Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
Gold and Silver - The Two Horsemen - 11th Nov 19
Towards a Diverging BRIC Future - 11th Nov 19
Welcome to the Zombie-land Of Stock Market Investing - 11th Nov 19
Illiquidity & Gold And Silver In The End Game - 11th Nov 19
Key Things You Need to Know When Starting a Business - 11th Nov 19
Stock Market Cycles Peaking - 11th Nov 19
Avoid Emotional Investing in Cryptocurrency - 11th Nov 19
Australian Lithium Mines NOT Viable at Current Prices - 10th Nov 19
The 10 Highest Paying Jobs In Oil & Gas - 10th Nov 19
World's Major Gold Miners Target Copper Porphyries - 10th Nov 19
AMAZON NOVEMBER 2019 BARGAIN PRICES - WD My Book 8TB External Drive for £126 - 10th Nov 19
Gold & Silver to Head Dramatically Higher, Mirroring Palladium - 9th Nov 19
How Do YOU Know the Direction of a Market's Larger Trend? - 9th Nov 19
BEST Amazon SMART Scale To Aid Weight Loss for Christmas 2019 - 9th Nov 19
Why Every Investor Should Invest in Water - 8th Nov 19
Wait… Was That a Bullish Silver Reversal? - 8th Nov 19
Gold, Silver and Copper The 3 Metallic Amigos and the Macro Message - 8th Nov 19
Is China locking up Indonesian Nickel? - 8th Nov 19
Where is the Top for Natural Gas? - 7th Nov 19
Why Fractional Shares Don’t Make Sense - 7th Nov 19
The Fed Is Chasing Its Own Tail; It Doesn’t Care What You Think - 7th Nov 19
China’s path from World’s Factory to World Market - 7th Nov 19
Where Is That Confounded Recession? - 7th Nov 19
FREE eBook - The Investment Strategy that could change your future - 7th Nov 19
Is There a Stock Market Breakout Ahead? - 6th Nov 19
These Indicators Aren’t Putting to an Economic Resurgence - 6th Nov 19
Understanding the Different Types of Travel Insurance - 6th Nov 19
The Biggest Gold Story Of 2020 - 6th Nov 19
Best Money Saving FREE Bonfire Night Fire Works Show Sheffield 2019 - 5th Nov 19
Is the Run on the US Dollar Due to Panic or Greed? - 5th Nov 19
Reasons Why Madrid Attracts Young Professionals - 5th Nov 19
Larger Bullish Move in USD/JPY May Just Be Getting Started - 5th Nov 19
Constructive Action in Gold & Silver Stocks - 5th Nov 19
The Boring Industry That Hands +500% Gains - 5th Nov 19
Stock Market Chartology vs Fundamentals - 4th Nov 19
The Fed’s Policy Is Like Swatting Flies with Nuclear Weapons - 4th Nov 19
Stock Market Warning: US Credit Delinquencies To Skyrocket In Q4 - 4th Nov 19
Stock Market Intermediate Topping Process Continues - 4th Nov 19
Stock Market $SPY Expanded Flat, Déjà Vu All Over Again - 4th Nov 19
How To Buy Gold For $3 An Ounce - 4th Nov 19

Market Oracle FREE Newsletter

How To Buy Gold For $3 An Ounce

The Great Credit Squeeze 2010

Interest-Rates / Credit Crisis 2010 Mar 16, 2010 - 09:38 AM GMT

By: Martin_D_Weiss

Interest-Rates

Best Financial Markets Analysis ArticleIf you think that the sovereign debt crisis is mostly behind us … that America’s federal deficit is turning into a non-issue … or that we can just go back to business as usual … you’d better consider the drama now unfolding in the hard numbers just released last week:


February deficit: In February alone, the official U.S. federal deficit was a monstrous $221 billion, far greater than anything we have ever experienced in history.

Back in the 1980s, for example, President Reagan was plagued with the worst string of federal deficits ever recorded until that time. But with February’s deficit, Washington has managed to run up just as much red ink as it did in all of 1986, the single worst deficit year under Reagan.

Going back further, to the 1970s under President Nixon, we also had a rash of deficit spending that sent chills up the spines of economists. But last month’s deficit of $221 billion was more than TRIPLE the sum total of ALL deficits during the six years under Nixon.

Ever since America’s Declaration of Independence, deficit spending has been a recurring theme in Washington that invariably returns with a vengeance, especially during wartime. But it took 169 long years and seven major wars — from 1776 to 1945 — to rack up a cumulative deficit that matches the gaping budget hole of just 28 short days in February.

What does the government resort to in order to finance these humongous deficits? The answer is obvious …

Unprecedented borrowing: In just one week last month (ending 2/26), the U.S. Treasury issued …

  • $32 billion in 7-year Treasury notes,
  • $42 billion in 5-year notes,
  • $44 billion in 2-year notes,
  • $8 billion in 30-year TIPS bonds,
  • $26 billion of 3-month bills,
  • $28 billion of 6-month bills,
  • $31 billion of 4-week bills, and
  • $25 billion of cash management bills.

Grand total: $236 billion in government debt issued in a single week, the most in the history of the world.

This means that Uncle Sam borrowed new money — and replaced old debt — at the rate of $390,212 per second … $23.4 million per minute … and $1.4 billion per hour — around the clock!

It is a pace of debt issuance that simply cannot be sustained without disastrous consequences.

Why not? One reason is because of …

Dreadful crowding out of the private sector: As long as Uncle Sam is continuing to hog most of the available credit, it’s going to be increasingly difficult — sometimes nearly impossible — for most businesses and consumers to get their share of desperately needed funds.

Consider the fourth quarter of last year, for example. The Fed’s Flow of Funds report, just released on Thursday, tells the story …

Fourth Quarter Credit Market Squeeze

Government borrowing was massive: The U.S. Treasury jumped into the credit markets and grabbed up new funds at an annual pace of $954.7 billion, while local and state governments raised $114.2 billion. Total government borrowing (after some reduction in gov’t agency bonds): $1,040.4 billion.

In contrast …

Most business borrowers were shoved out of the credit markets: Not only did they have a tough time getting new loans, they also cut down their EXISTING debts — either voluntarily or not — at the breakneck annual pace of $1,097.5 billion.

Millions of consumers were virtually ostracized from the credit market: They were forced to cut their existing mortgages at the annual rate of $365.1 billion and their consumer credit at the rate of $145.3 billion — a total annualized cutback of $510.4 billion.

Don’t underestimate the potential impact of this phenomenon on the economy and your investments.

Remember: We are not just witnessing a decline in new business and consumer borrowing — a trend that typically signals economic weakness. Rather, what we have here is …

  • A decline to ZERO on a net basis! Plus …
  • Massive pressure on consumers and businesses to actually PAY DOWN debts outstanding! Plus …
  • Widespread defaults and foreclosures forcing the lenders to WRITE OFF massive amounts of debts.

My main point: It’s bad enough when you see credit flowing to consumers and corporations at a slower pace. But what’s happening now is far, far worse! Credit is actually being sucked OUT of the consumer and corporate economy at a torrid pace.

In fact, if you step back from the trees, you see an even uglier picture:

Huge amounts of credit being denied — or even taken away from — those who could fuel a recovery … plus, at the same time, huge amounts of credit being grabbed by federal and local governments to finance their giant deficits.

Now do you see why we’ve been saying all along that this recovery is bought and paid for by Washington?

Now do you see why a sovereign debt crisis — and future difficulties by governments to continue borrowing — is such a threat?

Heck! If the U.S. economy is just limping along even with massive government support, imagine the paralysis that’s likely if the government cuts back that support to curtail out-of-control deficits!

Bottom line:

First, the massive supply of government bonds on the way will drive their prices down and long-term interest rates up. Short of a miracle, we see little hope to avoid this outcome.

Second, as the federal deficit continues to grow out of control, the Great Credit Crunch is going to get even worse.

Third, don’t jump to the conclusion that the credit crunch will immediately topple the U.S. economy or stock market. With all the money that Washington has pumped in, a weak recovery can continue and stocks could still enjoy an extension of their rally.

But it cannot last. In the long term, corporate profits cannot be sustained without credit. If credit remains scarce, forget about a long, multi-year recovery … and brace yourself for a violent double-dip recession beginning later this year.

Good luck and God bless!

Martin

Warning: Enrollment to our Million-Dollar Rapid Growth Portfolio ends for good on Monday, March 22 — so that we can start allocating the $1 million the next morning, March 23. If you’re already on board, great! Or for more info, visit our brand new Rapid Growth website by clicking here.

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules