Archive for the ‘Treasuries’ Category
The Fed’s D-Rate: 4.5% At Dec 31, 2013… And Dropping Fast
In April of 2010, Zero Hedge first brought up the topic of the Fed’s DV01, or the implicit duration risk borne by the Fed’s burgeoning balance sheet which at last check will approach 25% of US GDP by the end of 2013 (tangentially, back in 2010 the Fed’s DV01 was $1 billion - it is nearly $3 billion now and rising fast). Recently, we have noticed that the mainstream media has, with its usual 2 year delay, picked up on just this topic of the implicit and explicit risk borne by Bernanke’s grand (and final) monetary experiment. And slowly but surely they are coming to the inevitable conclusion (which our readers knew two years ago), that the Fed has no way out? Why? Ray Stone of Stone McCarthy explains so simply, a Nobel prize winning economist can get it.
From Stone McCarthy
Further asset purchases would compromise the Fed’s longer run profitability in two ways.
First, because the securities have been purchased during a period of economic distress the yields on these securities are unusually low. The purchase of these securities has been financed by reserve creation. The cost of reserve creation is the interest rate paid on reserves (IOER) currently only 25 bps.
Of course, the interest rates on IOER, RRPs, and Term Deposits all represent variable interest rates, while the yields on SOMA are effectively all fixed rates. Thus, there is an asset/liability mismatch, which could compromise the Fed’s Net Interest Income (NIM) should short term interest rates rise. The Fed’s exit from the extraordinarily low funds rate regime will not be compromise by the prospect of reduced or negative NIM. Instead, the remittances to the Treasury would be reduced or suspended.
How high do these short-term interest rates have to go before the NIM become negative?
In 2012 the Fed generated $80.5 bln in interest income on an average $2.606 bln in SOMA holdings, or about 3.1%. The SOMA was funded by paying only 0.25% on average reserve balances of $1.527 trillion or about $3.8 bln. In other words NIM was about $77 bln.
Had the IOER been consistent with what FOMC participants regard as normal in the longer-run, say 4-1/4%, NIM in 2012 would have been only about $15 bln, with a slightly restrictive posture, say 5-1/4% NIM would be close to zero, and with at 5-1/2% NIM would have been negative.
Now if we do the same arithmetic with a SOMA that is increased by $1 trillion due to the asset purchase programs, even keeping the effective yield at 3.1%, we see that NIM turns negative at a lower funds rate. Gross interest income from SOMA would increase to around $115 bln. At the same time if the IOER was set at 4-1/4%, NIM would fall from $15 bln to only $4 bln. At a 4-1/2% NIM becomes negative.
In other words, at Dec. 31, 2013, a 4.5% interest rate (or, as we call it, the D-Rate) is where the Fed starts losing money.
And then, if the Fed waits another year, the NIM breakeven is 3.5%… if the Fed then waits another year, the NIM breakeven drops to a minuscule 2.5%… and so on until year after year, the tiniest rise in rates will force the Fed approach Congress and explain why suddenly, not only is it not remitting interest income to the Treasury, but why just as suddenly, there is now a credit balance, that has to be funded by the Treasury (a move which monetarily will require the Fed to bail itself out, but which politically and economically will be an epic and final hit to the credibility of the Fed, as the Fed will be officially printing money just to print money).
Of course, the above analysis assumes the Fed delays and avoids exiting QE in 2013, and then 2014 (and so on) as this is the last instrument Bernanke and his successor have to push up the stock market, never mind the economy, the unemployment rate or inflation. Which the Fed will have no choice but do, and yet the longer it build the wall of QE worry, the greater the negative sensitivity to even the smallest increase in interest (and IOER) rates, if and when inflation picks up and Bernanke is taken to task with his “15 minutes” promise of eliminating hyperinflation.
In other words, while QE4EVA may be unlimited in the eye of the beholding Chairman, it is very much limited by the amount of reserves pumped into the system, and the amount of cash that Ben will have to pay banks as interest on their excess reserves.
Finally, as once again Zero Hedge readers know well ahead of everyone, it will be the foreign banksthat will be the proud recipients of the tens or hundreds of billions of IOER funds when the inevitable IOER rate hike starts. This was explained here:
[S]ince it is improbable that excess reserves held by any banks will decline at all in the coming years, one can also assume that the annualized interest paid to foreign banks, which would amount to at least $5 billion pear year, every year, will continue indefinitely as a direct Fed subsidy to the bottom line of Foreign banks.
All of this, of course, ignores what happens should the Fed hike interest rates across the board, which will also mean rising the rates on IOER, once inflation finally strikes: simple math means a 1% IOER means some $20 billion in interest paid to foreign banks, 2% – $40 billion, 5% – $100 billion paid to foreign banks, and so on. Putting these numbers in perspective, let’s recall that Italy’s third largest bank just got a €3.9 billion bailout (its third), and has a market cap of some €2.9 billion.
Expect the MSM to figure out that it is precisely the foreign banks operating in the US, which now hold well more than half of all excess reserves in circulation, that will be the majority benefactors of the dollar bonanza that will be unleashed once the IOER begins its trickle up, in the next few years (or months at the rate record gasoline prices are soaring). Sadly, by then will we have far greater problems as a result of nobody once again understanding what is really going on behind the scenes.
Starting next year, new rules designed to prevent another meltdown will force traders to post U.S. Treasury bonds or other top-rated holdings to guarantee more of their bets. The change takes effect as the $10.8 trillion market for Treasuries is already stretched thin by banks rebuilding balance sheets and investors seeking safety, leaving fewer bonds available to backstop the $648 trillion derivatives market.
The solution: At least seven banks plan to let customers swap lower-rated securities that don’t meet standards in return for a loan of Treasuries or similar holdings that do qualify, a process dubbed “collateral transformation.” That’s raising concerns among investors, bank executives and academics that measures intended to avert risk are hiding it instead.
Why don’t we just call it what it is: Legalized accounting fraud.
Every time you think there’s a step that has been taken to reduce risk and leverage in the system, improving stability, you find a bank that has determined some means by which it can (and does) cheat, circumventing the rules. They find a loophole in the law and exploit it, making billions and reversing the alleged “stability” that was supposed to be provided.
Remember that the genesis of this change in the law was AIG, which had a ridiculous amount in derivative trades outstanding backed by nothing but hot air. They had structured the business such that they were effectively providing no collateral other than their “name”; when they were unable to meet margin calls the government stepped in to “rescue” them.
One Dollar of Capital would have prevented this. In fact, it’s the only thing that prevents this sort of game, as we continue to see that any attempt to impose discipline by other means is immediately evaded by the firms involved.
This sort of shenanigan must be prohibited and One Dollar of Capital appears to be the only means that will be effective, backed with criminal sanction for those firms and individuals that attempt to circumvent it.
Investors are plowing cash into new U.S. Treasuries at a record pace, making economic growth rather than budget austerity a key issue as President Barack Obama andMitt Romney face off in November’s presidential election.
Bidders offered $3.16 for each dollar of the $1.075 trillion of notes and bondsauctioned by the Treasury Department this year as yields reached all-time lows, above the previous high of $3.04 in all of 2011, according to data compiled by Bloomberg. The so-called bid-to-cover ratio was 2.26 from 1998 to 2001 when the nation ran budget surpluses.
I love this sort of misdirection.
First, investors are “plowing cash into Treasuries” because they are convinced that they will at least get their money back, and further, they believe that a positive real rate of return can be had.
The latter means deflation will win. The former means that investors believe they will lose money in anything else.
Now maybe you can construe that as “bullish” on Treasuries, but that’s a bit of a stretch.
Actually, it’s more than a stretch — it’s really bad, especially when a distorted market sends bad signals into the market and people listen to that in making policy decisions. Japan has bricked themselves inside a building of their own design; if rates go up ever the nation’s government will be immediately bankrupted. We’re not far from the same position; run our figures with a 5% average coupon across the curve and you find that we have a $750 billion annual interest cost, or 20% of the federal budget or more than three times what it is today.
That would make interest expense greater than we spent on any of Defense, Social Security or Medicare and Medicaid last year! Needless to say that won’t happen without bankrupting the Federal Government — yet that sort of average coupon was normal just a few years ago.
This sort of market distortion is not good, it’s ruinously bad. And as we have seen repeatedly over in Europe, rates have a habit of going from “heh, this is really nice” to “screw you” in extraordinarily violent moves, often with little or no effective warning.
Discussion (registration required to post)
A “paralyzed” Federal Reserve Bank, in its “final days,” held hostage by Wall Street “robots” trading in markets that are “artificially medicated” are just a few of the bleak observations shared by David Stockman, former Republican U.S. Congressman and director of the Office of Management and Budget. He is also a founding partner of Heartland Industrial Partners and the author of The Triumph of Politics: Why Reagan’s Revolution Failed and the soon-to-be released The Great Deformation: How Crony Capitalism Corrupts Free Markets and Democracy. The Gold Report caught up with Stockman for this exclusive interview at the recent Recovery Reality Check conference.
The Gold Report: David, you have talked and written about the effect of government-funded, debt-fueled spending on the stock market. What will be the real impact of quantitative easing?
David Stockman: We are in the last innings of a very bad ball game. We are coping with the crash of a 30-year–long debt super-cycle and the aftermath of an unsustainable bubble.
Quantitative easing is making it worse by facilitating more public-sector borrowing and preventing debt liquidation in the private sector—both erroneous steps in my view. The federal government is not getting its financial house in order. We are on the edge of a crisis in the bond markets. It has already happened in Europe and will be coming to our neighborhood soon.
TGR: What should the role of the Federal Reserve be?
DS: To get out of the way and not act like it is the central monetary planner of a $15 trillion economy. It cannot and should not be done.
The Fed is destroying the capital market by pegging and manipulating the price of money and debt capital. Interest rates signal nothing anymore because they are zero. The yield curve signals nothing anymore because it is totally manipulated by the Fed. The very idea of “Operation Twist” is an abomination.
Capital markets are at the heart of capitalism and they are not working. Savers are being crushed when we desperately need savings. The federal government is borrowing when it is broke. Wall Street is arbitraging the Fed’s monetary policy by borrowing overnight money at 10 basis points and investing it in 10-year treasuries at a yield of 200 basis points, capturing the profit and laughing all the way to the bank. The Fed has become a captive of the traders and robots on Wall Street.
TGR: If we are in the final innings of a debt super-cycle, what is the catalyst that will end the game?
DS: I think the likely catalyst is a breakdown of the U.S. government bond market. It is the heart of the fixed income market and, therefore, the world’s financial market.
Because of Fed management and interest-rate pegging, the market is artificially medicated. All of the rates and spreads are unreal. The yield curve is not market driven. Supply and demand for savings and investment, future inflation risk discounts by investors—none of these free market forces matter. The price of money is dictated by the Fed, and Wall Street merely attempts to front-run its next move.
As long as the hedge fund traders and fast-money boys believe the Fed can keep everything pegged, we may limp along. The minute they lose confidence, they will unwind their trades.
On the margin, nobody owns the Treasury bond; you rent it. Trillions of treasury paper is funded on repo: You buy $100 million (M) in Treasuries and immediately put them up as collateral for overnight borrowings of $98M. Traders can capture the spread as long as the price of the bond is stable or rising, as it has been for the last year or two. If the bond drops 2%, the spread has been wiped out.
If that happens, the massive repo structures—that is, debt owned by still more debt—will start to unwind and create a panic in the Treasury market. People will realize the emperor is naked.
TGR: Is that what happened in 2008?
DS: In 2008 it was the repo market for mortgage-back securities, credit default obligations and such. In 2008 we had a dry run of what happens when a class of assets owned on overnight money goes into a tailspin. There is a thunderous collapse.
Since then, the repo trade has remained in the Treasury and other high-grade markets because subprime and low-quality mortgage-backed securities are dead.
TGR: Walk us through a hypothetical. What happens when the fast-money traders lose confidence in the Fed’s ability to keep the spread?
DS: They are forced to start selling in order to liquidate their carry trades because repo lenders get nervous and want their cash back. However, when the crisis comes, there will be insufficient private bids—the market will gap down hard unless the central banks buy on an emergency basis: the Fed, the European Central Bank (ECB), the people’s printing press of China and all the rest of them.
The question is: Will the central banks be able to do that now, given that they have already expanded their balance sheets? The Fed balance sheet was $900 billion (B) when Lehman crashed in September 2008. It took 93 years to build it to that level from when the Fed opened for business in November 1914. Bernanke then added another $900B in seven weeks and then he took it to $2.4 trillion in an orgy of money printing during the initial 13 weeks after Lehman. Today it is nearly $3 trillion. Can it triple again? I do not think so. Worldwide it’s the same story: the top eight central banks had $5 trillion of footings shortly before the crisis; they have $15 trillion today. Overwhelmingly, this fantastic expansion of central bank footings has been used to buy or discount sovereign debt. This was the mother of all monetizations.
TGR: Following that path, what happens if there are no buyers? Do the governments go into default?
DS: The U.S. Treasury needs to be in the market for $20B in new issuances every week. When the day comes when there are all offers and no bids, the music will stop. Instead of being able to easily pawn off more borrowing on the markets—say 90 basis points for a 5-year note as at present—they may have to pay hundreds of basis points more. All of a sudden the politicians will run around with their hair on fire, asking, what happened to all the free money?
TGR: What do the politicians have to do next?
DS: They are going to have to eat 30 years worth of lies and by the time they are done eating, there will be a lot of mayhem.
TGR: Will the mayhem stretch into the private sector?
DS: It will be everywhere. Once the bond market starts unraveling, all the other risk assets will start selling off like mad, too.
TGR: Does every sector collapse?
DS: If the bond market goes into a dislocation, it will spread like a contagion to all of the other asset markets. There will be a massive selloff.
I think everything in the world is overvalued—stocks, bonds, commodities, currencies. Too much money printing and debt expansion drove the prices of all asset classes to artificial, non-economic levels. The danger to the world is not classic inflation or deflation of goods and services; it’s a drastic downward re-pricing of inflated financial assets.
TGR: Is there any way to unravel this without this massive dislocation?
DS: I do not think so. When you are so far out on the end of a limb, how do you walk it back?
The Fed is now at the end of a $3 trillion limb. It has been taken hostage by the markets the Federal Open Market Committee was trying to placate. People in the trading desks and hedge funds have been trained to front run the Fed. If they think the Fed’s next buy will be in the belly of the curve, they buy the belly of the curve. But how does the Fed ever unwind its current lunatic balance sheet? If the smart traders conclude the Fed’s next move will be to sell mortgage-backed securities, they will sell like mad in advance; soon there would be mayhem as all the boys and girls on Wall Street piled on. So the Fed is frozen; it is petrified by fear that if it begins contracting its balance sheet it will unleash the demons.
TGR: Was there some type of tipping that allowed certain banks to front run the Fed?
DS: There are two kinds of front-running. First is market-based front-running. You try to figure out what the Fed is doing by reading its smoke signals and looking at how it slices and dices its meeting statements. People invest or speculate against the Fed’s next incremental move.
Second, there is illicit front-running, where you have a friend who works for the Federal Reserve Board who tells you what happened in its meetings. This is obviously illegal.
But frankly, there is also just plain crony capitalism that is not that different in character and it’s what Wall Street does every day. Bill Dudley, who runs the New York Fed, was formerly chief economist for Goldman Sachs and he pretends to solicit an opinion about financial conditions from the current Goldman economist, who then pretends to opine as to what the economy and Fed might do next for the benefit of Goldman’s traders, and possibly its clients. So then it links in the ECB, Bank of Canada, etc. Is there any monetary post in the world not run by Goldman Sachs?
The point is, this is not the free market at work. This is central bank money printers and their Wall Street cronies perverting what used to be a capitalist market.
TGR: Does this unwinding of the Fed and the bond markets put the banking system back in peril, like in 2008?
DS: Not necessarily. That is one of the great myths that I address in my book. The banking system, especially the mainstream banking system, was not in peril at all. The toxic securitized mortgage assets were not in the Main Street banks and savings and loans; these institutions owned mostly prime quality whole loans and could have bled down the modest bad debt they did have over time from enhanced loan loss reserves. So the run on money was not at the retail teller window; it was in the canyons of Wall Street. The run was on wholesale money—that is, on repo and on unsecured commercial paper that had been issued in the hundreds of billions by financial institutions loaded down with securitized toxic garbage, including a lot of in-process inventory, on the asset side of their balance sheets.
The run was on investment banks that were really hedge funds in financial drag. The Goldmans and Morgan Stanleys did not really need trillion-dollar balance sheets to do mergers and acquisitions. Mergers and acquisitions do not require capital; they require a good Rolodex. They also did not need all that capital for the other part of investment banking—the underwriting business. Regulated stocks and bonds get underwritten through rigged cartels—they almost never under-price and really don’t need much capital. Their trillion dollar balance sheets, therefore, were just massive trading operations—whether they called it customer accommodation or proprietary is a distinction without a difference—which were funded on 30 to 1 leverage. Much of the debt was unstable hot money from the wholesale and repo market and that was the rub—the source of the panic.
Bernanke thought this was a retail run à la the 1930s. It was not; it was a wholesale money run in the canyons of Wall Street and it should have been allowed to burn out.
TGR: Let’s get back to our ballgame. What is to keep the U.S. population from saying, please Fed save us again?
DS: This time, I think the people will blame the Fed for lying. When the next crisis comes, I can see torches and pitch forks moving in the direction of the Eccles building where the Fed has its offices.
TGR: Let’s talk about timing. On Dec. 31, the tax cuts expire, defense cuts go into place and we hit the debt ceiling.
DS: That will be a clarifying moment; never before have three such powerful vectors come together at the same time— fiscal triple witching.
First, the debt ceiling will expire around election time, so the government will face another shutdown and it will be politically brutal to assemble a majority in a lame duck session to raise it by the trillions that will be needed. Second, the whole set of tax cuts and credits that have been enacted over the last 10 years total up to $400–500B annually will expire on Dec. 31, so they will hit the economy like a ton of bricks if not extended. Third, you have the sequester on defense spending that was put in last summer as a fallback, which cannot be changed without a majority vote in Congress.
It is a push-pull situation: If you defer the sequester, you need more debt ceiling. If you extend the tax expirations, you need a debt ceiling increase of $100B a month.
TGR: What will Congress do?
DS: Congress will extend the whole thing for 60 or 90 days to give the new president, if he hasn’t demanded a recount yet, an opportunity to come up with a plan.
To get the votes to extend the debt ceiling, the Democrats will insist on keeping the income and payroll tax cuts for the 99% and the Republicans will want to keep the capital gains rate at 15% so the Wall Street speculators will not be inconvenienced. It is utter madness.
TGR: It is like chasing your tail. How does it stop?
DS: I do not know how a functioning democracy in the ordinary course can deal with this. Maybe someone from Goldman Sachs can come and put in a fix, just like in Greece and Italy. The situation is really that pathetic.
TGR: Greece has come up with some creative ways to bring down its sovereign debt without actually defaulting.
DS: The Greek debt restructuring was a farce. More than $100B was held by the European bailout fund, the ECB or the International Monetary Fund. They got 100 cents on the dollar simply by issuing more debt to Greece. For private debt, I believe the net write-down was $30B after all the gimmicks, including the front-end payment. The rest was simply refinanced. The Greeks are still debt slaves, and will be until they tell Brussels to take a hike.
TGR: Going back to the triple-witching hour at year-end, if the debt ceiling is raised again, when do we start to see government layoffs and limitations on services?
DS: Defense purchases and non-defense purchases will be hit with brutal force by the sequester. As we go into 2013, there will be a shocking hit to the reported GDP numbers as discretionary government spending shrinks. People keep forgetting that most government spending is transfer payments, but it is only purchases of labor and goods that go directly into the GDP calculations, and it is these accounts that will get smacked by the sequester of discretionary defense and non-defense budgets.
TGR: I would think to unemployment numbers as well.
DS: They will go up.
Just take one example. According to the Bureau of Labor Statistics monthly report, there are 650,000 or so jobs in the U.S. Postal Service alone. That is 650,000 people who pretend to work at jobs that have more or less been made obsolete and redundant by the Internet and who are paid through borrowings from Uncle Sam because the post office is broke. Yet, the courageous ladies and gentlemen on Capitol Hill cannot even bring themselves to vote to discontinue Saturday mail delivery; they voted to study it! That is a measure of the loss of capacity to rationally cognate about our fiscal circumstance.
TGR: In the midst of this volatility, how can normal people preserve, much less expand their wealth?
DS: The only thing you can do is to stay out of harm’s way and try to preserve what you can in cash. All of the markets are rigged or impaired. A 4% yield on blue chip stocks is not worth it, because when the thing falls apart, your 4% will be gone in an hour.
TGR: But if the government keeps printing money, cash will not be worth as much, either, right?
DS: No, I do not think we will have hyperinflation. I think the financial system will break down before it can even get started. Then the economy will go into paralysis until we find the courage, focus and resolution to do something about it. Instead of hyperinflation or deflation there will be a major financial dislocation, which means painful re-pricing of financial assets.
How painful will the re-pricing be? I think the public already knows that it will be really terrible. A poll I saw the other day indicated that 25% of people on the verge of retirement think they are in such bad financial shape that they will have to work until age 80. Now, the average life expectancy is 78. People’s financial circumstances are so bad that they think they will be working two years after they are dead!
TGR: Finally, what is your investment model?
DS: My investing model is ABCD: Anything Bernanke Cannot Destroy: flashlight batteries, canned beans, bottled water, gold, a cabin in the mountains.
TGR: Thank you very much.
David Stockman is a former U.S. politician and businessman, serving as a Republican U.S. Representative from the state of Michigan 1977–1981 and as the director of the Office of Management and Budget under President Ronald Reagan 1981–1985. He is the author of The Triumph of Politics: Why Reagan’s Revolution Failed and the soon-to-be released The Great Deformation: How Crony Capitalism Corrupts Free Markets and Democracy.
Stockman was the keynote speaker at last weekend’s Casey Research Recovery Reality Check Summit. This event featured legendary contrarian investor Doug Casey, high-end natural resource broker Rick Rule, New York Times bestselling author John Mauldin and 28 other financial luminaries. Over the three-day summit, they provided investors with asset-protection action plans and actionable investment advice. And even if you were unable to attend, you can still hear every recorded presentation in the Summit Audio Collection. Learn more here.
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From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
Is the Federal debt a criminal enterprise, enabled by a criminal syndicate? Read on before you pass judgment.
Correspondent Doug laid out a compelling case that the Federal debt is fundamnentally a criminal scam, operated by the criminal syndicate of the Treasury and the Federal Reserve:
The Federal Reserve is a criminal syndicate buying debt that the government eagerly creates and sells for spending money that dumps the debt on us civilians.What perplexes me is that the scam is so simple and all the intellectuals either don’t get it or are handcuffed by mega-corporate media owners.The scam in simple terms:
1. Uncle Sam borrows money from The Fed, China, oil exporters, Bank of England, etc. by selling Treasury bonds
2. You are responsible for the bonds, i.e. IOUs
3. Uncle Sam collects taxes and pays the bondholders
4. The debt is breaking us; life will not be the same in the years to come
Uncle Sam borrows all its spending money from the non-government Fed and others, and spends only borrowed dollars raised from exchanging bonds for dollars as a debt plus interest on your back.
Uncle Sam collects income taxes and funnels the money to the holders of these criminal Treasury bonds.
The Fed/Treasury is an evil axis defunding you and me: the debt is $14.5 trillion; this is our debt, not the government’s debt. The government does not generally earn money; we do. Therefore every criminal debt certificate (Treasury bond) the Treasury exchanges for cash is a debt on you and me–a promise to pay for which citizens are responsible to pay, IOUs in simple terms. If the government printed the money instead of the criminal Fed, there would be no debt.
Uncle Sam borrows bucks and you become automatically indentured to pay back the bond and pay the vig! How is this not a criminal enterprise? If you go to a loan shark, at least you get to have the money in your hand and can spend it before you have to repay the loan and pay the vig!
Thank you, Doug, for explaining the criminal nature of the Federal Debt and the agencies and Fed that enable and enforce it.As we know, the Federal budget (and the “supplemental appropriations” that add hundreds of billions of dollars in “off-budget” spending) is consolidated. In other words, the government doesn’t specify that taxes collected paid for X spending and that the remaining Y spending is paid by borrowing money via selling TReasury bonds, so what spending is “paid by debt” is a politically charged assessment.
What the ballooning debt actually funds depends on the political convictions and agenda of the commentator, along with what constitutes “waste” in Federal spending. Some attribute the Federal deficit/borrowing to Medicare, others to hot wars and the Military-Industrial Complex, and still others to the endless bail-outs of financial Elites.
The common-sense perspective is to compare the circa 2000-01 $2.1 trillion annual Federal budgets of the pre-Global War on Terror (GWOT) and multi-trillion dollar bail-outs of banks/financial Elites with today’s $3.8 trillion annual budget (not counting all the political hot-potato spending hidden in “supplemental appropriations” to keep it out of the scrutinized budget). Since inflation was officially low for most of the decade, this vast increase in Federal spending cannot be explained as inflation; adjusted into real dollars (adjusted for inflation), it is still 40% pre-war, pre-bail-out levels.
Yes, Medicare spending is rising at 6%-7% annually, regardless of which political party is in power, and Social Security spending is outsripping the system’s tax revenue income. But clearly, a National Security State with few if any meaningful restraints on its spending (no “anti-terrorist” dictatorship shall go unrewarded/unfunded, etc.) or influence has added trillions in spending with little oversight or accountability.
The same can be said of the endless trillions squandered bailing out the banks and related financial Elites, including the quasi-Federal agencies (Fannie Mae and Freddy Mac) that funded the criminal enterprise known as the housing bubble/bust.
If the majority of the additional Federal spending was in fact squandered to boost the revenues, earnings and political influence of Elites, fiefdoms and special interests, then the taxpaying citizenry footing the bill did not receive any measurable benefit from all this additional debt. As Doug observed, the taxpayers are in effect borrowing vast sums from the loan sharks and not even getting to spend the money on themselves: the money was squandered on Elites, supposedly on behalf of the taxpayers, who must pay interest (i.e. the vig, “vigorish”) on the fast-rising debt.
As Doug asked: how is this not a criminal enterprise?
Charles Hugh Smith – Of Two Minds
In sum, the net foreign acquisitions of long-term securities, the change in foreign holdings of short-term U.S. securities, and banking flows yielded monthly net TIC outflows of $51.8 billion. Of this, net foreign private outflows were $44.4 billion, and net foreign official outflows were $7.4 billion.
Uh, that’s a problem folks, and one that is directly caused by government ponzi economic policy.
It’s one we better address too – and quickly.