Sunday, January 16, 2011

Has The Collapse Already Started?

Business Insider reports that Municipal bonds have tanked.  Mind you, they've been on the way down for a while, and the 50 day moving average crossed the 200 day moving average in mid-December.
There's an apparent periodicity to the decline; you can see the prices coming back up after the mid-December bottom, but to a lower peak.  This is an impressive drop, and probably a harbinger of bigger drops.

And the comments to that article are nothing but stupid sniping about whether the stupid party or the evil party is responsible.  I'm sure after the world has collapsed, they'll still be arguing over it. 

I think it's generally accepted that what will happen is that municipal debts will default, and states will start going bankrupt.  The Federal government backstops the bad debt for a while, but with debt already at 100% of GDP, that only lasts a little while, and then the Fed.gov defaults.  With the debt we have rolled up, there are essentially two options, default and inflation, aside from drastically cutting spending.  We're already trying inflation (bought gas or food lately?).  I can not imagine our congress-critters having the guts to cut spending.  Default is probably inevitable.  Business Insider ran a piece predicting this last summer. 

Along the way, expect states to start looking like third world banana republics.  Oh, wait.  That's started already

You may look at the presentation in that Jeff Gundlach piece and say, "Why should we collapse at debt of 100% of GDP when countries like Japan or Greece have so much more debt?"  None of these places are dynamic growing economies, or places you'd like to be, I bet.  Part of why they're afloat is that we're paying for some of their needs, like the defense of much of the EU and Japan.  Donald Sensing speculated on how we can know how much debt we can sustain and concluded we'll only know after the collapse. 

So has it started?  If that trend on the municipal bonds continues, I think it has.  We'll have to watch that and see what develops.

2 comments:

Mo said...

I suspect it'll never be like it was again. This correction will likely result in a new paradigm. What that will look like is a mystery to me.

The problems seem too nebulous for me to even comprehend. I know what I see on my street and it appears the slide has plenty of slope left. Politicians/bureaucrats are saying what they need to hoping to keep the lid on. How can they reconcile all the debt when asset value has evaporated or never really existed in the first place?

This ride we're on looks mighty bumpy. I'm leaving my seat-belt on.

Anonymous said...

I coined a new word, today. A first for me.

The word is Democrazy.

I'm sure that you will see the relevance to your article about societal decline.

bogbeagle