Monday, May 30, 2011

Precursors of the Green Technology Age

We are already seeing some precursors of the coming "Green Technology Age" start to unfold. The latest evidence of the coming period can be seen in Germany, where the government just announced its intentions to close down all of the nuclear reactors by 2022. Its a significant development when a large nation starts taking significant steps towards embracing a green technology industry. This followed closely on the heels of an announcement that the Japanese government intends to push for a plan for solar panels on all new buildings by 2030.

The first precursors surfaced in the smaller developed nations such as Norway, the Netherlands, and Finland back in 2007. These social trends were an indication of what would happen next. After the massive earthquake that struck Japan, and the tsunami that followed, it was only a matter of time before some larger nations start taking steps towards a green technology future.

In the coming years, we will continue to see more and more precursors of the coming "Green Technology Age" as "The Great Deflation" continues to unfold. When "The Great Deflation" ends in 2021, the "Green Technology Age" will start. The "Green Technology Age" is expected to span from 2021 to 2042, and economic fundamentals should be strong enough to support an industry based on green technology such as solar panels, wind farms, carbon capture technology, biofuels, and vehicles that use hydrogen for fuel. In the United States, the green technology industry will result in the creation of 35 million jobs.

For those that can make it through "The Great Deflation" without getting their wealth wiped out by the deflationary collapse, the start of the "Green Technology Age" will offer an unprecedented opportunity to get in on the next emerging market as the green technology industry starts taking off in 2021. The "Green Technology Age" would be identified as Supercycle wave (b), which means that it would be a very long reprieve period, but still a bear market rally within the larger Grand Supercycle degree bear market.

Expect more precursors of the coming "Green Technology Age" to unfold in the coming years. The technology for the coming green technology industry already exists, its only a matter of time before it all gets produced on an industrial scale.

Saturday, May 28, 2011

Global Warming during the Great Tribulation

Global warming is one of the issues that human civilization will have to deal with during "The Great Tribulation". There is already awareness of the issue among scientists, as well as the potential implications of climate change on the food supply and arable land.

Global warming and climate change were not an issue the last time we were in a Grand Supercycle degree bear market, even during 1770 - 1784 (Supercycle wave (c) of Grand Supercycle wave [II]). It is an issue that we will be facing in the future as a consequence of the excessive use of fossil fuels such as petroleum, coal, and natural gas. The burning of fossil fuels results in the release of carbon dioxide in the atmosphere, increasing the greenhouse effect in the atmosphere and resulting in global warming.

There has been many warnings from scientists about the implications of staying the course on excessive use of fossil fuels. Even Hollywood has gotten into the fray as well with the release of The Day After Tomorrow in 2004, which imagines destructive weather of unprecedented magnitude unfolding as a result of climate change. Yet, the warnings continue to be ignored by many people and even the Obama Administration didn't make an effort to address the issue when there was an opportunity to do so with a large majority in the House and a filibuster proof majority in the Senate in 2009. Human civilization will end up learning the importance of clean energy the hard way in the coming years and decades, especially in the United States.

The implications of global warming has been examined by a number of scientists, such as the article Memorial Day 2030 from Climate Progress. The timing will be affected by an emerging "green technology" industry that will start to take hold after "The Great Deflation" ends, giving rise to the "Green Technology Age" (identified as Supercycle wave (b) of Grand Supercycle wave [IV]) which will start in 2021 and end in 2042. The rise of a green technology industry will slow down the rate that greenhouse gases are accumulated in the atmosphere, which will ultimately affect the timing of when the effects of climate change will start having a substantial impact on human civilization.

It will be around 30 years or so before climate change will have a substantial impact on human civilization. We are starting to see some hints of the effects of climate change in the future. Just this year, we got some of the most extreme weather in many decades take place, with the 2011 Mississippi River floods, the 2011 Super Outbreak (of tornadoes), and most recently, the 2011 Joplin tornado.

Given the negative social mood that will be present during "The Great Tribulation", food shortages and increasing scarcity of arable land, both caused by climate change, could easily be used as a justification for starting a war. Wars generally erupt during the largest C waves of bear markets of Primary degree and above, and history (going all the way back to 1200 BC) indicates that Grand Supercycle degree bear markets always result in war. The period of "The Great Tribulation", identified as Supercycle wave (c) of Grand Supercycle wave [IV], would be a time when wars over resources would erupt.

There is a lot of skepticism about global warming and climate change now, but I predict that a "point of recognition" will take place in 2043, which will take the form of a "Global warming panic". This would be the center of Cycle wave I down during "The Great Tribulation". At that time, it will be impossible for people to dismiss the reality of man made global warming due to the impact of extreme weather that will be unfolding during that time.

Look for governments to make some very hard choices about the use of fossil fuels and the use of green technology during the first few years of the next bull market, Grand Supercycle wave [V]. The effects of climate change will remain well after "The Great Tribulation" ends, but with the hard choices that governments will make during 2055 - 2058, the planet's climate will slowly return to normal over many decades during the bull market that will unfold.

Wednesday, May 25, 2011

Social Mood overcomes Citizens United

When the Citizens United ruling was rendered by the US Supreme Court in January 2010, the ruling was seen as a silver bullet in the heart of the Democratic Party as the ruling allowed corporations to spend as much as they want to influence the outcome of elections. Since then, corporations, along with the US Chamber of Commerce, pulled all the stops out in campaign spending. As the theory went, corporations had the wealth advantage and could theoretically throw in enough money to allow Republicans to win elections in even the most blue of states and districts, and the course of the United States towards fascism would be impossible to stop.

Yet, we were already seeing evidence that Citizens United wasn't a silver bullet after all. The most dramatic example that played out during the 2010 elections was Meg Whitman spending $163 million of her own money in a bid to be the next governor of California. In spite of setting records for spending, she still lost the election to Jerry Brown.

The scenario unfolded again. It all unfolded in NY-26, a district that is very red as far as far as the political arena is concerned. For many decades, the district was won by a Republican even in cases where the Democratic candidate for governor or president carried the state by a large margin. NY-26 isn't just red, its very far into the red.

In a special election that concluded last night, Democratic candidate Kathy Hochul defeated Republican candidate Jane Corwin in what will be considered one of the biggest upsets in national history. In spite of conservative groups such as Karl Rove's American Crossroads spending $2 million in ad buys, plus assistance of John Boehner launching a fundraising event, Jane Corwin still lost.

The reason why the special election went the way it did is due to the social mood of the voters in the district. There was already a lot of anger in play, mainly over Rep Paul Ryan's budget plan that would have ended Medicare for all practical purposes. All of that pent up anger was going to be expressed at the ballot box in spite of conservatives spending massive amounts of money on ad buys. The day that Jane Corwin stated that she would have voted to end Medicare was the day that voters became increasing angry over the prospect of losing Medicare in the future.

There is again a political aspect to the development as well. In spite of the setback in NY-26, the GOP will continue to accelerate farther to the right. The next leg down in the bear market is about to unfold, which means increasing polarization in the political arena.

The larger picture is still the same. Expect the Palin Administration to purge Medicare in 2017 under the pretense of balancing the federal budget. This will certainly build up a massive surge of anger as we go through the worst part of "The Great Deflation" during that time, which will result in the Democratic Party getting a filibuster proof majority in the Senate, a large majority in the House, and a Democrat winning the 2020 presidential election.

Monday, May 23, 2011

Bears in control of Crude Oil

It looks like the bear market rally on crude oil has peaked and the next leg down is starting. In the last post about crude oil, I had predicted a peak in the $115 to $122 range. The bear market rally peaked a hair short of the target zone at $114.81 a barrel. Primary wave [3] down has arrived for crude oil.

Here's an intermediate term chart of crude oil.

We can see that when the ending diagonal was done, it was followed by a sharp decline downwards. The sharp decline isn't too surprising, given that it would take roughly a month to retrace the ending diagonal. The decline in progress, however, is likely too brief to be a Minor degree impulse, so its most likely Minute wave [i] of a leading diagonal. Notice the potential three wave structure of the initial decline from the top.

A leading diagonal has implications at the gas pump as well, since gas prices tend to follow crude oil. The implication of a leading diagonal is that gas prices at the pump could stay above $4 a gallon in many areas of the United States until perhaps early 2012. A rounded top pattern in gas prices at the pump is a very likely scenario.

The top of the bear market rally really does have all the expected characteristics of a large wave 2 in a bear market. In 2008, when oil peaked at $147 a barrel, there were calls by Congress for an investigation into speculation and price manipulation, but the pressure was brief. This time around, with the peak of the bear market rally approaching, the Obama Administration started calling for investigation into the role of speculators and price manipulation in the rise of oil. The difference is that there has been a stronger response from the government this time around, which indicates a stronger level of fear than in 2008. Not only has the Obama Administration called for an investigation into price manipulation, but also recently pushed to put an end of government subsides for Big Oil as well, arguing that Big Oil is doing fine without the subsidies as evidenced by stratospheric profits. On top of that is a speech by Obama in April 2011 on the subject, emphasizing the need for energy independence and cutting the use of foreign oil.

Expect the Obama Administration to continue putting pressure on Big Oil for a number of months, possibly into 2012, in spite of crude oil's decline from the peak. Only when crude oil starts the initial Minor wave 3 down will government involvement end.

We are seeing the effect of "The Great Deflation" in crude oil prices, and the forecast is for oil to continue falling. Here is a chart of oil from 2003 to 2022.

Recall that when Primary wave [1] down took place in crude oil, OPEC started cutting production in a frantic effort to put a floor on falling prices. There is every reason that the same thing will happen again when Primary wave [3] down unfolds in earnest.

Looking at the larger picture, Peak Oil occurred in 2008 at a global production of 86 million barrels per day. With Primary wave [3] down unfolding in oil prices, OPEC will cut production again to try to put a floor on falling prices. This will be accompanied by Big Oil shutting down production facilities as well. It costs roughly $25 to produce a barrel of oil from oil sands and from deep sea drilling. Once oil falls below $25 a barrel, oil companies will start shutting down production to avoid taking losses on their balance sheet. The result will be a chronic shortage of oil that will be evident during the Palin Administration Period, with production falling faster than the Hubbert Curve would predict. One of the consequences is economic and living conditions falling to the level of the 1930s by 2021.

Friday, May 20, 2011

Rise of the 2012ers

The undercurrents of bearish social mood continues to simmer underneath the surface even as the bear market rally moves towards its final top. Religious belief in "the end of the world" has been picking up steam as the Grand Supercycle degree bear market continues to unfold.

We are seeing a preview of what the "end of the world" meme will look like next year as December 21, 2012 approaches. It isn't the so-called end of the Mayan calender that has gotten the attention of the media recently. It's the prediction of the start of the end of the world on May 21, 2011. The doomsday prediction has taken the media by storm in the last several days and every major news studio has covered the developments.

Here's a sample of news articles to illustrate the pervasiveness of the doomsday meme:

1 -- 'Judgement Day' generating buzz
2 -- May 21, 2011 -- A Portrait of Believers in the "End of the World'
3 -- May 21, 2011 -- Judgement Day rumors spread across the US
4 -- Preachers line up against May 21 Leader

The fact that such doomsday predictions would take the media by storm speaks of the bearish social mood that is already present. The date will pass without incident, but the meme isn't going to disappear. As the next leg down in the bear market commences, more and more people will embrace the idea of doomsday.

Bear markets of Cycle degree and above result in substantially increased popularity of religion as magical thinking takes over. Given the size of the bear market that we are in now, I expect magical thinking to run rampant in religious circles. One of the consequences of magical thinking is a high frequency of doomsday memes, and its no surprise that such memes are already appearing now.

If Primary wave [3] down unfolds as I expect, then the 2012 doomsday meme will rapidly pick up steam in the next several months. The meme involves the idea that Planet X, named "Nibiru" will come hurtling into the inner solar system and wreck havoc on Earth on December 21, 2012, thus bringing about Judgement Day. This meme started taking root in 1998, but now, it is spreading like wildfire. Expect the majority of Christians to jump on the 2012 doomsday bandwagon by the time this year ends. 

Wednesday, May 18, 2011

A View of the Great Tribulation

The worst part of the Grand Supercycle degree bear market is decades into the future, but we are already starting to see some glimpses of what the period will be like when we get there.

According to Living Planet Report, humans will need two Earths by 2030 if the current trend of resource consumption continues. The trend, however, will change with "The Great Deflation" unfolding in full force in the coming months and years. Resource consumption will greatly slow down during the worst part of "The Great Deflation" which will change the timing of when resource consumption goes critical. The critical event would likely occur in 2042.

The worst part of Grand Supercycle wave [IV] will start in 2042, which would be Supercycle wave (c). In many ways, 2042 - 2055 will be a lot like 1770 - 1784 -- wars, revolutions, uprisings, authoritarianism, and religious persecution, all unfolding on a global scale. However, it will be worse this time around because there are issues that human civilization will be facing that were never an issue back in the 1770 - 1784 period : Global warming, which will cause a lot of havoc on its own, the fear of an asteroid impact (2007 VK184) in 2048, and chronic resource shortages. That's why I refer to the period of Supercycle wave (c) as "The Great Tribulation" as it will be a period of very hard times for humanity.

First of all, a chronic resource shortage will crash the global economy, resulting in manufacturing corporations and businesses closing their doors, which will eventually help push the unemployment rate to 75% (U6) in the United States by 2055, with similar unemployment levels in Europe as well.

Second, a chronic resource shortage will result in a massive chasm between the upper class / rich and everyone else as essential commodities such as food and water get priced out of reach of all but the top 5%.

Given the negative social mood that will be present during "The Great Tribulation", a chronic resource shortage could easily be used as a justification for starting a war. In addition, it could be more than a coincidence that the start of the chronic resource shortage corresponds with the start of Supercycle wave (c), which is the year 2042.

On the long term, I expect that the start of Grand Supercycle wave [V] in 2055 will be characterized by governments making some very hard choices about resource consumption that will help run the global economy in a more resource efficient manner.

Sunday, May 15, 2011

Our Current and Future Path

Here is an update on our current position within the larger Elliott wave sequence. The larger picture still remains the same. With the blow-off top possibly in its final days, it's time to assess where we are and where we are going.

The long term trends have not changed, as shown by our current position at the largest degrees of trend:

Ultra Millennium wave ((III))    1400 - 11000+  Modern and Future Civilization
Super Millennium wave ([1])    1400 - 4400+    Modern and Future Civilization
Millennium wave ((1))              1400 - 2233      Modern Civilization

The Millennium degree trend is still up.

Within Millennium wave ((1)), it is clear that the first three Grand Supercycle waves have already completed. We are in a Grand Supercycle degree bear market, which started in 2000.

Here's a chart of the DJIA from 1915 to 2055, showing the projected wave path of the DJIA in the years and decades ahead.

Given that Grand Supercycle wave [IV] must stay within the trend channels associated with Millennium wave ((1)) with perhaps a throw-under at the end of the correction, I lean heavily towards a flat. The bear market is just getting started and we are yet to enter the heart of the abyss. The bear market should end in 2055, which would also correspond with a Kondratiev cycle low point.

Within Grand Supercycle wave [IV], we are still in the initial leg down, which is Supercycle wave (a). It is clear that Supercycle wave (a) is unfolding as an expanded flat, with Cycle wave a and Cycle wave b completed and Cycle wave c in progress. Since an expanded flat is a 3-3-5 pattern, we should expect Cycle wave c to unfold as a five wave impulse. Within Cycle wave c, only Primary wave [1] is completed and we are very close to completing Primary wave [2].

Here is a chart of the DJIA from 1998 to 2021, showing the projected wave path of Supercycle wave (a).

The projected wave path of Supercycle wave (a), of course, paints a picture of deflation unfolding with increasing momentum over time. It is for that reason that I call the period "The Great Deflation". So far, "The Great Deflation" has been unfolding in a punctuated fashion. This will change with the start of Primary wave [3] down, when deflation will unfold in full force.

Here is a chart of the DJIA from 2007 to 2015, showing the portion of Cycle wave c that has unfolded so far, plus a projection for a portion of Primary wave [3] down. Expect Primary wave [3] to last 55 - 60 months. The bear market is projected to continue sliding down the "Slope of Hope" until Oct 2013, when the center of Primary wave [3] is reached.

The point of recognition is arrowed on the chart. That's when economists and market analysts start to realize that a major depression is in progress. Until the center of Primary wave [3] is reached, there will be numerous calls for a bottom and reassurances of recovery by economists, market analysts, and politicians. In the early part of Primary wave [3] down, economists will likely say that "it's just a double dip recession".

Another aspect of "The Great Deflation" is a great bull market in the US Dollar that started in 2008.

Here's a chart of the US Dollar Index from 1998 to 2021, showing the projected wave path of the rest of Cycle wave I.

As shown in the chart, the down trend in the dollar, which started in the 1700s, ended in 2008. The 300 year bear market in the dollar is clearly too big to be a Grand Supercycle degree correction, it is most likely Millennium wave ((2)). The projected wave path of the US Dollar Index also paints a picture of deflation unfolding with increasing momentum over time.

While Primary wave [3] down unfolds in the stock market, economy, and job market, Primary wave [3] up will unfold in the US Dollar Index. The end of "The Great Deflation" will correspond with the peak of Cycle wave I in the US Dollar Index. 13 years is definitely a reasonable duration for a Cycle degree advance within a larger bull market, and in addition, retrace the 32 year ending diagonal (1976 - 2008) within the guideline range of 10 - 15 years.

We did not have a "Great Recession" that recently ended. The current bear market is not in the same league as the Great Depression, so we are not in the "Second Great Depression" either. We are in a major depression. I think that the Crisis of the Roman Republic is a better comparison to the magnitude of the bear market that is unfolding and the hard times that are coming. I propose to call the current period, Grand Supercycle wave [IV], the "Crisis of the Western World".

Tuesday, May 10, 2011

Racing for the Bottom

The precursors of the coming Palin Administration Period are already unfolding. With the continuation of austerity measures unfolding at the state level, it is becoming very clear from a socionomic perspective that a massive bear market is unfolding.

In a deflationary collapse, tax revenue dries up, and governments respond with austerity measures which means that essential services and safety nets get cut back or even purged altogether. As the worst of "The Great Deflation" is still yet to unfold, the austerity trend is still in its infancy.

In the latest series of developments, Michigan, Missouri, and now Florida, have passed legislation aimed at cutting back on unemployment benefits. Here's the chain of events that have unfolded so far:

1 -- In March 2011, Michigan became the first state to cut unemployment benefits, reducing the standard duration from 26 weeks to 20 weeks. The change would take effect in January 2012. There is more information about the development here. Just before Gov. Rick Snyder signed the bill into law, the National Employment Law Project expressed concern that other states would start working on similar legislation.

2 -- In April 2011. Missouri became the second state to cut unemployment benefits. The reduction is the same as in Michigan, but the law would take effect immediately upon signing into law. Gov. Jay Nixon signed the bill into law a short time later. There is more information about the events in Missouri here.

3 -- In May 2011, Florida is set to become the third state to cut unemployment benefits when Gov. Rick Scott signs HB 7005 into law. The cuts go substantially farther than in either Michigan or Missouri. The duration of unemployment benefits would be cut to as little as 12 weeks. Additionally, the new law will require potential workers to provide detailed documentation of five employer contacts per week. There is more information about the development here. In response to the imminent signing of HB 7005 into law, Christine Owens, the Executive director of the National Employment Law Project, made a statement about the potential destructive impact of the new law.

The trend that we see here is what is known as "the Race to the Bottom". Expect this trend to not just continue, but accelerate in the coming months and years. As Primary wave [3] down unfolds, the effects of "The Great Deflation" will result in tax revenue that rapidly dries up. This will lead to increased austerity measures at the state level.

The actions of Gov. Rick Snyder, Gov. Rick Scott, and Gov. Jay Nixon, all at the state level, is a precursor to what the Palin Administration will do at the federal level in 2017. As the worst part of "The Great Deflation" unfolds with Primary wave [5] down in force, unemployment benefits will be purged at the federal level by the Palin Administration sometime in 2017. By then, federal tax revenue will have almost completely dried up.

Saturday, May 7, 2011

State of the Economy

As the blow-off top in the Primary degree bear market rally enters what could possibly be its last days, exuberant optimism continues to grow in intensity. There is consensus among economists and analysts that the worst is over.

The latest development occurred yesterday with a jobs report that indicated that 244,000 jobs were created in April 2011. The report, of course, served as fuel for exuberant optimism. In response of the report, President Obama has put down the proverbial "Mission Accomplished" sign on the economy, declaring victory. There is more information about the development on this Daily Kos page, which also includes a video of the weekly address.

What we are seeing is the "seductive personality" of a large wave 2 (in a bear market) play out in the political arena. The rich, the upper class, bankers, and politicians are all partying like its 2007. There is a lot of exuberant optimism in the air, even more evident than it was in 2007. In a bear market, bullish sentiment is stronger at the peak of wave 2 than at the start of the bear market.

In terms of nominal GDP, the economy has been growing since 2009. To get the true state of the economy, one must look at GDP in terms of real money. Gold is considered real money. GDP in terms real money better reflects the true purchasing power of a nation's economic output. Nominal GDP (and Real GDP as well) is expressed in terms of dollars. The dollar is a fiat currency.

In terms of real money, the US economy peaked in 1999 (39 billion ounces of gold) and has fallen 73% from the peak, reaching a new low of 10.4 billion ounces of gold in the first quarter of 2011. Using the same measure, the US economy fell 48% during the Great Depression. By this measure, we are in a major depression, which has so far unfolded in terms of the loss of purchasing power.

"The Great Deflation" has been unfolding since 2000. Wage deflation has been unfolding for the last 11 years. There is more information about the development on this Daily Kos article. There are other places where "The Great Deflation" has been unfolding such as the declining housing market and the stock market in terms of real money (DJIA/gold ratio).

The only reason why economists still believe the economy is expanding is that GDP in terms of dollars continues to rise. However, the reason why the Nominal GDP and Real GDP continue to rise is that the dollar has been devalued into the ground as government, corporations, businesses, and even individuals get leveraged to the hilt in credit and debt -- which has resulted in a massive credit bubble that has been growing for 37 years and counting.

The bear market rally will soon come to an end, and the next leg down, Primary wave [3], will unfold. When the trend change occurs, "The Great Deflation" will unfold in full force, and the economy will decline in nominal terms as well as in real money terms. The economy (in terms of nominal GDP) will fall faster than gold will. The stock market will fall in nominal terms as well, and will also fall faster than gold, with a downside target of around 500 for the DJIA by 2021.

There is already awareness of the true magnitude of the bear market that we are in, as evidenced by a Gallup Poll done last month. There are more people that think that we are in a depression than those who think that the economy is growing. There is no doubt, however, that those who think that a depression is unfolding are making comparisons with the Great Depression. As I have shown many times, we are in a major depression, and I think that the Crisis of the Roman Republic is a better comparison to the hard times that we are going though right now.

Friday, May 6, 2011

Fault Lines in Europe

A couple of days ago, Portugal accepted $116 billion in international aid. This was the third time in a year that a nation in Europe needed a bailout. Although many economists still believe that the damage has been contained and a possible contagion has been contained, there is strong evidence that the fault lines continue to grow in number and extent in Europe.

There is reason to believe that the events that have unfolded in Europe since March 2009 -- and even the United States for that matter -- are consistent with the characteristic of a large degree wave 2 in a bear market. On the outside, everything appears to be on the mend and a recovery appears to be taking hold. Underneath the surface, however, are fault lines that grow in size and number until they reach critical mass. During that time, economists and analysts start to believe in recovery and renewed growth as the later part of the bear market rally unfolds.

Here is what has happened in Europe in the last year:

April 2010 - May 2010:  Greece goes into a debt crisis as yields on Greek bonds exceed 10 percent, making the debt too heavy of a burden to bear. Greece gets bailed out by the European Union in April 2010. Greece then attempts to implement austerity measures, which is then followed by mass protests in the streets.

June 2010: There is fear that Ireland, Portugal, Spain, and Italy would possibly default on their debt, creating the fear of debt contagion.

Nov 2010: Ireland gets bailed out as its deficit reaches 32% of its GDP.

March 2011: Portugal's government collapses, creating the fear of a debt default.

April 2011: Finland votes against bailing out Portugal, which is indicative that a Primary degree trend change in social mood is imminent.

May 2011: Portugal gets bailed out by the European Union.

The end game is unfolding. All eyes are now on Spain, yet fault lines are appearing in unexpected places. There are now indications that the United Kingdom will need a bailout in the near future. There is more information about the development here. Greece, Portugal, and Ireland are small countries. Its one thing to bail out a small country. Trying to bail out a large country is another matter. The UK is 7 times bigger than Portugal in terms of GDP. In other words, the UK is too big to bail out. A debt default is inevitable.

This is how the second leg down of the Great Depression got started. Germany defaulted on its debt in 1930, and the ripple effects that followed were global in scale. The next leg down of "The Great Deflation" could easily be precipitated by the UK defaulting on its debt, and the resulting ripple effect would be global, creating a chain reaction of defaults throughout the western world.

Tuesday, May 3, 2011

The Glass Debt Ceiling

The end game on the debt ceiling has been set into motion. The debt ceiling has been utilized as a political football. On one side is the GOP, which is vowing austerity measures at the federal level as a condition to raise the debt ceiling. On the other side is President Obama and the Democratic Party, which wants spending cuts implemented, but also wants to keep the safety nets intact.

The debt ceiling is at $14.3 trillion. As of yesterday, the debt stood at $14.25 trillion. At the current trajectory, the debt ceiling will be reached sometime in June 2011.

Even now, the Treasury has set into motion a series of bookkeeping maneuvers to keep the government running for as long as possible. There is more information on the development here. These measures buy time, but only slow down the rise of the debt. An increase on the debt ceiling will still have to be voted on in Congress and then signed into law.

There is a lot of bear market politics in play as the GOP continues to accelerate farther to the right, widening the gap between the GOP and the Democratic Party, and making the political arena more polarized.

Expect a lot of drama in the political arena for a number of weeks, perhaps as long as a couple of months, as the debt ceiling gets utilized as a political football. There is already talk of "economic doomsday" in politics and media about the consequences of not raising the debt ceiling. Just over a week ago, Standard and Poor's downgraded its credit outlook for the United States, citing political gridlock. There is more information about the development here.

In the end, cooler heads are going to prevail, but the political theater that takes place between now and then is going to make many people nervous. This nervousness is already evident with banks lobbying to push for an increase in the debt ceiling. We are in the final stages of a Primary degree bear market rally, which results in the type of social mood where there is a reluctant willingness to compromise.

On the much longer term, the United States will eventually default on its debt (around the year 2013 - 2015), but it won't be due to a failure to raise the debt ceiling, but due to rising interest payments eventually making the existing debt too heavy of a burden to bear as tax revenue dries up.