interconnections between them. This discussion makes me think of one of my favorite movie lines:
Godfather 3:
Vincent Mancini: Don Lucchesi, you are a man of finance and politics. These things I don't understand.
Don Lucchesi: You understand guns?
Vincent Mancini: Yes.
Don Lucchesi: Finance is a gun. Politics is knowing when to pull the trigger.
Ben Bernanke, you have studied the Great Depression your entire career. Please take the stage.
Let the games begin!
And if the Bank of England were to fail, what might the consequences of that be?
The world would have to learn a new way to finance it's business activities.
Remember this is massive speculation on the order of Bob Shaw. The reality of these words actually occuring are about as much as a Huber-Lynch oil field where I can raise Unicorns. I am simply taking a flight of fancy.
The Bank of England has always been very powerful, in fact, in my opinion it is the most powerful central bank even more than the Federal Reserve because of the LIBOR:
http://www.bba.org.uk/bba/jsp/polopoly.jsp?d=225&a=1416&view=print
As the Fed influences the Federal Funds rate, the Bank of England influences the London Interbank Offered Rate (LIBOR).
http://en.mimi.hu/business/libor.html
In the past, the Federal Funds Rate and the LIBOR were almost always identical and one could say connected to other. The connection is that they are both dollar rates--the LIBOR determines the amount of Eurodollars on deposit for foreign central banks in the major banking houses in London and is the primary currency used to settle international transactions. Fed Funds are for domestic dollars.
http://en.wikipedia.org/wiki/Eurodollar
We all know the dollar is the world reserve currency, and Eurodollar simply means the reserves held outside the US. As Uncle Sam runs a trade deficit, the world is flooded with Eurodollars:
http://beginnersinvest.about.com/od/banking/a/aa071105a.htm
The deficit next year is expected to explode. The LIBOR rises as Fed Funds stay the same since massive amount of dollars are moving out of country. A rising LIBOR (London Interbank Rate) damages London Banks as the cost of their financing increase (at the very same time they want to lower rates since their housing market is collapsing).
The Bank of England has taken direct measures to try and influence LIBOR down by pumping Sterling into the market but it hasn't been too successful:
http://news.bbc.co.uk/1/hi/business/7002628.stm
http://business.timesonline.co.uk/tol/business/economics/article3705920....
http://www.marketoracle.co.uk/Article4437.html
In addition, the Bank of England now wants to cut rates to save its housing market.
On the other side, to dampen inflation from Eurodollars, the ECB raises rates and performs currency swaps increasing its float to prevent complete collapse of the dollar, along with the Yuan buying up dollars. In addition, the ECB raises rates--England is at 5%, ECB is at 4%, and Fed at 2%. If ECB is equal or higher than England then capital will flee from the Bank of England into the ECB. And the housing bust will be getting worse as the LIBOR rises.
At that point, England will likely have more Northern Rocks. And like where the US is now, will need the international bond market to fund their banks or they collapse subjecting them to the world marketplace for both finance and oil--a position they have never been in before. Will someone save them? And if so, on what terms?
The result would be the death of the LIBOR, perhaps the pound Sterling, and a major shift of power in finance away from the Bank of England.
These are scary times. I am certainly frightened. Power is shifting in a major way. I'm not sure what actions might be taken. People get violent. I don't know how long or when but things are certainly changing. The nationalization of the US banking industry is absolutely historical.
What does this have to do with oil, you ask?
Everything. Once the North Sea collapsed London was vulnerable--they would soon become an importer. Also, the international oil companies such as BP, Shell, Exxon were losing production meaning a loss in leverage concerning OPEC as Non-OPEC started to peak except Russia who is not exactly buddy-buddy with the West. The Middle East was the prize. France & Germany (members of the ECB) had contracts with Saddam Hussien for oil lined up prior to the invasion and if you remember were the countries attempting to block London and the US in the UN prior to the invasion.
London & the US went alone over the objection of the UN. Perhaps they could break OPEC open up new markets and keep financial power. But the war was not successful (maybe the amount of oil found wasn't so much) but the Pentagon needed a secure supply that was obtained in Iraq and I'm sure nobody really wanted to see Saddam stay in power. Cheney pushed to attack Iran and expand the theatre but was stopped by the Pentagon and the intelligence community. Cheney talked to Saudi king maybe pushing to attack Iran and Saudi rejected.
Not that Iran is a good state by any means, but the UN prefers crippling sanctions to war.
In my opinion, we are seeing gigantic shifts in power right now. My sincere hope is that war and violence is not used by those attempting to cling to power.
You are mistaken. Should China and OPEC cease buying US debt, or conversely start unloading US debt, the dollar would collapse. Nouriel Roubini has been speculating that the end of Bretton Woods II may be near. In that case, the US would have no option but default. It is anything but unlikely. The world's central banks are getting tired of propping up the US by recycling its increasingly worthless dollars that are now causing hyperinflation in their nations.
That is why it helps to be the World's (capital W) reserve currency. What are you going to replace it with, the Euro, a recognized failed currency (links available)?
How is the Euro supposedly failed?
a good video you might like is Robert Newman's A brief history of oil...
He muses about Euros becoming the new reserve currency. All OPEC has to do is stop using US Dollars and use Euros instead. All those dollars would go back to the US and the US would have to exchange Dollars to Euros, flushing the market and devaluing the Dollar.. Thus the Dollar currency would crash, even more so. That all oil transactions occur in USD is probably the only thing keeping it up?
Agree with energyblog. Another thing propping up the dollar, in spite of the shambled US financial situation, is the huge amount of dollars and US investments held by Japan and Middle Eastern countries. None of these countries want to see a catastrophic decline in the dollar and probably do not dare demand other currency to replace the same because of the triggering effect this would have on further decline of the dollar. It is a catch 22 situation for those countries.
disagree with energyblog.
the US has major problems but the Eurozone has worse. As credit crisis continues (and we are not even half way IMO, though it may SEEM that we are - definitionally 5 standard deviation events go 2 standard deviations further than anyone expects before the fact), there will be several countries in Euro that can't pay bills without cash infusions and central banks will be forced to act - however they will have to act in unison according to charter, and in times of