Sagarin wrote:
coach d wrote:The Fed CANNOT turn us into Japan. The Japanese owe that money to themselves, not outside investors, and the USA could not get anywhere near 170% GDP in public debt without major international ramifications (i.e., no purchases of debt except at much higher rates).
More on the cliff not being exactly the end of the world:
http://www.latimes.com/business/money/la-fi-mo-fiscal-cliff-economic-forecast-20121128,0,7080142.storyI think the investment theory ramifications are "buy the rumor, sell the fact". They (companies and investors) have been in the process of "buying the cliff", just like they bought the Obama reelection and sold immediately upon the fact coming true.
I'd dearly love to know what Mr. Buffet is doing (not saying) right now, but it looks to me like a bunch of folks who should know better are in the process of dumping some of their winners. Personally, I'm hoping to buy some good companies at fire sale prices.
Of course I'm using Japan as a bit of a metaphor in that they do not possess the world's reserve currency, their savings rate has historically been much higher than ours, their demographic situation is much worse (though we are headed there), and they import all of their oil. However, they are still suffering the aftermath of massive overleverage and failed Keynesian policies of one stimulus plan after another and QE-to-perpetuity.
I believe the CBO baseline projections on growth to be overly optimistic, and our ratio of debt to GDP could skyrocket in a hurry. Yes, there could be a bond market revolt, but the Fed would merely double down with probably unsterilized money printing in that case. Our total debt to GDP ratio, including entitlements, is roughly 350%, and I'm not sure how that compares to Japan. Of course, we will see massive entitlement cuts and reform if the bond vigilantes start acting up as we need to service the cash flow obligations to appease our creditors.
However, I still see deflation/disinflation as the most serious threat, which is why growth is anemic and yields far out on the curve are so low (and likely headed lower). We are already on our second lost decade, the Fed is out of ideas, except pulling out the bazookas, and somehow the whitehouse thinks merely returning to "Clinton-era" rates and cutting spending by a mere $4 trillion over a decade will get the job done. Talk about being out of touch. We really almost need to go over the "cliff," because it's a start, and if we merely do a patch, we will be facing another downgrade (though, truthfully, we're already there). Once the Euro-Zone starts to really suffer the fate of its own failed Keynesian policy, the sovereign debt crisis will reach our shores. But we are not there yet.
Where's the "Gang of Six" when we need them?
"Forget the Fiscal Cliff: it is merely a much needed economic distraction for the next 3-4 months (distracting from what? Why Europe of course). Yes, it will be resolved, and yes taxes will go up, and yes, debates over it will most likely be carried over into 2013 and nothing will be compromised until the ultimate debt ceiling deadline (because it is really a Fiscal Cliff-Debt Ceiling package deal) is hit some time in March 2013, but eventually one or both parties will cave, right after the market plunges to put it all into the proper perspective as it did around the time of TARP and the August 2011 debt ceiling debate, and a resolution will materialize. The bigger issue has nothing to do with the Fiscal Cliff, which is indeed a sideshow. The bigger issue, as Art Cashin explains, has everything to do with a secular decline in the US economy, where a 1% growth rate will soon be the "New Killing It", where millions more (in part-time workers) will soon be let go, and where businesses no longer generate the cash flows needed to stay open. Art Cashin explains."
http://www.zerohedge.com/news/2012-12-04/out-fiscal-cliff-and-fire-art-cashin-real-looming-malaise
Coach D, this is what I've been trying to convey to you:
http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2012/12/TSY%20market%20duration_0.gif"The chart shows, without a doubt, that the Fed is now the sole monopolist of Treasury demand expressed in mid-modified duration - i.e., the risk parameter most relevant to the Fed as it attempts to push everyone into higher risk assets (when instead all it is doing is merely allowing everyone to frontrun it). It also shows that in the past 3 years, the Private Sector has had its exposure to US Treasurys grow by virtually a non-existent amount, a simple fact that would make the head of steeped in theory and clueless of actual practice hollow pundits, such as Paul Krugman, explode.
To put it simply, the Fed's QE can not stop as there is no real market, or demand for TSYs expressed in duration terms, a fact the Fed's 4 year meddling in the market has been able to conceal quite effectively. Alas, the Fed knows this. The Fed also knows that in a country which will continue piling up $1 trillion + deficits forever, there will always have to be a backstop funder of the US deficit. Since China is long gone as a buyer of US paper, this only leaves the Fed.
In other words, the simplest reason why the Fed will never exit is because the US will never again run a budget surplus, meaningless discussions over what a token $80 billion a year tax increase (which will fund the US deficit for 2-3 weeks) will do notwithstanding, and the Fed will need to monetize ever more US-sourced paper until Bernanke and his successor after 2014 are the only "market" for bonds left standing."