Wednesday, August 11, 2010

The U.S. Is In Deep Trouble

"Contradictions do not exist. Whenever you think that you are facing a contradiction, check your premises. You will find that one of them is wrong" (John Galt, "Atlas Shrugged").

The idea for this post started with an email from a colleague who was wondering about the relative strength in the yen vs. the dollar.  After all, isn't the mainstream media and zombie-worshipped CNBC telling us that Japan is the next Europe?  What the heck?  Isn't the strength in the yen vs. the dollar seemingly a contradiction?  I say flat out, "no."  Let's look at a chart - I love weekly charts in order to look at long term trends and eliminate the daytrader/technical/algorithmic noise (click on the chart to enlarge)

It would be hard to argue that this chart is anything but bullish.  And it has been in a bull trend for over 8 years (almost as long as the bull trend in gold!).  So where's the non-contradiction that appears to be a contradiction?  Examine the fundamental economic condition of Japan vs. the U.S.  You can google for the data.  The easiest one would be total country debt/GDP.  Bubblevision likes to look at just Government debt to GDP.  Japan has a lot of Government debt.  However, the U.S. has a lot of overt Government debt - over $13 trillion now - and an absurdly enormous amount of off-balance-sheet implied debt (the net present value of all of the entitlement programs which take total U.S. Government obligations to north of $50 trillion on a GAAP accounting basis), AND an enormous amount of private sector debt. The Japanese people are net savers. When you combine all of the U.S. debt in aggregate, the U.S. systemically has more debt than anyplace that we know of in the universe.  As the article linked below alludes, the total U.S. debt/GDP is 360% (this excludes the entitlement obligation component). 

Furthermore, the U.S. spending deficit, when you include on and off-budget spending (see yesterday's post), dwarfs the spending deficits and borrowing requirements of Europe and Japan.  Can you see now why investors with a big dollar exposure would be quietly, under the cover and distraction of the false information promoted on CNBC,  be swapping out of dollars and into yen? Per the chart above, this has been occurring for over 8 years.  I would bet good money (i.e. gold) that smart money, Chinese money, Russian money, etc is using the yen as a diversification instrument because the yen is probably the second most liquid piece of paper after dollars and Japan is in better shape fiscally than the U.S.

In support of my view, I am linking a fabulous essay written by David Stockman, who was one of Reagan's Budget Directors.  As you read his piece, one has to wonder if Stockman is now more of the Libertarian view of Government, given that Reagan's Administration was really the first one to take advantage of an unbacked, fiat U.S. dollar reserve currency and the ability to issue more debt than could be serviced out of economic growth.  Of course, back then, our system was just starting to really gorge on deficit spending and debt issuance.  Now, we're past the tipping point. In this piece, Stockman points out the necessity of looking at both public and private debt combined.  He also demonstrates that total debt in the U.S. has been increasing, contrary to the financial media/deflationist myth that the private sector is deleveraging (remember, check those premises):  
Under present realities, though, the problem isn't the flows; it's the massive, never-before-seen stock of combined public and private debt that's depressing the economy, which overwhelms any "flow" effects from fiscal policy. Specifically, at $52 trillion, credit-market debt today is 3.6 times that of GDP...
Here's the link to the article - warning: it's full of dry numerical analysis - you know, the kind of stuff that's seeded in Truth:  Must read  If you read through this, you will have a much greater understanding why the yen is in a bull market vs. the U.S. dollar AND you will see why this is not a contradiction.


  1. Hi, according to John Mauldin the Japanese savings rate has fallen to 1.8%

    The other thing with Japan is that their national pension fund has now started to sell assets this year for the first time, to pay retirees their entitlements, so holes are appearing in their economy.

    In the short term I suppose this shows people are looking for safety so they are running to the Yen, but it's hard to see how it is safe in the longer term.

  2. ZZZZ...Let's go back to debating Glenn Beck.

  3. This usd/treasury game is getting tiring...


  5. Dave,

    Are you really sure that you are right that Obama is a pimp? Leastways not girls that is, maybe girlie boys?

  6. For those of you who think that the CTFC is ever going to don anything about anything before the market does it for them.

    It is all about stdiously being inactive to avoid litigation for collusion in price rigging. Sometimes I think Ted Butler is part of it. You know like how the banks used to start up their own Bond Holders committee's before the greenmailers got involved to split the vote and muddy the waters.

    Gary Gensle.....It's one of 30 areas requiring detailed rules from the CFTC.

    "Our priority is complying with the statute. We don't have the luxury to triage," Gensler said. "We have to finish in 12 months."

  7. That chart is not $/'s "Yen/$"

  8. It makes sense that smart money would diversify into yen since it's better than some of the alternatives. I agree that the US is in terrible shape. It's even worse than you think, because the unfunded liabilities were $107 trillion last time I checked.

  9. Ya, I think (emphasis on "think") the $107 trillion is the nominal number. The mid-50's trillion number, I believe, is the GAAP-derived NPV.

    This whole thing is completely insane. I've always thought about writing the Government and offering to have them pay me the NPV of my social security benefits in exchange for foregoing those benefits when I hit 59.5 LOL.

  10. dave,

    I would like to point out to a book by a fellow Indian, "Subprime Resolved" by A
    nil Selarka. Look at Chapter 7 on Gold and FED balance sheet. The write claims t
    hat 8600 tons of gold is all gone in gold price manipulation. He explains this b
    y scrutinising FED balance sheet in detail. Gold is all gone thru leasing operat
    ions to Bullion banks and other CB's.

    When public knows this, what's going to happen?

    From india

  11. Tyler Durden and Bix Weir thnk that September will see a smack down in PM's because GS have put gold on a "weak" buy. I don't see it. To get a smack down in gold it has to clear the physical buying hurdle and we are again seeing buying in $1,200 region and silver is leaving London by the plane load. Smacking down the market now would just have shed loads of gold leaving the vaults because the real cash players are not fooled by the COMEX.

    I think that gold has to go up at least to $1,500 before they can get a real good rout to clean out the longs on a $300 fall to the downside without the risk of the physical buyers cleaning out the vaults. Remember when gold was smacked to $700 last time they got a Chinese guy buying a tonne on the option trading day. If they do it again they are likely to get 30 of these guys buying on their "fixing" day. So I don't see it, what's your take.

  12. Uh-Oh...The Hindenburg Omen triggered.

    SofaKing happy I liquidated this week.

  13. India: thanks for the book suggestion. If there's an English version I may read it. Yes, there is a theory that most if not all of the gold held by the Fed ON BEHALF of the Treasury has been leased out and swapped in the grand price-capping scheme.

    THere is some gold in Ft. Knox but most of it has been moved to what is termed "deep storage" at West Point. The Treasuries' gold has not been independently audited since the mid-1950's.

    My view is that it is most of it is indeed gone.

  14. Anonymous re: Tyler/Bix. Stick with your view. You are correct. Tyler Durden maybe understands about 10% of what he THINKS he understands about the gold market. He's a legend in his mind. You would be surprised if I told you some of the respected/legitimate purveyors of information/commentary who think Tyler is a complete baffoon, including me.

    Bix has never made an accurate market call in the 8 years that I've been observing his writings. I love Bix for the views he's willing to go on record with, but in general he's nuts. LOL.

  15. SK: relax. The "Hindenburg Omen" call is made every couple years to no avail. I believe it's one of those things like the Mayan Calendar/2012 call. If you have faith that it is bona fide, better get everything in that you want to do now. LOL. I don't buy into it and I try to keep my thinking and views as cleansed from "faith" based thinking as possible.

  16. Dave,
    Yes This book is in English. We were ruled by British. We in India read/write/speak at least 3-4 languages including English.

    The writer is migrating to USA. In his blogs he trashes US economy with vigor. Strong proponent of Gold. He fits in your pack very well. Cris Powel of gata wrote about it few days back.

    Check book web site afer few days.

    From India

  17. Dave - Isn't Tyler Durden a pseudo for more than one person at ZH?

  18. It's a psuedonym for one person.