Alert: QE II Has Lit The Fuse

Thursday, November 11, 2010

Executive Summary

• The US is one failed auction away from economic meltdown.
• OECD countries are not aligned on what battle they’re fighting.
• ‘Emergency’ measures governments are now taking will become permanent.
• Currency devaluation & higher prices are inevitable.
• Time to prepare is running out. Use the time you have wisely.
• Chris gives specifics of his personal preparations for use as a guide.

Part I

If you have not yet read Part I of this report, please click here to read it first.

Part II

To quickly review Part I, the US has embarked on a very dangerous strategy of trying to print its way to prosperity, and various countries have, in exceptionally strong terms, indicated severe displeasure with the move. Essentially, they’ve determined that the US is trying to export its difficulties to them, and this is not appreciated.

So what do we make of this, and what might happen next?

I’ll be honest with you here: I have been redoubling my efforts at personal preparation over the past few weeks (and they were already on set to “high” over the past six months). I now see a very high possibility that a fiscal and/or associated dollar crisis could happen in the next 12 months. How high? Right now it looks like 50/50 to me; it’s a coin flip (or Russian roulette with three in the cylinder, if you prefer).

All that would be required to set match to dry tinder would be a single failed Treasury auction. You may consider this unlikely due to the presence of the Fed backstopping all new government borrowing, and that’s certainly a valid consideration, but the wildcard here is that the Fed is merely backstopping all the new Treasury issuances. As I indicated in part one, above, while the US might be floating roughly $1.2 – $1.5 trillion in new Treasuries in 2011, there’s another $3 trillion or so of ‘rollovers’ that have to go off without a hitch as well.

To launch this crisis into a new phase would simply require that one or more of the existing holders of the debt requiring rollover to abstain, and instead simply take their money and walk away from the auction.

So far, this doesn’t seem terribly likely, as the custody account at the Fed has been growing steadily both before, during, and after the financial crisis (chart below is in