Best of the Week
Most Popular
1.Election Forecast 2015 - Opinion Polls Trending Towards Conservative Outright Win - Nadeem_Walayat
2.UK Solar Eclipse - End Time Sign, Judgement Day, Doomsday! - Nadeem_Walayat
3.Gold And Silver - When Will Precious Metals Rally? Not In 2015 - Michael_Noonan
4.Preparing for the Next Stocks Bear Market - Forecast 2015-2016 - Gary_Savage
5.Is a Stock Market Crash Imminent? - David Eifrig
6.Gold Price Slumps as US Dollar Soars, What's Next? - Nadeem_Walayat
7.US Dollar Forex Pairs and Gold Chartology - Rambus_Chartology
8.Election Forecast 2015: The Day Labour Lost the General Election - Nadeem_Walayat
9.The ECB Should End QE Next Month - EconMatters
10.Silver Price Poised to Surge - Zeal_LLC
Last 5 days
How Stock Investors Should Play the 2016 Presidential Race - 26th Mar 15
MidEast Energy Alert: Why the Crisis in Yemen Could Get Ugly Very Fast - 26th Mar 15
Stock Market Downward Spiral of Dumbness - 26th Mar 15
The Monetary Approach Reigns Supreme - 26th Mar 15
Stock Market Large Gap Down, Despite the Algos' Push Back - 26th Mar 15
Crude Oil Surges, Gold price Spikes as Middle East Tensions Escalate - 26th Mar 15
The U.S. Housing Market Recovery Is Fabricated Optimism - 26th Mar 15
Why Yemen Is The Next Saudi-Iranian Battleground - 26th Mar 15
The Crude Oil Price Crash and China Economic Slow Down - 26th Mar 15
Global Financial Markets Are More Distorted Than Ever Before - 26th Mar 15
One More Stock Market Rally and Then a Huge Drop Expected - 26th Mar 15
Danger Will Robinson - Stock Market Crash Warning - 25th Mar 15
Learn the Basics of Corrective Elliott Waves - 25th Mar 15
Why CNBC Is Hazardous to Your Financial Health! - 25th Mar 15
Will Your Retirement Accounts Survive The Coming Tax Code "Revolution"? - 25th Mar 15
US Dollar - Americas Phoenix - 25th Mar 15
California’s Epic Drought: Only One Year of Water Left! - 25th Mar 15
What’s Wrong With Silver? - 25th Mar 15
SPX Futures Appear Weak. WTIC and Gold May Be at Max Retracement - 25th Mar 15
We’re at the Dawn of a “New Energy Age” - 25th Mar 15
A Very Weak U.S. Economic Recovery - 25th Mar 15
Zero UK CPI Inflation Rate Prompts Deflation Danger Propaganda For Fresh Money Printing - 25th Mar 15
Stock Market NYSE Hi-Lo Index Aggressive Sell Signal - 24th Mar 15
Palladium Commodity Price Forecast - 24th Mar 15
Bitcoin Price Gearing Up for a Fall - 24th Mar 15
Safety Deposit Boxes In UK Being Closed By ‏HSBC – Not Closing Gold Vaults - 24th Mar 15
Japan Short Term Gains And Long Term Disaster - 24th Mar 15
China's Fragile Evolution - 24th Mar 15
David Cameron Announces Resignation Even Before Being Re-elected, Handing Labour 6 Seats - 24th Mar 15
City of London's Ownership of American Colonies - 24th Mar 15
Stock Market Reversal May Have Begun - 24th Mar 15
Casey Gathers Top Gold Experts to Share Secrets for Making Money in Any Market - 24th Mar 15
Thoughts on The Current Crude Oil Market - 24th Mar 15
U.S. Economy Still on Life Support - What Your Governments Hiding From You... - 24th Mar 15
UK Election Forecast 2015 - Budget Bribes Fail, SNP Insurgency Catastrophe - Video - 24th Mar 15
Is Stock Market Minor Top Taking Hold? - 23rd Mar 15
Greece and EU Running Out of Time as Bank Runs Intensify - 23rd Mar 15
Stock Market Slightly Negative Expectations Following Last Week's Rally - 23rd Mar 15
This Rising Interest Rates Play Could Make You a Quick 55% - 23rd Mar 15
Platinum Commodity Price False Break Low - 23rd Mar 15
The Real Reason The American Dream is Unraveling - 23rd Mar 15
Election Forecast 2015 - Budget Bribes Fail to Impress Voters, Tory's Lose Seats in Opinion Polls - 23rd Mar 15
Silver Price Reliance During U.S. Dollar Rally - 23rd Mar 15
Gold Price Outlook Dramatic Improvement Following US Dollar Topping Action - 23rd Mar 15
Wall Street Doesn't Want You to Do This - 22nd Mar 15
The "Natural Interest Rate" Is Always Positive and Cannot Be Negative - 22nd Mar 15
Exploring The Gold Market: The Fed, The Charts. The COTS and GLD - 22nd Mar 15
Stocks Bull Market Continues - 22nd Mar 15
Gold And Silver - China's AIIB Spells U.s. Dollar Demise, Not Clear For Precious Metals - 22nd Mar 15
Cocoa Commodity Price Technical Outlook - 21st Mar 15
Yield Curve, Futures, Suggest No U.S. Interest Rate Hike Until December - 21st Mar 15
Three Iconic Stocks Are Poised for a Dive - 21st Mar 15
We're All Hedge Funds Now! - 21st Mar 15
Why Stock Market Seasonality May Be Critical in 2015 - 20th Mar 15
Yellen's Tiger Riding Dilemma Keeps Interest Rates Near Zero - 20th Mar 15
FOMC is boxed in, Gold and Silver - 20th Mar 15
Silver Price Poised to Surge - 20th Mar 15
Why Aren’t These Investors Worried About The Gold Price? - 20th Mar 15
Gold Price Downside $850/oz; Upside Jump to $2,000/oz on ‘Grexit’ - 20th Mar 15
Cheap Paper Money - Precious Metals Technical Outlook - 20th Mar 15
Best Cash ISA vs Budget 2015 Scrapping Tax on Savings Interest on First £1,000 - 20th Mar 15
GDXJ / Gold Ratio - 20th Mar 15
What the “Yellen Effect” Ultimately Means for Crude Oil - 20th Mar 15
Sharp Fall In USD Index And Its Implications - 20th Mar 15
UK Solar Eclipse - End Time Sign, Judgement Day, Doomsday! - 19th Mar 15
How Many Shale Oil Plays Make Money At $37 Per Barrel? - 19th Mar 15
Gold Price Rises 2.1% – Fed Signals Loose Monetary Policies to Continue - 19th Mar 15
The Hottest Investment Opportunities in Tech Stocks Sector Right Now - 19th Mar 15
China's Deflationary Economic Bust and Beyond: Anne Stevenson-Yang Presentation - 19th Mar 15
T-Mobile CEO: "Sprint couldn't give away service...their network is completely dead" - 19th Mar 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

US Economy Still on Life Support

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

© 2005-2015 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

Free Report - Financial Markets 2014