FedUpUSA

Archive for the ‘Treasuries’ Category

Is the U.S. government on the verge of a massive debt problem?  For years, the U.S. government has been able to borrow all the money that it has wanted to at extremely low interest rates.  But now many of the lending sources that the U.S. government has been depending on are drying up.  Even before this recent crisis in Japan, a number of big players were moving away from U.S. Treasuries and the U.S. Federal Reserve was having to step in to pick up the slack.  But now this debt crunch is about to get a whole lot worse.  For years, many had feared that it would be China that would start dumping U.S. government debt, but now it turns out that Japan is going to be the real problem.  Right now, Japan is the second largest foreign holder of U.S. government debt.  Japan currently holds about $882 billion in U.S. Treasury bonds and they are likely going to have to liquidate much of that in order to fund the rebuilding of their nation.  So needless to say they won’t be accumulating any more U.S. government debt.  But the U.S. government still needs to borrow a trillion and a half dollars from someone every single year.  So where in the world are they going to get it?

This is called a debt problem.  Have you ever gotten to the point where you are in debt up to your eyeballs and nobody wants to lend you any more money?

Well, the U.S. government is rapidly reaching that point.

Even before the crisis in Japan, several of the big boys had starting moving away from U.S. government debt.

PIMCO, the biggest bond fund on the entire globe, recently acknowledged that they are dumping all of their U.S. Treasuries.

So if foreign nations like Japan are not gobbling up U.S. government debt and big bond funds like PIMCO are not buying any of it, then who in the world is going to be purchasing the massive amounts of debt that the U.S. government is constantly pumping out?

Well, many of you already know that answer.

The Federal Reserve is going to step in of course.  The Federal Reserve knows that if the U.S. government cannot borrow gigantic quantities of money at super low interest rates it will go broke.  So the Federal Reserve is just going to keep buying up most new U.S. government debt.  It is just that simple.

But isn’t that a Ponzi scheme?

Of course it is.  Let’s not mince words here.  It is a total scam.

And it is a scam that cannot go on indefinitely.

The truth is that the Ponzi Scheme of the U.S. Treasury issuing bonds and the Federal Reserve buying them up cannot last forever as PIMCO’s Bill Gross noted in his March newsletter….

“Basically, the recent game plan is as simple as the Ohio State Buckeyes’ “three yards and a cloud of dust” in the 1960s. When applied to the Treasury market it translates to this: The Treasury issues bonds and the Fed buys them. What could be simpler, and who’s to worry? This Sammy Scheme as I’ve described it in recent Outlooks is as foolproof as Ponzi and Madoff until… until… well, until it isn’t.”

Gross also noted in his recent newsletter that the Federal Reserve is currently buying up about 70 percent of all new U.S. government debt.

So now that Japan is out of the picture, how high will that figure go now?

80 percent?

90 percent?

Over the past several weeks there has been all kinds of speculation about whether “quantitative easing” will be extended past June or not.

Well, whether they call it “quantitative easing” or not, the truth is that the Federal Reserve is going to have to continue to “buy” most new U.S. government debt or the system will crash.

We have gotten to the point where the U.S. federal government cannot continue to function without Federal Reserve monetization of the debt.

This is a sign that we are rapidly approaching the financial endgame.

So why doesn’t the U.S. government just stop spending so much stinking money and stop getting us all into so much debt?

Well, because there isn’t enough political will in Washington D.C. to do any real budget cuts, and if our politicians did balance the budget at this point it would crash the economy.

Just the other day, the U.S. House of Representatives passed a continuing resolution to fund the federal government that would cut 6 billion dollars from U.S. government spending.

On that exact same day, the official U.S. national debt figure rose by 72 billion dollars.

Now the debt normally does not go up that much on a typical day.  But what this example does show is the losing battle that our politicians are fighting.

On Wednesday, U.S. Treasury Secretary Timothy Geithner warned a House of Representatives appropriations subcommittee that they should not even think about not raising the debt ceiling….

“Congress has to do it. There’s no alternative.”

The truth is that the U.S. government has to keep going into more debt.  Under the current system the alternative would be to collapse the economy.

But the debt that we have already piled on to the backs of future generations is absolutely criminal.

How mad do you think future generations are going to be with us for heaping 14 trillion dollars of debt on to their shoulders?

Talk about a debt problem!

But this is what we get for allowing a private central bank to run our financial system.  This debt-based system was designed to fail from its very inception.

The man supposedly “in charge” over at the Federal Reserve, Ben Bernanke, has a track of record of incompetence that is absolutely staggering.  It is a mystery why our representatives in Washington D.C. are not howling for his resignation.

Instead, most of our politicians continue to express blind faith in our current financial system and they continue to insist that everything is going to be okay.

Well, everything is not going to be okay.  The Obama administration is projecting that the federal budget deficit for this fiscal year will be an all-time record 1.65 trillion dollars.

Of course they are also trying to convince us that budget deficits will go down in future years, but by now we should all know not to trust the rosy future projections of government officials.

After all, it was only a few short years ago that Bush administration officials were promising that we would be swimming in huge budget surpluses by now.

The truth is that the government has been lying about all of this for a long time.  For now, the Federal Reserve is just going to keep monetizing U.S. government debt for as long as it can.

This Ponzi scheme will keep on working and working and working until someday it simply doesn’t anymore.

When that day arrives, the U.S. government debt problem is going to unleash hell on world financial markets.

The Economic Collapse

Selling government debt is a gigantic confidence game.  For decades, investors all over the globe have gobbled up massive amounts of U.S. debt at incredibly low interest rates because they believed that it was a certainly that they would be paid back and be able to make a little bit of profit on top of it.  Unfortunately, things have changed.  Confidence is U.S. Treasuries is dying, and if confidence in U.S. government debt completely collapses at some point we could literally be looking at financial Armageddon.  Why is that so?  Well, when the world totally loses faith in U.S. Treasuries, interest rates on U.S. Treasuries will have to keep going up until enough investors are found to buy them.  But much higher interest rates will mean much higher interest on the national debt and thus much higher federal budget deficits.  That will erode confidence in U.S. Treasuries even further.  In the end, a vicious cycle of eroding confidence and higher interest rates could ultimately lead to hyperinflation as the U.S. government and the Federal Reserve flood the system with endless amounts of paper money to try to keep the system solvent.

Faith in U.S. Treasury bonds is absolutely critical if the world financial system is going to continue to operate in a stable manner.  In the post-World War 2 era, U.S. Treasuries have been largely viewed as the absolutely safest investment out there.  So if there comes a point when the market for U.S. Treasuries completely collapses, it is going to cause unprecedented financial chaos.  The worldwide derivatives market, which is already highly unstable, would almost certainly implode.  Credit markets all over the globe would seize up.  Global trade would quickly grind to a standstill.

This isn’t going to happen overnight (hopefully).  Rather, the loss of confidence in U.S. Treasuries is something that is likely to take months or even years to play out.  But once that confidence is gone, it is not something that will be able to be rebuilt easily.

Think of it this way – once you drive a car off a cliff, is it easy to reconstruct it?

Of course not.

Well, that is where we are headed with U.S. Treasuries.

The Federal Reserve is flooding the system with new dollars, Barack Obama and the U.S. Congress seem poised to pass a new tax deal which does not include corresponding spending cuts which will cause U.S. government budget deficits to become even more bloated, and there is a tremendous lack of faith both in U.S. political leaders and in the Federal Reserve at this point.

The rest of the world is losing faith that the U.S. government is going to be able to handle all of the debt that it has accumulated.  We may be approaching a “tipping point” soon.

The following are 10 signs that confidence in U.S. Treasuries is dying….

#1 The financial community is extremely concerned that the tax deal that Barack Obama is pushing is going to dramatically increase U.S. government budget deficits over the next two years.  On Monday, Moody’s warned that if Barack Obama’s tax deal with the Republicans becomes law, it will increase the likelihood that Moody’s could soon be forced to slash the rating of U.S. government debt.

#2 Already there are signs that some bond investors are looking for the exits.  Last week, U.S. Treasuries suffered their largest  two day sell-off since the collapse of Lehman Brothers back in September 2008.

#3 The yield on 10-year Treasury bonds set a six-month high on Monday before pulling back a bit.  Most analysts believe that Treasury yields are going to push significantly higher in coming weeks.

#4 This trend of rising yields has been going on for a while.  In fact, yields on 10-year Treasury bonds have been steadily rising since October 7th.

#5 Even before the recent tax deal was announced there were already troubling signs regarding the growth of U.S. government debt.  The U.S. government budget deficit rose to $150.4 billion in November, which was the largest November budget deficit ever recorded.

#6 It is not just the new tax deal that has investors around the globe spooked.  The truth is that the rest of the globe reacted very negatively to the new round of quantitative easing that the Federal Reserve announced back in November.  The Federal Reserve is flooding the system with liquidity and the rest of the world is not amused.

#7 The American people have less faith in the Federal Reserve and in the financial system than at any other point in recent memory.  For example, a new Bloomberg National Poll has found that a majority of Americans now want the Federal Reserve to either be held more accountable or to be abolished entirely.

#8 Investors all over the globe are starting to wake up and realize that America’s debt problem is unsolvable.  David Bloom, the currency chief at HSBC, raised eyebrows when he recently stated that “if yields are rising because people think America’s fiscal situation is unsustainable, then its Armaggedon.”

#9 There is also a growing feeling among investors that the Federal Reserve simply does not care about the danger of inflation, and this is making bondholders very nervous.  Stephen Lewis of Monument Securities recently put it this way….

“There is a feeling that the Fed doesn’t care about inflation – in fact, wants more of it – and that is certainly not in the interest of bondholders.“

#10 Over the next 12 months, the U.S. government is going to be rolling over trillions of dollars in debt along with all of the new borrowing that it is going to be doing. In fact, the U.S. government is somehow going to have to find a way to finance debt that is equivalent to 27.8 percent of GDP in 2011.

For years our politicians have told us that “deficits don’t matter”, but the truth is that they do matter.  The national debt of the United States is now the biggest debt in the history of the world by far, and yet most Americans do not seem to grasp the absolute financial horror that we are facing as a nation.

In the end, debt is always painful.  It can be a lot of fun to run out and buy a beautiful new house, a couple of brand new cars and to run your credit cards up to the max, but eventually it catches up with you.  Well, the same thing is now happening to us on a national level.

We are getting to the point where eventually we are not even going to be able to service the debt that we have already piled up.  Once that happens we can either declare national bankruptcy or we can try to hyperinflate our way out of trouble.

Meanwhile, the once great U.S. economic machine is dying as well.  The only reason we have been able to survive with all of this debt as long as we have is because of how powerful our economy has been.

But over the past couple of decades, the big global corporations that now dominate our economy have shipped thousands of factories and millions of jobs overseas.

The mighty economic machine which is supposed to provide funds to pay off all of this debt is being dismantled right in front of our eyes.

There was no way in the world that U.S. government debt was going to be sustainable even if our economy remained vibrant and healthy.  The sad truth is that U.S. government debt is approximately 13 times larger than it was just 30 years ago.

But now that the “real economy” is dying a savage death there is simply no hope that this thing is ever going to turn around.  The only thing left to do is to take bets on when the implosion is going to happen.

All of this “great tax cut debate” nonsense going on in Washington D.C. right now is just a bunch of incompetent politicians running around rearranging the deck chairs on the Titanic.  Perhaps these tax cuts will provide enough of a short-term economic boost to get many of them re-elected in 2012.  Meanwhile, our long-term economic problems continue to get a lot worse.

It has become quite obvious that Barack Obama is completely clueless about the economy, and what is even sadder is that the “highly educated” Chairman of the Federal Reserve, Ben Bernanke, seems almost equally as clueless.

Unfortunately, Americans have become so dumbed-down that they don’t even realize that their leaders are incompetent.  In fact, as sad as it is to say, most Americans you will meet on the street probably cannot even tell you what U.S. Treasuries are.

Let us hope and pray that investors around the globe continue to have at least some confidence in U.S. Treasuries for at least a little while longer.  When “financial Armageddon” finally does happen, it isn’t going to be pleasant for any of us.

So enjoy these happy economic times while you still have them, because at some point things are going to get a whole lot worse.

The Economic Collapse

Ah…..and the whole story starts to emerge…..

Gee, PERJURY?  Yep.

Ok Congress….. your move.

Or is it ours?

The TBAC (Treasury Borrowing Advisory Report) is usually quite dry and boring.

Well, it is this time too.

Except for one small piece….

The presenting member stated that the market expects the Federal Reserve to purchase $100 billion per month, as well as $30 billion per month in MBS reinvestments.  This will total $1,560 billion in Treasury purchases over the next year.  The member stated, however, that market participants believe the Fed will leave the status of QE2 open ended, with purchases ultimately dependent on economic conditions.  The presenter also noted that the program should last six months to two years. 

Compare with:

That’s direct monetization of the entire Federal deficit.

I hope you like really expensive commodities and everything made from them….. if this is actually done, you’re going to get them in spades, way beyond what’s currently baked into the cake.

Heh Ben!  How ‘ya like this?  You know, you can see it coming, but by the time you do, it’s too damn late to do anything about it…