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Debt crisis and hyperinflation

whitefly
Posts: 1
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7/10/2016 4:17:56 AM
Posted: 5 months ago
The current economic situation seems in some ways insanely unsustainable. Many governments have so much debt that they probably won't ever be able to pay up, but many bond traders still buy these bonds while expecting even lower interest rates which will make the value of their investments to go up.

Negative interest rates are an interesting idea in principle, but in practice they can't get very much below zero until traders inevitably lose all confidence in these bonds. What happens when people realize that the value of these bonds is not going to go up anymore, and holding them might not make sense overall, considering the risk of default?

Will central banks just continue to buy these bonds and keep interest rates low, whatever it takes, until most of the debt in the world is owned by central banks? Or how will this play out?

What happens if Deutsche Bank goes bankrupt with their $70 trillion or so of derivatives exposure? Will this trigger a wave of bankrupcies and how severe will it be?

A lot of really smart people I follow are considering it quite possible that we will have a crisis so severe that you won't necessarily be able to buy food in the stores anymore, for example.

I don't really see this myself, but then again, wouldn't rule it out either. A complete loss of confidence in our fiat currencies could be possible at some point if central banks continue to buy up everything, and just issue new currency for it.

In this situation, bitcoin and other alternative currencies could play a role, and they could even largely replace our fiat currencies if things got bad enough.

The primary problems during a transition period like this would be that most people at first wouldn't own any bitcoin for example ... The government would have to start collecting tax in bitcoins, and I'm not sure to what extent it could do that and how quickly it could transition to that. In government things always happen pretty slowly.

The private sector would have to also organize all trade to happen via alternative currencies, which would mean some changes to information systems at least .. These could probably be accomplished pretty quickly, at least a lot faster than what the government could do.

Facing even a severe financial crisis doesn't seem at all impossible, if you either have a farm for producing food, or alternatively some bitcoins and maybe also guns to protect against social unrest. This part of it is ugly to think about, since in this age of dependence on the capitalist system, even a famine could be a possibility among the unprepared.

How do you see the next few years? Will governments be somehow able to normalize interest rates, or will the same reckless policies just continue? Will the flat yield curve present any problems in practice? What happens if a lot of bond investors decide to move into gold instead for example?
BillSPrestonEsq
Posts: 140
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7/11/2016 1:55:31 AM
Posted: 5 months ago
At 7/10/2016 4:17:56 AM, whitefly wrote:

I wish I was smarter when I read a question like this. I try to wrap my head around the most logical chain of events to most likely occur, but it's a tough one.
One we had a housing bubble, which was created because of easy credit driving up prices leading to more speculation leading to higher prices and then a contraction of credit leading to a deflationary spiral (at least as I see it). Next in order to cover the loses which where backed by mostly demand deposits huge amounts of money were created in order to lower interest rates almost to nothing and drive housing prices back up. So now here we are again with housing prices back up, but now the money supply is what? Four times the size? So now what happens? Inflation must eventually set it. It must, what has changed really except for the supply of money? But inflation hasn't really risen drastically almost 8 years later.
I think housing costs are too high for the next generation to afford, many are still living with their parents or living with roommates. The unemployment rate amongst the next generation isn't great either, many holding a lot of debt especially student loan debt. This will drive housing prices down and still the amount of demand deposits held in mortgages will challenge the solvency of the whole banking system.
If interest rates continue to stay low and they must still for that reason inflation will rise as I think the confidence in the economy is still continuing to rise even after all this time. People will seek to save their money from inflation, taking it out of savings. This will challenge the solvency of banks. Ahh nope brain is catching on fire, I think it will be that because so much of the value of housing is holding up the whole banking system because of our awesome 10% reserve requirement, eventually banks will become insolvent. They will borrow from central banks, taxes will go up, ahh again so many variables it makes my head spin. Long story short we are probably in big trouble in my opinion. But who knows, the solutions are possibly endless. We definitely need some major major changes in thought surrounding economic and political theory because this isn't working.
ironslippers
Posts: 516
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7/13/2016 9:41:45 PM
Posted: 5 months ago
At 7/10/2016 4:17:56 AM, whitefly wrote:
The current economic situation seems in some ways insanely unsustainable. Many governments have so much debt that they probably won't ever be able to pay up, but many bond traders still buy these bonds while expecting even lower interest rates which will make the value of their investments to go up.

I'll open by quoting Bill "I wish I was smarter when I read a question like this. I try to wrap my head around the most logical chain of events to most likely occur, but it's a tough one."

I have yet to find a school of economics that isn't based on growth. The growth paradigm logically is unsustainable.

Lower interest rates create lower yields, making more capital necessary to be invested to maintain required yields

My own thought is there is a bond bubble.

Negative interest rates are an interesting idea in principle, but in practice they can't get very much below zero until traders inevitably lose all confidence in these bonds. What happens when people realize that the value of these bonds is not going to go up anymore, and holding them might not make sense overall, considering the risk of default?

Negative interest rates are directly opposed to the economic growth paradigm. For each financial segment that NIRP and ZIRP support there are segments that are robbed of gains.

Will central banks just continue to buy these bonds and keep interest rates low, whatever it takes, until most of the debt in the world is owned by central banks? Or how will this play out?

That is how it appears, but since the books of central banks aren't transparent its hard to say just how much capital is stored in central banks and who will be the beneficiaries of this capital

What happens if Deutsche Bank goes bankrupt with their $70 trillion or so of derivatives exposure? Will this trigger a wave of bankrupcies and how severe will it be?

The Deutsche Bank subsidiaries in the USA showed poorly in the Fed 'Stress Test'. Bank Runs are a product of mania then panic, and financial institutions covering long term investment with short term loans.

A lot of really smart people I follow are considering it quite possible that we will have a crisis so severe that you won't necessarily be able to buy food in the stores anymore, for example.

Be careful to weigh the interest of smart people promoting their own agenda.
Currently Venezuela comes to mind, a one trick pony that is suffering by failing to diversify into any other income stream than oil.

I don't really see this myself, but then again, wouldn't rule it out either. A complete loss of confidence in our fiat currencies could be possible at some point if central banks continue to buy up everything, and just issue new currency for it.

Academics will disagree with me when I say that the economy is a confidence game, Human temperament is entirely relevant to economic conditions.

In this situation, bitcoin and other alternative currencies could play a role, and they could even largely replace our fiat currencies if things got bad enough.


The primary problems during a transition period like this would be that most people at first wouldn't own any bitcoin for example ... The government would have to start collecting tax in bitcoins, and I'm not sure to what extent it could do that and how quickly it could transition to that. In government things always happen pretty slowly.

The private sector would have to also organize all trade to happen via alternative currencies, which would mean some changes to information systems at least .. These could probably be accomplished pretty quickly, at least a lot faster than what the government could do.

I believe there is a place for crypto currencies but are not the end all, bottom line might be as simple as what value do you bring to society (barter system).

Facing even a severe financial crisis doesn't seem at all impossible, if you either have a farm for producing food, or alternatively some bitcoins and maybe also guns to protect against social unrest. This part of it is ugly to think about, since in this age of dependence on the capitalist system, even a famine could be a possibility among the unprepared.

Paraphrasing Marx - Capitalism will evolve to a sole dependency on financial products.

How do you see the next few years? Will governments be somehow able to normalize interest rates, or will the same reckless policies just continue? Will the flat yield curve present any problems in practice? What happens if a lot of bond investors decide to move into gold instead for example?

It'll all be cool until the panic sets in, then it'll sh!t all over
Those are my short reponses.
Everyone stands on their own dung hill and speaks out about someone else's - Nathan Krusemark
Its easier to criticize and hate than it is to support and create - I Ron Slippers
harrytruman
Posts: 812
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7/20/2016 9:28:18 PM
Posted: 4 months ago
At 7/10/2016 4:17:56 AM, whitefly wrote:
The current economic situation seems in some ways insanely unsustainable. Many governments have so much debt that they probably won't ever be able to pay up, but many bond traders still buy these bonds while expecting even lower interest rates which will make the value of their investments to go up.

Negative interest rates are an interesting idea in principle, but in practice they can't get very much below zero until traders inevitably lose all confidence in these bonds. What happens when people realize that the value of these bonds is not going to go up anymore, and holding them might not make sense overall, considering the risk of default?

Will central banks just continue to buy these bonds and keep interest rates low, whatever it takes, until most of the debt in the world is owned by central banks? Or how will this play out?

What happens if Deutsche Bank goes bankrupt with their $70 trillion or so of derivatives exposure? Will this trigger a wave of bankrupcies and how severe will it be?

A lot of really smart people I follow are considering it quite possible that we will have a crisis so severe that you won't necessarily be able to buy food in the stores anymore, for example.

I don't really see this myself, but then again, wouldn't rule it out either. A complete loss of confidence in our fiat currencies could be possible at some point if central banks continue to buy up everything, and just issue new currency for it.

In this situation, bitcoin and other alternative currencies could play a role, and they could even largely replace our fiat currencies if things got bad enough.

The primary problems during a transition period like this would be that most people at first wouldn't own any bitcoin for example ... The government would have to start collecting tax in bitcoins, and I'm not sure to what extent it could do that and how quickly it could transition to that. In government things always happen pretty slowly.

The private sector would have to also organize all trade to happen via alternative currencies, which would mean some changes to information systems at least .. These could probably be accomplished pretty quickly, at least a lot faster than what the government could do.

Facing even a severe financial crisis doesn't seem at all impossible, if you either have a farm for producing food, or alternatively some bitcoins and maybe also guns to protect against social unrest. This part of it is ugly to think about, since in this age of dependence on the capitalist system, even a famine could be a possibility among the unprepared.

How do you see the next few years? Will governments be somehow able to normalize interest rates, or will the same reckless policies just continue? Will the flat yield curve present any problems in practice? What happens if a lot of bond investors decide to move into gold instead for example?

It's si8mple, the Fed prints more worthless paper and tanks the economy,