On this blog, you’ve learned how our political and financial leaders subtly lie to us – on almost a daily basis. You’ve also learned how truly inept many of our political leaders are – they do not understand what is happening or why. They do not understand that they are being manipulated by the global elite for evil purposes. They are flying blind in the middle of a hurricane and are looking for anything that they think might help. Unfortunately, the ‘solutions’ they are given for our current economic problems (by the Fed, the Treasury, our President, etc.) will only cause us more pain in the future. The endgame for all of this is the complete failure of the global financial system – but if you assume that everyone is trying to ‘help’ – then you are at a definite disadvantage.
You can see how a lack of Bible knowledge is used mightily by our enemy. Without a firm grounding in God’s Word – we assume that everyone is trying to do the ‘right’ thing – a seriously flawed assumption. God tells us that we live in a world ruled by evil and darkness. Our world is ruled by a spiritual being that is focused on one purpose – the destruction of the human race – and he has no rules. So, without Biblical knowledge – we build our decisions on flawed assumptions that are built on lies. We don’t heed our Lord’s warnings that we should always be on guard against our enemy’s schemes.
The Bible tells us that Satan ‘blinds’ unbelievers – you can now see how this happens. We focus on the world – and with no knowledge of the spiritual realm – we do not understand the motives behind what is happening in our physical world. We go right along with the flow of things – and never recognize that this is leading us to our destruction. You are beginning to see just how deceptive our true enemy is and why we cannot fight him by ourselves. We are dealing with a being that brings demonic power against us (spiritual warfare – for those who are mature, you understand what I’m saying here) and at the same time he can bring evil forces in our world against us. You and I do not have the intelligence or power to overcome such a being – which is why we must rely on the Lord to guide us and strengthen us. I know that Satan does not fear me – but I also know what he does fear. He fears what God is doing through me. He fears that God is giving me the ability to overcome this evil world. He fears what God is telling me to do – because I’m doing what I’m told to do. He fears these things because God is going to tear down his strongholds. The Lord’s light is going to shine in the darkness – and darkness cannot stand in the light. Lies do not hold up against the truth – get ready to watch them fall. This is what our enemy fears. This is why I’m doing the things I’ve been given to do. This is why I’ve been placed in the middle of the battle – to take a few hits here and there – and advance the message.
Occasionally, I come across an article that contains comments from our leaders that are so ridiculous, so lacking in common sense – that I cannot believe they are even published. The article below contains some of the most asinine statements I have heard over the past 6 months – and we’ve certainly heard many uninformed, ridiculous comments during this time. The statements below from our President lead me to believe that he (and the global elite) believe they can say whatever they want and we’ll buy it – hook, line and sinker.
The United States Congress just passed an $800 billion dollar ‘stimulus’ package that – when coupled with all of the other ‘stimulus’ packages – will add trillions of dollars to our Federal debt. In the same breath – we’re then told that the President is going to focus on ‘fiscal responsibility’ and schedule a ‘summit’. This has to be our government at its absolute lowest. Let’s completely disregard anything resembling fiscal responsibility and then hold a ‘summit’. Now we’re concerned about the long term effects of our debt? This is typical of our wasteful and incompetent leadership. How can you push for a bill that is bloated, full of pork, will do nothing to revive our economy and will contribute to the financial collapse of the United States - and then talk about fiscal responsibility? I’ll tell you how – you are either incompetent or you are full of deception. When it comes to our President, I believe it’s the latter. Let’s do something financially destructive and then try to convince people that you’re ‘concerned’ about the effects of your actions. Will the American people ever wake up?
jg – Feb 14, 2009
________________
Obama to Shift Focus to Budget Deficit
February 14, 2009
Wall St. Journal
By JONATHAN WEISMAN
With a $787 billion stimulus package in hand, President Barack Obama will pivot quickly to address a budget deficit that could now approach $2 trillion this year.
He has scheduled a "fiscal-responsibility summit" on Feb. 23 and will unveil a budget blueprint three days later, crafted to put pressure on politicians to address the country's surging long-term debt crisis.
President Barack Obama, left, meets Deere CEO Robert Lane at White House Friday. Obama defended his stimulus plan before business leaders.
Speaking Friday to business leaders at the White House, the president defended the surge of spending in the stimulus plan, but he made sure to add: "It's important for us to think in the midterm and long term. And over that midterm and long term, we're going to have to have fiscal discipline. We are not going to be able to perpetually finance the levels of debt that the federal government is currently carrying."
Along those lines, White House budget director Peter R. Orszag has committed to instituting tougher budget-discipline rules -- once the economy turns around. Those include a mandate that any "nonemergency" spending increases be offset by equal spending cuts or tax increases.
Officials say the budget blueprint to be released this month will also attempt to make public the full extent of the dire fiscal situation, by not repeating some of the accounting used in crafting President George W. Bush's budgets. Recent budget blueprints excluded from deficit projections the long-term costs of wars in Iraq and Afghanistan. Those budgets also didn't include the cost of preventing the alternative minimum tax -- instituted in 1969 to ensure the rich didn't escape taxation -- from hitting the middle class.
Officials are examining whether to include those costs. The budget will project out 10 years, not the five-year forecast instituted by Mr. Bush. And with the stimulus cost, the fiscal 2009 deficit in the document is likely to exceed the $1.2 trillion forecast by the Congressional Budget Office last month.
Obama aides say they aren't looking for quick action, but a start to the conversation. "We're going to bring some things to the table, but we're going to listen to everybody else," said Christina Romer, chairman of the White House Council of Economic Advisers, in an interview Friday. "It's a giant issue, and it's not one we can solve unilaterally."
The president met with 44 fiscally conservative "Blue Dog" Democrats this week and gave a nod to legislation that would set up commissions to deal with long-term deficit strains. The commissions would then present plans to Congress for an up-or-down vote.
"We feel like we've found a partner in the White House," said Rep. Charlie Melancon (D., La.), a Blue Dog co-chairman.
For Mr. Obama, the national debt has become a pressing dilemma. If he transitions too quickly from priming the economy with money to pulling back for the sake of fiscal rectitude, the president risks choking off whatever economic recovery he might spark in the next year. Ms. Romer points to the seesaw nature of the New Deal, when President Franklin D. Roosevelt would spend big one year and then back away the next, never allowing the economy really to get traction.
But if the administration waits too long to address the deficit, long-term interest rates may have to rise to attract buyers for all those Treasury bonds. That too could send the economy back into recession.
White House economic aides believe they have room to maneuver. Demand for Treasury bonds will remain strong for the next two to three years, a senior administration official said. But the White House also considers it imperative to signal how serious Mr. Obama is about a debt that could soar toward levels experienced by Japan, whose national debt equals the size of the country's economy. At just over 40% of gross domestic product, the U.S. debt is the country's highest in a decade.
That is manageable, administration economists say, but needs to be stabilized.
Projections for 2009 deficit range from Goldman Sachs's $1.43 trillion to $1.9 trillion from economic firm Strategas Research Partners. At 13.5% of GDP, a $1.9 trillion shortfall would more than double the peacetime record during Ronald Reagan's presidency, and approach the mark set in 1942 as the U.S. joined World War II.
Write to Jonathan Weisman at jonathan.weisman@wsj.com
Showing posts with label U.S. Budget Deficit. Show all posts
Showing posts with label U.S. Budget Deficit. Show all posts
Saturday, September 16, 2006
The US is Insolvent (and headed towards bankruptcy)
If we wanted to sum up the financial/economic knowledge of our current leaders - I think this quote by Joe Biden says it all:
“We’re going to go bankrupt as a nation,” Biden said.
“Now, people when I say that look at me and say, ‘What are you talking about, Joe? You’re telling me we have to go spend money to keep from going bankrupt?’” Biden said. “The answer is yes, that's what I’m telling you.” - Joe Biden (July 16, 2009)
Unbelievable. People sometimes confuse insolvency with bankruptcy. There are basically two types of insolvency. You can be insolvent and remain out of bankruptcy - as long as you have the cash flow to pay your debts. Insolvency simply means that your liabilities exceed assets.
From Wikipedia:
Balance sheet insolvency
-Having negative net assets – in other words, liabilities exceed assets.
This is obviously not a good development and is typically the first step towards bankruptcy. The next step is cash flow insolvency - which means that you do not have the cash to pay your debts as they come due.
From Wikipedia:
Cash flow insolvency
-Unable to pay debts as they fall due.
Cash flow insolvency is the final step that leads to bankruptcy. You can be balance sheet solvent (a problem arises if your assets are illiquid - and you cannot sell them to raise needed cash), and still be cash flow insolvent - and forced to file bankruptcy. This is why financial analysts focus on a company's 'cash flow' - and not just the balance sheet. There have been many investors who have been burned - when a company's balance sheet looked strong - but the company simply ran out of cash. Liabilities and assets don't mean a whole lot if a company can't pay its bills.
The obvious truth here is that if you are balance sheet insolvent (the U.S. has been insolvent for years) and are rapidly approaching cash flow insolvency - spending more money is obviously very unwise. The only reason we're not bankrupt already (due to out of control spending) - is because other nations and investors are loaning us the money to remain cash flow solvent. Without this additional money (cash flow) - we will not be able to meet our debt obligations - leading us to default on our debt - and ultimately bankruptcy. It's the same for individuals, companies and governments.
The biggest problem we face today is that with all of the 'stimulus' packages and 'bailouts' - the United States will be required to borrow 3 times the amount of money in fiscal 2009 - as it did in 2008. This is not a small number (estimated budget deficit of $1.8 trillion) - and the trends are not good. As Dr. Martenson mentions below - if we can't borrow this money by selling Treasuries - the only alternative is printing more money. As I've mentioned before - this will lead to a dramatic decline in the dollar, sky-high interest rates - lots of very bad things happening.
As for our current leaders in Washington D.C. - they are either completely ignorant of financial/economic matters - or they are deceiving us. I'll let you decide.
jg - July 17, 2009
___________________________
The US is Insolvent (and headed towards bankruptcy)
Friday, July 17, 2009, 10:59 am, by cmartenson
Last night, in Boulder Colorado I had the honor to present a 1 hour mini version of the Crash Course ideas to an audience that I estimate to be in the vicinity of 300+. Sponsored by Transition Colorado, who did a remarkable and professional job of organizing and managing the event, this talk was attended by more young people than any other talk I have yet given.
This was extremely heartening.
Dr. Albert Bartlett was in attendance, which was a great honor for me, although I confess to being nervous at the thought of covering exponential growth with him in the audience. Kind of like giving meditation advice to the Dali Lama is how it seemed. Nonetheless, I now have a picture of myself with a man I am sure will be recognized through time as being both right and unwavering in his views on exponential growth and population.
At the talk I necessarily had to gloss over some important details and one of those concerned the statement that “The United States is Insolvent.”
I originally wrote about this unpleasant fact back in 2006 and today, unfortunately, the situation has only deteriorated. I want to revisit that topic because there is really nothing more onerous to the future prosperity of a country than going bankrupt. If you care about the future prosperity of the US, you need to understand this situation.
Yesterday, my jaw literally dropped when I read this statement made by Vice President Joe Biden;
“We’re going to go bankrupt as a nation,” Biden said.
“Now, people when I say that look at me and say, ‘What are you talking about, Joe? You’re telling me we have to go spend money to keep from going bankrupt?’” Biden said. “The answer is yes, that's what I’m telling you.”
What surprised me was not the admission by a sitting US Vice President that the nation is headed towards bankruptcy. I suppose that's pretty clear to everybody by now so why not just tell it like it is? What got me was that the statement, as expressed, displays an unbelievable ignorance of finance and economics. The claim boils down to the idea that the way to avoid bankruptcy is by spending money.
If this is somehow possible, I sincerely hope that Mr. Biden sees fit to share the secret with the millions of people that entered bankruptcy this year. Otherwise, it will have to stand as a jaw-droppingly inane comment.
But it clues us into the mindset of at least some of the DC leadership and that gives us some sense of how much faith we should place in their efforts to centrally manage everything from car companies to secretive trillions handed out to untrustworthy bankers.
Instead of blind faith, we might prefer to trust in our own ability to look at the data and ask, “how is this going to work?”
This morning I finally read an exceptional document put out by Sprott Asset Management (Toronto, Can.) which exactly and precisely lays bare the magnificent funding problems that DC has created for itself. Titled “The Solution…Is The Problem” it opens with a statement of fact, “In fiscal 2009, the United States must find buyers for almost three times the debt that was issued last year.”
Three times, or 300% more debt sales by the US government this year compared to last year. How will that happen? Rather than just sort of assume that this will somehow get done, this report breaks down the potential purchases of US debt by specific classes of purchasers and provides a mid-year report card on how each one is doing in their quest to buy 300% more than last year.
The results are not encouraging.
We begin with the largest buyers of debt outside of the United States – ‘Foreign and International Holders’ (#2). This group accounts for the largest source of external capital for US debt purchases and represents a very important group to float the deficit. They collectively purchased $564 billion last year, and the US will require them to increase their purchases to $1.6 trillion in 2009. Thus far, they have only purchased $465 billion to March 2009, which is halfway through US fiscal year - and well behind the pace needed to triple last year’s purchases.
Current data does not bode well for further purchases either. In fact, April Treasury data revealed that ‘Foreign and International Holders’ were net sellers of US debt from March to April 2009.4 This is not surprising given the public comments from officials in China, Japan, Russia and Brazil concerning the level of debt issuance by the United States and its potential impact on the US dollar.
The report continues on covering all ten classes of purchasers and it turns out that only one, “Other Purchasers” is on track to triple their purchases over last year. The other nine? Most are well off of the pace needed to cover up a massive gap.
How will the shortfall be covered? In reality there is only one option and it is the reason I own gold. As the Sprott paper concludes:
As we hope the breakdown above has revealed, the future solvency of the United States as a nation state is currently in jeopardy. It is in far deeper trouble than the mainstream press cares to admit. There are simply not enough new buyers of debt on this planet to support the spending programs of the United States government - and it appears that current holders of debt are beginning to sell. Because it is impossible to balance the budget from outside sources of capital, the only source of funds left for the US, in all reality, is continued money printing.
Such money printing represents a breach of the public trust required to operate a fiat money system. We trust that they will operate the money machine responsibly and they trust that we will go about our daily lives and be productive. Instead the Fed is aiding and abetting the largest printing operation in history and is steadfastly refusing to be audited in any way shape or form. If confidence and transparency are required elements for the sustainable continuation of a fiat money system, the US dollar is in for a rough ride.
While the short term wiggles and jiggles of the markets, and their attendant mouthpieces in the media, do their best to confuse us, it is the larger trends that will illuminate the way.
There can be no doubt except that the US government is financially insolvent. While we may not know the exact timing (this year, next?) or the exact mechanisms (raise taxes hugely? Renege on entitlement benefits?) we can be sure that past profligacy will translate into future hardship and reduced prosperity.
And the shame of it all is that it did not have to be this way. History is thoroughly unambiguous on this matter; spending beyond ones means inevitable ends in tears. No exceptions. How did we manage to forget this?
As I probe further into this country’s recent past, the time of my grandfather and great-grandfather, I am reading of people who understood that prosperity resulted from a combination of productivity and living well within ones means. I wonder what changed and how we so completely forgot the lessons of the (very) recent past that today it is possible for a Vice President of the country to state that spending is the key to avoiding bankruptcy and then walk out of the room with his head held high.
“We’re going to go bankrupt as a nation,” Biden said.
“Now, people when I say that look at me and say, ‘What are you talking about, Joe? You’re telling me we have to go spend money to keep from going bankrupt?’” Biden said. “The answer is yes, that's what I’m telling you.” - Joe Biden (July 16, 2009)
Unbelievable. People sometimes confuse insolvency with bankruptcy. There are basically two types of insolvency. You can be insolvent and remain out of bankruptcy - as long as you have the cash flow to pay your debts. Insolvency simply means that your liabilities exceed assets.
From Wikipedia:
Balance sheet insolvency
-Having negative net assets – in other words, liabilities exceed assets.
This is obviously not a good development and is typically the first step towards bankruptcy. The next step is cash flow insolvency - which means that you do not have the cash to pay your debts as they come due.
From Wikipedia:
Cash flow insolvency
-Unable to pay debts as they fall due.
Cash flow insolvency is the final step that leads to bankruptcy. You can be balance sheet solvent (a problem arises if your assets are illiquid - and you cannot sell them to raise needed cash), and still be cash flow insolvent - and forced to file bankruptcy. This is why financial analysts focus on a company's 'cash flow' - and not just the balance sheet. There have been many investors who have been burned - when a company's balance sheet looked strong - but the company simply ran out of cash. Liabilities and assets don't mean a whole lot if a company can't pay its bills.
The obvious truth here is that if you are balance sheet insolvent (the U.S. has been insolvent for years) and are rapidly approaching cash flow insolvency - spending more money is obviously very unwise. The only reason we're not bankrupt already (due to out of control spending) - is because other nations and investors are loaning us the money to remain cash flow solvent. Without this additional money (cash flow) - we will not be able to meet our debt obligations - leading us to default on our debt - and ultimately bankruptcy. It's the same for individuals, companies and governments.
The biggest problem we face today is that with all of the 'stimulus' packages and 'bailouts' - the United States will be required to borrow 3 times the amount of money in fiscal 2009 - as it did in 2008. This is not a small number (estimated budget deficit of $1.8 trillion) - and the trends are not good. As Dr. Martenson mentions below - if we can't borrow this money by selling Treasuries - the only alternative is printing more money. As I've mentioned before - this will lead to a dramatic decline in the dollar, sky-high interest rates - lots of very bad things happening.
As for our current leaders in Washington D.C. - they are either completely ignorant of financial/economic matters - or they are deceiving us. I'll let you decide.
jg - July 17, 2009
___________________________
The US is Insolvent (and headed towards bankruptcy)
Friday, July 17, 2009, 10:59 am, by cmartenson
Last night, in Boulder Colorado I had the honor to present a 1 hour mini version of the Crash Course ideas to an audience that I estimate to be in the vicinity of 300+. Sponsored by Transition Colorado, who did a remarkable and professional job of organizing and managing the event, this talk was attended by more young people than any other talk I have yet given.
This was extremely heartening.
Dr. Albert Bartlett was in attendance, which was a great honor for me, although I confess to being nervous at the thought of covering exponential growth with him in the audience. Kind of like giving meditation advice to the Dali Lama is how it seemed. Nonetheless, I now have a picture of myself with a man I am sure will be recognized through time as being both right and unwavering in his views on exponential growth and population.
At the talk I necessarily had to gloss over some important details and one of those concerned the statement that “The United States is Insolvent.”
I originally wrote about this unpleasant fact back in 2006 and today, unfortunately, the situation has only deteriorated. I want to revisit that topic because there is really nothing more onerous to the future prosperity of a country than going bankrupt. If you care about the future prosperity of the US, you need to understand this situation.
Yesterday, my jaw literally dropped when I read this statement made by Vice President Joe Biden;
“We’re going to go bankrupt as a nation,” Biden said.
“Now, people when I say that look at me and say, ‘What are you talking about, Joe? You’re telling me we have to go spend money to keep from going bankrupt?’” Biden said. “The answer is yes, that's what I’m telling you.”
What surprised me was not the admission by a sitting US Vice President that the nation is headed towards bankruptcy. I suppose that's pretty clear to everybody by now so why not just tell it like it is? What got me was that the statement, as expressed, displays an unbelievable ignorance of finance and economics. The claim boils down to the idea that the way to avoid bankruptcy is by spending money.
If this is somehow possible, I sincerely hope that Mr. Biden sees fit to share the secret with the millions of people that entered bankruptcy this year. Otherwise, it will have to stand as a jaw-droppingly inane comment.
But it clues us into the mindset of at least some of the DC leadership and that gives us some sense of how much faith we should place in their efforts to centrally manage everything from car companies to secretive trillions handed out to untrustworthy bankers.
Instead of blind faith, we might prefer to trust in our own ability to look at the data and ask, “how is this going to work?”
This morning I finally read an exceptional document put out by Sprott Asset Management (Toronto, Can.) which exactly and precisely lays bare the magnificent funding problems that DC has created for itself. Titled “The Solution…Is The Problem” it opens with a statement of fact, “In fiscal 2009, the United States must find buyers for almost three times the debt that was issued last year.”
Three times, or 300% more debt sales by the US government this year compared to last year. How will that happen? Rather than just sort of assume that this will somehow get done, this report breaks down the potential purchases of US debt by specific classes of purchasers and provides a mid-year report card on how each one is doing in their quest to buy 300% more than last year.
The results are not encouraging.
We begin with the largest buyers of debt outside of the United States – ‘Foreign and International Holders’ (#2). This group accounts for the largest source of external capital for US debt purchases and represents a very important group to float the deficit. They collectively purchased $564 billion last year, and the US will require them to increase their purchases to $1.6 trillion in 2009. Thus far, they have only purchased $465 billion to March 2009, which is halfway through US fiscal year - and well behind the pace needed to triple last year’s purchases.
Current data does not bode well for further purchases either. In fact, April Treasury data revealed that ‘Foreign and International Holders’ were net sellers of US debt from March to April 2009.4 This is not surprising given the public comments from officials in China, Japan, Russia and Brazil concerning the level of debt issuance by the United States and its potential impact on the US dollar.
The report continues on covering all ten classes of purchasers and it turns out that only one, “Other Purchasers” is on track to triple their purchases over last year. The other nine? Most are well off of the pace needed to cover up a massive gap.
How will the shortfall be covered? In reality there is only one option and it is the reason I own gold. As the Sprott paper concludes:
As we hope the breakdown above has revealed, the future solvency of the United States as a nation state is currently in jeopardy. It is in far deeper trouble than the mainstream press cares to admit. There are simply not enough new buyers of debt on this planet to support the spending programs of the United States government - and it appears that current holders of debt are beginning to sell. Because it is impossible to balance the budget from outside sources of capital, the only source of funds left for the US, in all reality, is continued money printing.
Such money printing represents a breach of the public trust required to operate a fiat money system. We trust that they will operate the money machine responsibly and they trust that we will go about our daily lives and be productive. Instead the Fed is aiding and abetting the largest printing operation in history and is steadfastly refusing to be audited in any way shape or form. If confidence and transparency are required elements for the sustainable continuation of a fiat money system, the US dollar is in for a rough ride.
While the short term wiggles and jiggles of the markets, and their attendant mouthpieces in the media, do their best to confuse us, it is the larger trends that will illuminate the way.
There can be no doubt except that the US government is financially insolvent. While we may not know the exact timing (this year, next?) or the exact mechanisms (raise taxes hugely? Renege on entitlement benefits?) we can be sure that past profligacy will translate into future hardship and reduced prosperity.
And the shame of it all is that it did not have to be this way. History is thoroughly unambiguous on this matter; spending beyond ones means inevitable ends in tears. No exceptions. How did we manage to forget this?
As I probe further into this country’s recent past, the time of my grandfather and great-grandfather, I am reading of people who understood that prosperity resulted from a combination of productivity and living well within ones means. I wonder what changed and how we so completely forgot the lessons of the (very) recent past that today it is possible for a Vice President of the country to state that spending is the key to avoiding bankruptcy and then walk out of the room with his head held high.
Teeing Up the Middle Class
As I have mentioned before – President Obama is moving us toward the European economic model. This article details some of the taxes that are being planned to pay for our ever-increasing deficits. We are going to tax and spend ourselves into oblivion.
Our current President is no different than his predecessors. Promises (lies) to get elected – then do whatever you want once elected.
We see, once again, that nothing has ‘changed’.
jg – August 4, 2009
__________________________________
AUGUST 4, 2009
Teeing Up the Middle Class
Wall St. Journal
Few of President Obama’s 2008 campaign pledges were more definitive than his vow that anyone making less than $250,000 a year “will not see their taxes increase by a single dime” if he was elected. And he was right, very strictly speaking: It’s going to be many, many, many billions of dimes.
Asked about raising taxes on the middle class on Sunday on CBS’s “Face the Nation,” White House economist Larry Summers wouldn’t repeat Mr. Obama’s pre-election promise. “It is never a good idea to absolutely rule things out no matter what,” Mr. Summers said—except, apparently, when his boss is running for office. Meanwhile, on ABC’s “This Week,” Treasury Secretary Timothy Geithner also slid around Mr. Obama’s vow and said, “We have to bring these deficits down very dramatically. And that’s going to require some very hard choices.”
These aren’t even nondenial denials. The Obama advisers are laying the groundwork for taxing the middle class while claiming the deficit made them do it.
The liberal establishment is even further along in finally admitting that Mr. Obama wasn’t, er, telling the truth. A piece in the New York Times over the weekend declared in a headline that “the Rich Can’t Pay for Everything, Analysts Say.” And it quoted Leonard Burman, a veteran of the Clinton Treasury who now runs the Brookings Tax Policy Center, as saying that “This idea that everything new that government provides ought to be paid for by the top 5%, that’s a basically unstable way of governing.” They’re right, but where were they during the campaign?
In an editorial on February 26, “The 2% Illusion,” we wrote that the feds could take 100% of the taxable income of everyone in America earning more than $500,000 and still have raised only $1.3 trillion even in the boom year of 2006. The rich are fewer and less rich now, while the Obama budget is nearly $4 trillion.
Democrats already plan to repeal the Bush tax cuts, but that won’t raise enough money. So they’re proposing an income tax surcharge on “the wealthy,” but that won’t raise enough either. Democrats have no choice but to soak the middle class because only they have enough money to finance the liberal dream of yoking the middle class to cradle-to-grave government entitlements.
Democrats have already taxed the middle class by raising cigarette taxes to pay for the children’s health-care expansion. They’re also teeing up average earners with their cap-and-tax energy bill. Mr. Obama had hoped that cap-and-tax would raise some $646 billion over a decade, but Democrats in the House had to give most of that away in bribes to business to pass their bill. To finance ObamaCare, they’re also proposing another 10-percentage-point increase in the payroll tax on firms and individuals that don’t purchase health insurance. But this won’t raise enough money either.
So waiting in the wings is the biggest middle-class tax increase of them all: a European-style value added tax, or VAT. This tax would apply to every level of production or service, and it is beloved by politicians in Europe because it raises so much money so easily without voters noticing. Ezekiel Emanuel, a White House aide and brother of Chief of Staff Rahm Emanuel, has advocated a 10% VAT to finance national health care. Look for a VAT to be one of the prominent options when Mr. Obama’s tax reform commission issues its report later this year.
The undeniable reality is that you can’t run a European-style welfare-entitlement state without European-style levels of taxation on the middle class (and eventually without low European-style growth and high jobless rates). It’s looking more and more like Mr. Obama’s no-middle-class-tax pledge was one of the greatest confidence tricks in American political history.
Printed in The Wall Street Journal, page A12
Our current President is no different than his predecessors. Promises (lies) to get elected – then do whatever you want once elected.
We see, once again, that nothing has ‘changed’.
jg – August 4, 2009
__________________________________
AUGUST 4, 2009
Teeing Up the Middle Class
Wall St. Journal
Few of President Obama’s 2008 campaign pledges were more definitive than his vow that anyone making less than $250,000 a year “will not see their taxes increase by a single dime” if he was elected. And he was right, very strictly speaking: It’s going to be many, many, many billions of dimes.
Asked about raising taxes on the middle class on Sunday on CBS’s “Face the Nation,” White House economist Larry Summers wouldn’t repeat Mr. Obama’s pre-election promise. “It is never a good idea to absolutely rule things out no matter what,” Mr. Summers said—except, apparently, when his boss is running for office. Meanwhile, on ABC’s “This Week,” Treasury Secretary Timothy Geithner also slid around Mr. Obama’s vow and said, “We have to bring these deficits down very dramatically. And that’s going to require some very hard choices.”
These aren’t even nondenial denials. The Obama advisers are laying the groundwork for taxing the middle class while claiming the deficit made them do it.
The liberal establishment is even further along in finally admitting that Mr. Obama wasn’t, er, telling the truth. A piece in the New York Times over the weekend declared in a headline that “the Rich Can’t Pay for Everything, Analysts Say.” And it quoted Leonard Burman, a veteran of the Clinton Treasury who now runs the Brookings Tax Policy Center, as saying that “This idea that everything new that government provides ought to be paid for by the top 5%, that’s a basically unstable way of governing.” They’re right, but where were they during the campaign?
In an editorial on February 26, “The 2% Illusion,” we wrote that the feds could take 100% of the taxable income of everyone in America earning more than $500,000 and still have raised only $1.3 trillion even in the boom year of 2006. The rich are fewer and less rich now, while the Obama budget is nearly $4 trillion.
Democrats already plan to repeal the Bush tax cuts, but that won’t raise enough money. So they’re proposing an income tax surcharge on “the wealthy,” but that won’t raise enough either. Democrats have no choice but to soak the middle class because only they have enough money to finance the liberal dream of yoking the middle class to cradle-to-grave government entitlements.
Democrats have already taxed the middle class by raising cigarette taxes to pay for the children’s health-care expansion. They’re also teeing up average earners with their cap-and-tax energy bill. Mr. Obama had hoped that cap-and-tax would raise some $646 billion over a decade, but Democrats in the House had to give most of that away in bribes to business to pass their bill. To finance ObamaCare, they’re also proposing another 10-percentage-point increase in the payroll tax on firms and individuals that don’t purchase health insurance. But this won’t raise enough money either.
So waiting in the wings is the biggest middle-class tax increase of them all: a European-style value added tax, or VAT. This tax would apply to every level of production or service, and it is beloved by politicians in Europe because it raises so much money so easily without voters noticing. Ezekiel Emanuel, a White House aide and brother of Chief of Staff Rahm Emanuel, has advocated a 10% VAT to finance national health care. Look for a VAT to be one of the prominent options when Mr. Obama’s tax reform commission issues its report later this year.
The undeniable reality is that you can’t run a European-style welfare-entitlement state without European-style levels of taxation on the middle class (and eventually without low European-style growth and high jobless rates). It’s looking more and more like Mr. Obama’s no-middle-class-tax pledge was one of the greatest confidence tricks in American political history.
Printed in The Wall Street Journal, page A12
Federal Tax Revenues Crashing
I would love to find some good data/news somewhere that actually made sense – but there simply isn’t any. Most recent mainstream media articles touting economic ‘good news’ are either using flawed assumptions, bad/manipulated data or completely disregard data that would contradict their positive spin.
I wrote a couple of months ago that we were in a relatively calm period before things really started to head south. I think we’re nearing the end of anything resembling calm.
Declining Federal tax revenues will translate into bigger deficits – which will require additional Treasury debt – which will flood the debt market with even more Treasury bills/notes. At some point, the world will say ‘enough’ – and all sorts of unpleasant things will start happening.
John - August 4, 2009
____________________________
Nathan's Economic Edge
http://economicedge.blogspot.com/
TUESDAY, AUGUST 4, 2009
Federal Tax Revenues – Cliff Diving and Data Hiding…
Remember what Chris Martensen called good economic data? You know, data that “is not statistically massaged before release, it is not 'sampled' but rather tallied up in its entirety, and it squares up nicely with other good sources of data.”
Good Data
• Sales tax data
• Income tax data
• Truck tonnage moved
• Port shipping container traffic
• Air transport
• UPS, FedEx, and other major shippers' volume
• Corporate Revenues (just added to list)
Well, here’s the data from the top of the list, the only data the government releases that meets Chris’s “good” criteria.
And how’s it looking? Is it down the .7 or even 5% that comes out of the massaged and adjusted data? NO! It’s down, wait for it, 22% year over year for Federal individual tax receipts and it’s down a horrific 57% for Corporate Income Taxes!
Now that’s a crash of revenue, just when our government is RAMPING spending all while simultaneously spending trillions of your dollars to bail out the central banks and pay bonuses on Wall Street!
What will that mean for our deficits? GAME OVER! The math is simply so far from working that there is NO WAY to keep the game going very much longer. You can ignore it, call it looney Tunes, whatever, the math simply tells the truth and cannot lie.
Federal tax revenues plummeting
AP ENTERPRISE: Plummeting tax revenues starve government just as Obama embarks on big plans
By Stephen Ohlemacher, Associated Press Writer
On Monday August 3, 2009, 8:51 pm EDT
WASHINGTON (AP) -- The recession is starving the government of tax revenue, just as the president and Congress are piling a major expansion of health care and other programs on the nation's plate and struggling to find money to pay the tab.
The numbers could hardly be more stark: Tax receipts are on pace to drop 18 percent this year, the biggest single-year decline since the Great Depression, while the federal deficit balloons to a record $1.8 trillion.
Other figures in an Associated Press analysis underscore the recession's impact: Individual income tax receipts are down 22 percent from a year ago. Corporate income taxes are down 57 percent. Social Security tax receipts could drop for only the second time since 1940, and Medicare taxes are on pace to drop for only the third time ever.
The last time the government's revenues were this bleak, the year was 1932 in the midst of the Depression.
"Our tax system is already inadequate to support the promises our government has made," said Eugene Steuerle, a former Treasury Department official in the Reagan administration who is now vice president of the Peter G. Peterson Foundation.
"This just adds to the problem."
While much of Washington is focused on how to pay for new programs such as overhauling health care -- at a cost of $1 trillion over the next decade -- existing programs are feeling the pinch, too.
Social Security is in danger of running out of money earlier than the government projected just a few month ago. Highway, mass transit and airport projects are at risk because fuel and industry taxes are declining.
The national debt already exceeds $11 trillion. And bills just completed by the House would boost domestic agencies' spending by 11 percent in 2010 and military spending by 4 percent.
For this report, the AP analyzed annual tax receipts dating back to the inception of the federal income tax in 1913. Tax receipts for the 2009 budget year were available through June. They were compared to the same period last year. The budget year runs from October to September, meaning there will be three more months of receipts this year.
Is there a way out of the financial mess?
A key factor is the economy's health. The future of current programs -- not to mention the new ones Obama is proposing -- will depend largely on how fast the economy recovers from the recession, said William Gale, co-director of the Tax Policy Center.
"The numbers for 2009 are striking, head-snapping. But what really matters is what happens next," said Gale, who previously taught economics at UCLA and was an adviser to President George H. W. Bush's Council of Economic Advisers.
"If it's just one year, then it's a remarkable thing, but it's totally manageable. If the economy doesn't recover soon, it doesn't matter what your social, economic and political agenda is. There's not going to be any revenue to pay for it."
A small part of the drop in tax receipts can be attributed to new tax credits for individuals and corporations enacted in February as part of the $787 billion economic stimulus package. The sheer magnitude of the tax decline, however, points to the deep recession that is reducing incomes, wiping out corporate profits and straining government programs.
Social Security tax receipts are down less than a percentage point from last year, but in May the government had been projecting a slight increase. At the time, the government's best estimate was that Social Security would start to pay out more money than it receives in taxes in 2016, and that the fund would be depleted in 2037 unless changes are enacted.
Some experts think the sour economy has made those numbers outdated.
"You could easily move that number up three or four years, then you're talking about 2013, and that's not very far off," said Kent Smetters, associate professor of insurance and risk management at the University of Pennsylvania.
The government's projections included best- and worst-case scenarios. Under the worst, Social Security would start to pay out more money than it received in taxes in 2013, and the fund would be depleted in 2029.
The fund's trustees are still confident the solvency dates are within the range of the worst-case scenario, said Jason Fichtner, the Social Security Administration's acting deputy commissioner.
"We're not outside our boundaries yet," Fichtner said. "As the recovery comes, we'll see how that plays out."
The recession's toll on Social Security makes it even more urgent for Congress to address the fund's long-term solvency, said Sen. Herb Kohl, D-Wis., chairman of the Senate Aging Committee.
"Over the past year, millions of older Americans have watched their retirement savings crumble, making the guaranteed income of Social Security more important than ever," Kohl said.
President Barack Obama has said he wants to tackle Social Security next year, after he clears an already crowded agenda that includes overhauling health care, addressing climate change and imposing new regulations on financial companies.
Medicare tax receipts are also down less than a percentage point for the year, pretty close to government projections. Medicare started paying out more money than it received last year.
Meanwhile, the recession is taking a toll on fuel and industry excise taxes that pay for highway, mass transit and airport projects. Fuel taxes that support road construction and mass transit projects are on pace to fall for the second straight year. Receipts from taxes on jet fuel and airline tickets are also dropping, meaning Congress will have to borrow more money to fund airport projects and the Federal Aviation Administration.
Last week, Congress voted to spend $7 billion to replenish the highway fund, which would otherwise run out of money in August. Congress spent $8 billion to replenish the fund last year.
Rep. Richard Neal, D-Mass., chairman of the House subcommittee that oversees fuel taxes, is working on a package to make the fund more self-sufficient. The U.S. Chamber of Commerce, which doesn't back many tax increases, supports increasing the federal gasoline tax, currently 18.4 cents per gallon.
Neal said he hasn't endorsed a specific plan. But, he added, "You can't keep going back to the general fund."
BUT WAIT! That’s actually an improvement in Corporate tax receipts… then a funny thing happened on the way to look at the St. Louis Fed’s charts. It seems that this chart series, (FCTAX), the only one that presents federal tax data on the Fed’s site, has stopped reporting data! Below is the same series chart that I posted on April 10th of this year:
I wrote a couple of months ago that we were in a relatively calm period before things really started to head south. I think we’re nearing the end of anything resembling calm.
Declining Federal tax revenues will translate into bigger deficits – which will require additional Treasury debt – which will flood the debt market with even more Treasury bills/notes. At some point, the world will say ‘enough’ – and all sorts of unpleasant things will start happening.
John - August 4, 2009
____________________________
Nathan's Economic Edge
http://economicedge.blogspot.com/
TUESDAY, AUGUST 4, 2009
Federal Tax Revenues – Cliff Diving and Data Hiding…
Remember what Chris Martensen called good economic data? You know, data that “is not statistically massaged before release, it is not 'sampled' but rather tallied up in its entirety, and it squares up nicely with other good sources of data.”
Good Data
• Sales tax data
• Income tax data
• Truck tonnage moved
• Port shipping container traffic
• Air transport
• UPS, FedEx, and other major shippers' volume
• Corporate Revenues (just added to list)
Well, here’s the data from the top of the list, the only data the government releases that meets Chris’s “good” criteria.
And how’s it looking? Is it down the .7 or even 5% that comes out of the massaged and adjusted data? NO! It’s down, wait for it, 22% year over year for Federal individual tax receipts and it’s down a horrific 57% for Corporate Income Taxes!
Now that’s a crash of revenue, just when our government is RAMPING spending all while simultaneously spending trillions of your dollars to bail out the central banks and pay bonuses on Wall Street!
What will that mean for our deficits? GAME OVER! The math is simply so far from working that there is NO WAY to keep the game going very much longer. You can ignore it, call it looney Tunes, whatever, the math simply tells the truth and cannot lie.
Federal tax revenues plummeting
AP ENTERPRISE: Plummeting tax revenues starve government just as Obama embarks on big plans
By Stephen Ohlemacher, Associated Press Writer
On Monday August 3, 2009, 8:51 pm EDT
WASHINGTON (AP) -- The recession is starving the government of tax revenue, just as the president and Congress are piling a major expansion of health care and other programs on the nation's plate and struggling to find money to pay the tab.
The numbers could hardly be more stark: Tax receipts are on pace to drop 18 percent this year, the biggest single-year decline since the Great Depression, while the federal deficit balloons to a record $1.8 trillion.
Other figures in an Associated Press analysis underscore the recession's impact: Individual income tax receipts are down 22 percent from a year ago. Corporate income taxes are down 57 percent. Social Security tax receipts could drop for only the second time since 1940, and Medicare taxes are on pace to drop for only the third time ever.
The last time the government's revenues were this bleak, the year was 1932 in the midst of the Depression.
"Our tax system is already inadequate to support the promises our government has made," said Eugene Steuerle, a former Treasury Department official in the Reagan administration who is now vice president of the Peter G. Peterson Foundation.
"This just adds to the problem."
While much of Washington is focused on how to pay for new programs such as overhauling health care -- at a cost of $1 trillion over the next decade -- existing programs are feeling the pinch, too.
Social Security is in danger of running out of money earlier than the government projected just a few month ago. Highway, mass transit and airport projects are at risk because fuel and industry taxes are declining.
The national debt already exceeds $11 trillion. And bills just completed by the House would boost domestic agencies' spending by 11 percent in 2010 and military spending by 4 percent.
For this report, the AP analyzed annual tax receipts dating back to the inception of the federal income tax in 1913. Tax receipts for the 2009 budget year were available through June. They were compared to the same period last year. The budget year runs from October to September, meaning there will be three more months of receipts this year.
Is there a way out of the financial mess?
A key factor is the economy's health. The future of current programs -- not to mention the new ones Obama is proposing -- will depend largely on how fast the economy recovers from the recession, said William Gale, co-director of the Tax Policy Center.
"The numbers for 2009 are striking, head-snapping. But what really matters is what happens next," said Gale, who previously taught economics at UCLA and was an adviser to President George H. W. Bush's Council of Economic Advisers.
"If it's just one year, then it's a remarkable thing, but it's totally manageable. If the economy doesn't recover soon, it doesn't matter what your social, economic and political agenda is. There's not going to be any revenue to pay for it."
A small part of the drop in tax receipts can be attributed to new tax credits for individuals and corporations enacted in February as part of the $787 billion economic stimulus package. The sheer magnitude of the tax decline, however, points to the deep recession that is reducing incomes, wiping out corporate profits and straining government programs.
Social Security tax receipts are down less than a percentage point from last year, but in May the government had been projecting a slight increase. At the time, the government's best estimate was that Social Security would start to pay out more money than it receives in taxes in 2016, and that the fund would be depleted in 2037 unless changes are enacted.
Some experts think the sour economy has made those numbers outdated.
"You could easily move that number up three or four years, then you're talking about 2013, and that's not very far off," said Kent Smetters, associate professor of insurance and risk management at the University of Pennsylvania.
The government's projections included best- and worst-case scenarios. Under the worst, Social Security would start to pay out more money than it received in taxes in 2013, and the fund would be depleted in 2029.
The fund's trustees are still confident the solvency dates are within the range of the worst-case scenario, said Jason Fichtner, the Social Security Administration's acting deputy commissioner.
"We're not outside our boundaries yet," Fichtner said. "As the recovery comes, we'll see how that plays out."
The recession's toll on Social Security makes it even more urgent for Congress to address the fund's long-term solvency, said Sen. Herb Kohl, D-Wis., chairman of the Senate Aging Committee.
"Over the past year, millions of older Americans have watched their retirement savings crumble, making the guaranteed income of Social Security more important than ever," Kohl said.
President Barack Obama has said he wants to tackle Social Security next year, after he clears an already crowded agenda that includes overhauling health care, addressing climate change and imposing new regulations on financial companies.
Medicare tax receipts are also down less than a percentage point for the year, pretty close to government projections. Medicare started paying out more money than it received last year.
Meanwhile, the recession is taking a toll on fuel and industry excise taxes that pay for highway, mass transit and airport projects. Fuel taxes that support road construction and mass transit projects are on pace to fall for the second straight year. Receipts from taxes on jet fuel and airline tickets are also dropping, meaning Congress will have to borrow more money to fund airport projects and the Federal Aviation Administration.
Last week, Congress voted to spend $7 billion to replenish the highway fund, which would otherwise run out of money in August. Congress spent $8 billion to replenish the fund last year.
Rep. Richard Neal, D-Mass., chairman of the House subcommittee that oversees fuel taxes, is working on a package to make the fund more self-sufficient. The U.S. Chamber of Commerce, which doesn't back many tax increases, supports increasing the federal gasoline tax, currently 18.4 cents per gallon.
Neal said he hasn't endorsed a specific plan. But, he added, "You can't keep going back to the general fund."
BUT WAIT! That’s actually an improvement in Corporate tax receipts… then a funny thing happened on the way to look at the St. Louis Fed’s charts. It seems that this chart series, (FCTAX), the only one that presents federal tax data on the Fed’s site, has stopped reporting data! Below is the same series chart that I posted on April 10th of this year:
That’s right, you can see that corporate tax receipts were down well over 70% at that time!
Now, when that same data series is pulled up, you will find that the data begins in 1996 and ENDS in 2008!
In fact, do a search at the Fed’s site and you will find that all aggregate tax receipt information is suddenly only reported to the beginning of 2008!
Fred Search, Gov't Receipts, Expenditures & Investment
Why would they do that? Oh, go ahead and ask. I can already guess their response… “That data is no longer relevant.” Or, “It was an error and will be corrected [when the recession is over].” LOL, seriously, when they were playing games with the “excess reserves” charts, they came up with all types of excuses and now it’s impossible to know exactly how it’s calculated.
One more time:
The BEA, the BLS, in fact ALL government reports are suspect. All reporting of government statistics should be scrapped. The Fed should be abolished, The central banks and bankers should be removed – as in gone, a new money system should be put in place, there should be a Constitutional Amendment dictating the SEPARATION OF CORPORATIONS AND THEIR MONEY FROM STATE, and finally, there should be a new government agency responsible for collecting and reporting economic statistics and that agency should have a mandate to develop data collection methods that cannot be changed over time and there should also be a mandate to release RAW DATA with every report, there should be absolute transparency in that all the calculations and all collection methods should be easily viewable by anyone. Oh, and NO ONE, not even the President should have access to the information before the public!
POSTED BY NATHAN A. MARTIN AT9:29 AM
How the Federal Reserve is Monetizing Debt
If you’ve been paying attention to recent U.S. Treasury bond/note auctions, you’ve probably noticed that the amount of debt offered at these auctions is growing significantly. This is a direct result of our Federal Government’s spending on the numerous stimulus and bailout packages. To put the amount of debt in perspective – a year ago the U.S. would auction anywhere from $5 to $15 billion a week (on average). Last week the U.S. auctioned over $230 billion in Treasury bonds/notes.
Although our leaders in Washington act as though they have a blank check – it’s easy to see the repercussions of what they’re doing. The growing deficits are requiring the Treasury to auction more and more debt. The question becomes – at what point do we hold an auction where no one shows up to buy? As you’ve seen me say before – I (and others) believe this is already happening to some degree.
Here's what caught my eye in the most recent one:
What we see here is federal debt (bottom chart) exploding at a nearly 30% yr/yr rate of change in response to a collapse in corporate and consumer borrowing (top charts).
This raises a most interesting question: "Who is lending the money to accommodate all that federal borrowing?"
Here's where the story gets interesting.
What we see here is that from the early 1990's onward until 2007, foreigners bought progressively more and more US assets and did so by bringing their money to the US and leaving it there. It is only over the past seven months, out of decades, where that process has reversed and become negative. This is a significant event, to say the least.
The answers are: "We won't" and "Nothing good."
Digging in
The dollar
Not surprisingly, the dollar recently put in a new closing low for the year (YTD 2009) and is approaching a major area of support and resistance. If it breaks through, we could be looking at a rapid game-changer here.
Of course, I've said all this before, and every time we seem to get close, there's been an upside surprise in store. The forces aligned to prevent a dollar collapse are numerous.
But the same risk remains, and the fundamental picture concerning the dollar has not changed since I first became wary of its fortunes in 2002. In fact, it's grown worse. Federal deficits are higher than I ever imagined possible (13% of GDP!), and now the TIC flows are negative. The only somewhat bright(er) spot is that the trade deficit has shrunk quite a bit. However, it, too, remains solidly in negative territory, meaning it continues to apply pressure to the value of the dollar by increasing the total number of dollars that need to find a quiet resting place outside of the country.
With the exception of the 5-year auction, which mysteriously stank up the joint with a worrisome bid-to-cover ratio well below 2.0 (the bond market behaved poorly upon the release of that news item), the story here is that foreign central banks are buying up vast quantities of Treasury offerings.
Wait a minute, hold on there…I thought we just talked about how the TIC report said that foreign central banks have only bought $50 billion in total US paper assets through May - and now they are said to be buying $95 billion during a single week in July alone?
Something is not adding up here.
One explanation is that the custody account, at some $2.7 trillion dollars, is accumulating a lot of interest. If those interest payments are not "sent home" and remain in the account, then the account will grow by enough to more or less explain the difference. For example, the $135 billion difference shown above could be generated by a 5% return to the custody account, which is not an unthinkable rate of interest for that account.
International check kiting
Some people view the custody account as nothing more than an elaborate version of check kiting, played at the central banking level.
Check kiting
An illegal scheme whereby a false line of credit is established by the exchanging of worthless checks between two banks. For instance, a "check kiter" might have empty checking accounts at two different banks, A and B. The kiter writes a check for $50,000 on the Bank A account and deposits it in the Bank B account. If the kiter has good credit at Bank B, he will be able to draw funds against the deposited check before it clears, i.e., is forwarded to Bank A for payment and paid by Bank A. Since the clearing process usually takes a few days, the kiter can use the $50,000 for a few days, and then deposit it in the Bank A account before the $50,000 check drawn on that account clears.
In this game, Central Bank A prints up a bunch of money and buys the debt of Country B. Then the central bank of Country B prints up a bunch of money and buys the debt of Country A.
Both enjoy the appearance of strong demand for their debt, both governments get money to use, and nobody is the wiser. Except that the world's total stock of central bank reserves keep on growing and growing and growing, as reflected in the custody account, which will someday result in thoroughly unserviceable amounts of debt, an unmanageable flood of money, or both.
If this strikes you as a scam, congratulations; you get it.
If that was all there was to the story, then it would be far less interesting than it actually is. When we dig into the custody account data, we find that the total picture is hiding something quite extraordinary. Even as the total custody account has been growing steadily and faithfully, the composition of that account has been changing dramatically.
Here we note that agency bonds peaked in October of 2008 at nearly a trillion dollars but have declined by $178 billion since then. Treasuries, on the other hand, have increased by over $500 billion over that same span of time. A half a trillion dollars! If you were wondering how the US bond auctions have managed to go so smoothly, here's part of your answer.
What is going on here? How is it possible that central banks are buying so many Treasury bonds, at the fastest rate of accumulation on record?
It would appear that foreign central banks have been swapping agency bonds for Treasury bonds, but that's not how the markets work. First, they would have to sell those bonds, before they could use the proceeds to buy government debt. So to whom did they sell those Agency bonds in order to afford the Treasury bonds?
Here we might recall that the Federal Reserve has been buying agency bonds by the hundreds of billions.
The shell game
Have you ever seen a sidewalk magician run the shell game, where a pebble under a shell is magically shuffled around - now you see it under this shell, now you see it under that shell, now it disappears completely - or does it? The more it moves around, the more confused you get. If you can only figure out which shell the pebble is hidden under, you win! But where is the pebble? The point of the game, from the perspective of the street hustler, is to use complexity of motion to confuse the mark.
These are the three critical points to remember as you read further:
1. The US government has record amounts of Treasuries to sell.
2. Foreign central banks, which have a big pile of agency bonds in their custody account, would like to help but want to keep things somewhat under the radar to avoid scaring the debt markets.
3. The Federal Reserve does not want to be seen directly buying US government debt at auctions, because that could upset the whole illusion that there is unlimited demand for US government paper, but it also desperately wants to avoid a failed auction.
For various reasons, the Federal Reserve cannot just up and start buying all the Treasury paper that becomes available in record amounts, week after week, month after month.
Instead, it uses this three-step shell game to hide what it is doing under a layer of complexity:
Shell #1: Foreign central banks sell agency debt out of the custody account.
Shell #2: The Federal Reserve buys those agency bonds with money created out of thin air.
Shell #3: Foreign central banks use that very same money to buy Treasuries at the next government auction.
Shuffle, shuffle, shuffle, shuffle, shuffle, SHUFFLE, shuffle! Confused yet?
Don't be. If we remove the extraneous motion from this strange act, we find that the Federal Reserve is effectively buying government debt at auction. This is exactly, precisely what Zimbabwe did, but with one more step involved, introducing just enough complexity to keep the entire game mostly, but not completely, hidden from sight. They can scramble the shells all they want, but the pebble is still there somewhere - the pebble being the fact that the Fed is creating money to fund the purchase of US debt.
At the time, the Federal Reserve program to purchase agency bonds was described like this:
Fed to Pump $1.2 Trillion Into Markets
Greatly Expanded Purchases Are Designed to Lower Interest Rates, Stimulate Borrowing
The Federal Reserve yesterday escalated its massive campaign to stabilize the economy, saying it would flood the financial system with an additional $1.2 trillion.
In its statement yesterday, the Fed said it will increase its purchases of mortgage-backed securities by $750 billion, on top of $500 billion previously announced, and double, to $200 billion, its purchases of [Agency] debt in housing-finance firms such as Fannie Mae and Freddie Mac.
While "stimulating borrowing," "stabilizing the economy," and "lowering interest rates" are laudable goals, the primary goal of the program seems to have been something else entirely - to assure plentiful funds for the massive US Treasury auctions coming due. I saw nothing in any article I read about this program that even suggested that one of the goals was to allow foreign central banks to effectively swap their agency debt for US government debt using money printed from thin air. But that's clearly one of the outcomes.
The Federal Reserve, for its part, has been quite open about these purchases of Agency debt. It even provides an excellent website with nice graphics, allowing us to track the purchase program.
Although our leaders in Washington act as though they have a blank check – it’s easy to see the repercussions of what they’re doing. The growing deficits are requiring the Treasury to auction more and more debt. The question becomes – at what point do we hold an auction where no one shows up to buy? As you’ve seen me say before – I (and others) believe this is already happening to some degree.
Personally, I believe the Federal Reserve has been supporting Treasury auctions for some time – but I could not figure out how they were doing it. Chris Martenson explains how they’re doing it in the article below.
You have to ask yourself – why all the secrecy? Why do they need to support our Treasury auctions? What happens if they stop supporting Treasury auctions?
The answers will lead you to one unpleasant conclusion – U.S. debt creation is unsustainable.
John – August 5, 2009
You have to ask yourself – why all the secrecy? Why do they need to support our Treasury auctions? What happens if they stop supporting Treasury auctions?
The answers will lead you to one unpleasant conclusion – U.S. debt creation is unsustainable.
John – August 5, 2009
___________________________________
The Shell Game - How the Federal Reserve is Monetizing Debt
The Shell Game - How the Federal Reserve is Monetizing Debt
Sunday, August 2, 2009, 10:02 pm, by cmartenson (Chris Martenson)
Executive Summary
• The Federal Reserve and the federal government are attempting to "plug the gap" caused by a slowdown of private credit/debt creation.
• Non-US demand for the dollar must remain high, or the dollar will fall.
• Demand for US assets is in negative territory for 2009
• The TIC report and Federal Reserve Custody Account are reviewed and compared
• The Federal Reserve has effectively been monetizing US government debt by cleverly enabling foreign central banks to swap their Agency debt for Treasury debt.
• The shell game that the Fed is currently playing obscures the fact that money is being printed out of thin air and used to buy US government debt.
The Federal Reserve is monetizing US Treasury debt and is doing so openly, both through its $300 billion commitment to buy Treasuries and by engaging in a sleight of hand maneuver that would make a street hustler from Brooklyn blush.
Executive Summary
• The Federal Reserve and the federal government are attempting to "plug the gap" caused by a slowdown of private credit/debt creation.
• Non-US demand for the dollar must remain high, or the dollar will fall.
• Demand for US assets is in negative territory for 2009
• The TIC report and Federal Reserve Custody Account are reviewed and compared
• The Federal Reserve has effectively been monetizing US government debt by cleverly enabling foreign central banks to swap their Agency debt for Treasury debt.
• The shell game that the Fed is currently playing obscures the fact that money is being printed out of thin air and used to buy US government debt.
The Federal Reserve is monetizing US Treasury debt and is doing so openly, both through its $300 billion commitment to buy Treasuries and by engaging in a sleight of hand maneuver that would make a street hustler from Brooklyn blush.
This report will wade through some technical details in order to illuminate a complicated issue, but you should take the time to learn about this because it is essential to understanding what the future may hold.
One of the most important questions of the day concerns how the dollar will fare in the coming months and years. If you are working for a wage, it is essential to know whether you should save or spend that money. If you have assets to protect, where you place those monies is vitally important and could make the difference between a relatively pleasant future and a difficult one. If you have any interest at all in where interest rates are headed, you'll want to understand this story.
There are three major tripwires strung across our landscape, any of which could rather suddenly change the game, if triggered. One is a sudden rush into material goods and commodities, that might occur if (or when) the truly wealthy ever catch
on that paper wealth is a doomed concept. A second would occur if (or when) the largest and most dangerous bubble of them all, government debt, finally bursts. And the third concerns the dollar itself.
In this report, we will explore the relationship between those last two tripwires, government debt and the dollar.
Replacing private credit with public credit
Replacing private credit with public credit
Our entire monetary system, and by extension our economy, is a Ponzi economy in the sense that it really only operates well when in expansion mode. Even a slight regression triggers massive panics and disruptions that seem wholly inconsistent with the relative change, unless one understands that expansion is more or less a requirement of our type of monetary and economic system. Without expansion, the system first labors and then destroys wealth far our of proportion to the decline itself.
What fuels expansion in a debt-based money system? Why, new debt (or credit), of course! So one of the things we keep a very close eye on over here at Martenson Central, as they do at the Federal Reserve, is the rate of debt creation.
One of the big themes in the current credit bubble collapse is the extent to which private credit has been collapsing and the corresponding degree to which the Federal Reserve has been purchasing debt and the federal government has stepped up its borrowing. In essence, public debt purchases and new borrowing has attempted to plug the gap left by a shortfall in private debt purchases and borrowing.
That's the scheme right now - the Federal Reserve is creating new money out of thin air to buy debt, while the US government is creating new debt at the most fantastic pace ever seen. The attempt here is to keep aggregate debt growing fast enough to prevent the system from completely seizing up.
How are they doing?
The debt gap
One of the great perks of living in a relatively open society is that we generally get access to pretty good information. The Federal Reserve routinely publishes a document called "Monetary Trends," where they collapse all their points of interest into a nice, tidy collection, and then make it available for all to see.
Here's what caught my eye in the most recent one:
What we see here is federal debt (bottom chart) exploding at a nearly 30% yr/yr rate of change in response to a collapse in corporate and consumer borrowing (top charts). This raises a most interesting question: "Who is lending the money to accommodate all that federal borrowing?"
Here's where the story gets interesting.
Treasury International Capital (TIC) flows
Lately, a number of observers have made note of a troubling decline in foreign demand for US paper assets, notably bonds. Worse, it's even turned into outright selling which will ultimately translate into dollar weakness.
The relative demand for the dollar "out there" in the international Foreign Exchange (or "Forex") market directly impacts the dollar's strength. If there are more sellers then its value will fall; if there are more buyers, then its value will rise. One way to assess this delicate balance is to ask, "In total, are foreigners buying or selling US assets and what are they doing with those proceeds?"
Luckily for us, the exact answer to this very question is released in a monthly report put out by the Treasury Department, called the Treasury International Capital Flows report, or TIC report for short.
The recent TIC reports have been quite alarming, because they not only reveal the most sudden deceleration in flows in history, but also that they have been negative for some time now. This chart is from the Federal Reserve:
What we see here is that from the early 1990's onward until 2007, foreigners bought progressively more and more US assets and did so by bringing their money to the US and leaving it there. It is only over the past seven months, out of decades, where that process has reversed and become negative. This is a significant event, to say the least.
On the surface, the above chart hints at a potential disaster for a country that is embarking on the largest-ever federal debt binge in history.
After all, if US assets are being shunned by foreigners, how will we find enough buyers? And what will happen to the dollar?
The answers are: "We won't" and "Nothing good."
Digging in
If we dig into deeper into the detail of the report, we find something even more interesting. While the overall flows have been negative, there is an enormous difference between the behaviors of foreign central banks and private investors. Fortunately the TIC report distinguishes between these two broad classes of buyers.
Since the start of 2009 and continuing through the month of May, private investors sold $364 billion dollars worth of US assets, while central banks purchased $50 billion dollars worth (source is a .csv file available here from the Treasury). Added up, some $314 billion dollars of foreign money has left the country since the start of the year.
What this demonstrates is the utter reliance of the entire house of cards upon the continued purchase of US financial assets by foreign central banks. Without the continued cooperation of the foreign central banks in accumulating US assets, suffice it to say that the dollar will fall a lot lower than it already has.
The dollar
Not surprisingly, the dollar recently put in a new closing low for the year (YTD 2009) and is approaching a major area of support and resistance. If it breaks through, we could be looking at a rapid game-changer here.
Of course, I've said all this before, and every time we seem to get close, there's been an upside surprise in store. The forces aligned to prevent a dollar collapse are numerous.
But the same risk remains, and the fundamental picture concerning the dollar has not changed since I first became wary of its fortunes in 2002. In fact, it's grown worse. Federal deficits are higher than I ever imagined possible (13% of GDP!), and now the TIC flows are negative. The only somewhat bright(er) spot is that the trade deficit has shrunk quite a bit. However, it, too, remains solidly in negative territory, meaning it continues to apply pressure to the value of the dollar by increasing the total number of dollars that need to find a quiet resting place outside of the country.
Treasury auctions
During this past business week (July 27th - 31st, 2009), the US Treasury auctioned off more than $243 billion worth of various Treasury bills and bonds. "Indirect bidders," assumed to be mainly central banks, took an astonishing 39% of the total, or nearly $95 billion worth.
With the exception of the 5-year auction, which mysteriously stank up the joint with a worrisome bid-to-cover ratio well below 2.0 (the bond market behaved poorly upon the release of that news item), the story here is that foreign central banks are buying up vast quantities of Treasury offerings.
Wait a minute, hold on there…I thought we just talked about how the TIC report said that foreign central banks have only bought $50 billion in total US paper assets through May - and now they are said to be buying $95 billion during a single week in July alone?
Something is not adding up here.
To understand what, and to get to the essence of the shell game, we need to visit one more source of information - something called the Federal Reserve Custody Account.
The Federal Reserve Custody Account
It turns out that when China's central bank (or any other foreign central bank) decides to buy either US agency or Treasury bonds, they do not walk up to some window somewhere, hand over a pile of cash, and then take some nice looking bonds home with them in a suitcase.
Instead, what happens is that the Federal Reserve actually holds the bonds (or rather an electronic entry representing the bonds) in a special account for these various central banks. This is called the "Custody Account" and it holds US debt 'in custody' for various central banks. Think of it as a magnificently vast brokerage/checking account, run by the Federal Reserve for central banks, and you'll have the right image.
Although the TIC report shows flows of capital into and out of the country, it does not show you what is going on with those funds that are already in the country. If you look again at the first chart in this report, and behold the vast flows of money that came into the US between 1995 and 2008, you can get a sense of how much money got sent to the US and mostly remains parked there.
The custody account currently stands at $2.787 trillion (with a "t") dollars. It has increased by over $430 billion the past 12 months and by more than $275 billion in 2009 alone (through July 29). These are truly shocking numbers, and they tell us that foreign central banks have been accumulating US debt instruments throughout the crisis.
As we can see in the chart below, there has been absolutely no deflection in the growth of the custody account as a consequence of the financial crisis, bottoming trade, or the local needs of the countries involved. It's almost as if the custody account is completely disconnected from the world around it. If you can spot the credit bubble crisis on this chart, you have sharper eyes than me.
What does such a chart imply? We might wonder what sorts of distortions are created by having such a massive monetary spigot aimed from several central banks towards a single country. We also might question just how sustainable such an arrangement really is. It is a complete mystery how such a chart can display nary a wiggle, despite all that has recently transpired.
This next table showing the yearly changes in the custody account actually surprises me quite a bit.
Despite everything that's been going on, the custody account is on track to grow by the largest dollar amount on record this year, nearly $500 billion dollars (if the current pace continues). Where is all this money coming from and for how much longer?
Understanding the gap between the TIC and the Custody numbers
One thing you might have noticed is that the TIC report only shows $50 billion in foreign bank inflows for 2009, while the custody account grew by $277 billion.
How is it possible for the TIC report to show smaller inflows than growth in the custody account? We can see that clearly in this table, which compares the two. (Note: These are 12 monthly yr/yr changes, so the numbers will be different than the YTD numbers I just cited):
One explanation is that the custody account, at some $2.7 trillion dollars, is accumulating a lot of interest. If those interest payments are not "sent home" and remain in the account, then the account will grow by enough to more or less explain the difference. For example, the $135 billion difference shown above could be generated by a 5% return to the custody account, which is not an unthinkable rate of interest for that account.International check kiting
Some people view the custody account as nothing more than an elaborate version of check kiting, played at the central banking level.
Check kiting
An illegal scheme whereby a false line of credit is established by the exchanging of worthless checks between two banks. For instance, a "check kiter" might have empty checking accounts at two different banks, A and B. The kiter writes a check for $50,000 on the Bank A account and deposits it in the Bank B account. If the kiter has good credit at Bank B, he will be able to draw funds against the deposited check before it clears, i.e., is forwarded to Bank A for payment and paid by Bank A. Since the clearing process usually takes a few days, the kiter can use the $50,000 for a few days, and then deposit it in the Bank A account before the $50,000 check drawn on that account clears.
In this game, Central Bank A prints up a bunch of money and buys the debt of Country B. Then the central bank of Country B prints up a bunch of money and buys the debt of Country A.
Both enjoy the appearance of strong demand for their debt, both governments get money to use, and nobody is the wiser. Except that the world's total stock of central bank reserves keep on growing and growing and growing, as reflected in the custody account, which will someday result in thoroughly unserviceable amounts of debt, an unmanageable flood of money, or both.
If this strikes you as a scam, congratulations; you get it.
If that was all there was to the story, then it would be far less interesting than it actually is. When we dig into the custody account data, we find that the total picture is hiding something quite extraordinary. Even as the total custody account has been growing steadily and faithfully, the composition of that account has been changing dramatically.
Here we note that agency bonds peaked in October of 2008 at nearly a trillion dollars but have declined by $178 billion since then. Treasuries, on the other hand, have increased by over $500 billion over that same span of time. A half a trillion dollars! If you were wondering how the US bond auctions have managed to go so smoothly, here's part of your answer.
What is going on here? How is it possible that central banks are buying so many Treasury bonds, at the fastest rate of accumulation on record?
It would appear that foreign central banks have been swapping agency bonds for Treasury bonds, but that's not how the markets work. First, they would have to sell those bonds, before they could use the proceeds to buy government debt. So to whom did they sell those Agency bonds in order to afford the Treasury bonds?
Here we might recall that the Federal Reserve has been buying agency bonds by the hundreds of billions.
The shell game
Have you ever seen a sidewalk magician run the shell game, where a pebble under a shell is magically shuffled around - now you see it under this shell, now you see it under that shell, now it disappears completely - or does it? The more it moves around, the more confused you get. If you can only figure out which shell the pebble is hidden under, you win! But where is the pebble? The point of the game, from the perspective of the street hustler, is to use complexity of motion to confuse the mark.
These are the three critical points to remember as you read further:
1. The US government has record amounts of Treasuries to sell.
2. Foreign central banks, which have a big pile of agency bonds in their custody account, would like to help but want to keep things somewhat under the radar to avoid scaring the debt markets.
3. The Federal Reserve does not want to be seen directly buying US government debt at auctions, because that could upset the whole illusion that there is unlimited demand for US government paper, but it also desperately wants to avoid a failed auction.
For various reasons, the Federal Reserve cannot just up and start buying all the Treasury paper that becomes available in record amounts, week after week, month after month.
Instead, it uses this three-step shell game to hide what it is doing under a layer of complexity:
Shell #1: Foreign central banks sell agency debt out of the custody account.
Shell #2: The Federal Reserve buys those agency bonds with money created out of thin air.
Shell #3: Foreign central banks use that very same money to buy Treasuries at the next government auction.
Shuffle, shuffle, shuffle, shuffle, shuffle, SHUFFLE, shuffle! Confused yet?
Don't be. If we remove the extraneous motion from this strange act, we find that the Federal Reserve is effectively buying government debt at auction. This is exactly, precisely what Zimbabwe did, but with one more step involved, introducing just enough complexity to keep the entire game mostly, but not completely, hidden from sight. They can scramble the shells all they want, but the pebble is still there somewhere - the pebble being the fact that the Fed is creating money to fund the purchase of US debt.
At the time, the Federal Reserve program to purchase agency bonds was described like this:
Fed to Pump $1.2 Trillion Into Markets
Greatly Expanded Purchases Are Designed to Lower Interest Rates, Stimulate Borrowing
The Federal Reserve yesterday escalated its massive campaign to stabilize the economy, saying it would flood the financial system with an additional $1.2 trillion.
In its statement yesterday, the Fed said it will increase its purchases of mortgage-backed securities by $750 billion, on top of $500 billion previously announced, and double, to $200 billion, its purchases of [Agency] debt in housing-finance firms such as Fannie Mae and Freddie Mac.
While "stimulating borrowing," "stabilizing the economy," and "lowering interest rates" are laudable goals, the primary goal of the program seems to have been something else entirely - to assure plentiful funds for the massive US Treasury auctions coming due. I saw nothing in any article I read about this program that even suggested that one of the goals was to allow foreign central banks to effectively swap their agency debt for US government debt using money printed from thin air. But that's clearly one of the outcomes.
The Federal Reserve, for its part, has been quite open about these purchases of Agency debt. It even provides an excellent website with nice graphics, allowing us to track the purchase program.
However, this openness only extends to the amounts themselves, not the source(s) of those Agency bonds. This is, in my mind, yet another reason the Fed desperately wishes to avoid an audit. The results would expose the game for what it is.
As we can see in the above chart, the Fed has purchased more than $640 billion of Agency bonds, and has promised to buy more in the near future.
As we now know, at least some of that money has been recycled into US government debt, where "indirect bidders" have been snapping up an unusually high proportion of the recent offerings. (Note: The way Indirect bidders are calculated has recently changed, and I am not entirely clear on how much this influences the numbers we now see….I'm working on it).
A fair question to ask here is, "If there are green shoots everywhere and the stock market is racing off to new yearly highs, why is the Fed continuing to pump money into the system at these mind-boggling rates?" One answer could be, "Because things might not be as rosy as they seem."
Conclusion
The Federal Reserve has effectively been monetizing far more US government debt than has openly been revealed, by cleverly enabling foreign central banks to swap their agency debt for Treasury debt. This is not a sign of strength and reveals a pattern of trading temporary relief for future difficulties.
This is very nearly the same path that Zimbabwe took, resulting in the complete abandonment of the Zimbabwe dollar as a unit of currency. The difference is in the complexity of the game being played, not the substance of the actions themselves.
When the full scope of this program is more widely recognized, ever more pressure will fall upon the dollar, as more and more private investors shun the dollar and all dollar-denominated instruments as stores of value and wealth. This will further burden the efforts of the various central banks around the world as they endeavor to meet the vast borrowing desires of the US government.
One possible result of the abandonment of these efforts is a wholesale flight out of the dollar and into other assets. To US residents, this will be experienced as rapidly rising import costs and increasing costs for all internationally-traded basic commodities, especially food items. For the rest of the world, the results will range from discomforting to disastrous, depending on their degree of dollar linkage.
Under these circumstances, "inflation vs. deflation" is not the right frame of reference for understanding the potential impacts. For example, it would be possible for most of the world to experience falling prices, even as the US experiences rapidly rising prices (and hikes in interest rates) as a consequence of a falling dollar. Is this inflation or deflation? Both, or neither? Instead, we might properly view it as a currency crisis, with prices along for the ride.
Further, all efforts to supplant private debt creation with public debts should be met with skepticism, because gigantic programs are no substitute for the collective decisions of tens of millions of individuals and cannot realistically meet millions of individual needs in a timely or appropriate manner.
The shell game that the Fed is currently playing does not change the basic equation: Money is being printed out of thin air so that it can be used to buy US government debt.
My advice is to keep these potential issues and insights in sharp focus, make what moves you can to diversify out of dollars, and be ready to move rapidly with the rest. This game is far from over.
The Fed Buys Last Week's Treasury Notes
Great investigative work here by Chris Martenson. Chris shows us how the Federal Reserve is deceptively purchasing Treasury securities from the U.S. Government. This is a very big deal. It means that the world’s investors (domestic and foreign investors, etc.) are no longer willing to purchase all of our debt – which means that we cannot get the financing we need to sustain our enormous budget deficits. As I’ve mentioned before – if we can’t sell our debt – we will start down a path that will end with the bankruptcy of the United States (cash flow insolvency).
Thursday, August 6, 2009, 12:21 pm, by cmartenson
In concert with the claims I made in the prior post, The Fed bought $7 billion in Treasuries today and even more yesterday.
This $14-billion-plus buying activity by the Fed represents fresh money created out of thin air that was exchanged for the sovereign debt of the US. However, since the Fed has, for all practical purposes, never undone its permanent operations (hey, that's why they are called "POMOs"), we can consider these additions of money as good as permanent themselves.
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And now let's look at the detail for this most recent POMO:
Good grief! Just last week, when the auction results were announced, it was trumpeted to great fanfare that there was "more than sufficient" bid-to-cover, "strong demand," and all the rest.
And now it turns out that 47% (!) of the bonds that were taken by the primary dealers in that auction have been quietly bought by the Fed and permanently secreted to its balance sheet.
The Fed is stepping in (secretly) to purchase a significant amount of our debt to delay Treasury auction failures. They can’t purchase our debt forever, at some point the world is going to figure out what is going on. I suppose they are doing this so that when this is known – it will appear as though they were trying their best to help us.
It took about an hour for this information from Chris Martenson to spread to many of the popular economic blogs on the internet. It won’t take long before this becomes the #1 discussion topic on the internet – and then someone will break this news to the world.
Once the world figures this out – the value of the dollar will plummet and interest rates will sky-rocket. It’s going to be painful to watch our leaders in Washington try to manage through the worst financial crisis in our history. If you think the past year has been tough – you haven’t seen anything yet. Think about the problems California has been dealing with over the past year (significant tax revenue declines coupled with out of control government spending) – and then think about the fact that our Federal budget is approximately 40 times larger. I can only think of one word to describe what we’re going to see – chaos.
As I’ve mentioned before, the Fed doesn’t use existing money – it creates money. Therefore, when the Fed purchases our debt – it is increasing our money supply – by a significant amount. Add this to all of the other Fed ‘actions’ that have ballooned its balance sheet – and it’s not hard to see what is propping up our money supply.
Who bails out our Federal Government? It would be easy to say – no one. The truth is that we will be offered a way out by the world – but it will come with a very steep price.
This is the beginning of the end of the financial dominance of the United States.
This is the beginning of the end of the financial dominance of the United States.
jg – August 6, 2009
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The Fed Buys Last Week's Treasury Notes
The Fed Buys Last Week's Treasury Notes
Thursday, August 6, 2009, 12:21 pm, by cmartenson
In concert with the claims I made in the prior post, The Fed bought $7 billion in Treasuries today and even more yesterday.
This is at the upper end of their recent range of already exceptional purchasing activity.
If things are so rosy that every single dip is being bought in the stock market with a vengeance, I wonder why these printing operations are really necessary?
If things are so rosy that every single dip is being bought in the stock market with a vengeance, I wonder why these printing operations are really necessary?
This $14-billion-plus buying activity by the Fed represents fresh money created out of thin air that was exchanged for the sovereign debt of the US. However, since the Fed has, for all practical purposes, never undone its permanent operations (hey, that's why they are called "POMOs"), we can consider these additions of money as good as permanent themselves.
Looking at the maturity range, we can see that these are all long-dated bonds, with the one today specifically offering us a tantalizing clue as to how the shell game is being played.
Here's the Treasury announcement for the 7-year auction that came out on July 30 (last Thursday). Please note the specific CUSIP number circled. Every bond in this auction carries this specific identifying number.
Here's the Treasury announcement for the 7-year auction that came out on July 30 (last Thursday). Please note the specific CUSIP number circled. Every bond in this auction carries this specific identifying number.
________________________________________And now let's look at the detail for this most recent POMO:
Good grief! Just last week, when the auction results were announced, it was trumpeted to great fanfare that there was "more than sufficient" bid-to-cover, "strong demand," and all the rest.
And now it turns out that 47% (!) of the bonds that were taken by the primary dealers in that auction have been quietly bought by the Fed and permanently secreted to its balance sheet.
They didn't even wait a full week! A more honest and open approach would have been for the Fed to simply buy them outright at the auction, but this way, using "primary dealers" and "POMOs" and all these other extra steps, the basic fact that the Fed is openly monetizing US government debt is effectively hidden from a not-too-terribly inquisitive US press and public.
The speed of the shell game is accelerating.
The speed of the shell game is accelerating.
This immediate repurchase of newly auction bonds by the Fed tells us that demand for these bonds is not nearly as high as advertised, and that things are not quite as strong as represented.
And oh, by the way, don't expect any stock market weakness while so many billions are being shoveled out the Fed and into the pockets of the primary dealers. They'll have to do something with all that freshly minted cash.....
And oh, by the way, don't expect any stock market weakness while so many billions are being shoveled out the Fed and into the pockets of the primary dealers. They'll have to do something with all that freshly minted cash.....
A Closer Look at Gold
Here’s a great report by Chris Martenson relating to the article last week on gold. If large nations (Brazil, Russia, India, China, etc.) are calling for a new ‘global’ currency to replace the dollar as the world’s reserve currency – and China is encouraging its citizens to buy gold and silver – it’s time to pay attention. Regardless of what we’re told through the media – if our government does not take immediate action and change our fiscal policies (massive deficit spending coupled with declining revenues and Fed monetization of our debt) – we are on a path that will lead to the destruction of our currency. This isn’t simply opinion – it’s math. There’s also this little thing called ‘history’ to give us a clear picture of where we’re heading.
Due to what’s happening to the dollar and gold – Chris advises moving your wealth out of dollars (this includes dollar denominated stocks, bonds, etc.) – and into gold, silver, things you need around the house, etc. I couldn’t agree more. Since I don’t believe our government is going to do what’s necessary to prevent a collapse of the dollar (could happen tomorrow, 1 year, 5 years from now) – it’s better to be prepared now. Since we import much of what we buy - when the dollar begins a significant decline in value – things are going to become very expensive for us from a dollar perspective.
John – September 14, 2009
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Breakout! - A Closer Look at Gold
Monday, September 14, 2009, 7:02 am, by cmartenson
Executive Summary
• Gold had the highest weekly close ever
• UN calls dollar trading a "confidence game"
• US fiscal deficit breaks all records, keeps accelerating
• Brazil, Russia, India, & China (BRICs) have dollar concerns
• China promotes owning gold to its citizens
• Examining US dollar reserve currency status (again)
Normally I like to switch up my analyses each week, but last week's look at gold already needs some updating, due to a few important occurrences. There was a blistering array of developments and cross currents this past week that make me suspect we may be entering a new inning of this game.
The first of these is that gold just had its highest weekly close ever:
Of course, this is not an inflation-adjusted number. Gold hit $850 back in 1980, and if we bring that number forward into today's dollars, it would equal more than $2,200.
However, a brand new all-time highest weekly close, even if not inflation-adjusted, is a matter of some importance for the people who watch such things. Heck, nobody ever inflation-adjusts the Dow Jones for comparison purposes, and I don't hear much complaint about that oversight, so perhaps we can skip it from now on for consistency.
Looking at a slightly longer-term chart of gold, we can see that the breakout we noted last week has carried on and gone a bit further (like a good breakout should):
Part of the reason for gold's advance is that the dollar has (again) been faring poorly. However, as we can see in the chart below, the dollar is approaching what I would expect to be a heavy band of resistance right around 76.
Also, the dollar appears to be oversold (MACD, below), or approaching oversold (RSI, above), and is therefore due for a bounce. If it happens, then this is relatively normal market activity; if it does not, then there's potentially something else at work. That is what I want to explore here.
This week we saw a lot of fascinating and seemingly important information coming from all quarters, which, if I could sum it up, would read, "The rest of the world is getting really anxious about the fiscal recklessness of the US."
Questioning the Dollar
The opening salvo was launched on Monday with this very boldly worded statement from a UN trade conference:
UN Says New Currency Is Needed to Fix Broken ‘Confidence Game’
Sept. 7 (Bloomberg) -- The dollar’s role in international trade should be reduced by establishing a new currency to protect emerging markets from the “confidence game” of financial speculation, the United Nations said.
UN countries should agree on the creation of a global reserve bank to issue the currency and to monitor the national exchange rates of its members, the Geneva-based UN Conference on Trade and Development said today in a report.
China, India, Brazil and Russia this year called for a replacement to the dollar as the main reserve currency after the financial crisis sparked by the collapse of the U.S. mortgage market led to the worst global recession since World War II. China, the world’s largest holder of dollar reserves, said a supranational currency such as the International Monetary Fund’s special drawing rights, or SDRs, may add stability.
A new currency? That would be a rather bold departure from 65 years of dollar-reserve supremacy. The timing of this call couldn't be more interesting.
It's kind of amusing that the UN group would try and pin the blame for the "confidence game" on financial speculators, who, by definition, take both sides of the trades. Instead, a confidence game is one where the foundation is one of fraudulent intent, which is a better description of most of the world's existing fiat money systems than it is of speculators.
Where the UN trade commission couched their calls in some feel-good positioning ("we're trying to save developing markets from evil speculators"), the deeper meaning that most commentators drew here was that the UN group took a firm jab at the US dollar's role as the world's reserve currency.
The fact that the UN is now getting into the game of bashing the reserve role of the horribly mismanaged US dollar tells us that there has been a significant shift in the political winds, specifically among the BRIC countries.
Reasons For Being Nervous
The main reason that any creditor nation starts to fear the debtor's abilities to repay, or begins to suspect that a reserve currency may not be a credible store of value, is when the debtor/reserve nation converts an ill-advised debt spree into a reckless mess.
Speaking of which, September 8th saw the release of yet another grim budget deficit report by the US federal government, detailing the carnage for August:
In the above table, we note that every single category of federal government revenue, even social insurance (it's never down!), is negative year-over-year by a collective, jaw-dropping 16.2%.
With personal income receipts down twenty percent and corporate income receipts down fifty-six percent, I am again hard-pressed to believe the claim of a one-percent decline in GDP last quarter.
Said more plainly, the GDP report from the BLS is thoroughly unbelievable and useless. It's useless because it treats an increase in government debt expenditures as "growth." And it is unbelievable because it is hopelessly debased by the statistically indefensible practices of applying hedonic and imputation adjustments to the tune of some 35% of the total GDP.
But the government deficit story becomes even more alarming when we look at outlays, which have increased by an incredible 19.8% year-over-year.
While I realize that some will say, "But we're in an emergency!" we should take care to note the increases in the Social Security, Medicare, and Medicaid outlays. These are only somewhat driven by the emergency, and they are up by between 8% and 24%, indicating that the non-discretionary portion of the federal budget is out of control. However, there are certainly more people entering the ranks of Social Security because they lost work and cannot find a new job, thanks to the recession/depression, and have grudgingly opted to begin taking Social Security as a last resort.
This next article is a good read if you want to understand this new social wrinkle:
Out of Work, and Too Down to Search On
They were left out of the latest unemployment rate, as they are every month: millions of hidden casualties of the Great Recession who are not counted in the rate because they have stopped looking for work.
But that does not mean these discouraged Americans do not want to be employed. As interviews with several of them demonstrate, many desperately long for a job, but their inability to find one has made them perhaps the ultimate embodiment of pessimism as this recession wears on.
Some have halted their job searches out of sheer frustration. Others have decided it makes more sense to become stay-at-home fathers or mothers, or to go back to school, until the job market improves. Still others have chosen to retire for now and have begun collecting Social Security or disability benefits, for which claims have surged.
Back to the story line - one of the main reasons that foreign creditors such as Brazil, Russia, India, and China (the "BRICs") have begun to openly express their reservations about loaning the US any more money is because of a combined 16% decline in revenue and 20% increase in expenditures.
That's no way to run a country, and if anybody knows this from cold, hard experience, it's a BRIC country.
So they peer into the endless parade of dismal US budget reports, like the one I've shown above, and they see a path to ruin. If ever there was a reason to be nervous about the dollar, the monthly budget deficit report is it.
Finally, China put its money where its words were by buying $50 billion of Special Drawing Rights (SDRs) from the IMF:
China to buy $50 billion of first IMF bonds
China is buying the equivalent of $50 billion of the International Monetary Fund's first bond sale in a move that might boost Beijing's standing in the Fund and help its quiet campaign to expand the reach of its tightly controlled currency.
China took the unusual step of paying for the IMF bonds with 341.2 billion yuan -- a currency that is not traded on global markets -- rather than dollars, which it uses for much of its trade and other foreign transactions.
While we might note that $50 billion is a relative drop in the bucket, given China's massive foreign currency positions, it is a first step indicating that China is actively seeking an alternative to the US dollar as a reserve currency.
I consider this to be more of a symbolic step than a meaningful one, because the SDRs represent a basket of fiat currencies, of which the US dollar is only one. Essentially, this move actually increased, not decreased China's dollar exposure as they traded yuan for the SDRs. On the other hand, the IMF now has a big old pile of Chinese yuan, and I am wondering what they will do with them.
So we might also consider this move less in the context of China obtaining SDRs and more in the context of China finally making moves to get its own currency into play on the international stage. If this is the case, this was an important move.
Gold Has a Booster Rocket
The situation is now so obvious that even Alan Greenspan has spotted it:
Gold Rally Signals Move Away From Currencies, Greenspan Says
Sept. 9 (Bloomberg) -- Gold prices that jumped above $1,000 an ounce this week are signaling that investors are buying metals to hedge against declines in currencies, former Federal Reserve Chairman Alan Greenspan said.
The gains are “strictly a monetary phenomenon,” Greenspan said today at an investment conference in New York. Rising prices of precious metals and other commodities are “an indication of a very early stage of an endeavor to move away from paper currencies,” he said.
“What is fascinating is the extent to which gold still holds reign over the financial system as the ultimate source of payment,” Greenspan said.
I truly do not like to be on the same side of the boat as Alan Greenspan. Over time I have found him to be a nearly perfect fade, meaning that whatever he was up to, it was highly advisable to consider taking the other side. I linked to this article mainly as a cautionary tale help to keep my enthusiasm for gold in check.
I do love that last line in the quote above, about gold as the ultimate source of payment, because to those who have been paying attention, this is not really all that surprising or fascinating at all. Gold is a hedge against the certainty that paper money has been, historically and without fail, mismanaged.
Also, too, I should point out that Mr. Greenspan was hardly the first prominent official to recently propose that gold should be an effective countermeasure against a global epidemic of currency mismanagement.
In fact, the President of Russia said as much last July, but more subtly:
G-8 ‘World Currency’ Coin’s Creator Seeks Russia Participation
July 15 (Bloomberg) -- The gold coin displayed by Russian President Dmitry Medvedev at last week’s Group of Eight summit as an illustration of how a future global currency may look, may be made at Russian mints, its originator said.
Medvedev pulled out the coin at a news conference on July 10, saying: “Perhaps one day something similar could appear. You would be able to hold it in your hand and use as a means of payment.” Leaders at the summit in L’Aquila, Italy, received the coin as a gift, said former journalist Alessandro Sassoli, author of a project he calls “united future world currency.”
“We are thinking of involving Russian mints and school students” to find a name for the currency in a competition involving a thousand schools worldwide, Sassoli said by e-mail. He provided Medvedev with a cover letter describing the project and asking for his opinion.
The coin, resembling a euro, is 29 millimetres in diameter and weighs 15.55 grams of pure gold, Sassoli said. As many as 20 gold and 150 silver coins have been minted. Sassoli said the G-8 organizers and Italian Prime Minister Silvio Berlusconi’s government asked for 13 gold and 10 silver coins for the summit.
The story here is quite revealing, as it demonstrates that the Russian President went so far as to commission the Belgian mint to make a set of demonstration gold and silver coins in order to propose an intrinsic gold and silver backing for a new global reserve currency. I absolutely did not expect to hear such proposals from such high levels for another five to ten years from now.
This says quite a lot about the mindset of at least one BRIC country (Russia), and this next article reveals the mindset of another:
China pushes silver and gold investment to the masses
We are indebted again to Paul Mylchreest's Thunder Road Report for news that will bring big smiles to gold and silver investors everywhere. Apparently China is pushing the idea of buying gold and silver for investment purposes to the general population in the way that Western television sells soap powder. If 1.3 billion Chinese citizens start buying gold and silver, even in tiny quantities, imagine what that will do to the market!
The report notes that China's Central Television, the main state-owned television company, has run a news programme letting the public know how easy it is to buy precious metals as an investment. On silver investment the announcer is quoted as saying "China has introduced its first ever investment opportunity for silver bullion. The bars are available in 500g, 1kg, 2kg and 5kg with a purity of 99.9%. Figures show that gold was fifty times more expensive than silver in 2007, but now that figure has reached over seventy times. Analysts say that silver has been undervalued in recent years. They add that the metal is the right investment for individual investors and could be a good way to cash in."
What appears to have happened in China is a total relaxation of strictures on holding precious metals by the individual with the government pushing gold and silver as an investment option, seemingly at every opportunity. This is a far cry from the situation only a few years ago where the distribution of gold and silver was strictly controlled. Now, the Thunder Road Report notes that every bank will sell gold and silver bullion bars in four different sizes to individuals and gold related investments are said to be soaring in popularity.
There are two ways to increase your country's holdings of gold and silver, if that is an aim. One way is for the central bank or government to buy precious metals in the open market. This naturally tends to have a volcanic impact on the precious metals markets, and it is usually done as surreptitiously as possible. The other way is to encourage your citizens to buy them on their own.
Both result in more gold and silver crossing and remaining within your borders. All indications are that China is now running both strategies for increasing gold and silver holdings within the country.
The Golden Boom
In all the years that I have been watching gold and silver, the above news items constitute about as important a set of developments as I've ever seen.
From a monetary standpoint, I am thrilled that some countries are openly questioning the wisdom of allowing individually-managed fiat currencies to dominate and dictate the terms of international trade, and especially that they are questioning the role of the US dollar, which is being managed in a way that would make a third-world dictator blush.
I personally view these developments as the beginning of the end for the US dollar as the world's reserve currency. If the US government does not read the signs appropriately, it runs the risk of mistakenly losing its vaunted reserve currency status. If that happens, the US will rapidly discover that it did not actually hit a triple; instead, it was granted third base by an overly kind umpire who has been overruled and replaced.
On a related note, I was quite surprised by the news that the US decided now was a good time to hit China with some heavy import tariffs on tires. Given all that's been going on, I wonder if this is really the best time to be wagging stern fingers in China's direction.
I track the price of gold because it might give us an early indication about what's going on behind the scenes.
The smoke signals indicate that a tectonic shift in appetites for and attitudes about the US dollar is underway.
What Happens If the US Loses Reserve Currency Status?
As I wrote this past week in the Martenson Insider, Poland recently suffered a failed bond auction, meaning that investors did not buy all the government securities offered by the Polish government. Naturally this is a terminal sort of event, and the US is not yet (seemingly) near that same fate. If or when it does, everything will change.
The signs that we'll be looking for that will indicate that the US dollar is losing its grip on the world will be both a decline in the price of the dollar relative to other currencies and a rise in US Treasury interest rates.
For now, the dollar is falling, but Treasury interest rates are holding firm, so according to this pair of indicators, it seems that we are "not there yet."
But if (or when) this does happen, the most obvious and immediate impacts will be the imposition of capital controls (blocking the flow of money out of the country), an immediate increase in the price of most commodities, a skyrocketing gold price, rapidly rising interest rates, and quite probably a banking holiday (because the big international banks would be quite paralyzed by the capital controls).
One other predictable 'feature' of a dollar crisis would be an FDIC funding crisis. For now, the FDIC will insure $250,000 per account, and it has a $500 billion line of credit from the Treasury, so all is well for the moment.
But this means that if the Treasury has a funding crisis, the FDIC has a funding crisis. For this reason, the moment I detect that a dollar crisis is underway, I will personally be removing, converting, or spending my bank-deposited funds as rapidly as I can, in case the banking system seizes up and lacks the funds to operate. While this is a remote chance, it is a non-zero chance.
Needless to say, a funding/dollar crisis would result in another body blow to the US economy, which will, of course, only exacerbate our existing and future problems.
Because I view the probable outcomes of a dollar crisis to be so severe, I would support any and all measures to curtail federal government deficit spending and Federal Reserve monetization of debt. Unfortunately, these actions would undoubtedly be immensely unpopular with politicians and crowds.
However, sooner or later we will have to bite the bullet and admit that we are never going back to our former levels of growth and consumption and that we'll have to go through a period of austerity, saving, and investment. My strong preference would be to do it now and not further add to our risks by increasing our borrowing and spending, but that's not even remotely the same tune that DC is currently humming. And China knows it, too.
I am personally concerned by the pressures that I see mounting in the international arena, and I think gold is one signal telling us that something is not quite right.
Conclusion
Gold broke out and closed the week at a new high. This is an important development, both because it has meaning all on its own and because of what it is potentially telling us about things happening beneath the surface.
There's enough smoke coming from a variety of news sources and foreign countries to suggest that we might even glimpse a bit of flame. Under all of this pressure is the deep-seated concern by creditors to the US that the US is operating in a fiscally ruinous manner and shows no intention of willingly changing course.
Reserve currency status is an "exorbitant privilege" (credit: Valéry Giscard d'Estaing) that has conferred tremendous advantage and latitude to the US. Loss of this privilege would result in a very sudden drop in US standards of living and impose harsh austerity measures to which the US is only accustomed to being on the giving, not receiving, end.
Instead of adopting a humble stance, the US appears to be digging in its heels, most recently exhibited by the imposition of import tariffs on Chinese-made tires.
Meanwhile the BRIC countries are talking about and taking significant action towards limiting their exposure to the US dollar, and they have been extraordinarily vocal in recent weeks and months in their attempts to prompt a serious discussion of the matter by other countries.
The US is playing a dangerous game and risks an even more serious economic and financial adjustment by running deficits that would simply not be tolerated in any developing country. Should this lack of imposition of two-way austerity reach the breaking point, a dollar crisis would be the most likely result.
As always, when I see mounting risks, I would vastly prefer to be a year early than a day late.
This would be a good time to continue to move your wealth out of dollars and into other forms of wealth. I am currently a big fan of direct wealth in the form of productive land (soil, trees, hydropower), gold and silver, and anything that you might need around the house, especially any critical items that are imported.
__________________________
UN Says New Currency Is Needed to Fix Broken ‘Confidence Game’
Bloomberg
By Jonathan Tirone
Sept. 7 (Bloomberg) -- The dollar’s role in international trade should be reduced by establishing a new currency to protect emerging markets from the “confidence game” of financial speculation, the United Nations said.
UN countries should agree on the creation of a global reserve bank to issue the currency and to monitor the national exchange rates of its members, the Geneva-based UN Conference on Trade and Development said today in a report.
China, India, Brazil and Russia this year called for a replacement to the dollar as the main reserve currency after the financial crisis sparked by the collapse of the U.S. mortgage market led to the worst global recession since World War II. China, the world’s largest holder of dollar reserves, said a supranational currency such as the International Monetary Fund’s special drawing rights, or SDRs, may add stability.
“There’s a much better chance of achieving a stable pattern of exchange rates in a multilaterally-agreed framework for exchange-rate management,” Heiner Flassbeck, co-author of the report and a UNCTAD director, said in an interview from Geneva. “An initiative equivalent to Bretton Woods or the European Monetary System is needed.”
The 1944 Bretton Woods agreement created the modern global economic system and institutions including the IMF and World Bank.
Enhanced SDRs
While it would be desirable to strengthen SDRs, a unit of account based on a basket of currencies, it wouldn’t be enough to aid emerging markets most in need of liquidity, said Flassbeck, a former German deputy finance minister who worked in 1997-1998 with then U.S. Deputy Treasury Secretary Lawrence Summers to contain the Asian financial crisis.
Emerging-market countries are underrepresented at the IMF, hindering the effectiveness of enhanced SDR allocations, the UN said. An organization should be created to manage real exchange rates between countries measured by purchasing power and adjusted to inflation differentials and development levels, it said.
“The most important lesson of the global crisis is that financial markets don’t get prices right,” Flassbeck said. “Governments are being tempted by the resulting confidence game catering to financial-market participants who have shown they’re inept at assessing risk.”
The 45-year-old UN group, run by former World Trade Organization chief Supachai Panitchpakdi, “promotes integration of developing countries in the world economy,” according to its Web site. Emerging-market nations should consider restricting capital mobility until a new system is in place, the group said.
The world body began issuing warnings in 2006 about financial imbalances leading to a global recession.
The UN Trade and Development report is being held for release via print media until 6 p.m. London time.
To contact the reporters on this story: Jonathan Tirone in Vienna at jtirone@bloomberg.net
Last Updated: September 7, 2009 09:52 EDT
Due to what’s happening to the dollar and gold – Chris advises moving your wealth out of dollars (this includes dollar denominated stocks, bonds, etc.) – and into gold, silver, things you need around the house, etc. I couldn’t agree more. Since I don’t believe our government is going to do what’s necessary to prevent a collapse of the dollar (could happen tomorrow, 1 year, 5 years from now) – it’s better to be prepared now. Since we import much of what we buy - when the dollar begins a significant decline in value – things are going to become very expensive for us from a dollar perspective.
John – September 14, 2009
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Breakout! - A Closer Look at Gold
Monday, September 14, 2009, 7:02 am, by cmartenson
Executive Summary
• Gold had the highest weekly close ever
• UN calls dollar trading a "confidence game"
• US fiscal deficit breaks all records, keeps accelerating
• Brazil, Russia, India, & China (BRICs) have dollar concerns
• China promotes owning gold to its citizens
• Examining US dollar reserve currency status (again)
Normally I like to switch up my analyses each week, but last week's look at gold already needs some updating, due to a few important occurrences. There was a blistering array of developments and cross currents this past week that make me suspect we may be entering a new inning of this game.
The first of these is that gold just had its highest weekly close ever:
Of course, this is not an inflation-adjusted number. Gold hit $850 back in 1980, and if we bring that number forward into today's dollars, it would equal more than $2,200.
However, a brand new all-time highest weekly close, even if not inflation-adjusted, is a matter of some importance for the people who watch such things. Heck, nobody ever inflation-adjusts the Dow Jones for comparison purposes, and I don't hear much complaint about that oversight, so perhaps we can skip it from now on for consistency.
Looking at a slightly longer-term chart of gold, we can see that the breakout we noted last week has carried on and gone a bit further (like a good breakout should):
Part of the reason for gold's advance is that the dollar has (again) been faring poorly. However, as we can see in the chart below, the dollar is approaching what I would expect to be a heavy band of resistance right around 76.
Also, the dollar appears to be oversold (MACD, below), or approaching oversold (RSI, above), and is therefore due for a bounce. If it happens, then this is relatively normal market activity; if it does not, then there's potentially something else at work. That is what I want to explore here.
This week we saw a lot of fascinating and seemingly important information coming from all quarters, which, if I could sum it up, would read, "The rest of the world is getting really anxious about the fiscal recklessness of the US."
Questioning the Dollar
The opening salvo was launched on Monday with this very boldly worded statement from a UN trade conference:
UN Says New Currency Is Needed to Fix Broken ‘Confidence Game’
Sept. 7 (Bloomberg) -- The dollar’s role in international trade should be reduced by establishing a new currency to protect emerging markets from the “confidence game” of financial speculation, the United Nations said.
UN countries should agree on the creation of a global reserve bank to issue the currency and to monitor the national exchange rates of its members, the Geneva-based UN Conference on Trade and Development said today in a report.
China, India, Brazil and Russia this year called for a replacement to the dollar as the main reserve currency after the financial crisis sparked by the collapse of the U.S. mortgage market led to the worst global recession since World War II. China, the world’s largest holder of dollar reserves, said a supranational currency such as the International Monetary Fund’s special drawing rights, or SDRs, may add stability.
A new currency? That would be a rather bold departure from 65 years of dollar-reserve supremacy. The timing of this call couldn't be more interesting.
It's kind of amusing that the UN group would try and pin the blame for the "confidence game" on financial speculators, who, by definition, take both sides of the trades. Instead, a confidence game is one where the foundation is one of fraudulent intent, which is a better description of most of the world's existing fiat money systems than it is of speculators.
Where the UN trade commission couched their calls in some feel-good positioning ("we're trying to save developing markets from evil speculators"), the deeper meaning that most commentators drew here was that the UN group took a firm jab at the US dollar's role as the world's reserve currency.
The fact that the UN is now getting into the game of bashing the reserve role of the horribly mismanaged US dollar tells us that there has been a significant shift in the political winds, specifically among the BRIC countries.
Reasons For Being Nervous
The main reason that any creditor nation starts to fear the debtor's abilities to repay, or begins to suspect that a reserve currency may not be a credible store of value, is when the debtor/reserve nation converts an ill-advised debt spree into a reckless mess.
Speaking of which, September 8th saw the release of yet another grim budget deficit report by the US federal government, detailing the carnage for August:
In the above table, we note that every single category of federal government revenue, even social insurance (it's never down!), is negative year-over-year by a collective, jaw-dropping 16.2%.
With personal income receipts down twenty percent and corporate income receipts down fifty-six percent, I am again hard-pressed to believe the claim of a one-percent decline in GDP last quarter.
Said more plainly, the GDP report from the BLS is thoroughly unbelievable and useless. It's useless because it treats an increase in government debt expenditures as "growth." And it is unbelievable because it is hopelessly debased by the statistically indefensible practices of applying hedonic and imputation adjustments to the tune of some 35% of the total GDP.
But the government deficit story becomes even more alarming when we look at outlays, which have increased by an incredible 19.8% year-over-year.
This next article is a good read if you want to understand this new social wrinkle:
Out of Work, and Too Down to Search On
They were left out of the latest unemployment rate, as they are every month: millions of hidden casualties of the Great Recession who are not counted in the rate because they have stopped looking for work.
But that does not mean these discouraged Americans do not want to be employed. As interviews with several of them demonstrate, many desperately long for a job, but their inability to find one has made them perhaps the ultimate embodiment of pessimism as this recession wears on.
Some have halted their job searches out of sheer frustration. Others have decided it makes more sense to become stay-at-home fathers or mothers, or to go back to school, until the job market improves. Still others have chosen to retire for now and have begun collecting Social Security or disability benefits, for which claims have surged.
Back to the story line - one of the main reasons that foreign creditors such as Brazil, Russia, India, and China (the "BRICs") have begun to openly express their reservations about loaning the US any more money is because of a combined 16% decline in revenue and 20% increase in expenditures.
That's no way to run a country, and if anybody knows this from cold, hard experience, it's a BRIC country.
So they peer into the endless parade of dismal US budget reports, like the one I've shown above, and they see a path to ruin. If ever there was a reason to be nervous about the dollar, the monthly budget deficit report is it.
Finally, China put its money where its words were by buying $50 billion of Special Drawing Rights (SDRs) from the IMF:
China to buy $50 billion of first IMF bonds
China is buying the equivalent of $50 billion of the International Monetary Fund's first bond sale in a move that might boost Beijing's standing in the Fund and help its quiet campaign to expand the reach of its tightly controlled currency.
China took the unusual step of paying for the IMF bonds with 341.2 billion yuan -- a currency that is not traded on global markets -- rather than dollars, which it uses for much of its trade and other foreign transactions.
While we might note that $50 billion is a relative drop in the bucket, given China's massive foreign currency positions, it is a first step indicating that China is actively seeking an alternative to the US dollar as a reserve currency.
I consider this to be more of a symbolic step than a meaningful one, because the SDRs represent a basket of fiat currencies, of which the US dollar is only one. Essentially, this move actually increased, not decreased China's dollar exposure as they traded yuan for the SDRs. On the other hand, the IMF now has a big old pile of Chinese yuan, and I am wondering what they will do with them.
So we might also consider this move less in the context of China obtaining SDRs and more in the context of China finally making moves to get its own currency into play on the international stage. If this is the case, this was an important move.
Gold Has a Booster Rocket
The situation is now so obvious that even Alan Greenspan has spotted it:
Gold Rally Signals Move Away From Currencies, Greenspan Says
Sept. 9 (Bloomberg) -- Gold prices that jumped above $1,000 an ounce this week are signaling that investors are buying metals to hedge against declines in currencies, former Federal Reserve Chairman Alan Greenspan said.
The gains are “strictly a monetary phenomenon,” Greenspan said today at an investment conference in New York. Rising prices of precious metals and other commodities are “an indication of a very early stage of an endeavor to move away from paper currencies,” he said.
“What is fascinating is the extent to which gold still holds reign over the financial system as the ultimate source of payment,” Greenspan said.
I truly do not like to be on the same side of the boat as Alan Greenspan. Over time I have found him to be a nearly perfect fade, meaning that whatever he was up to, it was highly advisable to consider taking the other side. I linked to this article mainly as a cautionary tale help to keep my enthusiasm for gold in check.
I do love that last line in the quote above, about gold as the ultimate source of payment, because to those who have been paying attention, this is not really all that surprising or fascinating at all. Gold is a hedge against the certainty that paper money has been, historically and without fail, mismanaged.
Also, too, I should point out that Mr. Greenspan was hardly the first prominent official to recently propose that gold should be an effective countermeasure against a global epidemic of currency mismanagement.
In fact, the President of Russia said as much last July, but more subtly:
G-8 ‘World Currency’ Coin’s Creator Seeks Russia Participation
July 15 (Bloomberg) -- The gold coin displayed by Russian President Dmitry Medvedev at last week’s Group of Eight summit as an illustration of how a future global currency may look, may be made at Russian mints, its originator said.
Medvedev pulled out the coin at a news conference on July 10, saying: “Perhaps one day something similar could appear. You would be able to hold it in your hand and use as a means of payment.” Leaders at the summit in L’Aquila, Italy, received the coin as a gift, said former journalist Alessandro Sassoli, author of a project he calls “united future world currency.”
“We are thinking of involving Russian mints and school students” to find a name for the currency in a competition involving a thousand schools worldwide, Sassoli said by e-mail. He provided Medvedev with a cover letter describing the project and asking for his opinion.
The coin, resembling a euro, is 29 millimetres in diameter and weighs 15.55 grams of pure gold, Sassoli said. As many as 20 gold and 150 silver coins have been minted. Sassoli said the G-8 organizers and Italian Prime Minister Silvio Berlusconi’s government asked for 13 gold and 10 silver coins for the summit.
The story here is quite revealing, as it demonstrates that the Russian President went so far as to commission the Belgian mint to make a set of demonstration gold and silver coins in order to propose an intrinsic gold and silver backing for a new global reserve currency. I absolutely did not expect to hear such proposals from such high levels for another five to ten years from now.
This says quite a lot about the mindset of at least one BRIC country (Russia), and this next article reveals the mindset of another:
China pushes silver and gold investment to the masses
We are indebted again to Paul Mylchreest's Thunder Road Report for news that will bring big smiles to gold and silver investors everywhere. Apparently China is pushing the idea of buying gold and silver for investment purposes to the general population in the way that Western television sells soap powder. If 1.3 billion Chinese citizens start buying gold and silver, even in tiny quantities, imagine what that will do to the market!
The report notes that China's Central Television, the main state-owned television company, has run a news programme letting the public know how easy it is to buy precious metals as an investment. On silver investment the announcer is quoted as saying "China has introduced its first ever investment opportunity for silver bullion. The bars are available in 500g, 1kg, 2kg and 5kg with a purity of 99.9%. Figures show that gold was fifty times more expensive than silver in 2007, but now that figure has reached over seventy times. Analysts say that silver has been undervalued in recent years. They add that the metal is the right investment for individual investors and could be a good way to cash in."
What appears to have happened in China is a total relaxation of strictures on holding precious metals by the individual with the government pushing gold and silver as an investment option, seemingly at every opportunity. This is a far cry from the situation only a few years ago where the distribution of gold and silver was strictly controlled. Now, the Thunder Road Report notes that every bank will sell gold and silver bullion bars in four different sizes to individuals and gold related investments are said to be soaring in popularity.
There are two ways to increase your country's holdings of gold and silver, if that is an aim. One way is for the central bank or government to buy precious metals in the open market. This naturally tends to have a volcanic impact on the precious metals markets, and it is usually done as surreptitiously as possible. The other way is to encourage your citizens to buy them on their own.
Both result in more gold and silver crossing and remaining within your borders. All indications are that China is now running both strategies for increasing gold and silver holdings within the country.
The Golden Boom
In all the years that I have been watching gold and silver, the above news items constitute about as important a set of developments as I've ever seen.
From a monetary standpoint, I am thrilled that some countries are openly questioning the wisdom of allowing individually-managed fiat currencies to dominate and dictate the terms of international trade, and especially that they are questioning the role of the US dollar, which is being managed in a way that would make a third-world dictator blush.
I personally view these developments as the beginning of the end for the US dollar as the world's reserve currency. If the US government does not read the signs appropriately, it runs the risk of mistakenly losing its vaunted reserve currency status. If that happens, the US will rapidly discover that it did not actually hit a triple; instead, it was granted third base by an overly kind umpire who has been overruled and replaced.
On a related note, I was quite surprised by the news that the US decided now was a good time to hit China with some heavy import tariffs on tires. Given all that's been going on, I wonder if this is really the best time to be wagging stern fingers in China's direction.
I track the price of gold because it might give us an early indication about what's going on behind the scenes.
The smoke signals indicate that a tectonic shift in appetites for and attitudes about the US dollar is underway.
What Happens If the US Loses Reserve Currency Status?
As I wrote this past week in the Martenson Insider, Poland recently suffered a failed bond auction, meaning that investors did not buy all the government securities offered by the Polish government. Naturally this is a terminal sort of event, and the US is not yet (seemingly) near that same fate. If or when it does, everything will change.
The signs that we'll be looking for that will indicate that the US dollar is losing its grip on the world will be both a decline in the price of the dollar relative to other currencies and a rise in US Treasury interest rates.
For now, the dollar is falling, but Treasury interest rates are holding firm, so according to this pair of indicators, it seems that we are "not there yet."
But if (or when) this does happen, the most obvious and immediate impacts will be the imposition of capital controls (blocking the flow of money out of the country), an immediate increase in the price of most commodities, a skyrocketing gold price, rapidly rising interest rates, and quite probably a banking holiday (because the big international banks would be quite paralyzed by the capital controls).
One other predictable 'feature' of a dollar crisis would be an FDIC funding crisis. For now, the FDIC will insure $250,000 per account, and it has a $500 billion line of credit from the Treasury, so all is well for the moment.
But this means that if the Treasury has a funding crisis, the FDIC has a funding crisis. For this reason, the moment I detect that a dollar crisis is underway, I will personally be removing, converting, or spending my bank-deposited funds as rapidly as I can, in case the banking system seizes up and lacks the funds to operate. While this is a remote chance, it is a non-zero chance.
Needless to say, a funding/dollar crisis would result in another body blow to the US economy, which will, of course, only exacerbate our existing and future problems.
Because I view the probable outcomes of a dollar crisis to be so severe, I would support any and all measures to curtail federal government deficit spending and Federal Reserve monetization of debt. Unfortunately, these actions would undoubtedly be immensely unpopular with politicians and crowds.
However, sooner or later we will have to bite the bullet and admit that we are never going back to our former levels of growth and consumption and that we'll have to go through a period of austerity, saving, and investment. My strong preference would be to do it now and not further add to our risks by increasing our borrowing and spending, but that's not even remotely the same tune that DC is currently humming. And China knows it, too.
I am personally concerned by the pressures that I see mounting in the international arena, and I think gold is one signal telling us that something is not quite right.
Conclusion
Gold broke out and closed the week at a new high. This is an important development, both because it has meaning all on its own and because of what it is potentially telling us about things happening beneath the surface.
There's enough smoke coming from a variety of news sources and foreign countries to suggest that we might even glimpse a bit of flame. Under all of this pressure is the deep-seated concern by creditors to the US that the US is operating in a fiscally ruinous manner and shows no intention of willingly changing course.
Reserve currency status is an "exorbitant privilege" (credit: Valéry Giscard d'Estaing) that has conferred tremendous advantage and latitude to the US. Loss of this privilege would result in a very sudden drop in US standards of living and impose harsh austerity measures to which the US is only accustomed to being on the giving, not receiving, end.
Instead of adopting a humble stance, the US appears to be digging in its heels, most recently exhibited by the imposition of import tariffs on Chinese-made tires.
Meanwhile the BRIC countries are talking about and taking significant action towards limiting their exposure to the US dollar, and they have been extraordinarily vocal in recent weeks and months in their attempts to prompt a serious discussion of the matter by other countries.
The US is playing a dangerous game and risks an even more serious economic and financial adjustment by running deficits that would simply not be tolerated in any developing country. Should this lack of imposition of two-way austerity reach the breaking point, a dollar crisis would be the most likely result.
As always, when I see mounting risks, I would vastly prefer to be a year early than a day late.
This would be a good time to continue to move your wealth out of dollars and into other forms of wealth. I am currently a big fan of direct wealth in the form of productive land (soil, trees, hydropower), gold and silver, and anything that you might need around the house, especially any critical items that are imported.
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UN Says New Currency Is Needed to Fix Broken ‘Confidence Game’
Bloomberg
By Jonathan Tirone
Sept. 7 (Bloomberg) -- The dollar’s role in international trade should be reduced by establishing a new currency to protect emerging markets from the “confidence game” of financial speculation, the United Nations said.
UN countries should agree on the creation of a global reserve bank to issue the currency and to monitor the national exchange rates of its members, the Geneva-based UN Conference on Trade and Development said today in a report.
China, India, Brazil and Russia this year called for a replacement to the dollar as the main reserve currency after the financial crisis sparked by the collapse of the U.S. mortgage market led to the worst global recession since World War II. China, the world’s largest holder of dollar reserves, said a supranational currency such as the International Monetary Fund’s special drawing rights, or SDRs, may add stability.
“There’s a much better chance of achieving a stable pattern of exchange rates in a multilaterally-agreed framework for exchange-rate management,” Heiner Flassbeck, co-author of the report and a UNCTAD director, said in an interview from Geneva. “An initiative equivalent to Bretton Woods or the European Monetary System is needed.”
The 1944 Bretton Woods agreement created the modern global economic system and institutions including the IMF and World Bank.
Enhanced SDRs
While it would be desirable to strengthen SDRs, a unit of account based on a basket of currencies, it wouldn’t be enough to aid emerging markets most in need of liquidity, said Flassbeck, a former German deputy finance minister who worked in 1997-1998 with then U.S. Deputy Treasury Secretary Lawrence Summers to contain the Asian financial crisis.
Emerging-market countries are underrepresented at the IMF, hindering the effectiveness of enhanced SDR allocations, the UN said. An organization should be created to manage real exchange rates between countries measured by purchasing power and adjusted to inflation differentials and development levels, it said.
“The most important lesson of the global crisis is that financial markets don’t get prices right,” Flassbeck said. “Governments are being tempted by the resulting confidence game catering to financial-market participants who have shown they’re inept at assessing risk.”
The 45-year-old UN group, run by former World Trade Organization chief Supachai Panitchpakdi, “promotes integration of developing countries in the world economy,” according to its Web site. Emerging-market nations should consider restricting capital mobility until a new system is in place, the group said.
The world body began issuing warnings in 2006 about financial imbalances leading to a global recession.
The UN Trade and Development report is being held for release via print media until 6 p.m. London time.
To contact the reporters on this story: Jonathan Tirone in Vienna at jtirone@bloomberg.net
Last Updated: September 7, 2009 09:52 EDT
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