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Wednesday, June 16, 2010

Time for Government to double down

The deflationary forces are appearing everywhere. Reality is setting back in after burning through over 1 trillion dollars in drunken spending (stimulus?) after this past year. My hope WAS after government saw that taking such actions are fruitless, and we need to get some fiscal discipline. To lead the country into new industry development. To DEAL with China's trade imbalances (waaay too late), to stop the games and get to work.

The charts, the deflationary forces re-appearing such as retail sales down 1.2% in a month, unemployment about to rocket higher due to the temporary census jobs expiring, European financial destabilization, these event you would think trigger someone to say "we can't keep doing the same thing, we must change course".

In addition, Money supply, classically known as M3, which has been discontinued by the government tracking since 2006, has taken a nose dive not seen since the Great Depression. The web site ShadowStats still tracks M3, as shown below. This is also Deflationary.

Chart of U.S. Money Supply Growth

I am starting to think, there is no way the government will do the right thing. The government in the next few months WILL announce some crazy scheme of drunken spending to top the last year's efforts.

But as a stock trader, the question is when. I have to assume its not "tomorrow", and trade without the benefit of insider information. If the US does do something drastic, to "double down" on making the US insolvent, I fear that will be the jump the shark moment for the US.

US bond rates are down, US dollar valuation is up, world looks "bad", US, not as "bad" relatively speaking. That edge give the politicians room to double down, to in effect "use up" the good credit available to the US. Then to throw that good credit down into the debt monster in a fruitless effort to stimulate demand.

The point of this entry is to call out that if the market cracks lower, the decline is at the mercy of those who can change the game in the near term. And the US government now has the breathing space to do so. But once the credit of the US is "used up" and rates move towards 5% for 30 year bonds, the government may finally get what is seems so hell bent to accomplish, and that is cause a US solvency crisis.

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