By: Mick P | Wed, Sep 17, 2008
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An Occasional Letter From The Collection Agency

A recap of the scenario:

bubble, easy money, inflation in fiat money supply, inflation in commodities and hard assets, inflation, fear of inflation, rising rates, YC inverting, flattening, rising and inverting again, tightening, withdrawal of liquidity, corrections, crashes, talk of stagflation, FEAR, withdrawal of speculative funds, further corrections and crashes, demand collapse.......Deflation.

The above quote is from The Bernanke Conundrum written on the 8th May 08 and has come to pass. We hear today that the US Treasury is monetizing the debt taken on by the Fed for the nationalization of AIG:

For some of us, AIG was just a matter of time, as I wrote in "AIG gets caught by the Auditors" back in February '08:

With a little bit of luck maybe that article got some out of AIG stock or at least got them thinking about what the future might hold. The fall of AIG isn't just one company, it was a sum of many parts:

Of course I doubt Mr Katz will go onto Bloomberg and issue a groveling apology, he like many others will blame speculators and shorters for the demise. What piffle. Banks, insurers and mortgage companies are going down not because of short positions but because they screwed up. They got greedy, they got complacent, they ignored risk and most importantly they employed very stupid people who preferred to please their masters rather than tell the truth.

Capitalism is screwed, more precisely the US / Anglo Saxon model is screwed. That means we are all screwed too. In the space of just over a week the main drivers behind the credit boom have imploded, brokers have gone down and the biggest insurer of debt has folded softly into the arms of the Fed. I wrote Pre-emptive Warning of a Major Banking Crisis back in March '08 which concluded:

You know the dollar has a problem when sterling can do this:

The moral hazard invoked by the Fed, US Treasury and Congress is beyond anything ever seen in the past 1000 years. The very structures of daily life, of daily subsistence have been placed in jeopardy to save the banking and brokerage fraternity.

A deep recession or depression would have carried out its duties by purging mal-investment and bad credit. It would have been painful and unpalatable but the financial system would have survived. No doubt it would have changed and the power structures controlling it would have moved but, it would have survived.

Most readers know I see a deflationary depression in our futures. Now I see something different becoming a possibility. What if the US produces large scale, short term Treasury debt on a rolling basis to fund the long term debt incurred by the multi bailouts?

Some are thinking it would be inflationary, monetizing debt by the use of credit. As we have seen in numerous examples issuing short term debt to fund long term borrowing is a mugs game, it has been the downfall of Fannie, Freddie, Northern Rock, HBOS, Bear Stearns, Merrill Lynch, Lehmans, AIG, Countrywide and so on.

What on earth makes that risky, flawed model any different for the US as a whole? The assets taken in exchange for this increased short term government debt are toxic, useless, untradeable and riddled with legal complexity. Why would anyone want to buy short term debt issued by the most debt riddled country in the world?

Its beginning to look like the "insurance" on debt is also about to disappear:

You want my advice? Get out, we're screwed. A deflationary depression would be a good outcome at this stage.



Mick P

Author: Mick P

Mick P (Collection Agency)
About Collection Agency

An Occasional Letter From The Collection Agency in association with Live Charts UK.

For some years now I have written an ongoing letter, using macro-economics, to try and peer into the economic future 6 to 18 months ahead. The letter was posted on a financial bulletin board to allow others discuss its topic.The letter contains no recommendations to buy or sell, indeed I leave that to all the other letters out there and to the readers own judgement. The letter is designed to make us all think about what may be coming, what macro trends are occurring and how that will affect future trends and how those trends will filter down to everyday life and help spot weak or strong areas to focus on for trading or investing.

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