Despite Declining Deficit, Foreigners Aren’t Bailing Us Out, So the Fed Will Keep QE Going

Bud Conrad, Chief Economist
Casey Research

The basic imbalance driving our economy is the government deficit, which spun out of control as a result of the Credit Crisis of 2008/9. But the sequester, improving tax base, lower interest rate, and elimination of stimulus spending have caused the big government deficit, while still extreme, to drop to half its previously nosebleed levels.

Even so, the deficits remain well out of proportion for a sustainable future. Projections for future government expenditures, including those related to the masses of retiring baby boomers, are on track to increase exponentially. Especially given that the deficits are actually much worse than generally discussed. Honest accounting would include the growing liabilities for retirees in the current accruals, resulting in deficits running closer to $5 trillion per year.

Foreigners recycling their trade surpluses have been an important source of purchases for US government debt. As you can see from the chart of long-term securities purchases by foreigners, that buying collapsed during the crisis. And, interestingly, it has recently fallen sharply again.

Offsetting the reduction in purchases of US debt by foreigners, the Fed has stepped in with multiple quantitative easings (QE), buying government securities itself in order to add liquidity and drive interest rates down. The shift into an accommodative policy is easy to see in the big picture of the holdings of Treasuries at the Fed:

Simply, the loss of foreign enthusiasm for US government debt would normally be a red flag for our economy. This time around, the slack is being papered over by the Fed, which is creating money out of thin air in order to buy what is, in essence, most of the new debt being issued by the federal government. By filling the gap left by exiting foreigners, the Fed has been able to sustain low interest rates—for the time being.

As the American public doesn't save much, and because foreigners are stepping away from US government debt, the Fed is left as the buyer of last resort and will have to keep up its QE.

Among a number of problems, the money creation required for the Fed to serve as the government's lender of last resort can be very inflationary once it ultimately bleeds into the economy. For now, most of the new money has been bottled up on the balance sheet of the Fed. With low rates, that is manageable. But if rates rise, as they eventually must in the face of rising inflation and a loss in confidence in the dollar, the interest the Fed pays on deposits rises as well, putting the viability of the institution at risk.

In addition, as rising rates increase the cost of servicing the government's many debts, federal deficits will also rise. And that has the very real potential to create the equivalent of an economic death cycle as foreigners, and pretty much anyone other than the Fed, rush to the exits on US government paper, causing interest rates to rise further.

While it is impossible to say with any certainty when the US government bond bubble, the largest in history, will burst, the recent up-moves in interest rates should serve as a clear warning shot. From the charts, it looks like the foreigners have taken notice.

For those of you interested in learning more about the coming end to the bond bubble, the latest edition of The Casey Report contains Bud Conrad's up-to-date report and in-depth analysis on inflation, deficits and interest rates. Your subscription comes with a 100% money-back guarantee… so you have nothing to lose by giving it a try. Click here for details.

IMF fears Fed tapering could 'reignite' euro debt crisis

The tapering of stimulus by the US Federal Reserve risks reigniting the eurozone debt crisis and pushing the weakest countries into a "debt-deflation spiral", the International Monetary Fund has warned.

Early tapering by the Fed "could lead to additional, and unhelpful pro-cyclical increases in borrowing costs within the euro area", the IMF said. Photo: Alamy

 

"The macroeconomic environment continues to deteriorate," said the Fund in its annual `Article IV' health check on the eurozone.

"Recovery remains elusive. Growth has weakened further and unemployment is still rising, and the risks of prolonged stagnation and inflation undershooting are high. Mounting social and political tensions pose an increasing threat to reform momentum."

The report warned that the onset of a new tightening cycle in the US had already led to major spill-over effects in the eurozone, pushing up bond yields across the board.

Early tapering by the Fed "could lead to additional, and unhelpfu, pro-cyclical increases in borrowing costs within the euro area. This could further complicate the conduct of monetary policy and potentially damage area-wide demand and growth. Financial market stresses could also quickly reignite," it said.

The Fund said the European Central Bank must take countervailing action to prevent "a vicious circle setting in," ideally by cutting interests, introducing a negative deposit rate, and purchasing a targeted range of private assets.

It should launch "credit-easing" policies to alleviate the deepening lending crunch in Spain, Italy, and Portugal, where borrowing costs for firms are 200 to 300 basis points higher than in Germany, with small businesses struggling to raise any money at all. The IMF said the more the Fed tightens in the US, the more the European authorities need to offset this with other forms of stimulus.
The report came as fresh data from the ECB showed that loans to the private sector contracted by €46bn in June, after falling by €33nbn in May , and €28bn in April. The annual rate of contraction has accelerated to 1.6pc.

The M3 broad money supply is also fizzling out, with growth dropping to 2.3pc year-on-year. There has been almost no growth in M3 since October 2012.
The money data tends to act as an early warning indicator for the economy a year or so ahead, and therefore casts doubt on recent claims by EU leaders that the crisis is over.
"Today's figures put serious question marks over the strength of the nascent recovery," said Martin van Vliet from ING. The data is at odds with the recent rebound in industrial output and rising PMI survey indexes for manufacturing.
The IMF said the eurozone economy would shrink by 0.6pc this year, the same as in 2012. It is expected to grow by 0.9pc next year but this will not be enough to make a dent on unemployment, and could easily be thrown off course by a fresh global shock.
"There is a high risk of stagnation, especially in the periphery. Such an outcome could push the periphery toward a debt-deflation spiral," it said.
The report said that it may take years to unwind the colossal credit boom of the early EMU years. "Historically, almost all of the run-up in household debt tends to be reversed. But in the euro area, the reduction in debt-to-GDP ratios has barely started, and the boom was more pronounced."
"Furthermore, in past deleveraging episodes, the debt reversal was largely facilitated by high inflation and growth, and supported by expansionary fiscal policy. Because these factors will not contribute much to the ongoing deleveraging process in the euro area periphery, the adjustment is likely to be protracted and have to rely more on reductions in nominal debt. The contrast with history is similarly sobering when it comes to corporate debt," said the Fund, adding that the EMU periphery has the daunting task of triple deleveraging by governments, households, and firms all at the same time.

The Fund said it is crucial that the eurozone deliver on pledges from a proper banking union and resolution fund capable of "swift decisions on burden sharing".
While polite in tone, the authors appear exasperated by "incomplete or stalled delivery of policy commitments" and seemingly endless foot-dragging by EMU leaders.
"The hurdle for reaching a collective agreement is always high. Moreover, building political support for such decisions can take considerable time, especially when they involve thorny issues such as burden-sharing or ceding national control. Hence, making swift progress on completing the banking union and moving toward greater fiscal integration are proving exceedingly difficult."
In a comment clearly aimed at Germany and the key creditor powers, the IMF said "unwavering political backing for institutional reforms remains critical and is in the interest of all EMU members."

 

Wake Up America: Government Preparing for Economic Collapse & 2nd Revolution

Obama ready to impose martial law in the USA. (New World order RFID chip) Economic Collapse in America 2013

'Bailouts For Wall Street, Not People': GOP Demands Detroit Be Denied Federal Aid

The Obama administration is making no sign of helping Detroit as its emergency manager and republican governor steer the city towards bankruptcy proceedings.

(Photo: Associated Press)

Yet, that is not enough assurance for some in the GOP who are pushing for passage of a law explicitly banning the bailout of Detroit, and any other municipality for that matter.
At least five republican senators have recently proposed tacking language onto spending bills that would broadly prohibit municipal bailouts.
These proposed measures, which would have far-reaching implications for towns and cities across the US if passed, are aimed towards preventing any federal aid to Detroit.
GOP leaders are attacking the city with notable venom at the moment its 700,000 residents—80 percent of whom are African-American—must contend with deepening crises of poverty and privatization.

Rising numbers of Republicans are declaring that the city has dug its own grave and does not deserve federal help. John Cornyn (R-Tex.) declared Thursday that Congress must not, under any circumstance, “bail out Detroit or any American city that mismanages its public finances.”
Yet, when Wall Street took a hit from its self-made 2008 financial crisis—which devastated towns and cities across the US, including Detroit—Republicans and Democrats stood behind a massive federal bailout of big banks, pushed forward under George W. Bush, with President Obama picking up the baton.
Today, there is little interest from either side of the aisle to extend a helping hand to the largest city to file for bankruptcy in US history.
Unions appealed to members of Congress not to turn their backs on the city. In a statement Thursday, AFSCME Detroit Local 207 president Lee Saunders declared:

The whole country is watching how this crisis gets resolved. As the nation emerges from the worst of the Great Recession, it is time for Congress and the White House to make it clear they will not turn their backs on our urban centers.

Nearly 60 percent of Detroit children live in poverty and 33 percent of all land sits vacant. Half of all streetlights are non-functional, and a majority of public parks have shut down.

_____________________

This work is licensed under a Creative Commons Attribution-Share Alike 3.0 License
Republished from: Common Dreams

US blows out $16.7 trillion debt limit

RT News
The US Treasury has already exceeded the federal legal borrowing limit of $16.7 trillion in May. That signals the main structural problems remain unresolved putting at risk the fragile recovery.
The country’s  outstanding public debt is already $38.82 million above the statuary debt ceiling and now at $16,738,220,000,000.00, according to Treasury data.   

Christopher Weafer from the Economist Macro Advisory Consultancy says the numbers show “that the debt issue along with the deficit is two very structural problems in the US that remain unresolved and without any clear mechanism on how they are going to be resolved”.
“In the short term it doesn’t cause any immediate crisis and that’s why I guess the news is not widely covered, ” Weafer told RT.
The American economy grew at 1.8 percent during the first three months of the year, lower than its 2.5 percent average pace during the last two decades. The unemployment rate, at 7.6 percent in June, remains above its 6 percent average during the period, Reuter’s reports.
Despite the US Fed and politicians are speaking  about recovery, that US economy which is picking up and looking stronger next year, the unsolved debt and deficit issues may reverse the process, Weafer says.
“The US budget deficit has only been twitted down by a few hundred million dollars. It’s still massively in deficit, and therefore the amount that the US government needs to borrow to fund that is still rising,  so we’ve reached this technical limit and it will go higher. These are issues that still need to be resolved and they will determine whether or not the pace of recovery can be expanded or whether it will be temporary and reverse next year.”
On Thursday President Barack Obama criticized House Republicans for demanding conditions on raising the US debt ceiling as he tries to shape the coming congressional debate over the nation’s budget priorities, Reuters reports. Obama accused Republicans of skirting responsibility to “pay the country’s bills” and refusing to spend for needed investments in education, energy and research.
“That’s not an economic plan,” Reuters quotes Obama.  “That’s just being a deadbeat.”
House Speaker John Boehner earlier this week said Republicans won’t agree to raise the debt ceiling without spending cuts. The current limit was expected to be reached sometime between October and December, according to Reuters.
In the debt ceiling debate two years ago, lawmakers and the White House battled for months before Obama signed an increase into law on Aug. 2, 2011, the day the Treasury Department warned that US borrowing authority would expire, Reuters reports.

Archbishop of Canterbury embarrassed about church's financial link to Wonga

Justin Welby 'irritated' to discover Church of England holds indirect £75,000 stake in payday lender he singled out for criticism

Link to video: Justin Welby: Wonga investment should not have happened
The archbishop of Canterbury, Justin Welby, has said he was annoyed and embarrassed to learn the Church of England holds an indirect stake in Wonga, the payday lender he promised to bring down through fairer competition, and has called for the church to rethink its investment guidelines.
Welby told BBC Radio 4's Today programme he was disappointed to discover the church's £5.5bn investment portfolio included a stake in Accel Partners, a US venture capitalist that co-funded the launch of Wonga, who Welby singled out when he called for an expansion to credit unions as a means to "compete" payday lenders out of existence.
Asked to rate his embarrassment on a scale of one to 10, he replied, "About eight".
"It shouldn't happen, it's very embarrassing, but these things do happen," he said. "We have to find out why and make sure it doesn't happen again."
Welby said the holding in Accel was worth about £75,000. He added: "I was irritated for a few minutes, but these things happen. I understand the business – it's an incredibly complex business."
Welby said he was unsure whether the investment in Accel broke church guidelines, one of which dictates that money should not be put into companies where 25% or more of its business is connected to such lending. However, he stressed that the investment should not have happened at all: "They shouldn't be investing in Wonga. We don't think it's a good thing."
Such ratios were set by the church's ethical investment advisory group, Welby said, which was independent from him. Nonetheless, he said he would call for a change to guidelines, which also allow the church to invest in companies with very small interests in things such as gambling and pornography: "We have to review these levels and make sure we're entirely consistent between what we're saying and what we're doing."
Asked if such guidelines suggest the church thought "a little sin" was tolerable Welby, understandably, disagreed – "Just for the record, I'm not in favour of sin" – but also stressed the complexity of such investments, for example asking whether the fact hotel chains make pornography available to guests meant the church should never invest in the entire sector.
"If you exclude any contact with anything that directly or indirectly at any point gets you anywhere bad, you can't do anything at all," he said. Welby added: "We can't say that we tolerate bad things, but you've got to live in the real world, and living in the real world means life is often very complicated and you can't escape the complexity."
However, he was clear that connection to payday lending was definitely wrong: "This is an embarrassment. We think that the payday lenders charge vastly excessive amounts for the loans they make. There is a totally inadequate range of choice for consumers in deprived areas. I've seen it. I've lived in these areas and worked in them. I've had staff who've been caught up in it and have had to be helped, and have had their lives destroyed by it. This is something that really matters to me."
Welby insisted he had never specifically targeted Wonga, calling them one of the more professionally managed companies in the sector, but had been answering a direct question about them when, earlier this week, he recounted a conversation with Wonga's chief executive, Errol Damelin.
"I said to him quite bluntly: 'We're not in the business of trying to legislate you out of existence, we're trying to compete you out of existence'," he told Total Politics magazine.
Welby told Today he did not support regulation to curb payday lenders' activities, for example credit caps: "If we try and cap interest rates and drive the legal payday lenders out of business through regulation people become desperate – and there's no consumer choice in a lot of our deprived areas – will end up with the loansharks, who are just a totally different kettle of fish, very much worse."
Instead, Welby said, he wanted the church to support a massive expansion of credit unions in poorer areas. Even these, he conceded, would be obliged to lend short-term at an annualised interest rate of about 70% or 80%, something he argued was hugely less than that charged by payday lenders: "It's a huge sum of money, but it's better than 5,500%."
He conceded there were potential problems with the church becoming directly involved in such a trade, but argued: "It's better to have a go than to just stand and wring your hands and say, it's all terrible."

It Is Almost As If We Are Being Forced To Watch The Replay Of 2008 Crisis, Only This Time You Will Be Watched, Recorded and Tracked During The Economic Collapse, And The Rest of The World Is Preparing For WWIII

NSA is allowed to spy on the people, they say it is constitutional but we know it is not. The pentagon wants to put blimps in the air over Washington to monitor everyone. These blimps will eventual spread to other cities. The government needs to track the movements of everyone for the economic collapse. The rest of the world is preparing for WWIII.
Gov’t INSANITY: Federal “regulators” are about to create another massive mortgage disaster
“It seems we really will never learn…”
Following the debacle of free-and-easy mortgage money to anyone who could fog a mirror in the run-up to the last housing bubble (remember that was just 6 years ago), regulators proposed ‘skin-in-the-game’ rules which forced banks to hold certain amounts of the loans they made (as opposed to securitizing and selling off that yieldy risk to the next greater fool). Makes sense.
However, in a major U-turn, with interest rates rising, mortgage rates spiking, and home prices now collapsing once again, it would appear the very same congress has folded.
As the WSJ reports, more stringent lending standards on top of the market environment leave the watchdogs, which include the Fed and the FDIC, wanting to loosen a proposed requirement that banks retain a portion of the mortgage securities they sell to investors (representing a victory for an unusual alliance of banks and consumer advocates that opposed the new rules).
Undermining the initial goal of imposing market discipline, former FDIC Chair Sheil Bair noted, “My sense is that Washington has lost its political will for serious reform of the securitization market.” Indeed it has, Sheila…..
http://www.zerohedge.com/news/2013-07-25/regulators-fold-lift-skin-game-rules-keep-housing-bubble-dreams-alive
Marc Faber – “It’s Gonna End One Day… Through War Or Financial Collapse”
“one day, this financial bubble will have to adjust on the downside.” This will occur via either an inflationary burst or a collapse of the system. Simply put, “it’s gonna end one day,” either through war or financial collapse, “it will be very painful…

It Is Happening Again: 18 Similarities Between The Last Financial Crisis And Today
If our leaders could have recognized the signs ahead of time, do you think that they could have prevented the financial crisis of 2008?  That is a very timely question, because so many of the warning signs that we saw just before and during the last financial crisis are popping up again.  Many of the things that are happening right now in the stock market, the bond market, the real estate market and in the overall economic data are eerily similar to what we witnessed back in 2008 and 2009.  It is almost as if we are being forced to watch some kind of a perverse replay of previous events, only this time our economy and our financial system are much weaker than they were the last time around.  So will we be able to handle a financial crash as bad as we experienced back in 2008?  What if it is even worse this time?  Considering the fact that we have been through this kind of thing before, you would think that our leaders would be feverishly trying to keep it from happening again and the American people would be rapidly preparing to weather the coming storm.  Sadly, none of that is happening.  It is almost as if they cannot even see the disaster that is staring them right in the face.  But without a doubt, disaster is coming. The following are 18 similarities between the last financial crisis and today…

#1 According to the Bank of America Merrill Lynch equity strategy team, their big institutional clients are selling stock at a rate not seen “since 2008“.
#2 In 2008, stock prices had wildly diverged from where the economic fundamentals said that they should be.  Now it has happened again.


#3 In early 2008, the average price of a gallon of gasoline rose substantially.  It is starting to happen again.  And remember, whenever the average price of a gallon of gasoline in the U.S. has risen above $3.80 during the past three years, a stock market decline has always followed.
#4 New home prices just experienced their largest two month dropsince Lehman Brothers collapsed.
#5 During the last financial crisis, the mortgage delinquency rate rose dramatically.  It is starting to happen again.
#6 Prior to the financial crisis of 2008, there was a spike in the number of adjustable rate mortgages.  It is happening again.
#7 Just before the last financial crisis, unemployment claims started skyrocketing.  Well, initial claims for unemployment benefits are rising again.  Once we hit the 400,000 level, we will officially be in the danger zone.
#8 Continuing claims for unemployment benefits just spiked to the highest level since early 2009.
#9 The yield on 10 year Treasuries is now up to 2.60 percent.  We also saw the yield on 10 year U.S. Treasuries rise significantly during the first half of 2008.
#10 According to Zero Hedge, “whenever the annual change in core capex, also known as Non-Defense Capital Goods excluding Aircraft shipments goes negative, the US has traditionally entered a recession”.  Guess what?  It is rapidly heading toward negative territory again.
#11 Average hourly compensation in the United States experienced itslargest drop since 2009 during the first quarter of 2013.
#12 In the month of June, spending at restaurants fell by the most that we have seen since February 2008.
#13 Just before the last financial crisis, corporate earnings were very disappointing.  Now it is happening again.
#14 Margin debt spiked just before the dot.com bubble burst, it spiked just before the financial crash of 2008, and now it is spiking again.
#15 During 2008, the price of gold fell substantially.  Now it is happening again.
#16 Global business confidence is now the lowest that it has been since the last recession.
#17 Back in 2008, the U.S. national debt was rapidly rising to unsustainable levels.  We are in much, much worse shape today.
#18 Prior to the last financial crisis, Federal Reserve Chairman Ben Bernanke assured the American people that home prices would not decline and that there would not be a recession.  We all know what happened.  Now he is once again promising that everything is going to be just fine.
Are the American people going to fall for it again?
http://theeconomiccollapseblog.com/archives/it-is-happening-again-18-similarities-between-the-last-financial-crisis-and-today