Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
If You Don’t Understand Bonds, You Don’t Understand Investing - 25th Aug 19
Gold's Next Move - 25th Aug 19
Fresh Water Crisis Unfolding - 25th Aug 19
Newbie Guide to Currency Pairs in Forex Trading – Review - 25th Aug 19
When A 16-Year-Old Earns $3 Million, You Know It's Not A 'Silly Fad' - 24th Aug 19
The Central Bank Time Machine - 23rd Aug 19
Stock Market August Breakdown Prediction and Analysis - 23rd Aug 19
U.S. To “Drown The World” In Oil - 23rd Aug 19
Modern Monetary Theory Could Destroy America - 23rd Aug 19
Seven Key Words That Explain "Stupidly High" Bond Market Prices - 23rd Aug 19
Is the Fed Too Late Prevent A US Housing Bear Market? - 23rd Aug 19
Manchester Airport FREE Drop Off Area Service at JetParks 1 - Video - 23rd Aug 19
Gold Price Trend Validation - 22nd Aug 19
Economist Lays Out the Next Step to Wonderland for the Fed - 22nd Aug 19
GCSE Exam Results Day Shock! How to Get 9 A*'s Grade 9's in England and Maths - 22nd Aug 19
KEY WEEK FOR US MARKETS, GOLD, AND OIL - Audio Analysis - 22nd Aug 19
USD/JPY, USD/CHF, GBP/USD Currency Pairs to Watch Prior to FOMC Minutes and Jackson Hole - 22nd Aug 19
Fed Too Late To Prevent US Real Estate Market Crash? - 22nd Aug 19
Retail Sector Isn’t Dead. It’s Growing and Pays 6%+ Dividends - 22nd Aug 19
FREE Access EWI's Financial Market Forecasting Service - 22nd Aug 19
Benefits of Acrobits Softphone - 22nd Aug 19
How to Protect Your Site from Bots & Spam? - 21st Aug 19
Fed Too Late To Prevent A US Housing Market Crash? - 21st Aug 19
Gold and the Cracks in the U.S., Japan and Germany’s Economic Data - 21st Aug 19
The Gold Rush of 2019 - 21st Aug 19
How to Play Interest Rates in US Real Estate - 21st Aug 19
Stocks Likely to Breakout Instead of Gold - 21st Aug 19
Top 6 Tips to Attract Followers On SoundCloud - 21st Aug 19
WAYS TO SECURE YOUR FINANCIAL FUTURE - 21st Aug 19
Holiday Nightmares - Your Caravan is Missing! - 21st Aug 19
UK House Building and House Prices Trend Forecast - 20th Aug 19
The Next Stock Market Breakdown And The Setup - 20th Aug 19
5 Ways to Save by Using a Mortgage Broker - 20th Aug 19
Is This Time Different? Predictive Power of the Yield Curve and Gold - 19th Aug 19
New Dawn for the iGaming Industry in the United States - 19th Aug 19
Gold Set to Correct but Internals Remain Bullish - 19th Aug 19
Stock Market Correction Continues - 19th Aug 19
The Number One Gold Stock Of 2019 - 19th Aug 19
The State of the Financial Union - 18th Aug 19
The Nuts and Bolts: Yield Inversion Says Recession is Coming But it May take 24 months - 18th Aug 19
Markets August 19 Turn Date is Tomorrow – Are You Ready? - 18th Aug 19
JOHNSON AND JOHNSON - JNJ for Life Extension Pharma Stocks Investing - 17th Aug 19
Negative Bond Market Yields Tell A Story Of Shifting Economic Stock Market Leadership - 17th Aug 19
Is Stock Market About to Crash? Three Charts That Suggest It’s Possible - 17th Aug 19
It’s Time For Colombia To Dump The Peso - 17th Aug 19
Gold & Silver Stand Strong amid Stock Volatility & Falling Rates - 16th Aug 19
Gold Mining Stocks Q2’19 Fundamentals - 16th Aug 19
Silver, Transports, and Dow Jones Index At Targets – What Direct Next? - 16th Aug 19
When the US Bond Market Bubble Blows Up! - 16th Aug 19
Dark days are closing in on Apple - 16th Aug 19
Precious Metals Gone Wild! Reaching Initial Targets – Now What’s Next - 16th Aug 19
US Government Is Beholden To The Fed; And Vice-Versa - 15th Aug 19
GBP vs USD Forex Pair Swings Into Focus Amid Brexit Chaos - 15th Aug 19
US Negative Interest Rates Go Mainstream - With Some Glaring Omissions - 15th Aug 19
GOLD BULL RUN TREND ANALYSIS - 15th Aug 19
US Stock Market Could Fall 12% to 25% - 15th Aug 19
A Level Exam Results School Live Reaction Shock 2019! - 15th Aug 19
It's Time to Get Serious about Silver - 15th Aug 19
The EagleFX Beginners Guide – Financial Markets - 15th Aug 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Budget Busting Bailouts in Europe Drive Global Debt Burden Higher!

Interest-Rates / Global Debt Crisis May 14, 2010 - 08:15 AM GMT

By: Mike_Larson

Interest-Rates

Best Financial Markets Analysis ArticleI’ve been out in Las Vegas this week for the MoneyShow. So naturally, I have gaming on the brain. My conclusion after reading the latest news out of Europe?

The European Central Bank (ECB) and European Union (EU) policymakers are going “all in” to head off the sovereign debt crisis there. Specifically …


• The 16 countries that share the euro currency and the International Monetary Fund (IMF) are going to offer as much as 750 billion euros ($953 billion) in loans and aid to nations who are struggling with massive debts and deficits.

Individual euro-zone governments will pay 440 billion euros ($559 billion), while the EU will pay 60 billion euros ($76 billion) and the IMF will cough up as much as 250 billion euros ($318 billion).

• The ECB, for its part, is going to purchase billions of dollars in government and private debt. Central banks in Germany, France and Italy all are buying government debt. And the ECB is going to start offering three-month loans at fixed rates to institutions which need them. The cap on this program? None.

• Finally, the Federal Reserve will throw a few chips onto the table by reopening its currency swap line with the ECB. The Fed will get euros in exchange for dollars so the ECB can then extend dollar-based loans to euro-zone banks that need them.

The Fed has agreed to trade our dollars for euros.
The Fed has agreed to trade our dollars for euros.

The program won’t have any cap, meaning the Fed’s exposure could theoretically be unlimited! The last time the Fed allowed ECB swaps, activity peaked at $583 billion in December 2008.

The Bank of Japan, Swiss National Bank and Bank of England will also have access to an unlimited amount of dollar swaps. Up to $30 billion will be made available to the Bank of Canada, too.

Good and Bad News in Wake of Europe’s Major Wager

The immediate impact of the move? Stocks soared around the world. The gains were particularly noteworthy in the PIIGS countries — Portugal, Ireland, Italy, Greece, and Spain.

We also saw the difference, or spread, in yield between “core” German 10-year debt and debt in the PIIGS countries collapse. That spread tightened to 343 basis points (3.43 percentage points) from 973 points in Greece. It also narrowed to 201 points from 254 points in Portugal and to 94 points from 173 points in Spain.

The drawback?

By bailing out the worst offenders, the more well-behaved European nations are handicapping themselves. They’re exposing themselves to more risk. And they’re going to have to foot the bill for the massive rescue package, driving up their own debts and deficits!

That’s not exactly something the euro-zone nations can afford, by the way. The region-wide budget deficit is on track to hit 6.6 percent of GDP in 2010 — more than twice the so-called “cap” of 3 percent. Next year won’t be any better, with the current forecast calling for a deficit of 6.1 percent.

Result: German bond yields surged 18 basis points after the rescue was announced.

What about the U.S.?

While we help finance another bailout, our deficit continues to skyrocket.
While we help finance another bailout, our deficit continues to skyrocket.

Our deficit could be as much as $1.6 trillion this year, or almost 11 percent of GDP.

Our debt load is soaring and on track to double to $18.6 trillion over the next decade.

Our Treasury is borrowing more than $375,000 per SECOND in certain weeks.

Our politicians have shown zero willpower to get the deficit under control, beyond a few token “window dressing” moves. And now, via the IMF and the Fed, we’re going to be ponying up untold billions of dollars more to bail out profligate European nations.

Is it any wonder that U.S. Treasury bonds also got clubbed after the bailout was announced? Bond futures prices plunged more than three points from their recent high, while 10-year Treasury note yields surged more than 30 basis points.

The Most Important Question to Ask: “Where’s All this Bailout Money Going to Come From?”

What about the longer-term outlook for interest rates? Well, investors need to ask themselves a simple question: Where the heck is all the bailout money going to come from? It’s not like we have it sitting around in some national piggy bank somewhere.

To pay for it all, government printing presses will shift into overdrive.
To pay for it all, government printing presses will shift into overdrive.

The answer is that policymakers at the Fed and ECB are going to print some of it out of thin air. And government officials are going to borrow hundreds of billions of dollars more in the bond market both here and in Europe.

All the money printing raises serious inflation concerns. And all the borrowing will drive up bond supply. Both are downright bearish for bond prices.

Oh, and now that the sovereign debt crisis has been temporarily tamped down in continental Europe, what do you think is going to happen next?

I’ll tell you what …

Investors are going to start searching for the next major victim. I believe they’re going to focus their ire on two of the biggest debt and deficit offenders on the planet — the U.K. and the U.S.

So if you are still exposed to long-term government, corporate, junk, or municipal debt here, now is the time to sell — and not look back! Or you can use specific vehicles such as inverse bond ETFs to profit or hedge yourself against an upward move in interest rates.

Until next time,

Mike

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