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The point of no return



June 03, 2009 – Comments (12)

Naked capitalism has a post titled about rich wealth, but what got my interest was the discussion on the point of no return on fiscal budgets, or rather, what is considered the point of no return.

Truly, he describe's today's wealthy, and they are not the wealthy of yesterday, doctors, lawyers, etc., but people involved in creating the biggest bubble in history and reflects that somehow these people won't be the wealthy of tomorrow or at least would have problems becoming wealthy, awe, too bad...

I bring up who the wealthy are and everytime I look, I see a lot of problems with ability to analyse the markets.  There was this massive bubble to ride and it seems to me that practically anyone could have done well and there were few exceptional skills.  There were some, but butt stupid and grossly incompetent analysis also did well in many cases.

In any event, what he describes as the point of no return seems highly optimistic to me.  It looks based on more recent history and not taking into consideration today's circumstances that are different.

And that also brings me to an interesting discussion I had with a friend, who made these comments when reviewing the article:

 I am certain that the solution to our problem is not borrowing more money.  I cannot see the logic in solving individual debt problems by having the nation behave the same way as a whole.  at the same time we are oppressing our employers who will pick up their marbles and play in another sandbox if we're not careful.

I am just wondering if the whole thing will come down and what life will be like for my kids.  Most people don't know about hadrian's wall.  It's where the roman empire walled off england from the blue devil (scots) and gave up.   It's their last stand before it collapsed 1500 years ago. They had central heat, sauna,  running water, urinals, somehow civilization went back to outhouses for 1200 years after it.  Every major empire has fallen from within, they don't get overrun, they collapse under their own weight, egypt, greece, rome, spanish, british.  You build until it's not sustainable.

I think that assessment is true and now the question becomes will the weight be reduced to prevent a collapse or will the path that just keeps adding to the weight load continue?




12 Comments – Post Your Own

#1) On June 03, 2009 at 10:57 AM, kaskoosek (29.94) wrote:

Point of no return commenced when the fed decided to buy treasury.


That is what I call a bout of retardation.

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#2) On June 03, 2009 at 11:10 AM, AdirondackFund (< 20) wrote:

Except that we work and live and eat and socialize around a principle little known, or even acknowledged.  It is called 'enlightened self interest'.  How is it in my self interest to allow my Government to vaporize the buying power of MY MONEY simply because they can't balance their budget and have to dilute MY MONEY further in order to BAIL THEMSELVES my expense?  How, for the love of Pete, is that even remotely in line with my own ENLIGHTENED SELF INTEREST????

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#3) On June 03, 2009 at 11:21 AM, RootnToot (29.44) wrote:

It is transcendently frightening that the government thinks that they can spend us out of this mess.As Ron White says, 'You can't fix Stupid"!

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#4) On June 03, 2009 at 11:31 AM, jstegma (28.69) wrote:

Very good post. 

The wealthy who created the bubble and got rich doing so will still be rich.  The government took care of them first with the bailouts of insolvent banks and more importantly AIG's CDS portfolio.  The rich got bailed out and everyone else got pretty much nothing.

The point of no return is out there.  The closer we get, the more pain will be required to avoid getting there.  At some point we'll come to the "get realistic point", hopefully before it's too late.

The rise and fall of empires is an important factor in long term investing.  I think it is probably the answer to my "widow's mite" conundrum - if she'd invested her 2 copper coins at 2% above inflation instead of throwing them in the temple collection, today she'd have $2 quadrillion.  2% doesn't sound that impressive, but in reality, it's amazing and even impossible.  We talk about the stock market averaging 8% or something, but that's a lot of hogwash in the long run.  It only works during periods of huge expansion, like the past century or two.  It can't possibly continue like it has over that time.  


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#5) On June 03, 2009 at 11:38 AM, ralphmachio (< 20) wrote:

They are providing an exit for the rich before the whole thing gives way. At the last moment, gold and silver will be where everyone flocks, if there is any civilization at all.

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#6) On June 03, 2009 at 11:38 AM, kaskoosek (29.94) wrote:

Gross Says Diversify From Dollar as Deficits Surge (Update3)
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By Dakin Campbell

June 3 (Bloomberg) -- Bill Gross, founder of Pacific Investment Management Co., advised holders of U.S. dollars to diversify before central banks and sovereign wealth funds ultimately do the same amid concern about surging deficits.

The U.S.’s “fortune-producing capabilities seem to be declining, which might suggest that its relative standard of living is doing so as well,” Gross wrote in his June investment outlook posted today on the Newport Beach, California-based firm’s Web site. “If so, the implications are serious.”

Gross, manager of the world’s biggest bond fund, said on May 21 that the U.S. will “eventually” lose its AAA credit rating after Standard & Poor’s lowered its outlook on the U.K.’s AAA to “negative” from “stable” amid an escalating ratio of debt-to-gross domestic product. While U.S. marketable debt is at about 45 percent of GDP, annual deficits of 10 percent will push the amount to 100 percent within five years, a level that rating companies and markets view as a “point of no return,” he said.

Government spending will push the budget deficit to $1.75 trillion in the year ending Sept. 30, according to the Congressional Budget Office’s forecast. The gap will be narrowed to “roughly” 3 percent of GDP from a projected 12.9 percent this year, Treasury Secretary Timothy Geithner said June 1.

‘Years to Come’

Federal Reserve Chairman Ben S. Bernanke said today that large U.S. budget deficits threaten financial stability and the government can’t continue indefinitely to borrow at the current rate to finance the shortfall.

The U.S. growth rate “requires a government checkbook for years to come,” Gross said. Coupled with Medicare and Social Security entitlements, government borrowing could reach 300 percent of GDP, meaning “the Chinese and other surplus nations cannot fund the deficit even if they were fully on board,” he wrote.

China, the largest U.S. creditor, with $767.9 billion of debt, has shifted purchases of Treasuries into shorter-maturity securities amid concern about unprecedented debt sales.

Geithner, speaking yesterday in an interview in Beijing with Chinese state media outlets, said he has “found a lot of confidence” in the U.S. economy during his trip to China.

Investors should position themselves in the front end of the yield curve as long-term Treasury yields likely move higher, steepening the so-called yield curve, Gross wrote.

Currency Diversification

Gross reduced his holdings of government-related bonds in the $150 billion Total Return Fund in April for the first time since January, according to company data. In addition to Treasuries, the government debt category can include inflation- linked Treasuries, so-called agency debt, interest-rate derivatives and bank debt backed by the FDIC.

The dollar weakened beyond $1.43 against the euro yesterday for the first time in 2009 on bets record U.S. borrowing will undermine the greenback, prompting nations to consider alternatives to the world’s main reserve currency.

Russian President Dmitry Medvedev may discuss his proposal to create a new world currency when he meets counterparts from Brazil, India and China this month, Natalya Timakova, a spokeswoman for the president, told reporters yesterday. Russia’s proposals for the Group of 20 meeting in London in April included studying a supranational currency.

The U.S. currency climbed 0.8 percent to $1.4186 per euro at 10:13 a.m. in New York, from $1.4303 yesterday, in the biggest intraday advance since May 27. The dollar traded at 95.82 yen, compared with 95.76.

International Investors

The government has pledged $12.8 trillion to open credit markets and snap the longest U.S. economic slump since the 1930s. The Fed will buy as much as $1.75 trillion in Treasuries and housing-related debt to drive down consumer borrowing costs. That could have “inflationary implications,” Gross said.

“Our expectation is the government won’t be able to exit” from those positions, Gross said in an interview on Bloomberg Radio today. The programs “will be semi-permanent positions on their balance sheets.”

For all the hand-wringing over the dollar’s slide, expanding deficits and declining credit ratings, the bond market shows international demand for American financial assets is as high as ever. The Federal Reserve’s holdings of Treasuries on behalf of central banks and institutions from China to Norway rose by $68.8 billion, or 3.3 percent, in May, the third most on record, data compiled by Bloomberg show.

The Total Return Fund rose 4.8 percent in 2008, beating 93 percent of its peers, data compiled by Bloomberg show. The fund has returned 1.5 percent this year, according to Pimco data.

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#7) On June 03, 2009 at 11:45 AM, biotechmgr (< 20) wrote:

Excellent piece. The solution to debt is not more debt. It just doubled down the bet on keeping the bubble inflated which instead may, as suggested by your friend, take down our current civilization.

 Anyone interested in a view of life after a major disruption might be interested in reading "Earth Abides". Reason for the disruption different, but you would learn what to do with your pocket change after it is no longer currency (if anybody has read it you know what I mean).

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#8) On June 03, 2009 at 3:05 PM, anchak (99.89) wrote:

Ma'am....I am frankly bewildered ..... I am trying to partake in this "euphoria" - simply as a trade.

Long term - I am looking for options to safeguard whatever little is there.

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#9) On June 03, 2009 at 3:30 PM, eldemonio (98.34) wrote:

It seems that the FED and US Government are using the same logic that I myself used in high school when I missed curfew.  If I was late, I might as well have stayed out all night long - If we are over budget, might as well be over by a trillion+. 


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#10) On June 03, 2009 at 5:09 PM, alexxlea (60.01) wrote:

Yeah, I'm of the same opinion as your friend on the theory of empire. Also, if a crash was coming, I would buy as many hard goods as possible and convert all of my liquid cash into printed cash, so that I could have some sort of material to pad my mud hut and rock bed with.

Seriously though, prepare yourselves... today was just an indication.

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#11) On June 03, 2009 at 8:22 PM, arboretum (27.98) wrote:

Some people (especially in this country) like to believe that the downfall of the British empire was caused by some kind of rebellion of oppressed peoples (this is clearly not the case, although public opinion in Britain did turn against imperalism a little bit after Gandhi's protests, etc).

If you ask me (or a fair few other people) what caused it, it was government debt. To pay for WWI, Britain and France gave the US their gold reserves (which they had to build Ft. Knox to hold). To pay for WWII Britain had nothing left and had to borrow (again from the US). The need to repay crippling debts, and military losses during WWII, left Britain unable to maintain a large enough military to keep the Empire afloat.

This time it is the US borrowing from China. OK there is no good excuse like having to fight off the Nazis, but it is the beginning of the same process IMO. It might take 40 years to complete, though, as it did with Britain. 

Most things that happen with Britain come to the US eventually. The forced nationalization / bailout of British Leyland (the UK equivalent of GM) in 1975 (I think, or thereabouts) was eerily similar to what is happening now to GM, 34 years later. 

If you've never heard of British Leyland, well, that tells you how well it all worked out for them.

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#12) On June 03, 2009 at 9:41 PM, oldfashionedway (33.84) wrote:

The KANSAS song "Point of Know Return" comes to mind.

With apologies to Thomas Friedman,  The financial world is flat... and we are watching as our economic "ship" is being sailed over the precipice.

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