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Global Debt Crisis, There Is Not Enough Money On Planet Earth

Interest-Rates / Global Debt Crisis 2012 May 11, 2012 - 08:43 AM GMT

By: Ashvin_Pandurangi

Interest-Rates

Diamond Rated - Best Financial Markets Analysis ArticleNo matter how you look at it, as The Automatic Earth and others have pointed out ad infinitum, in the end the US economy rests on two pillars: Jobs and Housing. They are where both all the good and bad in economic terms begin and end. Ben Bernanke and his Fed policies are majestically failing on both counts.


That is the reality that is shaping America's reality today. Anything else is just a sideshow. Discard all the hubris on recovery, on falling unemployment; all that is but a mirage the political/industrial/financial/media conglomerate wishes you to see and believe in, so you won't pay attention to what truly goes on. Which is that Fed and Treasury policies were never designed to support or revive the economy you depend on for your income and your well-being in general. They were and are designed to take your wealth away from you.

What is at issue? Easy as pie: banks were bailed out with many trillions of dollars in taxpayer funds (which they won’t pay back, they’ll just come back for more) without any scrutiny to speak of.

Bernanke and Geithner at best (yeah, right!) just "hoped" they would lend again, but they never made it a condition of the bailouts. What we find now is what I have repeatedly been saying for years now: The banks are far too deep in debt, even after the bailouts, to revive lending even to "healthy buyers". The entire bailout circus has been a scam, since the money was handed out to banks without looking at how much debt they really have on their books.

It's all been one big massive wealth transfer, perpetrated under the guise of fixing the financial system and the economy in general. Neither was the real purpose behind the bailouts: they were and are nothing but a clever way to steal from the poor and fork over the loot to the rich. And they ain't done yet. That, you can put your money on. That is a safe bet.

You need to wake up to this. You really do. You need to cut your dependence on the financial/political system to the maximum extent that you can. If you don't, it will steamroller over you. The system is so deep in debt that it will come looking for every last penny it can find in your pockets. Many of you will be caught by surprise, and stuck with tens of thousands of dollars, and often many times, in debt. That will turn you into a potential slave. Or a prisoner, if you will. Terminology is not an urgent priority on the chaingang.

So where do Ben B.S. Bernanke's deliberate "failures" show up? Have a look, I'll try and paint you a picture. First, here's Caroline Baum for Bloomberg:

Government’s Snake Oil Won’t Cure Jobs Ailment

Operating under the assumption that more stimulus will create more jobs, the Fed reduced its benchmark interest rate to 0 to 0.25 percent, pledged to keep it there at least through the end of 2014 and engaged in multiple rounds of bond buying to lower long-term interest rates. The Fed rationalized its stance, well after the crisis and recession had passed, as necessary to fulfill its full-employment mandate.

What if the Fed, through all its efforts, can’t buy more employment? What if unemployment is structural, with an inadequately trained workforce or labor immobility preventing employers and job seekers from hooking up? Signs are pointing in this direction. Long-term unemployment hasn’t been this high for this long since World War II, with 41.3 percent of the unemployed out of work for 27 weeks or more in April. The longer Americans are out of work, the more obsolete their skills.

The BLS unemployment rate may be 8.1% right now, but that's only because many millions of Americans are not counted as unemployed and/or are not counted as part of the labor force at all. And even that doesn't really make a dent of a difference: the Fed's rationale that in order to "fulfill its full-employment mandate", it put its benchmark interest rate at 0% simply makes no sense at all. None. Never did, really, but certainly after doing it for years and seeing the outcome, it's nothing short of bizarre. The only thing more bizarre, however, may be the pledge to keep at it until 2014 despite the numbers. Something doesn't add up to say the least.

And who can still be surprised to see that the hardest hit Americans are the same ones that bear the brunt of the disaster doctrine in Greece and Spain, the young people? Sure, US youth unemployment hasn't reached 53% yet. But it's much closer than we like to think. And there is no more surefire way to blow up a society than to offer its young nothing but idleness and despair. You will see in your lifetime how and why that is so. Bonnie Kavoussi for Huffington Post:

Half Of Recent College Graduates Lack Full-Time Job, Study Says

Of all those who have graduated college since 2006, only 51 percent have a full-time job, according to a Rutgers University study released Thursday. Eleven percent are unemployed or not working at all.

The situation is even more dire for those who have graduated since 2009. Fewer than half of college graduates from those years found their first job within 12 months of graduating, much less than the 73 percent of those who graduated from 2006 to 2008. Those who graduated since 2009 are three times more likely to not have found a full-time job than those from the classes of 2006 through 2008. [..]

Graduates since 2009 have earned an average starting salary of $27,000, down from $30,000 for the classes of 2006 and 2007. That's because employers can pay less with a surplus of job-seekers. In addition, many recent graduates take jobs below their skill level. The study found that 43 percent of employed recent graduates said their jobs do not require a college degree.

The wages of these recent college graduates will likely remain depressed for the next 10 to 15 years because they graduated into a weak economy, according to the Economic Policy Institute, a nonpartisan think tank. Many know it, too. Just half of employed recent graduates said they are satisfied with their income, opportunities for training and advancement, and progress toward career goals, the Rutgers study found.

Adding to that dissatisfaction, 55 percent graduate with student loan debt averaging $20,000, according to the study. One in four recent graduates with student loan debt have made no progress paying it off.

There's your US jobs situation, ostensibly a main reason for that 0% benchmark rate. And one half of "the pillars of the American economy". Let's go to the other half, housing. More Bernanke B.S. here. The 0% policy has led to the lowest mortgage rates ever. Amy Hoak writes for MarketWatch:

Mortgage rates hit record lows: Freddie Mac

Average interest rates on fixed-rate mortgages hit record lows in the most recent Freddie Mac survey of conforming rates, released on Thursday. Rates on the 30-year fixed-rate mortgage averaged 3.84% for the week ending May 3, down from 3.88% last week and 4.71% a year ago. Fifteen-year fixed-rate mortgages averaged 3.07%, down from 3.12% last week and 3.89% a year ago.

Meanwhile, rates on 5-year Treasury-indexed hybrid adjustable-rate mortgages averaged 2.85%, unchanged from last week and down from 3.47% a year ago. And 1-year Treasury-indexed ARMs also hit a record low at 2.7%, down from 2.74% last week and 3.14% a year ago.

Hey, that sort of worked, you could argue. Only, it doesn't. Even at the lowest rates on record people are not buying homes. First of all of course because many of them are much worse off financially than before. No job at all, wage cuts, benefit cuts, student debt, health care debts, there are many reasons why many Americans are not buying homes. Affordability is a two-sided coin. It doesn't help that home prices are still elevated either. They have a long way to fall; don't listen to that housing market bottom nonsense that oozes from every pore of the industry these days, that's just a sure sign of rot and fermentation.

Ben to the rescue: He doesn't know why really, but that 0% benchmark rate fails in housing just as it does in jobs. And Ben warns this could take a while, because the banks insist on keeping the money the Fed and Treasury have doled out to them. Which takes Ben by surprise, he'd like you to believe. Glenn Somerville for Reuters:

Bernanke: even worthy borrowers can't get mortgages

Banks have become so restrictive in making mortgages that many worthy home buyers are being frozen out of the U.S. housing market, and lending practices are not likely to loosen any time soon, Federal Reserve Chairman Ben Bernanke said on Thursday.

Speaking via satellite to a banking conference in Chicago, Bernanke highlighted ongoing problems in mortgage finance availability, even though banks are much healthier now as the 2007-2009 financial crisis has receded. "To be sure, a return to pre-crisis lending standards wouldn't be appropriate," Bernanke said. "However, current standards may be limiting or preventing lending to many creditworthy borrowers." [..]

Bernanke implied the backlash by banks against criticism of their lending practices, which now are far tighter, might be overdone and will be extremely hard to reverse. "Many factors suggest this situation will be difficult to turn around quickly, including the slow recovery of the economy and housing market, continued uncertainty surrounding the future of the government-sponsored enterprises, the lack of a healthy private-label securitization market, and cautious attitudes by lenders," Bernanke said.

Overall, Bernanke said, home mortgage credit outstanding at banks has contracted about 13 percent from its peak.

The government-sponsored enterprises - Fannie Mae and Freddie Mac - are key vehicles in home-mortgage finance because they buy mortgages originated by banks and package them into securities that they resell to investors. The practice frees up funds for banks to make new mortgages. But Fannie Mae and Freddie Mac had to be bailed out by the government and were taken over at the height of the crisis. The government is considering options that include possibly winding them down, leaving it unclear what type of housing finance system eventually will emerge in future.

U.S. Housing Secretary Shaun Donovan told Reuters on Thursday he believed that 10 to 20 percent of potential home-buyers who could adequately carry the debt were being "locked out" of the market because credit was either not available or was available only at a restrictive price. "We had risk-amnesia going into the crisis and I think now we've gone a bit too far in the other direction," he said.

Bernanke said Fed surveys show that even when home buyers can make a 20 percent down payment, banks are often reluctant to offer mortgage money to any but the best qualified. "Most banks indicated that their reluctance to accept mortgage applications from borrowers with less-than-perfect records is related to 'putback risk' - the risk that a bank might be forced to buy back a defaulted loan if the underwriting or documentation was judged deficient in some way," he said.

Recent Fed surveys on credit conditions have found that, years after the crisis, banks remain worried about hangover from the bursting of the housing bubble and now also fear strains from the ongoing European debt crisis. [..]

Am I the only person on this planet who remembers that all that money was trucked out, and that benchmark rate was cut, with the explicit goal of making banks lend again? Am I the only one as well who thinks that if they don't do that, we should demand for that money to be returned?! At times it feels like reality has become a lonely place to be.

Last week William D. Cohan tried valiantly to cut through this sort of crap for Bloomberg:

U.S. Perfecting Formula for Budget Failure

Erskine Bowles, a true Southern gentleman and co-chairman of President Barack Obama’s erstwhile budget-deficit commission, came to New York City from his home in North Carolina the other night to talk sense about the nation’s perilous fiscal condition.

"I think today we face the most predictable economic crisis in history," he told an audience on April 24 at the Council on Foreign Relations -- an audience that might actually be able to help do something about the problem. "Fortunately, I think it’s also the most avoidable. I think it’s clear, if you do simple arithmetic, that the fiscal path that the nation is on is simply not sustainable."

Bowles, a Democrat, then laid on the crowd some pretty simple, but devastating, arithmetic. He explained that 100 percent of the tax revenue that entered the Treasury in 2011 went out the door to pay for mandatory spending -- such as Medicare, Medicaid and Social Security -- and to pay the interest on our staggering $15.6 trillion national debt.

That means that every single dollar we spent on everything else, including two wars, national defense, homeland security, education, infrastructure, high-value-added research and the like, was borrowed. "And," he warned, "half of it was borrowed from foreign countries. And that is a formula for failure in anybody’s book."

He said the U.S. is now paying $250 billion a year in interest on the debt, and that is only because, mercifully, interest rates are at historic lows. That’s chiefly because investors are more worried about the risk of default by European nations, and because the Fed is doing everything in its power to keep interest rates low. "It’s because we’re the best-looking horse in the glue factory," he said.

If interest rates were normalized, Bowles said, the annual bill would be $600 billion a year. "We’ll be spending over $1 trillion on interest alone before you know it," he said. To nervous laughter, he offered the example of the country’s obligation, by treaty, to defend Taiwan in the event that China decides to invade the island. "There’s only one problem with that," he said. "We’ll have to borrow the money from China to do it."

But wait, it gets worse. He reminded the audience of the numerous "cliffs" the country faces at the end of 2012 when the George W. Bush tax cuts expire: More than $1.1 trillion will be cut from the budget, about half of which will come from defense because of the infamous "sequester" of last year; the payroll tax cut will expire, as will the "patch" in the alternate minimum tax. "If you add all those up," he said, "it’s probably $7 trillion worth of economic events that are going to occur in December. And there’s been little to no planning for that." [..]

Without serious debt reduction, it won’t take much of an increase in interest rates to create a fiscal crisis for the country the likes of which only those who lived through the Great Depression can recall. Once interest rates reach a level that reflects the genuine risk inherent in our ongoing fiscal mismanagement, and debt-service eats up more and more of a shrinking pie, the financial crisis we just lived through (and are still living through) will seem like a sideshow.

"Deficits are truly like a cancer," Bowles said, "and over time they are going to destroy our country from within."

But if you would like to have a glimpse at reality, away from the empty dreamscapes incessantly fed you by pundits, presidents and assorted spokesmen, here's a bit of a cold shower from Harry Wilson at the Telegraph.

Companies must raise £28 trillion ($45 trillion) to finance 'wall' of debt

Businesses will need to secure as much as £28.5 trillion to refinance old borrowings and fund new spending, raising major questions over the ability of the world economy to avoid a recession, according to a report from Standard & Poor's.

British companies will have to find between £220bn and £268bn of new financing to fund their growth plans on top of refinancing hundreds of billions of pounds more of existing debt, according to the ratings agency. The scale of the refinancing required, as well as the amount of new debt companies must sell, could create what S&P described as a "perfect storm for credit markets".

The report continued: "Governments and banking regulators are now not as well placed to counter another perfect storm scenario given that they have already expended so much of their fiscal and monetary arsenal to mitigate the problems arising in recent years." The consequences of this are already being felt in the rising cost of borrowing faced by everyone from the largest banks to homebuyers when taking on new debt or refinancing existing loans.

British banks have dramatically reduced the size of their balance sheets in the past three years, as well as tripling the amount of capital they hold against potential losses. However, these moves have led to a shrinkage in the amount of credit available to businesses and soaked up some of the investor demand for new debt.

Anthony Peters at SwissInvest said it was likely there would "not be enough money" available in the coming years for companies to refinance and raise the amount of new debt required. "There is not enough money on planet Earth to fund it all. We are living on borrowed money and there is no way of avoiding that," he said.

Fears over the ability of countries to fund their debt have caused borrowing costs to soar. This week, Spanish 10-year bonds yields rose above the 6pc danger level, while Italian bond yields have also jumped. S&P said this is likely to only be the start of a wider credit crisis as national austerity programmes and sovereign debt fears combine to put "refinancing needs in jeopardy".

On Thursday, the Dutch central bank said it thought Europe was on the brink of a "lost decade" of low economic growth as the region struggles to get its finances in order. Against this backdrop, eurozone and British companies will have to have to deal with managing the £7.1 trillion debt pile they have accumulated, equivalent roughly to 80% of the region's economy.

This is real. This is not something someone wants you to believe, it's not a mirage or a dream. And those $45 trillion, mind you, is just what companies need to raise. It does not include countries. Which need at least as much on top of it. And it's not as if Ben Bernanke is not familiar with these numbers; if anyone has access to the most accurate data, it's him, collecting them is what the Fed does.

Once again: get out of the way as much as you can or you will be robbed blind and end up as a steamrollered debt slave. Put your remaining wealth somewhere where no-one can get their hands on it. And then lay low and try to ride it out, that perfect storm. The only way to outsmart it is to go where it can't touch you. Even if that's close to home.

Ashvin Pandurangi, third year law student at George Mason University
Website: http://theautomaticearth.blogspot.com (provides unique analysis of economics, finance, politics and social dynamics in the context of Complexity Theory)

© 2012 Copyright Ashvin Pandurangi to - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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