Best of the Week
Most Popular
1.BrExit House Prices Crash, Flat or Rally? UK Housing Market Affordability Crisis - Nadeem_Walayat
2.Stocks Bull Market Climbs Wall of Worry, Bubble? When Will it End? - Nadeem_Walayat
3.Gold Price Is Now On Its Way To All-Time Highs - Hubert_Moolman
4.Deutche Bank Stock Price Crash - The EU Has Problems Far Beyond the Brexit - Harry_Dent
5.UK interest Rate PANIC CUT! As Banks Prepare to Steal Customer Deposits - Nadeem_Walayat
6.Gold and Silver Bull Phase 1 : Final Impulse Dead Ahead - Plunger
7.Central Bankers Fighting An Unprecedented Global Economic Slowdown - Gordon_T_Long
8.Putin Hacking Hillary for Trump, Russia's Manchurian Candidate? - Nadeem_Walayat
9.Stock Market Insiders Are Secretly Selling, Cycle Top Next Month - Chris_Vermeulen
10.Gold Sector - Is it time to Back up the Truck? – Mortgage the Farm? - Peter_Degraaf
Free Silver
Last 7 days
Can Stocks Survive Without Stimulus? - 25th Aug 16
Why Putin Might Be on His Way Out - 25th Aug 16
Bond Guru Gary Shilling - The Bond Market Rally of a Lifetime - 25th Aug 16
A Zombie Financial System, Black Swans and a Gold Share Correction - 25th Aug 16
OPEC’s Output Freeze: What Has Changed Since Doha? - 25th Aug 16
Merkel Prepares For a Deliberate Crisis While White House Plans For a Disastrous Succession - 24th Aug 16
Suspicious Reversal in Gold Price - 23rd Aug 16
If Trump Can’t Pull Off a Victory, Expect a Civil War - 23rd Aug 16
Ceding ICANN and Internet Control to Globalists - 23rd Aug 16
How to Spot an Oversold Stock Market - 23rd Aug 16
Gerald Celente Sees Worst Market Crash, New Military Conflict, Gold Spike to $2,000/oz - 23rd Aug 16
EU Olympics Medals Table Propaganda Includes BrExit Britain - 22nd Aug 16
BrExit Win's Britain Olympics Success Freedom Dividend, Economy Next - 22nd Aug 16
Stock Market Top Forming, but Slowly - 22nd Aug 16
(Really) Alternative Banking Systems - 22nd Aug 16
Vauxhall Zafira Fires - Second Recall Issued - Inspection Before Bursting into Flames? - 21st Aug 16
Will the Stock Market Bubble Pop Regardless if the FED Never Raises Rates? - 21st Aug 16
US Government Spending - 3 Big Stories Not Being Covered – Part III - 21st Aug 16
Silver Analysis - 20th Aug 16
SPX New Highs, Correction Next? - 20th Aug 16
Housing Bubble - The Marginal Buyer Holds The Pin That Pops Every Asset Bubble - 20th Aug 16
Gold Miners Q2 2016 Fundamentals - 19th Aug 16
Which Price Ratio Matters Most in a Fiat Ponzi? - 19th Aug 16
Big Policies, Bigger Failures - 19th Aug 16
Higher Crude Oil’s Prices and USD/CAD - 19th Aug 16
Here’s Why You Should Look for Dividend Stocks and How - 19th Aug 16
Deglobalization Already Underway — 4 Technologies That Will Speed It Up - 19th Aug 16
These 6 Charts Show Why the Average American Is Fed Up - 18th Aug 16
SPX Easing Lower - 18th Aug 16
Low / Negative Interst Rate’s Legacy - 18th Aug 16
The 45th Anniversary of The Most Destructive Event In Modern Monetary History - 18th Aug 16
USDU - An Important Perspective on the US Dollar - 17th Aug 16
SPX Completes Wave 1 Decline - 17th Aug 16
How to Quickly Spot Common Fibonacci Ratios on a Chart - 17th Aug 16
When Does a Forecast Become a Trade? - 17th Aug 16
Kondratiev Wave - The Financial Winter Is Nearing! - 17th Aug 16
Learn "The 4 Best Elliott Waves to Trade -- and How to Trade Them" - 16th Aug 16
Stock Market Bears Turning Bullish At New All Time Highs - Time to Get Worried? - 15th Aug 16
Job Seekers Sacrificed to the Inflation Gods - 15th Aug 16
A Look At Commodities and Financial Markets Trading Week Ahead - 15th Aug 16
Stock Market New Top Forming? - 15th Aug 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

How to Trade Elliott Waves

U.S. Government Debt Goes From Frying Pan to Fire

Interest-Rates / US Debt Jun 17, 2012 - 01:44 AM GMT

By: Andy_Sutton

Interest-Rates

Best Financial Markets Analysis ArticleThis morning, the Treasury Department almost gleefully and proudly announced that foreign holdings of US Debt had hit a record high during the month of April and that bond heavyweight China had upped its holdings after trimming for two straight months. This dovetails nicely with a story that was published earlier this week about the federal reserve and its own holdings of US Debt, which have increased over 450% in the past three years. And no, that is not a typo. The federal reserve now holds over $1.6 Trillion in USGovt debt. Obviously the establishment is thrilled with these developments because it helps maintain the status quo of the dollar standard era. However, there are some serious ramifications that few are paying attention to and are getting almost zero coverage from traditional media outlets. From the AP this morning:


“China boosted its holdings 0.1 percent to $1.15 trillion in April. That followed a 1 percent drop in March and a 0.9 percent decline in February. March's figures were revised down from the government's initial estimate a month ago that China had boosted its holdings in March.

Japan, the second-largest buyer of Treasury debt, trimmed its holdings 0.9 percent to $1.07 trillion. Brazil, the third-largest buyer of Treasury debt, boosted its holdings 5.3 percent to $246.7 billion.”

The US Government and its catastrophic fiscal morass are now viewed by the world as a ‘safe haven’? This would easily qualify for a comedy shtick if it weren’t so serious.

Where is the ‘Eurozone Effect’ in USGovt Debt?

The headlines have been filled with story after story about how the major rating agencies (S&P, Moody’s and Fitch in particular) have been literally wrecking EU nations for their inability to get a handle on their fiscal affairs. This has created a self-reinforcing cycle. Agencies cut the ratings, which prompts bond investors to demand higher yields, which makes it even less likely that the nations will be able to meet payment obligations, which leads to further downgrades and so forth. Wash, rinse, repeat. Not only have the nations themselves been hit, but their banks have been hit as well – and deservedly so. In truth, the entire Eurozone, save for Germany, should be rated below investment-grade; and quite a few of them should be rated as junk.

Which brings us to America. The inability of our government to do much of anything without further borrowing is now well documented. Uncle Sam borrows nearly 50 cents of every dollar spent, and despite massive stimulus via heavy deficit spending, the USEconomy is dead in the water. There is a huge paradigm shift going on in the labor market right now. Jobs are available, but for the most part they’re of the variety of which two (or more) are needed to create a manageable situation for a family. Families are back on the credit card and this writer must wonder how much of that debt accumulation is out of necessity rather than a need for largesse. There is a bubble in student loan debt and both Social Security and Medicare are in serious trouble. Last August S&P, citing these and other factors, dropped the government’s rating a single notch. Generally when ratings go down, yields go up. Quite the opposite has happened in our case. Yields are now at all-time lows.

The False Paradigm Continues

First, this continues and even reinforces the notion that America is somehow immune from the laws of economics (and common sense for that matter). Somehow we can borrow and spend as much money as we want without fear of negative repercussions. In fact, not only won’t we be punished, we’ll be rewarded by having to pay lower interest rates. Does it make any sense though that the average credit card rate for individuals is somewhere in the mid 13% range and the average American’s finances – as bad as they are – are still several orders of magnitude better than that of the US Govt, which is treated to the lowest rates in history?

Make no mistake about it; the bubble blowing up in USTreasuries is the mother of all bubbles to date, eclipsed only by the even larger bubble being blown up in OTC derivatives, which almost NOBODY is talking about. In plain English, this will not end well – enjoy it while it lasts.

Why Save?

Secondly, the near-zero interest rates being paid by banks and other savings vehicles are so low that it actually discourages people from saving when they need to be doing it most. I had the severe displeasure of scanning rates on money market funds for a client the other day and found that the average of the handful of money market funds I looked at was .06%. That is six cents a year for every hundred dollars invested. Incredible. And when you figure that veritable fortune is taxed? Well, what’s the point of even saving? Unfortunately, many people are taking that attitude. If we’re not going to be compensated, why bother? A quick look at the savings averages for people nearing retirement is downright scary. Granted, this has been going on an awful long time. People appear to be under the false notion that the government is going to take care of them and that their Social Security (which is anything but) will carry them through. Many are now finding out the hard way that this simply isn’t the case.

We are Europe

Thirdly, the persistently poor economy, which by several authentic non-GDP based metrics has now been in recession for nearly 6 years, has created and entire class of people who are dependent on the government for either all or nearly all of their sustenance. Social Security Disability claims are at an all-time high. Food stamp subscriptions are at an all-time high, as are energy assistance, and Medicaid use. We are Europe, plain and simple. While our politicians and Mr. Geithner sit here and lecture the Europeans on fiscal responsibility, we’ve got our very own Titanic that is listing from a huge gash in its side caused by the overriding welfare mentality and a complete lack of leadership over the past half century. Much like many of the Eurozone nation-states, we have lost our own sense of personal responsibility. Somebody else will take care of it. Someone else will pay for it. Someone else will clean up our mess.

As the money flies out of Greek banks and the Eurozone in general so fast that it can barely be counted, there aren’t a lot of viable places to stash it. One must wonder where it is all going. Global stock markets have been in a correction over the past month or so. Commodities are stagnant as financial agents attack prices at every turn in a vain attempt to contain the effects of all the monetary inflation going on around the globe. USTreasuries have been one parking place, but really, given the fundamentals of America’s finances, stashing your capital in USTreasuries is the equivalent of jumping from the frying pan directly into the fire.

This is where the final component of the false paradigm comes into play: the complete lack of moral hazard. The bailout mentality, like the welfare mentality, is firmly in place. We taught banks and hedge funds back in 2008 (and even before) that the USTaxpayer is always willing, able, and ready to back up any losses experienced as a result of poor risk management, gambling, and outright irresponsible behavior. We’ve taught people that they can behave irresponsibly and buy homes they have no hope of ever affording and while millions have lost those homes, millions more have been bailed out.

The real question becomes who is going to do the bailing out when the USTreasury and OTC Derivative bubbles burst? There isn’t enough capital in America to cover the Treasury mess and there isn’t enough capital in the universe to cover the OTC casino gambling of financial agents around the globe.

Got gold?

By Andy Sutton


http://www.my2centsonline.com

Andy Sutton holds a MBA with Honors in Economics from Moravian College and is a member of Omicron Delta Epsilon International Honor Society in Economics. His firm, Sutton & Associates, LLC currently provides financial planning services to a growing book of clients using a conservative approach aimed at accumulating high quality, income producing assets while providing protection against a falling dollar. For more information visit www.suttonfinance.net

Andy Sutton Archive

© 2005-2016 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

Catching a Falling Financial Knife