A US-centric economic view of what’s happening in 22 slides: A US-centric economic view of what’s happening in 22 slides March 2009 US national debt ($11 trillion): US national debt ($11 trillion) Annual interest payments $400 billion FY2009 US projected budget deficit= ($2 trillion) [stimulus waste, bailouts, bank backstops, Fannie/Freddie] FY2010 US deficit = ($1.5 trillion) FY2009 US tax receipts $1.5-$2 trillion $2 trillion of debt is short-term: $2 trillion of debt is short-term That’s an interest rate time bomb; for now we pay 0.7%/yr Assume $2 trillion of the $3.5 trillion in bonds the next few years are short-term $2 + $2 = $4 trillion If interest rates spike to even 10% due to inflation risks, that would mean… $400 billion MORE in interest/yr: $400 billion MORE in interest/yr With decreased tax revenues, Defense, Education, Health, Social Security, Transportation would all have to be cut, some by as much as 50% March 2009 : March 2009 Fed announces that they’re going to print $300 billion and buy US Treasury bonds Robbing Peter to pay Paul What about the remaining $1.7 trillion in bonds they’ll have to sell? Who will buy those? What about the $1.5 trillion in FY2010? Foreign Govts hold $3 trillion: Foreign Govts hold $3 trillion The 2 leading holders of US federal debt are Japan and China But Japan’s exports are down 50% in Feb 2009 China’s exports were down 25% in Feb 2009 They no longer have the trade surplus with the US to put into US gov’t debt, and are plowing their remaining money back into their own economies Who else?: Who else? Federal employees, state and local governments and others have around $4 trillion of US govt debt But they’re net sellers: State governments have a $300 billion budget shortfall in the next 2 years, for example Maybe IRAs and 401ks could be taken over, which was the Argentine solution Trick or Treat: Trick or Treat Printing money was one of the last tricks that the Fed had left to use, and they used it The Money Supply : The Money Supply Current US dollars in circulation: $1 trillion In circulation in the US: $300 billion In circulation outside the US: $700 billion One of the main reasons why US dollars are held outside the US? Oil. World oil exports per year: 25 billion barrels At $40 a barrel = $1 trillion in transactions per year April 2, 2009 : April 2, 2009 The G20 meeting TODAY might be the most important currency meeting of this whole financial mess New currency possibilities? IMF involvement? Russia and China are talking about a global basket of currencies instead of using the US dollar to settle trades UN Panel also suggested a basket Gulf nations (Dubai, Abu Dhabi, Saudi Arabia, et al) talking about a local currency for oil trades Inflation : Inflation If there’s less of a demand for dollars overseas, countries dump dollars If we print money to monetize our debts If the US, UK, Switzerland, Japan, China, Europe all race to depreciate their currencies against each other to try to boost their exports Wages, Stock Market, Real Estate : Wages, Stock Market, Real Estate Dollar depreciation through various methods means inflation in some aspects of our economy $100 oil, $5 gas, those things will be back Wages don’t react as quickly People are already in a deflationary mindset, if their comp doesn’t keep pace, they cut back You could see the stock market react favorably to inflation, real estate react favorably, but the underlying businesses not doing as well But…. : But…. But…if interest rates have to be jacked up to react to the inflation, everything comes tumbling back down again But…if real estate dropped considerably, what is left of foreign capital, if it’s allowed in the US, might start picking up cheap commercial and residential property Let’s talk Interest Rate Swaps: Let’s talk Interest Rate Swaps Bank of America, JP Morgan and Citigroup alone have around $130 trillion of these on their books For example, if someone has a variable rate, they might swap it for a fixed rate, with the bank taking on the interest rate risk If interest rates shoot up like I think they may due to the profligate spending of the US government, interest rate swaps blow up And even if the US government hasn’t nationalized the banks by that point, they will have to clean up the $trillion mess Let’s talk Credit Default Swaps: Let’s talk Credit Default Swaps The US has 2 choices: continuing to put money into AIG and other writers of credit default swaps so they can pay these bets off at face value, OR Start tearing them up and say they’re either voidable or will be paid off at pennies on the dollar CDS and Europe : CDS and Europe One problem with pennies on the dollar is that hundreds of $billions of them are covering Western European banks, which are… Already precarious because of their investments in Eastern European countries that are going bad (mortgages in Poland denominated in Euros, for example) CDSs to me are a European issue more than a US issue, as European banks are way more leveraged than US banks, in some cases 10 to 1. $8 trillion: $8 trillion European banks own $8 trillion in US-denominated assets (govt debt, mortgages, consumer loans, etc.) If they have to start selling, it will further depreciate the dollar against the Euro They’d have to start selling if some of the CDS are ripped up, because of their crazy leverage. Life & annuity insurers: Life & annuity insurers Residential and commercial mortgages: if these continue to blow up, and further unemployment, decreased spending, potential increased interest rates would suggest a further blowing up, life insurers are especially vulnerable Technical indicators: if the current market run doesn’t reach Dow 11000, some guess it’ll come back down to hit 5500, with a potential low of 4000. That would hit annuity writers hard. Short-term gain = long-term pain?: Short-term gain = long-term pain? What governments, banks, insurers, hedge funds are doing now are short-term inflationary and papering-over things that don’t let the economy fix itself Mark-to-market accounting may be suspended = short-term gain = puts off until later fixing things Non-financials credit debt / GDP = 350%, the highest it has ever been. In the Depression, it spiked at 250%. Bank deposits: Bank deposits FDIC has very little money left, so they arranged to borrow (in other words, more printing) $500 billion for potential bank failures Insured US bank deposits represent $4 trillion Banks only have $300 billion on hand for that $4 trillion Japan bankruptcy: Japan bankruptcy The good news? Japan would probably go bankrupt before we would, so would serve as a warning that we’re doing the wrong things. Japan’s debt / GDP ratio is 200% US’s debt / GDP ratio is 75% Japan’s savings rate is now as sickly as the US’s Japan has already printed money, it didn’t work, asset values kept falling through 2003 What do we do?: What do we do? How this plays out is almost entirely out of our control ; we’re still very early in this whole process Hope that governments stop wasting money and time Put your head between your knees, grab a paper bag and hurl Got commodities and precious metals?