12 posts tagged “u.s. debt”
Dr. Martenson says it all here. If anyone thinks that this can continue indefinitely – you’re living in a fantasy.
jg – Oct 30, 2008
Treasury seeks "unprecedented borrowing"
Thursday, October 30, 2008, 5:19 pm, by cmartenson
I nominate this for understatement of the year:
Ryan Says Treasury to Need `Unprecedented' Financing
``This year's financing needs will be unprecedented,'' said Anthony Ryan, the Treasury's acting undersecretary for domestic finance, at a Securities Industry and Financial Markets Association conference in New York, where he was a last-minute substitute for Treasury Secretary Henry Paulson.
"Unprecedented" hardly does this justice, we need a more superlative word. "Ginormous" comes to mind.
Perhaps the Germans have a single word that means "future destroying" we could use.
Mr Ryan continues:
Ryan said the Bush administration's July projection of a $482 billion deficit doesn't include new programs launched to attack the credit crisis. The bank rescue program, a separate mortgage-backed securities program, the Fannie-Freddie takeover and a student loan program all need funding, Ryan said. Also, the Treasury is borrowing money on behalf of the Federal Reserve and the Federal Deposit Insurance Corp., he said.
First, how come we don't have a more recent budget projection than from last July? A lot has happened since and I think the Treasury markets would enjoy a bit of guidance on how much paper they will be asked to absorb. Also, I deplore the use of budget projections that exclude items that are, uh, part of the budget.
And here's one estimate of the range of total borrowing:
``The budget deficit for fiscal year 2009 might reach $1 trillion if Congress passes another stimulus package this winter,'' said Lou Crandall, chief economist of Wrightson ICAP, in a research note. ``And that's just the beginning of the bad news -- financing needs arising from off-budget items might be nearly as large as the on-budget deficit.''
Crandall estimates 2009's total borrowing needs at $1.95 trillion. He says Treasury could raise this money with an ``aggressive but sustainable'' increase in regular borrowing, accompanied by one-time auctions as needed.
The difference, I suppose, between the $1 trillion and the $1.95 trillion number is the difference between the fiscal year (Sept 30 - Sept 30) and the calendar year. So I guess Mr Crandall expects nearly a trillion of additional borrowing in the final 3 months of 2009.
For the record, because I factor in a loss of tax revenues and additional stimulus packages, I place next year's fiscal year borrowing at between $2 trillion and $2.5 trillion.
Also, I am cheating a little by knowing that this year's deficit was nearly $1.3 trillion (the first $1 trillion plus deficit on record) even though only $455 billion of that was publicly admitted to by the Bush administration.
I have no good explanation for why the registered deficit was 179% larger than the admitted deficit. Normally the difference is in the vicinity of the excess Social Security funds that were siphoned off, or about $180 billion.
This difference is a whopping $815 billion.
My suspicion is that some of this can be found over on the Federal Reserve Balance sheet but I cannot prove that yet.
Bottom line: The US Treasury department is about to shatter every borrowing record in all of history. Why is China continuing to hold all those US dollars?
I wrote in an earlier post on our monetary system (Part II) that debt levels are crushing the world’s economy - leading to deflationary pressures throughout the world. We’re seeing more and more articles like the one below that show how current household/corporate/government debt is approaching unmanageable levels. The same dynamic is at work here that is causing housing markets to collapse – debt levels are outpacing income around the world. As the ratio of total household debt to disposable income increases – consumers have less and less money to spend. This is causing the world’s economy to slow dramatically.
Let’s first take a look at household debts levels in the U.S. (South Korea household debt levels look very similar - graph shown in the article below).
It’s easy to see that our household debt to income ratio has grown exponentially over the past 30 years. This shouldn’t be surprising to us since our debt is growing exponentially – while our income is not (due to the effects of inflation). Let’s take a look at some information taken directly from the Fed. The following chart shows us our interest payments as a % of disposable income.
The chart above is showing us the percentage of our income required to meet our minimum debt payments (interest only). As you can see – since the early 1990’s – the minimum payment on our debt has risen steadily and now consumes over 14% of our income. Again – this is just to pay interest – this does not reflect payment of principal. If we add in principal – we see that Americans need almost $1 for every $5 earned to pay debt obligations.
Here’s the culprit (chart below). Household credit market debt outstanding has reached almost $15 trillion dollars in the U.S. What is happening today to the world’s economy is the result of some very simply math. We can only take on so much debt – before the amount of money required to service the debt – exceeds our ability to pay (income). If you are someone faced with paying the minimum on your credit card or buying groceries – what are you going to do? You’re going to buy groceries - of course. The same dynamic is playing out all over the world – current income cannot support existing debt plus living expenses (rent/mortgage, food, etc.) – so defaults are rising on credit cards, autos, mortgages, etc. People are prioritizing what they can afford – and buying additional ‘stuff’ is not high on the list – so the world’s economy is tanking. It doesn’t matter how much ‘liquidity’ is pumped into the world’s financial system – if consumers cannot take on any more debt – there is no lending. The other piece of the puzzle – as we’ve spent a great deal of time discussing in previous articles – is that debt growth isn’t simply good for the world’s economies – it’s required.
You’ll notice that household credit market debt outstanding seems to be leveling off on the chart above. You probably also noticed that the ratio of household debt service to income ratio (chart above) actually dropped last month. I posted an article a few weeks ago that explained how Americans actually reduced their outstanding debt in November – for the first time in our history. We are now beginning to realize that more debt is not good in this economic environment – and we see this phenomenon on these graphs. The graph below shows us the percentage change (Year/Year) of household credit market debt. As we’ve also discussed previously, consumer borrowing is falling off a cliff – and since exponential debt creation is required in this system – we’ve seen the Federal Reserve taking extraordinary actions to keep the system functioning.
This is not a problem isolated to the United States. Since every major economy is on the same system – we see that every nation is struggling with unmanageable debt loads.
External Debt (% of GDP)
The world doesn’t need more debt (as we’re constantly told by our leaders) – it needs a monetary system that is sustainable.
So, we are now in a situation where deflation (prices are dropping for everything) is rippling throughout the world’s economy due to crushing debt loads while the supply of money in the hands of consumers is also declining significantly. Since debt growth is slowing and debt equals money in our system– money supply growth is also slowing.
While the total supply of money continues to grow (albeit much slower over the past few months) – who is getting more of the money and who is getting less? Who is benefiting from the trillions in bailout money as the system collapses? The wealthy – bankers, Wall St., etc. Who continues to struggle under this system – you and me. Wealth is now being transferred from average people (that’s you and me again) to the rich at a dizzying pace.
It has always been this way – we just haven’t been paying attention. We live in a monetary system that allows (our Government allows this – which means you and I allow it) banks to create money and charge us interest on the money they create. Even though this fiat currency is inherently worthless, they continue to control more and more of the world’s assets through this system while you and I have less and less. I’ll say it again – this is not an accident.
Are the bailouts having any affect on the economy? Nope. Take a look at bank reserves at the Fed.
These excess reserves tell us that banks are not lending the money they are receiving – regardless of what we’re told through the media. This is due to the current state of the economy and the fact that the Fed is paying interest (.25%) on reserves.
How are credit markets? It appears that the Fed remains the lender of last resort.
Although we continue to hear lots of rhetoric about ‘reviving’ the economy - we are seeing economic conditions continue to deteriorate and we see the Fed and Treasury doing very little to help. The Fed lowered the Federal Funds Rate target to .25% yesterday – which simply matches the effective Federal Funds Rate – it’s actually been around .25% for months. Lots of talk – yet they are doing nothing to actually correct the situation. I don’t have to tell you again how this ends.
By the way – if you’ve heard the Fed talk about ‘Quantitative Easing’ and wondered what this means – it simply means that the Federal Reserve is planning to print vast amounts of dollars. If you’re thinking this could seriously devalue the dollar – you’re right.
jg – Dec 17, 2008
DECEMBER 17, 2008
The Perils of Consumer Debt on Display in South Korea
By EVAN RAMSTAD
Wall St. Journal
SEOUL -- After the Asian financial crisis hit South Korea a decade ago, the government helped the export-dependent economy recover by pumping out money and convincing people to borrow and spend more.
But this time around, the high household debt that accumulated in the past decade is depressing spending -- an experience that has relevance around the world as governments seek ways to get consumers to help lift their economies.
As exports drop and South Korea's economy slows, a high level of household debt is keeping consumers from spending more and the government -- like others elsewhere -- is wrestling with the question of how much to intervene.
South Korean lawmakers over the weekend approved a 2009 government budget that is 11.5% larger than this year's, at 284.5 trillion won ($208.65 billion). On Tuesday, the Ministry of Strategy and Finance unveiled a package of job programs and spending measures it calls the "South Korean New Deal."
The debate in South Korea is also colored by its unfinished rise from poverty, which began in the 1960s and proceeded strongly until the Asian crisis. In the aftermath, South Korean companies wiped out debt, built up cash and invested less in the economy, while the government eased consumer borrowing.
That led to a steep rise in consumer debt. Now, as the global slowdown erodes South Korea's ability to export goods, domestic consumption is too weak to drive economic activity the way it did in the late 1990s. The government expects private consumption to grow just 1% next year.
"Everybody is too much in debt, so they cannot consume," says Kim Kyeong-won, a senior vice president at Samsung Economic Research Institute.
According to data released by the Bank of Korea last week, South Korean household debt climbed 10.7% in the third quarter from the same period a year ago to a high of 676 trillion won. That amounts to 40 million won, or $29,300, per household.
South Korean government and banking officials acknowledge household debt levels are high but note that delinquency rates are low, and that falling interest rates are easing some of the pain. The central bank has lowered its main rate to 3% from 5.25% over the past two months. Meanwhile, tight restrictions on mortgages -- consumers can only borrow up to 60% of the value of their property -- should insulate banks if defaults rise or property values fall.
The government's policies for 2009 are based on an expectation of 3% economic growth next year, said Noh Dae-lae, a deputy finance minister. That's higher than the Bank of Korea's forecast of 2%. Some private economists predict a contraction for the first time since 1998.
The consumer-debt problem is entering the debate over whether the South Korean government is too involved in the economy. President Lee Myung-bak campaigned last year on a platform of scaling back government involvement, including cutting regulation and privatizing some government companies. The prospect that Mr. Lee will instead preside over more intervention is widely debated in the parliament and media.
In South Korea's crisis a decade ago, the government propped up failing businesses and banks, and it remains a big shareholder of some of those firms today. And as consumer debt grew over the past five years, several new government programs emerged to help people avoid bankruptcy, which carries a social stigma.
At a credit-counseling center that is part of one such program, Yoon Sook-hyeon recently appealed for a new repayment schedule after an illness kept her from making six months of payments on a $27,000 debt-workout program she started three years ago. Ms. Yoon, a divorced mother of four, ran up the debt when she started putting expenses from her family business, a small motel in Seoul, on personal credit cards.
"When I started using a credit card, it was just for living costs, education fees and clothes for the kids," Ms. Yoon says. "When the business got worse, it was hard to pay the bills so I got cash from credit cards. Then it got more difficult, so I had to use several cards together. Later, I couldn't even do it." A credit counselor listened to her story for about 30 minutes and agreed to extend her program.
Jung Sook-cha and her husband have run up nearly $70,000 in education-related loans, which allowed one of their children to study overseas. She said she's worried her husband, who works at a bank, may be forced to take a pay cut in the slowing economy, hurting their ability to maintain loan payments of $1,000 a month.
—SungHa Park contributed to this article.
Write to Evan Ramstad at evan.ramstad@wsj.com
If we wanted to sum up the financial/economic knowledge of our current leaders - I think this quote by Joe Biden says it all:
“We’re going to go bankrupt as a nation,” Biden said.
“Now, people when I say that look at me and say, ‘What are you talking about, Joe? You’re telling me we have to go spend money to keep from going bankrupt?’” Biden said. “The answer is yes, that's what I’m telling you.” - Joe Biden (July 16, 2009)
Unbelievable. People sometimes confuse insolvency with bankruptcy. There are basically two types of insolvency. You can be insolvent and remain out of bankruptcy - as long as you have the cash flow to pay your debts. Insolvency simply means that your liabilities exceed assets.
From Wikipedia:
Balance sheet insolvency
-Having negative net assets – in other words, liabilities exceed assets.
This is obviously not a good development and is typically the first step towards bankruptcy. The next step is cash flow insolvency - which means that you do not have the cash to pay your debts as they come due.
From Wikipedia:
Cash flow insolvency
-Unable to pay debts as they fall due.
Cash flow insolvency is the final step that leads to bankruptcy. You can be balance sheet solvent (a problem arises if your assets are illiquid - and you cannot sell them to raise needed cash), and still be cash flow insolvent - and forced to file bankruptcy. This is why financial analysts focus on a company's 'cash flow' - and not just the balance sheet. There have been many investors who have been burned - when a company's balance sheet looked strong - but the company simply ran out of cash. Liabilities and assets don't mean a whole lot if a company can't pay its bills.
The obvious truth here is that if you are balance sheet insolvent (the U.S. has been insolvent for years) and are rapidly approaching cash flow insolvency - spending more money is obviously very unwise. The only reason we're not bankrupt already (due to out of control spending) - is because other nations and investors are loaning us the money to remain cash flow solvent. Without this additional money (cash flow) - we will not be able to meet our debt obligations - leading us to default on our debt - and ultimately bankruptcy. It's the same for individuals, companies and governments.
The biggest problem we face today is that with all of the 'stimulus' packages and 'bailouts' - the United States will be required to borrow 3 times the amount of money in fiscal 2009 - as it did in 2008. This is not a small number (estimated budget deficit of $1.8 trillion) - and the trends are not good. As Dr. Martenson mentions below - if we can't borrow this money by selling Treasuries - the only alternative is printing more money. As I've mentioned before - this will lead to a dramatic decline in the dollar, sky-high interest rates - lots of very bad things happening.
As for our current leaders in Washington D.C. - they are either completely ignorant of financial/economic matters - or they are deceiving us. I'll let you decide.
jg
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The US is Insolvent (and headed towards bankruptcy)
Friday, July 17, 2009, 10:59 am, by cmartenson
Last night, in Boulder Colorado I had the honor to present a 1 hour mini version of the Crash Course ideas to an audience that I estimate to be in the vicinity of 300+. Sponsored by Transition Colorado, who did a remarkable and professional job of organizing and managing the event, this talk was attended by more young people than any other talk I have yet given.
This was extremely heartening.
Dr. Albert Bartlett was in attendance, which was a great honor for me, although I confess to being nervous at the thought of covering exponential growth with him in the audience. Kind of like giving meditation advice to the Dali Lama is how it seemed. Nonetheless, I now have a picture of myself with a man I am sure will be recognized through time as being both right and unwavering in his views on exponential growth and population.
At the talk I necessarily had to gloss over some important details and one of those concerned the statement that “The United States is Insolvent.”
I originally wrote about this unpleasant fact back in 2006 and today, unfortunately, the situation has only deteriorated. I want to revisit that topic because there is really nothing more onerous to the future prosperity of a country than going bankrupt. If you care about the future prosperity of the US, you need to understand this situation.
Yesterday, my jaw literally dropped when I read this statement made by Vice President Joe Biden;
“We’re going to go bankrupt as a nation,” Biden said.
“Now, people when I say that look at me and say, ‘What are you talking about, Joe? You’re telling me we have to go spend money to keep from going bankrupt?’” Biden said. “The answer is yes, that's what I’m telling you.”
What surprised me was not the admission by a sitting US Vice President that the nation is headed towards bankruptcy. I suppose that's pretty clear to everybody by now so why not just tell it like it is? What got me was that the statement, as expressed, displays an unbelievable ignorance of finance and economics. The claim boils down to the idea that the way to avoid bankruptcy is by spending money.
If this is somehow possible, I sincerely hope that Mr. Biden sees fit to share the secret with the millions of people that entered bankruptcy this year. Otherwise, it will have to stand as a jaw-droppingly inane comment.
But it clues us into the mindset of at least some of the DC leadership and that gives us some sense of how much faith we should place in their efforts to centrally manage everything from car companies to secretive trillions handed out to untrustworthy bankers.
Instead of blind faith, we might prefer to trust in our own ability to look at the data and ask, “how is this going to work?”
This morning I finally read an exceptional document put out by Sprott Asset Management (Toronto, Can.) which exactly and precisely lays bare the magnificent funding problems that DC has created for itself. Titled “The Solution…Is The Problem” it opens with a statement of fact, “In fiscal 2009, the United States must find buyers for almost three times the debt that was issued last year.”
Three times, or 300% more debt sales by the US government this year compared to last year. How will that happen? Rather than just sort of assume that this will somehow get done, this report breaks down the potential purchases of US debt by specific classes of purchasers and provides a mid-year report card on how each one is doing in their quest to buy 300% more than last year.
The results are not encouraging.
We begin with the largest buyers of debt outside of the United States – ‘Foreign and International Holders’ (#2). This group accounts for the largest source of external capital for US debt purchases and represents a very important group to float the deficit. They collectively purchased $564 billion last year, and the US will require them to increase their purchases to $1.6 trillion in 2009. Thus far, they have only purchased $465 billion to March 2009, which is halfway through US fiscal year - and well behind the pace needed to triple last year’s purchases. Current data does not bode well for further purchases either. In fact, April Treasury data revealed that ‘Foreign and International Holders’ were net sellers of US debt from March to April 2009.4 This is not surprising given the public comments from officials in China, Japan, Russia and Brazil concerning the level of debt issuance by the United States and its potential impact on the US dollar.
The report continues on covering all ten classes of purchasers and it turns out that only one, “Other Purchasers” is on track to triple their purchases over last year. The other nine? Most are well off of the pace needed to cover up a massive gap.
How will the shortfall be covered? In reality there is only one option and it is the reason I own gold. As the Sprott paper concludes:
As we hope the breakdown above has revealed, the future solvency of the United States as a nation state is currently in jeopardy. It is in far deeper trouble than the mainstream press cares to admit. There are simply not enough new buyers of debt on this planet to support the spending programs of the United States government - and it appears that current holders of debt are beginning to sell. Because it is impossible to balance the budget from outside sources of capital, the only source of funds left for the US, in all reality, is continued money printing.
Such money printing represents a breach of the public trust required to operate a fiat money system. We trust that they will operate the money machine responsibly and they trust that we will go about our daily lives and be productive. Instead the Fed is aiding and abetting the largest printing operation in history and is steadfastly refusing to be audited in any way shape or form. If confidence and transparency are required elements for the sustainable continuation of a fiat money system, the US dollar is in for a rough ride.
While the short term wiggles and jiggles of the markets, and their attendant mouthpieces in the media, do their best to confuse us, it is the larger trends that will illuminate the way.
There can be no doubt except that the US government is financially insolvent. While we may not know the exact timing (this year, next?) or the exact mechanisms (raise taxes hugely? Renege on entitlement benefits?) we can be sure that past profligacy will translate into future hardship and reduced prosperity.
And the shame of it all is that it did not have to be this way. History is thoroughly unambiguous on this matter; spending beyond ones means inevitable ends in tears. No exceptions. How did we manage to forget this?
As I probe further into this country’s recent past, the time of my grandfather and great-grandfather, I am reading of people who understood that prosperity resulted from a combination of productivity and living well within ones means. I wonder what changed and how we so completely forgot the lessons of the (very) recent past that today it is possible for a Vice President of the country to state that spending is the key to avoiding bankruptcy and then walk out of the room with his head held high.
This could be a very interesting week…….
jg – July 26, 2009
Treasury Auction Schedule
By: Karl Denninger
June 23rd, 2009
Let's see if I can count this up....
70 day CMBs, $30 billion (tomorrow)
13 week Bills, $32 billion (July 27th)
26 week Bills, $31 billion (July 27th)
52 week Bills, $27 billion (July 28th)
2 year Notes, $42 billion (July 28th)
5 year Notes, $39 billion (July 29th)
7 year Notes, $28 billion (July 30th)
19 year, 6 month TIPS (reopened), $6 billion (July 27th)
That's two hundred thirty-five billion dollars over the next week!
Almost one quarter of a trillion.......
I guess you should get while the getting is good, but this is going totally parabolic. That money has to come out of somewhere, by the way, in order for the sale to succeed, which is going to get rather interesting at some point - but exactly where it matters is impossible to know.
I expected that when we crossed the $100 billion threshold in a week the market would throw up all over it, but it didn't. Now we've got the government trying to sell a quarter of a trillion dollars in debt over the next week, the announcement is out there, and while the bond market is selling off to a material degree equities could care less!
This is flat-out insane. At this run rate we would be trying to sell twelve trillion dollars over one year's time, an obviously ridiculous and impossible-to-peddle amount of debt at any price.
When does the rest of the world wake up (not to mention the primary dealers) and say "NO!"? Never? Is there a truly insatiable demand for our government's debt, despite the fact that President Obama got up on the national stage last night and promised to spend another trillion dollars we don't have?
How do equities power higher into this sort of debt issuance? Is it simply that the market has deduced that the government will hand all of this zero-interest money out - indefinitely?
Guess what - that which is impossible won't happen, and the stock market is now telling you that the impossible will become reality. There has been and will not be any amount of fiscal sanity on the part of our government until the market imposes it, and when it does it is going to happen in exactly the same way it happened to Bear Stearns, Lehman, Fannie and Freddie. May I remind readers that it was said that Fannie and Freddie "couldn't" get in trouble due to their implicit government guarantee? Well guess what - they both effectively failed, but when the US Government finds itself in the same situation it has nobody who can take it into conservatorship and as such we're just going to have to deal with the consequences of failed debt auctions - that is, dramatically increased funding costs across the board in the economy, including the government, which will choke off any hope of economic anything.
Folks, this is how you get detonation of a nation's monetary and political system. Timing the "event" it is not easy, but the certainty of outcome given this sort of outrageously irresponsible activity is not in doubt.
I'm increasing my stock of things that "will never go to zero" and keeping my ear to the ground. The "short the phone book but make sure you get out fast before you get trampled" moment approaches - mark my words.
I have been watching the U.S. Treasury Bond/Note sales closely this week due to the sheer size of the offerings - $235 Billion. With all of the recent stimulus packages and bailouts - the question everyone is asking is – how much of our debt is the world willing to buy? Yesterday’s bond auction is the first indication that we’re in serious trouble.
‘Primary Dealers’ (Goldman Sachs, JPMorgan, etc.) of Treasury bonds/notes are required by the government to buy whatever is not sold. This hasn’t caused any heartburn for them in recent years because we’ve had ample demand for our bonds/notes – this is now changing. Primary dealers of yesterday’s auction were forced to buy a significant amount – which is why the auction effectively failed. Without primary dealer purchases, we would not have sold all of the bonds offered. It’s not hard to see why – our economy is unstable and our budget deficit of $1.8 trillion is flooding the market with our debt. Supply is outstripping demand. The U.S. government has been balance sheet insolvent for some time (liabilities exceeding assets) – our inability to sell bonds is the first step towards cash flow insolvency – bankruptcy and debt default. If you think things have been crazy over the past year – just wait until this gets out in the mainstream media. It doesn't help that the Treasury is selling another 28 billion in 7 year notes today and then quarterly refunding begins. Remember, just a few short months ago - our government was auctioning around $10-15 billion a week.
Many people who have kept an eye on Treasury auctions over the past year believe that it is entirely possible the Federal Reserve has been supporting Treasury Auctions directly (monetizing our debt). This is one reason they believe the Fed is opposed to an audit. I have attached a brief blog post below relating to this. It was posted yesterday. No one seems to know who is buying the bulk of recent auctions. In a truly free market - this wouldn't be a mystery.
Ladies and gentlemen, this is a very big shoe that just dropped. This is not theory or speculation - this is very real - and we are staring into a very real abyss. If the U.S. cannot fund its growing deficit - the party is over. No more low interest rates, no more stable currency, no more stock markets, no more ridiculous consumption rates, no more ridiculous budget deficits - and this will have a worldwide economic impact. Of course - most people have no real knowledge of what is happening below the surface due to all of the media spin - so our stock market continues to rise. At some point, it will be impossible to hide what is happening - and people will panic - and markets will fall. It seems that we have learned nothing from history. The parallels between now and 1929 are ominous.
Our economic system is collapsing - there's no other way to say it. The pace of collapse has recently slowed - but I believe we're now very close to being pushed off the ledge.
jg – July 30, 2009
US 5yr Bond Auction Effectively FAILS
http://market-ticker.denninger.net
Wed. July 29, 2009
That's right, FAILS.
No, you didn't hear it reported this way and won't, but that's the math.
Here you have the results (table attached):
And here's the math:
1.923 BTC X 61.59% Primary Dealer bid = 1.18 BTC (PD), greater than 1.0. Or to put it a different way, but for the primary dealers the bid-to-cover was less than one, meaning that some of the issue would have been left on the table.
Thats a fail; but for the primary dealers the issue would not have subscribed.
Primary dealers are required to bid. That's the deal in exchange for their being named as "primary dealers." For this reason short of thermonuclear war you will never see an actual (BTC < 1.0) "fail" on a US Treasury Auction - Treasury has rigged the process so as to insure that cannot be reported.
Therefore, the question is this: Less the primary dealer "bid" (forced by agreement) was there sufficient interest to subscribe the issue, and the answer is NO.
Those who think this is "no big deal" need to have their head examined. In general any BTC under 2.0 indicates a serious problem, and the perverse nature of the primary dealer system is the reason.
The United States' Credit Card (issued by China and Japan) is being slowly cut off. That the stock market "recovered" after this ridiculously bad auction (bow-wow is the best way to describe it) speaks to the vacuum between the ears of both the cheerleaders in the mainstream media and those in the equity markets.
There is only one other time in recent memory that we've had a bond market auction fail like this. You might want to go have a look at your charts - with dates - for what followed shortly thereafter.
They're going to try to sell 7yrs tomorrow, and then the real fun begins with the quarterly refunding.
That ought to be a real riot.
President Obama, you might want to have a chat with Bill Clinton about the Bond Market and Hillarycare, lest you wind up learning this lesson the hard way.
Nathan's Economic Edge
http://economicedge.blogspot.com
Bond and dollar futures are both higher. Higher during a week that they are issuing $235 billion??? Now here’s my question… how do we finance $235 billion of bond auctions in one week – WHERE DOES THE MONEY COME FROM? Well, if we look at the bid results, we find that the Primary Dealers (PDs) are doing more and more buying each week. And when we look at the TIC data, we find that international buyers are doing more selling than buying. So, if the money to buy such massive issuances is coming from the PDs, then they have to be using their own cash or equivalents to buy them – correct?
So, let’s go and look at the balance sheets of the biggest Primary Dealers and see how much cash they possess… Let’s start with JPM. Here’s their balance sheet from their 2008 Annual Report, page 131:
It shows roughly $27 billion in immediate cash.
Now let’s look at the balance sheet of Goldman Sachs:
Here we find $35.4 billion of cash and cash equivalents. Hmmm… Okay, let’s say that the 5 biggest each have that amount – 5 times 35.4 = $177 billion. Of course they can’t place 100% of their cash and equivalents in long term bonds, so I would assume that only a fraction of that money would actually be available to buy at auctions. Of course there are their "trading assets" which we have no idea how they are used. But my premise is that week after week of $100 billion or now $200+ billion auctions cannot be supported by the money that the Primary Dealers possess.
So again, WHERE’S THE MONEY COMING FROM? Since I can’t see where the money is coming from, I’m going to throw a wild guess out there and say that the government and PDs are simply printing it as they go! How much? WAY, WAY more than the announced use of Bernanke’s $300 billion. Sound like a conspiracy theory? It is, and I invite the Fed, the Treasury, and the Primary Dealers to open their books and prove me wrong. I want to see a paper trail leading to the purchase of those bonds and treasuries!
This is a vitally important question to have answered for the future of our country – CRITICAL.
I would love to find some good data/news somewhere that actually made sense – but there simply isn’t any. Most recent mainstream media articles touting economic ‘good news’ are either using flawed assumptions, bad/manipulated data or completely disregard data that would contradict their positive spin.
I wrote a couple of months ago that we were in a relatively calm period before things really started to head south. I think we’re nearing the end of anything resembling calm.
Declining Federal tax revenues will translate into bigger deficits – which will require additional Treasury debt – which will flood the debt market with even more Treasury bills/notes. At some point, the world will say ‘enough’ – and all sorts of unpleasant things will start happening.
John
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Nathan's Economic Edge
http://economicedge.blogspot.com/
Tuesday, August 4, 2009
Federal Tax Revenues – Cliff Diving and Data Hiding…
Remember what Chris Martensen called good economic data? You know, data that “is not statistically massaged before release, it is not 'sampled' but rather tallied up in its entirety, and it squares up nicely with other good sources of data.”
Good Data
• Sales tax data
• Income tax data
• Truck tonnage moved
• Port shipping container traffic
• Air transport
• UPS, FedEx, and other major shippers' volume
• Corporate Revenues (just added to list)
Well, here’s the data from the top of the list, the only data the government releases that meets Chris’s “good” criteria.
And how’s it looking? Is it down the .7 or even 5% that comes out of the massaged and adjusted data? NO! It’s down, wait for it, 22% year over year for Federal individual tax receipts and it’s down a horrific 57% for Corporate Income Taxes!
Now that’s a crash of revenue, just when our government is RAMPING spending all while simultaneously spending trillions of your dollars to bail out the central banks and pay bonuses on Wall Street!
What will that mean for our deficits? GAME OVER! The math is simply so far from working that there is NO WAY to keep the game going very much longer. You can ignore it, call it looney Tunes, whatever, the math simply tells the truth and cannot lie.
Federal tax revenues plummeting
AP ENTERPRISE: Plummeting tax revenues starve government just as Obama embarks on big plans
By Stephen Ohlemacher, Associated Press Writer
On Monday August 3, 2009, 8:51 pm EDT
WASHINGTON (AP) -- The recession is starving the government of tax revenue, just as the president and Congress are piling a major expansion of health care and other programs on the nation's plate and struggling to find money to pay the tab.
The numbers could hardly be more stark: Tax receipts are on pace to drop 18 percent this year, the biggest single-year decline since the Great Depression, while the federal deficit balloons to a record $1.8 trillion.
Other figures in an Associated Press analysis underscore the recession's impact: Individual income tax receipts are down 22 percent from a year ago. Corporate income taxes are down 57 percent. Social Security tax receipts could drop for only the second time since 1940, and Medicare taxes are on pace to drop for only the third time ever.
The last time the government's revenues were this bleak, the year was 1932 in the midst of the Depression.
"Our tax system is already inadequate to support the promises our government has made," said Eugene Steuerle, a former Treasury Department official in the Reagan administration who is now vice president of the Peter G. Peterson Foundation.
"This just adds to the problem."
While much of Washington is focused on how to pay for new programs such as overhauling health care -- at a cost of $1 trillion over the next decade -- existing programs are feeling the pinch, too.
Social Security is in danger of running out of money earlier than the government projected just a few month ago. Highway, mass transit and airport projects are at risk because fuel and industry taxes are declining.
The national debt already exceeds $11 trillion. And bills just completed by the House would boost domestic agencies' spending by 11 percent in 2010 and military spending by 4 percent.
For this report, the AP analyzed annual tax receipts dating back to the inception of the federal income tax in 1913. Tax receipts for the 2009 budget year were available through June. They were compared to the same period last year. The budget year runs from October to September, meaning there will be three more months of receipts this year.
Is there a way out of the financial mess?
A key factor is the economy's health. The future of current programs -- not to mention the new ones Obama is proposing -- will depend largely on how fast the economy recovers from the recession, said William Gale, co-director of the Tax Policy Center.
"The numbers for 2009 are striking, head-snapping. But what really matters is what happens next," said Gale, who previously taught economics at UCLA and was an adviser to President George H. W. Bush's Council of Economic Advisers.
"If it's just one year, then it's a remarkable thing, but it's totally manageable. If the economy doesn't recover soon, it doesn't matter what your social, economic and political agenda is. There's not going to be any revenue to pay for it."
A small part of the drop in tax receipts can be attributed to new tax credits for individuals and corporations enacted in February as part of the $787 billion economic stimulus package. The sheer magnitude of the tax decline, however, points to the deep recession that is reducing incomes, wiping out corporate profits and straining government programs.
Social Security tax receipts are down less than a percentage point from last year, but in May the government had been projecting a slight increase. At the time, the government's best estimate was that Social Security would start to pay out more money than it receives in taxes in 2016, and that the fund would be depleted in 2037 unless changes are enacted.
Some experts think the sour economy has made those numbers outdated.
"You could easily move that number up three or four years, then you're talking about 2013, and that's not very far off," said Kent Smetters, associate professor of insurance and risk management at the University of Pennsylvania.
The government's projections included best- and worst-case scenarios. Under the worst, Social Security would start to pay out more money than it received in taxes in 2013, and the fund would be depleted in 2029.
The fund's trustees are still confident the solvency dates are within the range of the worst-case scenario, said Jason Fichtner, the Social Security Administration's acting deputy commissioner.
"We're not outside our boundaries yet," Fichtner said. "As the recovery comes, we'll see how that plays out."
The recession's toll on Social Security makes it even more urgent for Congress to address the fund's long-term solvency, said Sen. Herb Kohl, D-Wis., chairman of the Senate Aging Committee.
"Over the past year, millions of older Americans have watched their retirement savings crumble, making the guaranteed income of Social Security more important than ever," Kohl said.
President Barack Obama has said he wants to tackle Social Security next year, after he clears an already crowded agenda that includes overhauling health care, addressing climate change and imposing new regulations on financial companies.
Medicare tax receipts are also down less than a percentage point for the year, pretty close to government projections. Medicare started paying out more money than it received last year.
Meanwhile, the recession is taking a toll on fuel and industry excise taxes that pay for highway, mass transit and airport projects. Fuel taxes that support road construction and mass transit projects are on pace to fall for the second straight year. Receipts from taxes on jet fuel and airline tickets are also dropping, meaning Congress will have to borrow more money to fund airport projects and the Federal Aviation Administration.
Last week, Congress voted to spend $7 billion to replenish the highway fund, which would otherwise run out of money in August. Congress spent $8 billion to replenish the fund last year.
Rep. Richard Neal, D-Mass., chairman of the House subcommittee that oversees fuel taxes, is working on a package to make the fund more self-sufficient. The U.S. Chamber of Commerce, which doesn't back many tax increases, supports increasing the federal gasoline tax, currently 18.4 cents per gallon.
Neal said he hasn't endorsed a specific plan. But, he added, "You can't keep going back to the general fund."
BUT WAIT! That’s actually an improvement in Corporate tax receipts… then a funny thing happened on the way to look at the St. Louis Fed’s charts. It seems that this chart series, (FCTAX), the only one that presents federal tax data on the Fed’s site, has stopped reporting data! Below is the same series chart that I posted on April 10th of this year:
That’s right, you can see that corporate tax receipts were down well over 70% at that time!
Now, when that same data series is pulled up, you will find that the data begins in 1996 and ENDS in 2008!
In fact, do a search at the Fed’s site and you will find that all aggregate tax receipt information is suddenly only reported to the beginning of 2008!
Fred Search, Gov't Receipts, Expenditures & Investment
Why would they do that? Oh, go ahead and ask. I can already guess their response… “That data is no longer relevant.” Or, “It was an error and will be corrected [when the recession is over].” LOL, seriously, when they were playing games with the “excess reserves” charts, they came up with all types of excuses and now it’s impossible to know exactly how it’s calculated.
One more time:
The BEA, the BLS, in fact ALL government reports are suspect. All reporting of government statistics should be scrapped. The Fed should be abolished, The central banks and bankers should be removed – as in gone, a new money system should be put in place, there should be a Constitutional Amendment dictating the SEPARATION OF CORPORATIONS AND THEIR MONEY FROM STATE, and finally, there should be a new government agency responsible for collecting and reporting economic statistics and that agency should have a mandate to develop data collection methods that cannot be changed over time and there should also be a mandate to release RAW DATA with every report, there should be absolute transparency in that all the calculations and all collection methods should be easily viewable by anyone. Oh, and NO ONE, not even the President should haveaccess to the information before the public! access to the information before the public.
Nathan A. Martin 0 comments
If you’ve been paying attention to recent U.S. Treasury bond/note auctions, you’ve probably noticed that the amount of debt offered at these auctions is growing significantly. This is a direct result of our Federal Government’s spending on the numerous stimulus and bailout packages. To put the amount of debt in perspective – a year ago the U.S. would auction anywhere from $5 to $15 billion a week (on average). Last week the U.S. auctioned over $230 billion in Treasury bonds/notes.
Although our leaders in Washington act as though they have a blank check – it’s easy to see the repercussions of what they’re doing. The growing deficits are requiring the Treasury to auction more and more debt. The question becomes – at what point do we hold an auction where no one shows up to buy? As you’ve seen me say before – I (and others) believe this is already happening to some degree.
Personally, I believe the Federal Reserve has been supporting Treasury auctions for some time – but I could not figure out how they were doing it. Chris Martenson explains how they’re doing it in the article below.
You have to ask yourself – why all the secrecy? Why do they need to support our Treasury auctions? What happens if they stop supporting Treasury auctions?
The answers will lead you to one unpleasant conclusion – U.S. debt creation is unsustainable.
John – August 5, 2009
The Shell Game - How the Federal Reserve is Monetizing Debt
Sunday, August 2, 2009, 10:02 pm, by cmartenson
by: Chris Martenson
Executive Summary
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· The Federal Reserve and the federal government are attempting to "plug the gap" caused by a slowdown of private credit/debt creation.
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· Non-US demand for the dollar must remain high, or the dollar will fall.
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· Demand for US assets is in negative territory for 2009
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· The TIC report and Federal Reserve Custody Account are reviewed and compared
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· The Federal Reserve has effectively been monetizing US government debt by cleverly enabling foreign central banks to swap their Agency debt for Treasury debt.
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· The shell game that the Fed is currently playing obscures the fact that money is being printed out of thin air and used to buy US government debt.
The Federal Reserve is monetizing US Treasury debt and is doing so openly, both through its $300 billion commitment to buy Treasuries and by engaging in a sleight of hand maneuver that would make a street hustler from Brooklyn blush.
This report will wade through some technical details in order to illuminate a complicated issue, but you should take the time to learn about this because it is essential to understanding what the future may hold.
One of the most important questions of the day concerns how the dollar will fare in the coming months and years. If you are working for a wage, it is essential to know whether you should save or spend that money. If you have assets to protect, where you place those monies is vitally important and could make the difference between a relatively pleasant future and a difficult one. If you have any interest at all in where interest rates are headed, you'll want to understand this story.
There are three major tripwires strung across our landscape, any of which could rather suddenly change the game, if triggered. One is a sudden rush into material goods and commodities, that might occur if (or when) the truly wealthy ever catch on that paper wealth is a doomed concept. A second would occur if (or when) the largest and most dangerous bubble of them all, government debt, finally bursts. And the third concerns the dollar itself.
In this report, we will explore the relationship between those last two tripwires, government debt and the dollar.
Replacing private credit with public credit
Our entire monetary system, and by extension our economy, is a Ponzi economy in the sense that it really only operates well when in expansion mode. Even a slight regression triggers massive panics and disruptions that seem wholly inconsistent with the relative change, unless one understands that expansion is more or less a requirement of our type of monetary and economic system. Without expansion, the system first labors and then destroys wealth far our of proportion to the decline itself.
What fuels expansion in a debt-based money system? Why, new debt (or credit), of course! So one of the things we keep a very close eye on over here at Martenson Central, as they do at the Federal Reserve, is the rate of debt creation.
One of the big themes in the current credit bubble collapse is the extent to which private credit has been collapsing and the corresponding degree to which the Federal Reserve has been purchasing debt and the federal government has stepped up its borrowing. In essence, public debt purchases and new borrowing has attempted to plug the gap left by a shortfall in private debt purchases and borrowing.
That's the scheme right now - the Federal Reserve is creating new money out of thin air to buy debt, while the US government is creating new debt at the most fantastic pace ever seen. The attempt here is to keep aggregate debt growing fast enough to prevent the system from completely seizing up.
How are they doing?
The debt gap
One of the great perks of living in a relatively open society is that we generally get access to pretty good information. The Federal Reserve routinely publishes a document called "Monetary Trends," where they collapse all their points of interest into a nice, tidy collection, and then make it available for all to see.
Here's what caught my eye in the most recent one
What we see here is federal debt (bottom chart) exploding at a nearly 30% yr/yr rate of change in response to a collapse in corporate and consumer borrowing (top charts).
This raises a most interesting question: "Who is lending the money to accommodate all that federal borrowing?"
Here's where the story gets interesting.
Treasury International Capital (TIC) flows
Lately, a number of observers have made note of a troubling decline in foreign demand for US paper assets, notably bonds. Worse, it's even turned into outright selling which will ultimately translate into dollar weakness.
The relative demand for the dollar "out there" in the international Foreign Exchange (or "Forex") market directly impacts the dollar's strength. If there are more sellers then its value will fall; if there are more buyers, then its value will rise. One way to assess this delicate balance is to ask, "In total, are foreigners buying or selling US assets and what are they doing with those proceeds?"
Luckily for us, the exact answer to this very question is released in a monthly report put out by the Treasury Department, called the Treasury International Capital Flows report, or TIC report for short.
The recent TIC reports have been quite alarming, because they not only reveal the most sudden deceleration in flows in history, but also that they have been negative for some time now. This chart is from the Federal Reserve:
What we see here is that from the early 1990's onward until 2007, foreigners bought progressively more and more US assets and did so by bringing their money to the US and leaving it there. It is only over the past seven months, out of decades, where that process has reversed and become negative. This is a significant event, to say the least.
On the surface, the above chart hints at a potential disaster for a country that is embarking on the largest-ever federal debt binge in history.
After all, if US assets are being shunned by foreigners, how will we find enough buyers? And what will happen to the dollar?
The answers are: "We won't" and "Nothing good."
Digging in
If we dig into deeper into the detail of the report, we find something even more interesting. While the overall flows have been negative, there is an enormous difference between the behaviors of foreign central banks and private investors. Fortunately the TIC report distinguishes between these two broad classes of buyers.
Since the start of 2009 and continuing through the month of May, private investors sold $364 billion dollars worth of US assets, while central banks purchased $50 billion dollars worth (source is a .csv file available here from the Treasury). Added up, some $314 billion dollars of foreign money has left the country since the start of the year.
What this demonstrates is the utter reliance of the entire house of cards upon the continued purchase of US financial assets by foreign central banks. Without the continued cooperation of the foreign central banks in accumulating US assets, suffice it to say that the dollar will fall a lot lower than it already has.
The dollar
Not surprisingly, the dollar recently put in a new closing low for the year (YTD 2009) and is approaching a major area of support and resistance. If it breaks through, we could be looking at a rapid game-changer here.
Of course, I've said all this before, and every time we seem to get close, there's been an upside surprise in store. The forces aligned to prevent a dollar collapse are numerous.
But the same risk remains, and the fundamental picture concerning the dollar has not changed since I first became wary of its fortunes in 2002. In fact, it's grown worse. Federal deficits are higher than I ever imagined possible (13% of GDP!), and now the TIC flows are negative. The only somewhat bright(er) spot is that the trade deficit has shrunk quite a bit. However, it, too, remains solidly in negative territory, meaning it continues to apply pressure to the value of the dollar by increasing the total number of dollars that need to find a quiet resting place outside of the country.
Treasury auctions
During this past business week (July 27th - 31st, 2009), the US Treasury auctioned off more than $243 billion worth of various Treasury bills and bonds. "Indirect bidders," assumed to be mainly central banks, took an astonishing 39% of the total, or nearly $95 billion worth.
With the exception of the 5-year auction, which mysteriously stank up the joint with a worrisome bid-to-cover ratio well below 2.0 (the bond market behaved poorly upon the release of that news item), the story here is that foreign central banks are buying up vast quantities of Treasury offerings.
Wait a minute, hold on there…I thought we just talked about how the TIC report said that foreign central banks have only bought $50 billion in total US paper assets through May - and now they are said to be buying $95 billion during a single week in July alone?
Something is not adding up here.
To understand what, and to get to the essence of the shell game, we need to visit one more source of information - something called the Federal Reserve Custody Account.
The Federal Reserve Custody Account
It turns out that when China's central bank (or any other foreign central bank) decides to buy either US agency or Treasury bonds, they do not walk up to some window somewhere, hand over a pile of cash, and then take some nice looking bonds home with them in a suitcase.
Instead, what happens is that the Federal Reserve actually holds the bonds (or rather an electronic entry representing the bonds) in a special account for these various central banks. This is called the "Custody Account" and it holds US debt 'in custody' for various central banks. Think of it as a magnificently vast brokerage/checking account, run by the Federal Reserve for central banks, and you'll have the right image.
Although the TIC report shows flows of capital into and out of the country, it does not show you what is going on with those funds that are already in the country. If you look again at the first chart in this report, and behold the vast flows of money that came into the US between 1995 and 2008, you can get a sense of how much money got sent to the US and mostly remains parked there.
The custody account currently stands at $2.787 trillion (with a "t") dollars. It has increased by over $430 billion the past 12 months and by more than $275 billion in 2009 alone (through July 29). These are truly shocking numbers, and they tell us that foreign central banks have been accumulating US debt instruments throughout the crisis.
As we can see in the chart below, there has been absolutely no deflection in the growth of the custody account as a consequence of the financial crisis, bottoming trade, or the local needs of the countries involved. It's almost as if the custody account is completely disconnected from the world around it. If you can spot the credit bubble crisis on this chart, you have sharper eyes than me.
What does such a chart imply? We might wonder what sorts of distortions are created by having such a massive monetary spigot aimed from several central banks towards a single country. We also might question just how sustainable such an arrangement really is. It is a complete mystery how such a chart can display nary a wiggle, despite all that has recently transpired.
This next table showing the yearly changes in the custody account actually surprises me quite a bit.
Despite everything that's been going on, the custody account is on track to grow by the largest dollar amount on record this year, nearly $500 billion dollars (if the current pace continues). Where is all this money coming from and for how much longer?
Understanding the gap between the TIC and the Custody numbers
One thing you might have noticed is that the TIC report only shows $50 billion in foreign bank inflows for 2009, while the custody account grew by $277 billion.
How is it possible for the TIC report to show smaller inflows than growth in the custody account? We can see that clearly in this table, which compares the two. (Note: These are 12 monthly yr/yr changes, so the numbers will be different than the YTD numbers I just cited):
One explanation is that the custody account, at some $2.7 trillion dollars, is accumulating a lot of interest. If those interest payments are not "sent home" and remain in the account, then the account will grow by enough to more or less explain the difference. For example, the $135 billion difference shown above could be generated by a 5% return to the custody account, which is not an unthinkable rate of interest for that account.
International check kiting
Some people view the custody account as nothing more than an elaborate version of check kiting, played at the central banking level.
An illegal scheme whereby a false line of credit is established by the exchanging of worthless checks between two banks. For instance, a "check kiter" might have empty checking accounts at two different banks, A and B. The kiter writes a check for $50,000 on the Bank A account and deposits it in the Bank B account. If the kiter has good credit at Bank B, he will be able to draw funds against the deposited check before it clears, i.e., is forwarded to Bank A for payment and paid by Bank A. Since the clearing process usually takes a few days, the kiter can use the $50,000 for a few days, and then deposit it in the Bank A account before the $50,000 check drawn on that account clears.
In this game, Central Bank A prints up a bunch of money and buys the debt of Country B. Then the central bank of Country B prints up a bunch of money and buys the debt of Country A.
Both enjoy the appearance of strong demand for their debt, both governments get money to use, and nobody is the wiser. Except that the world's total stock of central bank reserves keep on growing and growing and growing, as reflected in the custody account, which will someday result in thoroughly unserviceable amounts of debt, an unmanageable flood of money, or both.
If this strikes you as a scam, congratulations; you get it.
If that was all there was to the story, then it would be far less interesting than it actually is. When we dig into the custody account data, we find that the total picture is hiding something quite extraordinary. Even as the total custody account has been growing steadily and faithfully, the composition of that account has been changing dramatically.
Here we note that agency bonds peaked in October of 2008 at nearly a trillion dollars but have declined by $178 billion since then. Treasuries, on the other hand, have increased by over $500 billion over that same span of time. A half a trillion dollars! If you were wondering how the US bond auctions have managed to go so smoothly, here's part of your answer.
What is going on here? How is it possible that central banks are buying so many Treasury bonds, at the fastest rate of accumulation on record?
It would appear that foreign central banks have been swapping agency bonds for Treasury bonds, but that's not how the markets work. First, they would have to sell those bonds, before they could use the proceeds to buy government debt. So to whom did they sell those Agency bonds in order to afford the Treasury bonds?
Here we might recall that the Federal Reserve has been buying agency bonds by the hundreds of billions.
The shell game
Have you ever seen a sidewalk magician run the shell game, where a pebble under a shell is magically shuffled around - now you see it under this shell, now you see it under that shell, now it disappears completely - or does it? The more it moves around, the more confused you get. If you can only figure out which shell the pebble is hidden under, you win! But where is the pebble? The point of the game, from the perspective of the street hustler, is to use complexity of motion to confuse the mark.
These are the three critical points to remember as you read further:
1. The US government has record amounts of Treasuries to sell.
2. Foreign central banks, which have a big pile of agency bonds in their custody account, would like to help but want to keep things somewhat under the radar to avoid scaring the debt markets.
3. The Federal Reserve does not want to be seen directly buying US government debt at auctions, because that could upset the whole illusion that there is unlimited demand for US government paper, but it also desperately wants to avoid a failed auction.
For various reasons, the Federal Reserve cannot just up and start buying all the Treasury paper that becomes available in record amounts, week after week, month after month.
Instead, it uses this three-step shell game to hide what it is doing under a layer of complexity:
Shell #1: Foreign central banks sell agency debt out of the custody account.
Shell #2: The Federal Reserve buys those agency bonds with money created out of thin air.
Shell #3: Foreign central banks use that very same money to buy Treasuries at the next government auction.
Shuffle, shuffle, shuffle, shuffle, shuffle, SHUFFLE, shuffle! Confused yet?
Don't be. If we remove the extraneous motion from this strange act, we find that the Federal Reserve is effectively buying government debt at auction. This is exactly, precisely what Zimbabwe did, but with one more step involved, introducing just enough complexity to keep the entire game mostly, but not completely, hidden from sight. They can scramble the shells all they want, but the pebble is still there somewhere - the pebble being the fact that the Fed is creating money to fund the purchase of US debt.
At the time, the Federal Reserve program to purchase agency bonds was described like this:
Fed to Pump $1.2 Trillion Into Markets
Greatly Expanded Purchases Are Designed to Lower Interest Rates, Stimulate Borrowing
The Federal Reserve yesterday escalated its massive campaign to stabilize the economy, saying it would flood the financial system with an additional $1.2 trillion.
In its statement yesterday, the Fed said it will increase its purchases of mortgage-backed securities by $750 billion, on top of $500 billion previously announced, and double, to $200 billion, its purchases of [Agency] debt in housing-finance firms such as Fannie Mae and Freddie Mac.
While "stimulating borrowing," "stabilizing the economy," and "lowering interest rates" are laudable goals, the primary goal of the program seems to have been something else entirely - to assure plentiful funds for the massive US Treasury auctions coming due. I saw nothing in any article I read about this program that even suggested that one of the goals was to allow foreign central banks to effectively swap their agency debt for US government debt using money printed from thin air. But that's clearly one of the outcomes.
The Federal Reserve, for its part, has been quite open about these purchases of Agency debt. It even provides an excellent website with nice graphics, allowing us to track the purchase program.
However, this openness only extends to the amounts themselves, not the source(s) of those Agency bonds. This is, in my mind, yet another reason the Fed desperately wishes to avoid an audit. The results would expose the game for what it is.
As we can see in the above chart, the Fed has purchased more than $640 billion of Agency bonds, and has promised to buy more in the near future.
As we now know, at least some of that money has been recycled into US government debt, where "indirect bidders" have been snapping up an unusually high proportion of the recent offerings. (Note: The way Indirect bidders are calculated has recently changed, and I am not entirely clear on how much this influences the numbers we now see….I'm working on it).
A fair question to ask here is, "If there are green shoots everywhere and the stock market is racing off to new yearly highs, why is the Fed continuing to pump money into the system at these mind-boggling rates?" One answer could be, "Because things might not be as rosy as they seem."
Conclusion
The Federal Reserve has effectively been monetizing far more US government debt than has openly been revealed, by cleverly enabling foreign central banks to swap their agency debt for Treasury debt. This is not a sign of strength and reveals a pattern of trading temporary relief for future difficulties.
This is very nearly the same path that Zimbabwe took, resulting in the complete abandonment of the Zimbabwe dollar as a unit of currency. The difference is in the complexity of the game being played, not the substance of the actions themselves.
When the full scope of this program is more widely recognized, ever more pressure will fall upon the dollar, as more and more private investors shun the dollar and all dollar-denominated instruments as stores of value and wealth. This will further burden the efforts of the various central banks around the world as they endeavor to meet the vast borrowing desires of the US government.
One possible result of the abandonment of these efforts is a wholesale flight out of the dollar and into other assets. To US residents, this will be experienced as rapidly rising import costs and increasing costs for all internationally-traded basic commodities, especially food items. For the rest of the world, the results will range from discomforting to disastrous, depending on their degree of dollar linkage.
Under these circumstances, "inflation vs. deflation" is not the right frame of reference for understanding the potential impacts. For example, it would be possible for most of the world to experience falling prices, even as the US experiences rapidly rising prices (and hikes in interest rates) as a consequence of a falling dollar. Is this inflation or deflation? Both, or neither? Instead, we might properly view it as a currency crisis, with prices along for the ride.
Further, all efforts to supplant private debt creation with public debts should be met with skepticism, because gigantic programs are no substitute for the collective decisions of tens of millions of individuals and cannot realistically meet millions of individual needs in a timely or appropriate manner.
The shell game that the Fed is currently playing does not change the basic equation: Money is being printed out of thin air so that it can be used to buy US government debt.
My advice is to keep these potential issues and insights in sharp focus, make what moves you can to diversify out of dollars, and be ready to move rapidly with the rest. This game is far from over.
Great investigative work here by Chris Martenson. Chris shows us how the Federal Reserve is deceptively purchasing Treasury securities from the U.S. Government. This is a very big deal. It means that the world’s investors (domestic and foreign investors, etc.) are no longer willing to purchase all of our debt – which means that we cannot get the financing we need to sustain our enormous budget deficits. As I’ve mentioned before – if we can’t sell our debt – we will start down a path that will end with the bankruptcy of the United States (cash flow insolvency).
The Fed is stepping in (secretly) to purchase a significant amount of our debt to delay Treasury auction failures. They can’t purchase our debt forever, at some point the world is going to figure out what is going on. I suppose they are doing this so that when this is known – it will appear as though they were trying their best to help us.
It took about an hour for this information from Chris Martenson to spread to many of the popular economic blogs on the internet. It won’t take long before this becomes the #1 discussion topic on the internet – and then someone will break this news to the world.
Once the world figures this out – the value of the dollar will plummet and interest rates will sky-rocket. It’s going to be painful to watch our leaders in Washington try to manage through the worst financial crisis in our history. If you think the past year has been tough – you haven’t seen anything yet. Think about the problems California has been dealing with over the past year (significant tax revenue declines coupled with out of control government spending) – and then think about the fact that our Federal budget is approximately 40 times larger. I can only think of one word to describe what we’re going to see – chaos.
As I’ve mentioned before, the Fed doesn’t use existing money – it creates money. Therefore, when the Fed purchases our debt – it is increasing our money supply – by a significant amount. Add this to all of the other Fed ‘actions’ that have ballooned its balance sheet – and it’s not hard to see what is propping up our money supply.
Who bails out our Federal Government? It would be easy to say – no one. The truth is that we will be offered a way out by the world – but it will come with a very steep price.
This is the beginning of the end of the financial dominance of the United States.
jg – August 6, 2009
The Fed Buys Last Week's Treasury Notes
Thursday, August 6, 2009, 12:21 pm, by cmartenson
In concert with the claims I made in the prior post, The Fed bought $7 billion in Treasuries today and even more yesterday.
This is at the upper end of their recent range of already exceptional purchasing activity.
If things are so rosy that every single dip is being bought in the stock market with a vengeance, I wonder why these printing operations are really necessary?
This $14-billion-plus buying activity by the Fed represents fresh money created out of thin air that was exchanged for the sovereign debt of the US. However, since the Fed has, for all practical purposes, never undone its permanent operations (hey, that's why they are called "POMOs"), we can consider these additions of money as good as permanent themselves.
Looking at the maturity range, we can see that these are all long-dated bonds, with the one today specifically offering us a tantalizing clue as to how the shell game is being played.
Here's the Treasury announcement for the 7-year auction that came out on July 30 (last Thursday). Please note the specific CUSIP number circled. Every bond in this auction carries this specific identifying number.
And now let's look at the detail for this most recent POMO:
Good grief! Just last week, when the auction results were announced, it was trumpeted to great fanfare that there was "more than sufficient" bid-to-cover, "strong demand," and all the rest
And now it turns out that 47% (!) of the bonds that were taken by the primary dealers in that auction have been quietly bought by the Fed and permanently secreted to its balance sheet.
They didn't even wait a full week! A more honest and open approach would have been for the Fed to simply buy them outright at the auction, but this way, using "primary dealers" and "POMOs" and all these other extra steps, the basic fact that the Fed is openly monetizing US government debt is effectively hidden from a not-too-terribly inquisitive US press and public.
The speed of the shell game is accelerating.
This immediate repurchase of newly auction bonds by the Fed tells us that demand for these bonds is not nearly as high as advertised, and that things are not quite as strong as represented.
And oh, by the way, don't expect any stock market weakness while so many billions are being shoveled out the Fed and into the pockets of the primary dealers. They'll have to do something with all that freshly minted cash.....
jg – August 6, 2009
[email to friends and family August 2009]
Hello everyone,
As most of you know, I've been actively following the current economic crisis for the past 2 years. Since we're entering the time of year when we've historically seen high market volatility (Sept/Oct) - now is a good time to evaluate what is happening with regards to our economy - and what you can do now to protect yourself in the event things get interesting. If you only listen to most of the mainstream media outlets (CNN, CNBC, Fox News, Wall St. Journal, etc.) - it would seem that things are turning around. If you are someone who studies the data yourself and forms your own opinions - like myself - you see something else.
I have written many articles over the past 2 years on what is happening with regards to the economy and why - but I felt that since we're again heading into September with deteriorating economic data/activity - now would be a good time to summarize the greatest threats to our economy and what you can do now to help protect your finances.
If you are like most people in our nation today - then you accept what you hear from many of our financial and political leaders and you hope things turn out ok. What I've found is that many of the people we listen to everyday are manipulating economic information and 'spinning' things to sound more positive than reality. If my conclusion is correct, then we are heading toward a significant economic decline - something that you and I have never seen before. It's important to understand what's happening - and more importantly - why it's happening.
I have attached an article that reviews the most significant current threats to our economy. I hope you find it informative.
Take Care,
John
Today is August 25, 2009. There seems to be many positive news articles this week regarding our economy. Here’s a few I’ve seen over the past couple of days:
‘Bernanke, Trichet See End to Global Slump, Caution on Recovery’ – Bloomberg
‘We saved the world from disaster, Fed's Bernanke says’ - MarketWatch
‘Consumer confidence soars - Sentiment reading increased to 54.1 in August, well above economists' expectations.’ – CNN
‘Stocks show confidence - Bernanke appointment, signs of stability in housing market and rise in consumer sentiment report push market higher.’ - CNN
“Bernanke: 'We have been bold' - Fed chief defends central bank's response to the economic crisis as Obama says he will nominate him to another 4-year term” – CNN
‘Upbeat Data Buoy Stocks’ – Wall St. Journal
‘Bernanke Wins Vote of Confidence’ – Wall St. Journal
‘Housing Lifts Recovery Hopes - Stocks Soar on 7.2% Spurt in Home Resales; Bernanke Optimistic but Foreclosures Loom’ – Wall St. Journal
‘Central Bankers Breathing Easier’ – Wall St. Journal
‘Stocks, Oil Hit New 2009 Highs’ – Wall St. Journal
‘European Stocks Post Biggest Gain in Month’ – Wall St. Journal
‘Financials Help Stocks Climb’ – Wall St. Journal
As I’ve said before – underlying economic data is telling us that our economy continues to deteriorate. I see nothing that would tell me that things are turning around or anything that would restore my confidence in the system.
There is nothing within real economic data (raw data – no ‘adjusting’ or ‘massaging’ or ‘modeling’) that tells me that investing in Stocks, Bonds, Derivatives – would be a good idea at this time (brokerage account, 401(k), etc.). In fact, by investing in any of these types of investments – you are taking significant risks with your money. When I say significant – I mean that you could lose everything.
Since September and October have historically been the most volatile time of the year for financial markets - in this post, we’re going to take a look at some significant risks to our economy that we’ve discussed previously that could cause our entire system to collapse. Regardless of what we’re told by mainstream media - our economy has now reached a point that any one of the items below - or combination of items – could cause our economy to begin a decline much more severe than what happened last year (September – December 2008).
The following is what I (and others who are paying attention) have been watching closely over the past year. Since things are getting much worse below the surface of what we’re told by the mainstream media – the time for you to act is now.
- Bank failures continue to accelerate – and the FDIC insurance fund is now effectively out of money. There are various ways for the FDIC to replenish their funds – but these options either require more U.S. Treasury debt or more stress on banks (additional fees assessed to banks). Based on current financial conditions – it will not be easy to execute either option. Regardless, there is no way for the FDIC to gain access to enough money to insure the bank failure tsunami that is coming. This means that at some point in the near future – banks will fail – and depositors will not be able to withdraw their money. Contrary to what most people believe – banks only keep a fraction of their deposits (the downside of fractional reserve banking). Banks earn money by lending money at greater interest rates that they pay on deposits – there is no incentive for them to keep deposits. Without the FDIC insurance fund – there will be no money for depositors. This could possibly lead to a run on the banking system – followed by a bank holiday (banks are closed for a period of time by the government).
From Saxo Bank Research (Author: Robin Bagger-Sjoback):
“The current Reserve Ratio of 0.014% strongly indicates how bad this crisis has affected U.S. financial institutions. However, this is not the entire story. If we take a closer look at the non-current loans and charge-offs from banks, one realizes that the FDIC still has a lot of work to be done. Combined non-current loans and charge-offs amounted to nearly $100 billion in Q1 2009 compared to $15 billion/quarter pre-crisis. Moreover, according to analysts at the Royal Bank of Canada, the U.S. still has banking failures in the thousands to face before the crisis is over.”
2. U.S. Treasury debt sales are sky-rocketing due to out of control government spending and recent ‘stimulus’ and ‘bailout’ packages. Two weeks ago the U.S. Treasury auctioned over $230 billion in bills/notes. They are auctioning over $200 billion this week. Just a year ago – weekly auctions were in the $10-$15 billion range.
From Karl Denninger (www.market-ticker.org):
[Treasury Auctions this week]:
“*U.S. TREASURY TO AUCTION $27 BLLION IN 52-WEEK BILLS
*U.S. TREASURY TO AUCTION $42 BILLION IN TWO-YEAR NOTES
*U.S. TREASURY TO AUCTION $31 BILLION IN THREE-MONTH BILLS
*U.S. TREASURY TO AUCTION $28 BILLION IN SEVEN-YEAR NOTES
*U.S. TREASURY TO AUCTION $30 BILLION IN SIX-MONTH BILLS
*U.S. TREASURY TO AUCTION $39 BILLION IN FIVE-YEAR NOTES
“This is the price of supporting the grift and fraud in our banking system.
I count $207 billion, coming two weeks after a $250 billion dollar week.
Let's annualize - that would be about $5 trillion a year in annualized issuance.
My-oh-my how long can this continue?
Who knows. What I do know is that this is absolutely unsustainable, it is approaching 40% of GDP annually, and yet this is what is required to keep all the balls and plates in the air as a direct consequence of our government's decision to sponsor and permit massive financial system fraud to continue.”
Keep in mind that current Treasury auctions do not include any additional FDIC funding for future bank failures. If we add in the potential costs for ‘universal healthcare’ – the numbers get even more ridiculous.
3. Foreigners are not purchasing our debt or investing huge sums of money in the U.S. any longer. Based on our current account balance with the world – this is a very bad development.
If Foreigners are not purchasing our debt – who is? This question leads us to item #4.
4. It appears that the Federal Reserve is now directly purchasing U.S. Debt (commonly referred to as ‘monetizing’ debt). The Fed is now printing money out of thin air and giving it to the U.S. Treasury in exchange for U.S. debt. If you’re scratching your head and thinking that this is a very bad idea and could lead to some very bad things – you’d be right – which is why it is forbidden by the Federal Reserve Act of 1913.
We laugh at a country like Zimbabwe where hyperinflation has destroyed the value of their currency (people of Zimbabwe now use gold as money - rings, necklaces, coins, nuggets, etc – whatever they can find) and we think – wow, those guys don’t have a clue what they’re doing. The problem is – if we took the time to look into our own monetary (central banking) system – we would realize that we are using the exact same fiat currency monetary system as Zimbabwe.
What started Zimbabwe’s final spiral into hyperinflation? The President of Zimbabwe ordered their central bank to print trillions of Zimbabwe dollars to pay off their debts. What are we doing today? We are printing trillions of U.S. dollars to pay off our debts.
What is one of the first things you learn in Management 101? If you keep doing the same thing – don’t expect a different result.
So – if we look at the value of the U.S. dollar – what do the trends tell us? The trends tell us that the recent actions of the Federal Reserve could very easily cause the value of the dollar to decline significantly in the coming months/years.
Since the Fed’s activity (direct buying of U.S. Treasury debt) is not lawful, you’re not going to see the Fed do this out in the open and you’re not going to see this activity touted by mainstream media. Instead, they must create a grand illusion. Here’s a brief excerpt from a recent blog article by Chris Martenson that shows us their slight of hand.
“In concert with the claims I made in the prior Martenson Insider post, The Fed bought $7 billion in Treasuries today and even more yesterday.
This is at the upper end of their recent range of already exceptional purchasing activity.
If things are so rosy that every single dip is being bought in the stock market with a vengeance, I wonder why these printing operations are really necessary?
This $14 billion plus buying activity by the Fed represents fresh money created out of this air that was exchanged for the sovereign debt of the US. However, since the Fed has, for all practical purposes, never undone its permanent operations (hey, that's why they are called "POMOs") we can consider these additions of money as good as permanent themselves.
Looking at the maturity range we can see that these are all long-dated bonds with the one today specifically offering us a tantalizing clue as to how the shell game is being played.
Here's the Treasury announcement for the 7-year auction that came out on July 30 (last Thursday). Please note the specific CUSIP number circled. Every bond in this auction carries this specific identifying number.
And now let's look at the detail for this most recent POMO:
Good grief! Just last week, when the auction results were announced it was trumpeted to great fanfare that there was "more than sufficient" bid-to-cover, "strong demand" and all the rest.
And now it turns out that 47% (!) of the bonds that were taken by the primary dealers in that auction have been quietly bought by the Fed and permanently secreted to its balance sheet.
They didn't even wait a full week! A more honest and open approach would have been for the Fed to simply buy them outright at the auction but this way, using "primary dealers" and "POMOs" and all these other extra steps the basic fact that the Fed is openly monetizing US government debt is effectively hidden from a not-too-terribly inquisitive US press and public.
The speed of the shell game is accelerating.”
Now you know why the Federal Reserve and many of our political leaders are opposed to an audit of the Federal Reserve. They would prefer that we didn’t see behind the smoke and mirrors.
5. What is the real reason our government is bailing out banks and corporations - and providing trillions of dollars in economic ‘stimulus’? We’ve been told that our government needed to do these things or our entire financial system would collapse. Is this true? No. If you’ve read my previous articles on our monetary system – then you know that this system is going to collapse whether or not our government bails out anyone or not.
The truth that our leaders will not discuss and the mainstream media will not expose is that our economy is based on a monetary system that requires exponential debt growth (since our money is created by debt). Our monetary system requires that we create enough new debt each year equal to the aggregate interest on all of our outstanding debt. This number is now over $4 trillion dollars. The United States must now create over $4 trillion dollars of new debt each year – or the system will begin to fail - resulting in increased foreclosures and bankruptcies – leading to the collapse of the system.
This is exactly what we’re seeing today. We’re told that things are turning around by financial and political leaders – but if we ignore the rhetoric and study the data – what do we see? We see increasing numbers of bankruptcies and foreclosures by individuals, businesses and corporations. We see individuals and corporations taking on very little new debt because of the amount of existing debt – which is dramatically reducing the growth of our money supply. Again, the math tells us that this had to happen at some point. It’s happening now.
So, when we see household/consumer debt graphs that look like this……
……we must see government debt graphs that look like this – or the entire system would have collapsed months ago.
Since our money is created by debt and debt growth is now slowing considerably – we would expect to see the rate of growth of our money supply to also slow considerably – and that’s exactly what’s happening.
The blue line below shows our total money supply growth rate.
If you don’t think debt is destroying the system – take a look at this chart by Chris Martenson.
(This chart compares total debt (or “credit”) in the U.S. to GDP (or Gross Domestic Product) on a percentage basis. Current total credit-market debt stands at more than 340 percent of total GDP.)
If you want to understand the basics of our monetary system – how it works, who created it, why we’re currently in a deep recession, why it is unsustainable and what it means for our future – here’s a link to my article:
http://endtimediscussions.blogspot.com/2006/09/our-monetary-system.html
All of the recent Federal Reserve and government actions are simply delaying the inevitable collapse of this system. The debt of individuals, corporations and governments is now crushing the system. As individuals, we don’t want to take on anymore debt because we’re tapped out. The same thing is now happening to corporations and governments around the world. The problem is that exponential debt creation is required to prevent the system from collapsing.
6. What is the next shoe to drop? If you’ve read my earlier article on current stock market price to earnings ratios – then you know that P/E ratios are at all time highs. With the recent stock market run-up and corporate earnings plunging 15-20% this year – this shouldn’t surprise anyone. What is surprising is how high the P/E ratio is. Take a look at the chart below. The S&P 500 PE ratio is approaching 150. Until recently, it’s never been above 60. This would tell you that stocks are priced extremely high compared to earnings. The question you need to ask is - will earnings increase dramatically in coming quarters or will prices decline dramatically? History tells us that one or the other is going to happen – and happen soon.
However, P/E ratios don’t tell the whole story.
There are many people who are saying that all of the recent Federal Reserve actions have pumped billions of dollars into the system – and much of this money has found its way into the stock market.
The following is from Nathan’s Economic Edge (www.economicedge.blogspot.com):
‘Wondering where the fuel for the recent rocket shot is coming from? Well, as Point put it, “The New York Federal Reserve bought a record $5.6 billion in agency debt today. There's your fuel for the equity fire today.”’
Fed buys record $5.6 billion in agency debt
NEW YORK (MarketWatch) -- The Federal Reserve Bank of New York bought $5.605 billion in housing-agency debt on Friday, the biggest purchase since it began buying debt in the sector in December in the hopes of capping mortgage rates. It bought about half of the $11.209 billion offered to it by bond dealers, which analysts noted was rather high. The large purchase is a big switch from recent operations, which have slowly gotten smaller. Analysts hypothesized the central bank may have been trying to stretch out its purchases over a longer timeframe to improve the effect. "The size of today's purchase will lead many to pay greater attention to the next pass to see if the Fed is increasing the speed at which it purchases Agencies," said Dan Greenhaus, chief economic strategist at Miller Tabak. The Fed has bought $116.6 billion of the originally-stated $200 billion in debt issued by home-finance agencies.
From Chris Martenson (www.chrismartenson.com):
‘Today [August 7, 2009], again, we receive news that the Fed is continuing to pour more and more POMO money into the banking system, this time with a 'mere' ~$2 billion addition.’
“August 7 - New York Fed purchases $1.937 billion in agency coupons”
‘As long-time readers here know, I have been tracking the Permanent Open Market Operations (or "POMO") activity of the Fed for a long time.’
‘Today I want to update that chart above [Fed Treasury Purchases] and provide a little more context by placing it beneath a scaled chart of the Dow Jones index (time periods match exactly so the charts align). Again, what you are looking at is a chart of POMO activity (Treasury + Agency) that is being expressed as "billions of dollars per day." No effort has been made to account for weekends or holidays; this is simply taking each POMO and dividing it by the number of days that pass until the next one.’
‘What we might wonder here are three things:
1. How would the stock markets have behaved without the massive daily additions of billions of dollars?
2. When the stock market turned around in advance of the initiation of the POMO purchases which major bank holding companies, such as GS, were effectively front-running this flood of money?
3. If the stock market is up 40%+ and green shoots are everywhere, why is the Fed continuing to pour gasoline on the fire ($16 billion this week so far)?
Part of the answer may lie in a nice piece of work posted at ZeroHedge which notes that on POMO days that stock markets exhibited some statistically unlikely upward thrusts in the final few minutes of each associated trading day.
Under this scenario POMO money is being shuffled out of the endless thin-air vaults of the Fed and into the banking system where it needs to find something to do. One of those things, it seems, is to goose the stock market, especially late in the day.
The goal, we surmise, is simply to get the stock market to move upwards. This is not an unthinkable idea to me because, frankly, it is exactly the prescription I would write for an economy as dependent on rising asset prices as is the United States'. If a rising stock market helps to get people out buying and spending again then it is a worthy goal in many a policy-makers mind, I am sure.’ –Chris Martenson
I believe that this is certainly true – Fed buying activities are pumping up the market - but there also appears to be a certain level of market manipulation taking place. I and others have noticed that there seems to be a lot of overnight futures buying in the stock market that is driving stocks higher.
From Nathan’s Economic Edge on 8/20:
‘As is this manipulated market’s custom, key areas are often jumped overnight and that occurred again last night in the midnight hours. The release of higher than expected jobless claims, however, sent prices back below that level and they are now very close to even’:
…and on 8/21:
‘Equity futures rose “in the midnight hours” once again, rising non-stop from midnight eastern at 996 on the /ES to this morning at 1,013 – a leap over resistance’:
This is happening over and over again. These are not people actually buying stocks – these are people placing massive bets that the stock market will rise. With the stock market being extremely expensive at the moment, it seems like a very strange thing to do. Regardless, with all of the money being pumped into the system – the system itself is being manipulated on a massive scale. The question is – what happens when the music stops and the ‘stimulus’ ends? Nothing good for you and me.
If we step back and take an objective look at what is really happening with our economy, we see the following:
1. The banking system is under significant stress (81 banks have failed so far this year) and regulators expect hundreds more to fail in coming months/years.
2. The FDIC insurance fund is at an all time low reserve ratio.
3. The U.S. Treasury is auctioning massive amounts of debt – recent auctions are approximately $5 trillion annualized.
4. Foreign investors and governments are no longer buying massive amounts of our debt. This is required for us to continue to fund our current deficits.
5. The Federal Reserve is stepping in and secretly buying billions of dollars of U.S. Treasury debt to make up for the lack of foreign purchases.
6. Stocks are priced at historic highs compared to earnings.
7. Unemployment continues to deteriorate with hundreds of thousands of jobs lost each month. This continues to adversely affect housing sales/housing prices, etc.
There are a number of possible scenarios that could happen at any time that will result in the beginning of a collapse of our monetary/economic system. The following are the greatest threats to the stability of the system:
1. The #1 threat right now to our economy is a stock market collapse. It’s at historic highs compared to earnings, underlying economic fundamentals are deteriorating, it is highly volatile, Americans have placed their faith in the fact that the market will always rise and it has been manipulated higher due to all of the Fed/Government actions. While the stock market is a horrible indicator of the overall health of our economy – it does hold immense power over our state of mind. If it falls significantly – vast amounts of wealth will vanish overnight – possibly leading to a panic and a complete loss of faith in the entire system.
2. U.S. Treasury auctions begin failing. If the Fed allows auctions to begin failing (bid to cover ratios consistently drop below 2), then the U.S. Treasury will be required to offer much higher interest rates to get the money it needs to fund our deficits. If this happens, interest rates for us will sky-rocket. This, in turn, will have a significant negative impact on the stock and bond markets.
3. The banking system fails. If bank failures accelerate to the point the FDIC cannot back deposits – expect a national bank holiday for a period of time without access to your funds while the government ‘decides’ what to do. Again, all financial markets will be negatively impacted.
4. Federal Reserve actions cause the value of the dollar to plunge. If this happens – all kinds of bad things happen to us. Prices for imported goods (most of what we buy) will sky-rocket. Interest rates for us will sky-rocket. The dollar will quickly be replaced as the world’s reserve currency (there is already a global movement to replace the dollar). Other nations will require payment from us in other currencies – which will be very difficult for us to do.
All of these things will obviously cause a global crisis – not simply a crisis within the U.S.
Here’s what you need to do today:
- Check on the financial stability of your bank. How is the stock price? Do they own large amounts of illiquid securities and assets? Have they purchased high risk derivatives? Does their loan portfolio contain large real estate holdings that are not marked to market? Are they on the FDIC list of problem banks? Here’s the link: http://www.calculatedriskblog.com/2009/08/problem-bank-list-unofficial-aug-14.html.
- Diversify your brokerage account, 401(k), retirement funds, etc. For now – shift funds out of stocks and riskier investments. If you can – move to a gold ETF fund or buy physical gold (coins) if you can. At the least – move investments to cash. If you can, stay away from paper assets – stocks, bonds, derivatives, etc. If the crisis does get worse – these types of holdings will rapidly decrease in value.
- If possible, keep enough cash in your home (out of the bank) for a couple of month’s worth of expenses.
- Stock your pantry more often.
- Pay close attention to what is happening and check everything you’re told. Do not blindly accept what our political and financial leaders tell you through mainstream media. Think for yourself.
What we’re witnessing is a perfect financial storm that has enveloped our entire financial system. It’s like we’ve passed into the eye of the hurricane, so things seem somewhat calm – and we’re forgetting that the other side awaits us.
Once things begin to deteriorate – think about all of the positive mainstream media articles you’ve read and all of the positive speeches from our financial and political leaders you’ve listened to and ask yourself – were these people that clueless or was there another agenda at work here?
jg
It’s rare to see a mainstream article that correctly makes the connection between debt, our money supply and income. All of which are now rapidly contracting.
Those that do make the connection – inherently ask the same question.
From the article below:
“It is unclear why the US Federal Reserve has allowed this to occur.”
Indeed. Why would the Federal Reserve allow this to happen? The problem is that you will not find the answer by looking through normal channels – the Fed itself, mainstream media, most economists, etc.
The truth is that the Federal Reserve not only allowed this to occur – it caused it to occur.
As I’ve said many times before – answer the question as to why the Fed would cause this – and you’ll find just how deep the rabbit hole goes.
jg – September 16, 2009
US credit shrinks at Great Depression rate prompting fears of double-dip recession
Telegraph.co.uk
By Ambrose Evans-Pritchard, International Business Editor
Published: 11:59PM BST 14 Sep 2009
Both bank credit and the M3 money supply in the United States have been contracting at rates comparable to the onset of the Great Depression since early summer, raising fears of a double-dip recession in 2010 and a slide into debt-deflation.
Professor Tim Congdon from International Monetary Research said US bank loans have fallen at an annual pace of almost 14pc in the three months to August (from $7,147bn to $6,886bn).
"There has been nothing like this in the USA since the 1930s," he said. "The rapid destruction of money balances is madness."
The M3 "broad" money supply, watched as an early warning signal for the economy a year or so later, has been falling at a 5pc annual rate.
Similar concerns have been raised by David Rosenberg, chief strategist at Gluskin Sheff, who said that over the four weeks up to August 24, bank credit shrank at an "epic" 9pc annual pace, the M2 money supply shrank at 12.2pc and M1 shrank at 6.5pc.
"For the first time in the post-WW2 [Second World War] era, we have deflation in credit, wages and rents and, from our lens, this is a toxic brew," he said.
It is unclear why the US Federal Reserve has allowed this to occur.
Chairman Ben Bernanke is an expert on the "credit channel" causes of depressions and has given eloquent speeches about the risks of deflation in the past.
He is not a monetary economist, however, and there are indications that the Fed has had to pare back its policy of quantitative easing (buying bonds) in order to reassure China and other foreign creditors that the US is not trying to devalue its debts by stealth monetisation.
Mr Congdon said a key reason for credit contraction is pressure on banks to raise their capital ratios. While this is well-advised in boom times, it makes matters worse in a downturn.
"The current drive to make banks less leveraged and safer is having the perverse consequence of destroying money balances," he said. "It strengthens the deflationary forces in the world economy. That increases the risks of a double-dip recession in 2010."
Referring to the debt-purge policy of US Treasury Secretary Andrew Mellon in the early 1930s, he added: "The pressure on banks to de-risk and to de-leverage is the modern version of liquidationism: it is potentially just as dangerous."
US banks are cutting lending by around 1pc a month. A similar process is occurring in the eurozone, where private sector credit has been contracting and M3 has been flat for almost a year.
Mr Congdon said IMF chief Dominique Strauss-Kahn is wrong to argue that the history of financial crises shows that "speedy recovery" depends on "cleansing banks' balance sheets of toxic assets". "The message of all financial crises is that policy-makers' priority must be to stop the quantity of money falling and, ideally, to get it rising again," he said.
He predicted that the Federal Reserve and other central banks will be forced to engage in outright monetisation of government debt by next year, whatever they say now.
