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Economic sugar-rush

This was in the Telegraph:

The danger now is that when QE2 ends in less than 12 weeks’ time, global markets will be rocked by a surge in Treasury yields. Since mid-2009, QE has been used to buy up, along with dodgy mortgage-backed securities, swathes of US government debt.

This is how the Obama administration – and the British Government too - has been able to keep spending. Once the Fed exits the Treasury market, though, not only will the fiscal pump-priming stop, but US debt-service costs could balloon.

America is now shouldering declared federal liabilities of $9,100bn - making it, by a long way, the world’s largest debtor. On top of that, US government debt is set to rise a jaw-dropping 42pc by 2015, according to official estimates.

Already, $414bn of US taxpayers’ money was spent on sovereign interest payments during the last fiscal year - around 4.5 times the Department of Education budget. And that was with yields kept historically and artificially low by QE.

Global investors are increasingly wondering what happens when the money printing stops and those debt service costs rise. More and more interest is being shown in the fact that America’s total sovereign liabilities, including off-balance sheet items such as Medicare and Medicaid, amount to $75,000bn – no less than five times’ annual GDP.

The writer works for a fund that mostly invests in Russia. He's worked previously for the IMF. And written for the FT, among other papers. So his outlook has some credibility.
 
I've been sitting back wondering, "Am I the only person here who thinks this epic money-printing circle-jerk can't end well?"

I try to explain QE to my friends and family. It's kind of hilarious when they realise: "Oh... OOH... so it's just inventing money out of thin air?"
 
"Quantitative easing" describes much of economic policy in the US today; it is a key plank. More generally, unfettered credit expansion is a global phenomenon. Along related lines writes Charles Hugh Smith:

The Keynesian experiment is being extended to its ultimate point of failure. Interestingly, China, Europe, Japan and the U.S. are all pursuing the same Keynesian credit-expansion Grand Strategy. It is the single tool available to States and Central Banks imprisoned by conventional economic theories, and they are hitting that single policy switch like cocaine-crazed lab rats clamoring for another hit.

Their lab cage is our world.

The Federal government is now borrowing in excess of $1.6 trillion every year to prop up the Status Quo, fully 11% of America’s GDP and 40% of all Federal expenditures. This stands in stark contrast to the traditional economic view that deficits in excess of 3% of GDP a year are inherently destablizing. Now we borrow roughly four times that much (once we include the off-budget “supplemental appropriations” that run into the hundreds of billions of dollars every year) and the political and financial class evince a complacent confidence that these extremes are sustainable indefinitely.

The economic system -- of which quant finance is one integral aspect -- is unravelling, eroding, weakening. Weakened structures have a way of suddenly collapsing.
 
Any thoughts on where the metaphorical desk might be, to hide under when the roof is falling in? ;)

I've been thinking that places already living at bare subsistence levels might not be a bad bet: there are fewer things to go wrong and less complex inter-dependencies. High-tech societies need all sorts of complex inputs -- food, large amounts of water, transport, energy -- to stay aloft, and are hence subject to disruption. Just look at what the havoc wreaked by the Japanese earthquake: JIT manufacturing models (meaning scant inventory) plus global supply chains mean global manufacturing disruption.

Not trying to be a salesman but I recommend Charles Hugh Smith's book, "Survival+", which I think I picked up for $15. The man is a thinker and there's a lot of insight packed in the 400 pages of the book -- albeit not very comforting stuff.
 
Good post. Driving down rates keeps servicing debt cheap. Once rates start climbing it is going to take more money to keep it going. This is either a good motivator to keep rates low for a long time or tighten the belt fiscally. I personally think that the government will simply allow things to get so grave that only radical action can fix things. No benefit in doing anything right now.
 
Oh, come on man... they made a cut of like, what, 38 Billion? Which, you know, divided into a stated deficit of 9 Trillion, or the projected shortcoming of 50 Trillion over the next few years, is what..... oh, if only I were better at math. But it must be significant, right?
 
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