My question – How can I measure whether there is enough available investor liquidity in the world to absorb the upcoming world debt issues? Certainly then numbers are large but how much “real” investment is available to by these upcoming “toxic” treasuries and bonds?

Like CDS and other derivatives where OTC transactions have masked reality – can the world reliably even know?

And a very solid analysis by you of the stimulus issues, though I think it errs a bit by directing attention to international debt and away from CDS debt. I would add that after WWIII the USA gave Europe the Marshall Plan which I think cancelled a fair amount of their debt. Now we need a Marshall Plan. Will China give us one?

Probably not because that is not who most of the debt is owed to. Most is owed by banks to each other!

I see no way out other than repudiation of that debt, either by massive inflation or more direct means. If our government would stop loading the banks’ CDS debt on the taxpayers, then it would be the banks repudiating, and that’s where the blame belongs. If the government loads that unpayable debt (on the order of 50 trillion from rough estimates I have seen) onto us, we cannot, will not and should not pay.

Hang onto that thought that the Fed might not be capable of mopping up the excess money.

I can betcha the fed is betting on a convergence of events conspiring out along the time continuum…specifically tying the mop up to labor resources and the reflating of toxic asset values.

If the Fed drags its feet about mopping up excess dollar reserves until the “the slack in labor” is absorbed, which as we know could be a decade from now short of another world war…. the valuations of the majority of those toxic assets will have been largely reconstituted (to use a Richard Kline word)

At that point, the Fed can coerce a cram-down of these toxic assets back onto the balance sheets of the banks who owned them originally. Then the haircut the banks take won’t be so armageddon-like. It won’t be screwing the banks, it will be obligatory of them to take them back onto their balance sheets.

The Fed certainly need not lose when that convergence of asset reflation and slack in labor resources occurs.

But by that time, rest-assured, this trajectory of this path is a bubble-blowing event, and we will be well down the path towards the next bubble crisis.

In all likelihood, when we come out on the other side of this we will find the dollar being destroyed. For the Fed’s sake, they might not want to be holding so many dollar reserves on their balance sheets at that time. Swine and other forms of chattel might be better on their books than dollar liabilities.

As you know …”Anna Schwartz wrote the book on the last great banking crisis. That book was called ‘A Monetary History of the United States,’ and it was co-authored by the far more famous Milton Friedman. She says the bailout would have worked if it forced banks to take serious write downs on junk assets and allowed imploding banks to fail. Unfortunately we’re doing the opposite.” Source (Clusterstock/WSJ)

To judge the efficacy of present government intervention, we can look at the CDS price on 10-Year Treasuries which has risen about 28x from below 2 bps in July 2007 to 56 bps last Wednesday intra-day approaching that of Italy and higher than Germany, Finland, or Norway. Source

“Once a regional economic powerhouse and food exporter, Zimbabwe now relies on humanitarian food aid. Its towns and rural roads are lined with threadbare children in rags, or barefoot men.

With inflation running at 100,000 percent, President Robert Mugabe recently announced that prices would remain fixed at February levels. But after printing trillions of Zimbabwean dollars to fund 700 percent pay raises to civil servants and gifts of cars and tractors to rural chiefs, the government has been unable to deliver on that promise.

Independent economists say inflation now has risen to 200,000 percent and predict it could rise to 500,000 percent by May.” SourceGod help them & us!

It’s not just loathe, john. It might not be capable. We normally mop up excess money by selling off T’s, but a funny thing happened to our T’s on the way to the forum. We sold or repo’ed many of them for a grab bag of securities, long-dated securities that generally have a fixed coupon and will lose value in an inflationary spiral. If we put those back out in the open market, either the Fed takes another loss, or we re-screw the banks.

>> Similarly, as we have said before, the US was a world-dominating exporter, as China is now, and had the biggest gold reserves, as China now had the largest FX reserves.Thus it is China that needs to undergo a huge-scale stimulus program to make up for the loss of demand from the US. … So why don't we lean on China harder?

The US is is no position to lean on anyone. As you say yourself — the US is the debtor and China the creditor. When has the debtor ever been in a position "to lean on" the creditor?

China will do what's in China's interests to do. For now, it seems, China feels it is China's interest to prop up the treasury market. But as someone famous once said: Something that cannot last forever will one day stop.

Perhaps then Zimbabwe can give us some more advice.

no biggie, but the 5 and 10 year treasuries are called notes and the 30 year a bond

Lets add a few additional points.

In a post-Soviet world, a significant portion of sovereign economies were integrated into the global market economy, not only Russia, East Europe, but also speeding up the marketization of China.

As this developed, neo-liberalism and financialization (US primarily) were already well underway. In grossly simplistic terms, the West became the financier while China, etc., became the world’s workshop. The US was the importing/consuming agent, the East the exporting/producing agent.

Out of this we witness not only over consumption in the US, but too much manufacturing capacity and overproduction in the East. Reserve imbalances is simply the effect of such developments, not the cause.

Financialization, while an agent, was also the byproduct of a global shift in capital movements structuring a global trade system of import/export dependency.

Any solution that might engender greater US domestic production and internal Chinese consumption would take many years to unfold. In the meantime, the US (and China, which is trying to beef up its export-centric economy), is attempting to find its solution by increasing domestic consumption by way of re-starting the credit/debt engine.

The failure in this will become all the more apparent once it becomes increasingly clear that the credit/debt crisis is itself a byproduct of global overcapacity and overproduction/over consumption that is misaligned.

Focusing on effects rather than causes will delay global deterioration but it will not reverse it . . . simply postponing the “inevitable.”

The US re-inflation premise is based on an outcome in which this attempt at re-starting credit/debt consumption (aligned as it is with the success of China, etc., in maintaining ever expanding exports), leading to the re-start of US economic expansion.

I find it remarkable that in such a short time – since the US announced it’s $800bn program to buy consumer debt), the debate has shifted away from deflation to inflation. This outcome assumes success in the US program (combined with Obama’s anticipated stimulus package), in cutting short the recession to turn things around leading to economic expansion.

Should it fail, and I suspect it will, then deflation will continue.

The Fed will certainly be loathe to mop up the excess liquidity too quickly (as Greenspan iterated in his December 2003 minutes and which was echoed on numerous other occassions). The composition of the Fed and its leanings have not changed measurably in the past 5 years regardless of the exogenous shock.

And then there is the other problem of reflation: namely, that it can be kick-started without an economic recovery, which will only postpone monetary policy further from mopping up the excesses. This was certainly the case in the jobless recovery of 2003-2004. And even when jobs began showing up on the radar in April 2004, did the Fed act? NO, instead they demurred not to change policy until the “slack in labor resources” had been fully absorbed. Which in 2006 terms meant 4.5% UE rates.

Now, if we flip back to the 1930’s for a moment, the entire decade was one of a jobless recovery even with the WPA “we-poke-along” programs and such. The jobless rate in the 1930’s oscillated roughly somewhere between 14% to 25%.

But Yves is right to point out the distinction that the US debt-financed consumption country in 2008 is not the exporter-to-the-world US of the 1920’s. So, what we end up with in the US post 2008 is a country much like Great Britain in the 1930’s (as suggested by Richard Kline) which experienced a rise in the UE rate to 20% of the insured workforce by the end of 1930. The number of jobless rose 150% from 1m to 2.5m. Assuming a similar 150% increase in joblessness in the US, the UE rate will roughly approximate 11% before cresting.

Now, flipping back to GB in the 1930’s, it is important to note that some pockets of GB experienced severe recesssions, while other pockets experienced depressions. The industrialized areas were the hardest hit, with 30% of Glasgewians unemployed in 1933.

Indeed, Great Britain was a divided nation of uneven depressions and recessions (and even some pockets of prosperity in London and Southeast of England) in the 1930’s. The GB experience of the 1930’s is roughly what Richard Kline said he expects in mid-Oct that we will experience in the US “if we are lucky” he notes!

Funding for the 1911 mandated unemployment and health insurance schemes dried up as a result of the mass UE in the 1930’s GB.

By Aug 1931, the 1911 insurance scheme was replaced by a govt funded UE benefit system.

Recovery in GB did not take place until rearmament began in 1937 in response to and in preparation for the rise of Nazi Germany.

@ Patrick: the new board game “Zimbabwe Rules” could be the next real blockbuster board game to follow Monopoly. It should be noted that Monopoly was patented in 1935, and as such acted as an escape mechanism into a fantasyland of sorts where all the players begin the game “Liquid” and “Solvent.” With each pass around the board there were also random injections of cash along the way, sort of like the so-called “beneficent hand” of the FDR New Dealers or like the Fed today keeping all the inefficient flawed players in the game longer today (C, AIG, et all financial …come foremost to mind)

I can’t believe this headline! So much so, I can’t even get past it…I have to just let it sit there and dance and pirouette around on the tip of my brain!