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Archive for the ‘Treasury Bonds’ Category

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

http://www.treasury.gov/press-center/press-releases/Pages/tg1299.aspx

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.

The bond market figured it out immediately, pricing it in.

That’s the 10 year Treasury on a weekly chart.  It is now back to effectively where it was in the depths of the crash.

The 5-year yield is below that of the crash.

And the 2-year has basically been turned into a T-bill.

The bond market is telling you that there will be no material economic growth for the next two years and that a deflationary depression is the economic path that will be followed.

This is effectively what happened in Japan, although the worst of the economic impacts have been muted as they had tremendous internal surpluses to expend (those, incidentally, are now pretty-much “used up” – two decades later.)  We do not have those internal surpluses – to the contrary.

The stock market has been doing plenty of “up and down” and it will probably rally for a bit yet, as stock traders tend to be the short bus riders.  But make no mistake – the bond market’s response to the FOMC announcement is entirely rational and consistent with only one outcome – a sustained economic slowdown coupled with deflation, not inflation.

What will cause this?  The debt bubble collapsing.  Maybe kicked off by Congress failing to reach agreement or doing a “nothing” with the so-called “commission.”  Maybe kicked off by collapsing net interest spreads for the banks and then their collapse from the weight of their bad loans and inability to earn their way out of the box they’ve painted themselves into.  Or maybe Unicredit blows up and the tsunami comes from Europe. There are plenty of things ticking out there, and it only takes one big one that goes off to set the next move in motion.

The bottom line is that either the bond market is wrong or stocks are wrong.  Given that Bernanke just provided you his pronouncement and expectations, I wouldn’t bet against the bond market, and if the bond market is right then the modest “mini-crash” we just saw is a warning and not a buying opportunity, just as Pompeii’s Vesuvius rumbled many times before it blew its stack.

When this is priced into the equity markets – and others – it is likely to be in the form of a nasty dislocation.  This also fits with the technical picture; assuming the low today of 1103 holds for the moment and is a localized low then the most-likely retrace is up around 1220, all in the S&P 500.

The next move down, unfortunately, should comprise almost four hundred S&P points and close to four thousand DOW points, and is likely to be more violent than what we just experienced.  It could be worse too – it’s possible that we see an S&P decline of more than six hundred points, basically cutting the indices in half, more-or-less “all at once.”

Enjoy the rally today (and likely for a bit yet on a forward basis) but beware – if I have to choose between the stock market and bond market as to who’s right the bond market is almost always both the leader and the correct choice.

This is a massive downgrade on the economy folks….

Release Date: August 9, 2011

For immediate release

Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected.  Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up.  Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed.  However, business investment in equipment and software continues to expand.  Temporary factors, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan, appear to account for only some of the recent weakness in economic activity.  Inflation picked up earlier in the year, mainly reflecting higher prices for some commodities and imported goods, as well as the supply chain disruptions.  More recently, inflation has moderated as prices of energy and some commodities have declined from their earlier peaks.  Longer-term inflation expectations have remained stable.

The economy is going to hell.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.  The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, downside risks to the economic outlook have increased. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate as the effects of past energy and other commodity price increases dissipate further.  However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

In other words, we’re back in recession.

To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent.  The Committee currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings.  The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

ZIRP for at least two more years.  Therefore:

• If you’re a saver, you’re screwed.  Buy stocks and lose half or more of your money or accept nothing (less, of course, any actual inflation.) Senior citizens should be literally in the streets on this announcement.
• The economy is going to suck. That’s The Fed’s projection.  If you’re long the market, you’re in the wrong place.  Oh sure, we might get more bounce for a while, but if the economic outlook really justifies zero interest rates then profits have peaked – period.
• The banks are dead. NIM is going to get destroyed.  The start of ZIRP looks good for banks but the numerical spread, not the percentage spread, collapses as it goes on.  Look at Japan and their JGBs! Now about that profit you think banks are going to earn….. exactly how are they going to earn it lending money with no spread?

The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability.  It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.

Voting against the action were: Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an extended period.

This is REAL dissent – three, not one.

The market is trying to figure out whether to crap or go blind, but the bottom line here is that not only does The Fed expect a short term slowdown in the economy they have basically said that their expectation is that the economy is going to suck for at least the next two years.

“The 5-year Treasury has become the new 2-year; the 2 year note has become an overnight T-Bill and the 1-year note has become….hell, I dunno.”

A couple of revealing charts from the Fed’s Flow of Funds data.   Both show net flows into Treasuries by creditor type and the Federal Government’s borrowing during each quarter.   Note, the quarterly data is annualized.

The first chart illustrates how QE2 flushed domestics out of Treasuries and effectively funded 63 percent of the budget deficit in Q4.  The Treasury is prohibited from directly selling bonds to the central bank, but effectively finances the government through POMO.

Given that a large portion of the Rest of World category are central banks recycling BOP surpluses,  it’s likely that 90 percent of the U.S. budget deficit in Q4 was funded by central banks.    You think this may have anything to do with what’s happening in the commodity markets?   That is, the central banks’ printing presses providing the fuel for speculators?

Furthermore, we ask: who is going to finance the U.S. budget deficit when QE2 ends, especially at a sub 3.50 percent 10-year Treasury rate?    Bill Gross knows!

(click here if charts are not observable)

Macromon