When is the debt bubble going to pop?

[Thatsright19]

Central banks pretend to loan real money while governments pretend they will pay them back.

Money is debt and debt is money. Debt can never be repaid in aggregate because the money to pay the interest is never created.

Give me a control of a nations money supply and I care not who makes its laws.

[Thatsright19]

"Years of current account deficits - deficits induced not by the decisions of private savers looking to maximize returns but by foreign public sector entities seeking to maintain export growth - has literally resulted in a US economy that, on net, is unable to produce the goods its citizens want to consume.

South Korea, Russia, and other emerging markets that go through severe crises usually undergo a sharp depreciation in the inflation-adjusted value of the currency, making them hypercompetitive, at least for a while. This makes it easier to replace imports with domestic goods and services and much more attractive to export.

In contrast, the global financial crisis actually strengthened the U.S. dollar as it was seen as a haven. Currency depreciation - of substantial magnitude - is a mechanism by which economies recover from financial crisis. But we shouldn't underestimate that challenges that accompany such an adjustment.

Put simply, the Federal Reserve is positioned to declare war on Bretton Woods 2. November 3, 2010. Mark it on your calendars.

So perhaps Bretton Woods 2 does not end because foreign governments are unwilling to bear ever increasing levels of currency and interest rate risk or due to the collapse of private intermediaries in the US, but because it has delivered the threat of deflation to the US, and that provokes a substantial response from the Federal Reserve. A side effect of the next round of quantitative easing is an attack on the strong dollar policy.

The rest of the world is howling.

Consider the enormity of the situation at hand. The Federal Reserve is poised to crank up the printing press for the sake of satisfying their domestic mandate. One mechanism, perhaps the only mechanism, by which we can expect meaningful, sustained reversal from the current set of imbalances is via a significant depreciation of the dollar. The rest of the world appears prepared to fight the Fed because they know no other path.

Bad things happen when you fight the Fed. You find yourself on the wrong side of a whole bunch of trades. In this case, I suspect it means that Bretton Woods 2 finally collapses in a disorderly mess. There may really be no other way for it to end, because its end yields clear winners and losers. And the losers, in this case largely emerging markets, and not prepared to accept their fate.

Bottom Line: The time may finally be at hand when the imbalances created by Bretton Woods 2 now tear the system asunder. The collapse is coming via an unexpected channel; rather than originating from abroad, the shock that sets it in motion comes from the inside, a blast of stimulus from the US Federal Reserve. And at the moment, the collapse looks likely to turn disorderly quickly. If the Federal Reserve is committed to quantitative easing, there is no way for the rest of the world to stop to flow of dollars that is already emanating from the US. Yet much of the world does not want to accept the inevitable, and there appears to be no agreement on what comes next. Call me pessimistic, but right now I don't see how this situation gets anything but more ugly

We've often seen the phrase, "Saved by WWII" when seeing the analogy between now and the 1930s. Then the world was in disarray, based on economic constraints rooted in WWI reparations, the expansion and bursting of the stock market, and world wide abject poverty.

Saved by a war that cost 60 million lives? What was the option? The starvation of the poorest had begun in Eastern Europe, and revolution was in the air in United States. No one can contemplate the extent of the disaster that is coming now, since we don't conceptualize WWII as being caused by economics.

Perhaps it's time to promote this explanation, so it would be clearer just what kind of a precipice we are now looking over."

[artillery77]

Originally Posted by ohio_peasant

Indeed, the 1980s and 1990s were a wonderful time for investment and wealth-creation, owing to a confluence of factors: opening up of new markets, definitive conclusion to Europe's 20th century civil wars, China's pivoting into modernity. Conceivably, a similar confluence of factors is attenuating growth in the early 21st century: resurgence of nationalist sentiments in Europe and elsewhere, enervation of the trend of opening up new markets, retrenchment in places like China, and unfavorable demographics.

Several observations present themselves:

1. In the 1980s and 1990s, capital built more capital. One didn't need to be a skillful investor to profit handsomely. All that mattered was robustness to occasional hiccups (October 1987) and patience. Today, the situation is quite different. Longsuffering patience (buy and hold) isn't well-rewarded. Most markets and asset-classes are closely correlated, so that diversification helps little. It's just plainly harder to make money.

2. Neither fastidious austerity nor profligate indulgence seems to much matter. Global trends driving or stymieing growth are far larger than the particular fiscal or monetary policies of this or that government, though it is possible that governments can stampede into collective blunders.

3. Currencies are going to fluctuate. If we're going to diversify into international investments, we in effect become currency speculators. Recall that less than a decade ago, the US dollar was trading 2:1 against the British pound. Where is it now?

4. Fluctuations are OK if they're embedded in an overall ascendant trend. It's OK to suffer a 30% collapse, following a doubling in the preceding few years, with another doubling thereafter. But if we're going to have a protracted sideways/stagnant market, then every fluctuation hurts the more.

You've got some great points ohio peasant and #2 cracked a smile. I still wouldn't give up on buy and hold though...it's just there has to be a real belief in the business, and that's hard to do. That said i still trade with most of my mad money. The daily correlation is silly at points, which is my favorite entrance point, but I think there is a notable difference over a 2 year horizon. Buy and hold certainly isn't dead, and may still be the best place to get compounding payments without locking in for awhile. I've never been in a sideways market before, so this will be some tough but interesting trading.

With the markets so wonky though, it's hard to know what to do with new money. I've been doing a lot more deleveraging than I would have thought/hoped.