Sovereign Debt Crisis, Deficits, Speculation by Banks and the End of Monetization

People should not underestimate the rational of those in high places because their agenda may be totally different then what they say it is. That includes the predicament of Dubai and Greece and a host of other nations that include the US and UK. The credit crisis, borne of the subprime crisis just didn’t happen; it was planned that way. Are we supposed to believe that the Fed took interest rates close to zero and that they flooded the monetary system with money and credit, because they were incompetent or stupid, hardly? The Fed, banking and Wall Street knew subprime loans were not AAA, but triple BBB. They all knew the syndication of these bonds were a fraud, which they allowed and which kicked off the credit crisis. Again, all is not as it seems to be. Thus, those of you who believe it was greed and incompetence are wrong. Up until four years ago it was Sir Alan Greenspan who sold his soul out to the Illuminists, now it is Ben Bernanke. They do exactly as they are told by higher powers in the Brotherhood of Darkness. That is why they are reappointed until they are ready to leave.

The troubles that countries are having with sovereign debt are growing exponentially. First it was Dubai supposedly with $100 billion in debt problems, which in fact may be underwater three or four times that number. Then, of course, there are a host of others. In the case of Dubai, British banks are holding the bag and probably will go down in flames. Greece cannot find any support even from Goldman Sachs. The Germans don’t want to help even though they knew Greece never was qualified to be in the euro. Greece is in a state of denial; is demanding reparations from Germany, which in 1960 paid a substantial amount to Greece in compensation. Germans for some time have wanted to exit the euro and the eurozone, some 71%. They have been sick and tired of carrying most of the rest of the zone with their balance of payments surplus. Greece makes up about 2.4% of GDP of the zone hardly enough to be concerned about. Eurozone governments would be better off writing off Greek bonds than subsidizing the country. Any bailout would be short lived, because so many other nations are in serious trouble. Let’s face it the eurozone is really Germany, France and the Netherlands.

For the last two months the dollar with the help of insiders Goldman Sachs, JP Morgan Chase and Citigroup, who knew the Greek problem was on the way, has had an unusual rally that is about to end. They obviously knew the IMF would announce another gold sale and that the Fed would raise the discount rate. How could they not know with Goldman controlling the Treasury and Morgan the Fed? They also knew like any other observant economic professional that M3 was being reduced to almost no expansion as was happening simultaneously by the ECB and England, an event that would tend to strengthen the dollar. Doing this they all are playing a very dangerous game. If they lose control deflation will overwhelm inflation and a deflationary depression could begin. That will happen eventually, but the elitists would like it to happen on their timetable. The US has to find a way to end monetization and they have run out of options. The only possibility is for government to steal Americans’ retirement plans. The trouble is almost all sovereign debt cannot be avoided. Now the only question is when will the big conference begin to revalue, and devalue currencies, settle debt default and form a new international currency-trading unit in part backed by gold? All nations have been well aware for a long time that sovereign debt and some corporate and individual debt will never be repaid. That is why nations have reduced dollar holdings from 64.5% of foreign reserves to 61.4%. With the exception of four nations sovereign debt is not worth the paper it is written on. They are Switzerland, Canada, Australia and Norway.

The dollar rally will soon end and speculators should begin to take short positions. All the good news for the dollar is out. For the moment it is the best of a bad lot. Then only real money is gold and silver. In the future more and more people worldwide will realize that and eventually there will be a stampede into the two precious metals. America will produce a debt to GDP ratio or 95% to 100% this year.

A staggering blow to the Illuminists is the exposure of the criminal cartel known as Goldman Sachs in their testimony to Congress and now helping Italy and Greece illegally circumvent eurozone rules. This will push the public away from investment and toward the safety of gold and silver.

In an attempt to smother inflation and hyperinflation the US government may follow China’s lead and increase reserve requirements. That may reduce inflation, but it would also bring the US closer to deflationary depression. One false step and the game is over. That risk also includes the ECB and England. Funds already are not being lent out and such further constriction could be disastrous. Credit has already dropped by trillions of dollars as unemployment continues to grow. There is now no question that there will be no recovery. How can there be when there is little money and credit available to grease the skids of recovery. All we are seeing is a switch to stage 2 of inflation. The question is will central banks lose control, and it is obvious they are acting in concert, and fall victim to a deflationary depression.

Domestically real estate foreclosures, both residential and commercial, continue to climb. The government’s attempt to assist the residential market has been pathetic in a situation that is overwhelming. By next year, 50% of homeowners could be under water. Business can’t get the loans they need, so they cannot increase employment and the more workers fired the more who have  lost their homes.

The plight of the states in America is very serious. California, New Jersey and Pennsylvania are close to insolvency. These are followed by Michigan, Illinois, Ohio and Florida. Once the budget is passed some $25 billion will be split up among the states to keep them going. As we all know that isn’t the answer. Free trade, globalization, offshoring and outsourcing have softened them up – now they are ready for failure. 

As we told you long ago the entire strategy of the elitist is to have rotating powers over long spans of time; the demise of America was in the planning stages in the 1950s, and officially began with the Vietnam War, the Great Society and then GATT, which led to WTO and the US abandoning the gold standard on August 15,1971. After that is was all down hill. Each family today needs to have two breadwinners to replace 1972’s standard of living.

Welcome to corporatist fascist America. Fiscal deficits of $2 trillion a year while most transnational conglomerates, Wall Street and banks haul in obscene profits and our nation suffers 21-3/4% unemployment. Making matters worse have been wars and occupations in Iraq and Afghanistan, which have cost taxpayers off-budget losses of $1 trillion. A nation simply cannot be that dumb. It has to have been planned that way.

The latest TIC data had to be sobering for anyone who follows America’s debt problems. Chinese holdings of US Treasuries fell by $34.2 billion, or 4.3%. Japan increased holdings by $11.5 billion. This gives Japan the dubious honor of being the Number 1 Treasury holder in the world. Worldwide Treasury holdings fell $53 billion in December. $53.2 billion of sales were the result of foreign central bank sales. In 2008, their holdings rose $456 billion and in 2009, they fell $500 billion. As a result in 2009 the Fed purchased 80% of Treasuries via monetization.

The 2010 fiscal deficit will range from $1.6 trillion and $2 trillion. That should push debt to 95% to 100% of GDP. It should be interesting to you all that Treasury debt is now higher than GDP at $14.3 trillion. The US may not be as bad as Greece, but it is getting there. Our Treasury Secretary Mr. Geithner tells us even though the Fed has to buy 80% of Treasury bond issues our AAA rating is not in danger of being downgraded. In spite of his opinion Moody’s rating service continues its farce as not only the US deserve downgrading, so does a host of other nations. The bottom line is that debt for many nations is overwhelming, getting worse and in all probability cannot be regenerated, allowing an economy to rebound and be repaired. If conservative fiscal policies are put in place to cut back and pay off debt then there can be no recovery. Stimulus will unceremoniously end.

This day of reckoning or of choice is upon us. You either purge the system of its excesses, and allow the bankrupt to fail, suffer a doubling of unemployment, bankruptcy in the states, a fall in stock and bond prices, or you continue to stimulate with more dire consequences later. The game of chicken has begun and it’s a game the Fed and the Treasury will lose, no matter which way they go. Government is not gong to tell you the truth; you have to figure it out for yourself by listening to talk radio and going on to the Internet. Government won’t tell you that over the past ten years debt has increased 120%, or by $6.7 trillion, or $677 billion annually. The new average projection of additional debt over the next ten years is $853 billion annually. That is hardly fiscal restraint and it renders the debt unpayable. This is not a happy story, but government and the Fed have no intention of changing anything, although we believe they will soon be forced too, due to similar problems worldwide.

There is no question Greece and others have very bad debt problems, but we look at Greece’s problems, as a diversion, something to distract investors and Americans away from America’s growing unserviceable debt bomb. Foreigners have dramatically reduced purchases of Treasuries and real interest rates on 10-year T-notes are up 3/8% to ½% in recent months as buyers demand more yield on long dated bonds and notes. The Greeks took a ratings cut and the US, UK and others had the heat taken off for the time being. Unfortunately, Europe has as a result had fallout in the form of pressure on the euro, which may be on its way to being a non-currency. In fact future events may not only end the euro, but the European Union as well.

The Obama administration is backing off a plan to bar commercial banks from engaging in proprietary trading, favoring instead a watered-down version of a key tenet of the proposed “Volcker rule” governing how banks operate, according to people familiar with the situation. 

Sources told The Post that instead of issuing an outright ban on prop trading — or trading done on behalf of only the bank itself — the White House will propose that federally insured banks keep higher cash reserves if they want to run such trading desks. 

The about-face comes amid signs the administration faced an uphill battle selling lawmakers and Treasury officials on an outright ban. 

President Obama on Jan. 21 proposed sweeping banking industry reform, outlining plans that would bar a bank from owning, investing or sponsoring hedge funds or private equity funds, and running trading operations that did not specifically serve customers. 

The proposals went by the shorthand name “the Volcker rule,” as they were championed by former Federal Reserve Chairman Paul Volcker. 

However, in the month since the announcement stunned Wall Street, sources said Volcker’s ideas have been “marginalized” and are not expected to figure prominently in whatever the Senate formulates in the coming days. 

“My understanding is the White House really does believe in it, but Treasury and the Hill do not, so it’s not going very far,” said one person close to the Treasury Department. 

Wall Street bonuses rose 17 percent in 2009 from a year earlier as the securities industry rebounded from the financial crisis, New York State Comptroller Thomas DiNapoli said. 

Financial firms disbursed $20.3 billion compared with $18.4 billion in 2008, DiNapoli’s office calculated, basing its estimate on personal income-tax collections. It doesn’t include stock options or other types of deferred pay. The bonus pool was the second-largest ever, DiNapoli said in his yearly report. 

Cash and stock bonuses fell about a third from 2007, he said. New York State’s budget deficit is estimated to be $8.2 billion, 10 percent more than estimated in January, because Wall Street’s cash bonuses are less than forecast, Governor David Paterson said Feb. 3. Personal income tax collections in January were $1 billion below the $7.08 billion the state projected. 

“It would be preferable to have predictable growth and profitability,” DiNapoli said in an interview on Bloomberg Television today. “With New York depending on the sector for budget health, we need Wall Street to be profitable.” 

The average bonus for the industry was $123,000 last year, the comptroller said. Wall Street has added 3,900 jobs through December and DiNapoli said he expects that trend to continue. He said the increase in tax revenue from higher bonuses won’t solve New York’s budget problems. 

Item Structure and Publication Changes to the Consumer Price Indexes for January 2010 Effective with the release of CPI data for January 2010 scheduled for Friday, February 19, the BLS will introduce several item structure and other publication changes into the CPI.

The expenditure weight for second homes will be moved from Lodging away from home to a new, unpriced stratum under the Owners’ equivalent rent expenditure class. As such, the expenditure class index for Owners’ equivalent rent will now include both primary and secondary homes, and the title of that expenditure class index will change from Owners’ equivalent rent of primary residences to Owners’ equivalent rent of residences.

Current Structure:

• Lodging away from home

• Housing at school, excluding board

• Other lodging away from home including hotels and motels

• Owners equivalent rent of primary residence

• Owners equivalent rent of primary residence*

New Structure:

• Lodging away from home

• Housing at school, excluding board

• Other lodging away from home, including hotels and motels

• Owners equivalent rent of residences

• Owners equivalent rent of primary residence

• Unsampled owners’ equivalent rent of secondary residences*

For the vast majority of Americans, there is no cash benefit for falling housing prices in the CPI. The BLS has increased the weighting of housing, probably because housing prices are in retreat.

Your home price can fall while you pay more for the necessities of life and the Ministry of Truth will tell you that prices are going down even though your checkbook says the opposite. And Street Shills will yell hallelujah and implore the Fed to pump more credit. OER used to be 23.158% But wait, there’s more chicanery. Second home ownership is listed as ‘unsampled’. If we understand the English language correctly, this means the BLS does not sample to procure the particular data. 

Logic dictates that if one does not sample, then they are manufacturing the data by guessing. And there are other changes to CPI. Medical care commodities, because they are inflating, will also have unsampled factors in their compilations. www.bls.gov/cpi/cpichg2010.htm

How else did the BLS craft a benign CPI when PPI jumped 1.4% in January? Somehow the BLS got electricity prices falling 1.1% despite record snow storms and severely cold weather. All other energy prices soared. The 0.5% decline in ‘shelter’ is understandable but impacts only a small fraction of US citizens. The decline in ‘OER’ generated the first decline in Core CPI since 1982. The BLS has the priceof electricity and natural gas (energy services) declining 4.7% NSA over the past 12 months.

www.bls.gov/news.release/cpi.nr0.htm

We have maintained for years that CPI is constructed to NOT show inflation because: 1) It is used for COLAs, 2) It fosters the overstating of GDP, and 3) Provides cover for the Fed to paper over declining US living standards.

Saving jobs and boosting income, Chicago style USA Today: The number of federal workers earning six-figure salaries has exploded during the recession, according to a USA TODAY analysis of federal salary data.

Federal employees making salaries of $100,000 or more jumped from 14% to 19% of civil servants during the recession’s first 18 months and that’s before overtime pay and bonuses are counted.

Federal workers are enjoying an extraordinary boom time in pay and hiring during a recession that has cost 7.3 million jobs in the private sector.

The growth in six-figure salaries has pushed the average federal worker’s pay to $71,206, compared with $40,331 in the private sector.

www.usatoday.com/news/washington/2009-12-10-federal-pay-salaries_N.htm

Most of Kuwait’s multibillion-dollar investment company industry could be wiped out by debt repayments on the finance houses’ leveraged investments made before the recession, senior bankers have warned.

Spurred by cheap credit, abundant liquidity and few other opportunities in the government-dominated economy, Kuwaitis have set up scores of investment houses to bet on international and regional real estate, private equity and stocks. At its peak, the industry had assets of more than $50bn.

Meanwhile, Federal Reserve security holdings have ballooned in historical fashion over the past year.  “Securities held outright” jumped an incredible $1.397 TN from a year earlier.  “Mortgage-backed securities” accounted for $961.5bn of this expansion, followed by a $296.0bn increase in U.S. Treasury “Notes and bonds…”, and a $133.3bn increase in “Federal Agency debt securities.”  Since September 2008, Fed holdings of agency (debt and MBS) securities have grown from zero to $1.119 TN.

One advantage of announcing its move after the U.S. market close was that it afforded various Fed officials extra hours to comfort the markets before the resumption of trading.  Federal Reserve Bank President Dennis Lockhart said “not to interpret this action as a tightening or even a sign that a tightening is imminent.”  James Bullard, President of the St. Louis Fed, commented that the announcement “does not indicate anything one way or another about what we might eventually do with the fed funds rate.”  He added:  “The idea that’s in markets that there’s a high probability that we’ll raise rates later this year is overblown.”

The markets don’t seem all that worried about imminent tightening.  The December 2010 fed funds futures contract closed today with an implied yield of 0.615%, up 3.5 bps on the week but still down considerably from where it began the year (1.095%).  The December 2011 contract closed today at 2.03% – not exactly discounting “tight money.”

We find it difficult to take talk of an “exit strategy” seriously when the Fed continues to purchase tens of billions of marketable securities.  Why can’t they wind down the MBS purchases early (scheduled to end in March at $1.25 TN)?  Apparently, the Fed’s immediate objective remains to ensure that markets remain highly liquid.  They may discuss various future methods to ensure that the massive liquidity pool does not turn inflationary, but the marketplace is not really fooled.  Markets see ultra-easy “money” indefinitely.

With gold back above 1,100 and crude in the neighborhood of $80, perhaps the Fed felt compelled to do something.  Our own view (shared by many) is that they have no intention of implementing true tightening.  Their massive securities purchases have injected unprecedented liquidity into the system – and it will likely be years before these positions are reversed. 

We will assume that the Bernanke Fed is enthralled with the idea of an enormous liquidity cushion backstopping the system against future runs on banks, financial institutions, short-term financing markets, etc.  With over a Trillion dollars of “excess reserves,” there is today little fear of a renewed liquidity crisis.  Rather, worry revolves around the ramifications of the Fed moving to withdraw this liquidity bonanza or that these “reserves” might somehow fuel an inflationary lending boom.  It seems to me that the “academics” worry more about an inflationary surge while the markets worry more about the Fed reversing course and emptying the punchbowl.  So the innovative Bernanke Fed confronts an interesting challenge and delicate balancing act.

Our hunch is that the Fed’s primary objective is to design new monetary doctrine and strategy that provides somewhat the appearance of traditional tightening but without any meaningful impact on its New Age Systemic Liquidity Backstop.  The Fed wants to maintain excessively liquefied markets, but at the same time convince the marketplace that they have this liquidity very well contained.  It’s there as a protective measure, and the Fed wants to ensure it doesn’t turn problematic.  The marketplace, generally fixated on liquidity and sanguine on inflation, is these days unusually receptive to avant-garde policymaking.

The Fed has signaled that it is essentially scrapping its previous policy of carefully managing a targeted “fed funds rate” – or essentially the overnight rate for the inter-bank/financial institution lending market.  Traditionally, the Fed would manage the fed funds rate to its target level by adding or subtracting system liquidity.  With the Trillion or so of Fed-induced excess reserves, it is no longer practical for the Fed to manage the overnight rate as it has in the past.  Time for new doctrine. 

The Fed certainly wants to avoid being in a position where it would have to withdraw huge amounts of liquidity to force the fed funds rate up to some targeted level.  And our central bank is very focused on not putting the funds market in a situation where imminent Fed liquidity withdrawal causes a fearful market to preempt the Fed.  At the same time, the Bernanke Fed certainly doesn’t want to get out of the business of manipulating market expectations. 

So the Bernanke Fed has apparently devised a new rate target – the rate it will pay banks on excess reserve holdings.  We’ll have to wait for additional details, as well as to see how this new monetary regime works in practice.  From what we’ve read so far, it has the appearance of a handy expedient; a tool similar in form to the fed funds target rate – but without the baggage of an implied policy of managing the rate through the addition or, more importantly, removal of Fed liquidity.  The Fed hopes to have the luxury of raising the rate it pays on reserves held at the Federal Reserve, without forcing the system-wide overnight funds rate higher.  The Fed would today certainly prefer to separate the tasks of raising rates and removing system liquidity and, once apart, implement respective “tightenings” at varying paces (rates up very slowly… liquidity removal even slower).

Certainly not without justification, the markets came to the recognition that yesterday’s increase in the discount rate did not signal any imminent tightening of financial conditions.  It will be interesting to see if the markets eventually end up calling a bluff on Fed “exit” policies more generally.
 

When a congressional panel convened a hearing on the government rescue of American International Group Inc. in January, the public scolding of Treasury Secretary Timothy F. Geithner got the most attention.

Lawmakers said the former head of the New York Federal Reserve Bank had presided over a backdoor bailout of Wall Street firms and a coverup. Geithner countered that he had acted properly to avert the collapse of the financial system.

A potentially more important development slipped by with less notice, Bloomberg Markets reports in its April issue. Representative Darrell Issa, the ranking Republican on the House Committee on Oversight and Government Reform, placed into the hearing record a five-page document itemizing the mortgage securities on which banks such as Goldman Sachs Group Inc. and Societe Generale SA had bought $62.1 billion in credit-default swaps from AIG.

These were the deals that pushed the insurer to the brink of insolvency — and were eventually paid in full at taxpayer expense. The New York Fed, which secretly engineered the bailout, prevented the full publication of the document for more than a year, even when AIG wanted it released.

That lack of disclosure shows how the government has obstructed a proper accounting of what went wrong in the financial crisis, author and former investment banker William Cohan says. “This secrecy is one more example of how the whole bailout has been done in such a slithering manner,” says Cohan, who wrote “House of Cards” (Doubleday, 2009), about the unraveling of Bear Stearns Cos. “There’s been no accountability.”

Senator James Inhofe (R-OK) today asked the Obama administration to investigate what he called “the greatest scientific scandal of our generation” — the actions of climate scientists revealed by the Climategate Files, and the subsequent admissions by the editors of the Intergovernmental Panel on Climate Change (IPCC) Fourth Assessment Report (AR4).

Senator Inhofe also called for former Vice President Al Gore to be called back to the Senate to testify.

“In [Gore's] science fiction movie, every assertion has been rebutted,” Inhofe said. He believes Vice President Gore should defend himself and his movie before Congress.

Just prior to a hearing at 10:00 a.m. EST, Senator Inhofe released a minority staff report from the Senate Environment and Public Works Committee, of which he is ranking member. Senator Inhofe is asking the Department of Justice to investigate whether there has been research misconduct or criminal actions by the scientists involved, including Dr. Michael Mann of Pennsylvania State University and Dr. James Hansen of Columbia University and the NASA Goddard Institute of Space Science.

The Senate is moving ahead with a $15B jobs bill that will bestow tax credits on small businesses that hired the unemployed. This is how socialism works. You penalize and tax business and then give some a subsidy or benefit.

As we have forecast State and Federal Borrowing Is crowding out everyone else longer dated securities have faced weak demand so far, and the small auction Monday of 30-year inflation protected debt that kicks off a record $126 billion debt sale this week followed the trend.

Towers Watson study finds health care costs for big employers to rise 6.5 percent this year. A new study says health care costs for large employers will rise more than 6 percent this year, and more companies are thinking about revamping their benefits.

The study from benefits consultant Towers Watson says this year’s increase in the cost companies pay to administer health plans and pay claims is down slightly from 2009′s 7 percent hike.

The BLS has healthcare costs up only 3.4% for 2009. This is a way to keep inflationary expectations well anchored.

In 1975, the housing debt-to-income ratio was 23.21 percent. In 1980, the housing debt-to-income ratio was 39.26 percent. In 1985, the housing debt-to-income ratio was 32.59 percent. In 1990, the housing debt-to-income ratio was 26.17 percent. In 1995, the housing debt-to-income ratio was 22.69 percent. In 2000, the housing debt-to-income ratio was 23.43 percent. In 2005, the housing debt-to-income ratio was

26.83 percent. In 2009, the housing debt-to-income ratio was 18.84 percent.

Joe Stiglitz on GDP fraud: For example, while GDP is supposed to measure the value of output of goods and services, in one key sector government we typically have no way of doing it, so we often measure the output simply by the inputs. If government spends more even if inefficiently output goes up. In the last 60 years, the share of government output in GDP has increased from 21.4% to 38.6% in the US, from 27.6% to 52.7% in France, from 34.2% to 47.6% in the UK, and from 30.4% to 44.0% in Germany. So what was a relatively minor problem has now become a major one.

Likewise, quality improvements say, better cars rather than just more cars – account for much of the increase in GDP nowadays. But assessing quality improvements is difficult. Health care exemplifies this problem: much of medicine is publicly provided, and much of the advances are in quality.