Update on U.S. Debt and Fed Assets 20 comments
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Public Debt Outstanding is approaching $11.3 trillion…
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…and fears about this growing debt burden helped drive the dollar to a 4-month low today. Bigger contributors to the dollar’s fall included comments from the Bank of Japan, which said it wouldn’t prop up greenbacks. Also, S&P’s new “negative” outlook for UK sovereign debt had Bill Gross commenting that “eventually” the U.S. will itself lose its AAA-rating. In response, Tim Geithner pledged to reduce U.S. debt. This is consistent with Obama administration double-speak on the deficit. Its actual policy is to blow out the deficit before getting serious about reducing it.
Also today, the Fed released its latest balance sheet, which shows continued purchases of Treasurys, agency MBS and agency debt…
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The Fed is committed to buying $1.25 trillion of MBS, $200 billion of agency debt and $300 billion of longer-dated Treasurys in order to liquefy credit markets, though recently released meeting minutes suggest the Fed may buy more.
Over the last two weeks, its holdings of Treasurys, MBS and agency debt increased $26.4 billion, $64.7 billion and $4.9 billion respectively.
Despite these purchases, the yield on Treasurys (as measured by the 10 year bond) reached a new high for 2009: 3.3%.
Geithner pitches the rise in Treasury yields as good news, saying it indicates increased risk tolerance among investors. The trouble with his argument is that rising Treasury yields put upward pressure on other interest rates, like 30-year mortgages. Those rates can’t be allowed to rise because it would put more downward pressure on house prices.
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The president of the Dallas Fed on inflation risk and central bank independence - "Don't Monetize the Debt"
"the perception of risk" has been created by the Fed's purchases of Treasury bonds, mortgage-backed securities and Fannie Mae paper.
online.wsj.com/article...
The question is can I make enough money selling China's stuff to cover the asset value loss and the future interest charges. Will this plan allow me to buy a new Cadilac when to old one dies?
Do you think this is realy stupid business model bound to fail?
How different is it to the real world?
Fannie and Freddie have 5.2 Trillion in assets or guarantees outstanding. The public sector now functionally owns these two so why not add that in? If you going to do that you need to add in the FHLB's. They are approaching $1 trillion. There is also the forgotten Agency, Ginnie Mae. They have another 600+ billion in guaranteed mortgage assets. California has tons of Muni debt. So does NY and every other State. These are also public sector debts. Just not Federal public sector debt. But sadly the State of
California is going to have to have its bonds guaranteed by the Feds before this is over.
So I think the functional Public sector debt is much higher than you cite. Possibly the functional total that has a 'claim on the taxpayer" is closer to 20 Trillion. That would put it at 150% of GDP. Much worse than Japan.
It is unlikely that anyone in government will make this link. It is equally unlikely that the rating agencies will make this link. It is very possible that the Markets have already made this link. The ten year bond is telling us that it has made this link with the price action of the past three weeks. The dollar is making this link also.
At the end of the day it does not matter what the Government reports. What is important is how the market prices in all of the pieces.
The green shoots of the past months may wilt when the bond market nears 4% next week.
bk
Add to that the fact that for decades Congress has been taking Social Security receipts and spending them on current costs and writing IOU's (on their nonexistsent other-than-tax income) to the Social Security Trust Fund (which doesn't actually exist), and you begin to see the house of cards our two ruling parties have been building. BOTH parties. EVERY administration. EVERY Congress. This is NOT a partisan problem.
And ALL federal fiscal policy is based on the assumption of neverending economic growth of 3 - 4% annually. Another erroneous assumption.
In a word, the IOUSA government is UNSUSTAINABLE. And the idea that we can spend the equivalent of a decade's tax receipts on "stimulus" and magically fix it all and make it sustainable is absurd. Nonsense. Total foolishness.
Every Empire in all of world history has spent its way to collapse. Those who fail to learn history's lessons, get to repeat them. This is our turn. And our two ruling parties are doing everything right to achieve the certain, inevitable result.
Also, a weaker dollar and a modest degree of inflation-alarmist predictions of Weimar Germany or Zimbabwe style inflation are largely overblown-makes the real cost of paying off those debts tallied in US dollars that much cheaper. The reason the Obama administration policy seems like such anathema to so many is that the economic policy they are pursuing is actually very pro-labor. Those companies that have relied on importing vast quantities of goods from Southeast Asia and paying meager salaries to domestic floor-level employees are going to suffer mightily from this policy. Those companies that maintained their production here in the US up to this point stand to benefit tremendously.
On May 22 03:33 PM pslater wrote:
I have this nagging feeling I might be missing
> something in my analysis. Anyone have any other thoughts?
Energy costs are the Achilles heel of a weak
> dollar policy.
A further point of elaboration. In an ironic twist, higher energy costs-as measured in US dollars-also stand to make domestically produced goods more competitive; let's not forget that foreign made goods have to be put on container ships and sent over vast distances. The economic policy being pursued by the Obama administration has the potential to "localize," the US economy. It's a policy designed to prevent further extraction of wealth from the US economy in a global business environment of rapid globalization. The end result of Summers economic plan will be to focus on satisfying domestic consumer demand with our own production. This is possible because so many Americans have been moved into near-minimum-wage service jobs (And there are millions of them, think of all those people you see working in national chain big-box stores) that the US market is primed for a resurgence in manufacturing jobs.
it seems all we can really do is prepare to help friends, family, neighbors, and whoever else we can. it feels like a systematic destruction is well underway while the destroyers are yelling ,"look here look there we're from the government and we are here to help."
maybe if some keep their heads we can turn the growing anger to constitutional restoration instead of mob violence. it is a painful route but less painful than serfdom.
On May 23 10:51 AM Kevin Walmsley wrote:
> By the time this is all over, it would have been far easier and less
> expensive just to have let it go. Let the Wall Street banks go under,
> let the housing prices find their own level, let Detroit collapse,
> and replace all the above with a model that works, instead of one
> that depends on continually adding trillions in new borrowed money.
On May 22 03:33 PM pslater wrote:
> The outcomes from this appear to be higher interest rates, a lower
> dollar, and slower economic growth as the gov't soaks up much of
> the available capital. Still, after 25 years of investing and closely
> following economics, I have this nagging feeling I might be missing
> something in my analysis. Anyone have any other thoughts?
I don't see interest rates rising anytime soon. Bond rates will fluctuate within a livable range....
Mortgage rates will have to drop even more - because the current level 5% is not creating demand. The majority of homeowners already have a fixed rate mortgage near the 5-6% level. The rate should be somewhere between 2.5 to 3%. This would facilitate refinancing and home purchasing, and would put much needed extra money into our economy!
I'm afriad that without a further reduction in mortgage rates -housing prices will to continue to decline as they still have not reached a true price/value ratio. Historically housing prices increased in the range of 2% per year. In the 5 years leading up to the housing bubble they increased anywhere from 10-25% per year....this inflated value will have to be corrected. I hate to say it but, we can lose another 20 to 40% of home value depending on location.
On May 22 03:33 PM pslater wrote:
> The outcomes from this appear to be higher interest rates, a lower
> dollar, and slower economic growth as the gov't soaks up much of
> the available capital. Still, after 25 years of investing and closely
> following economics, I have this nagging feeling I might be missing
> something in my analysis. Anyone have any other thoughts?
Would you personally give any of the shaky individuals applying for mortgage loans today a 30 year loan at 3%? That is a negative real interest rate, on a likely depreciating asset, and it would be given to a high-risk borrower. An all-around terrible proposition to any sane creditor.
That is the problem. Unless it is backed by taxpayers, no one is going to loan any money at these ridiculous rates. And taxpayer-backed loans are a fraudulent concept. Continuing to push rates lower only EXACERBATES the problem.
Lack of supply is the problem, not lack of demand.
MM
On May 23 12:35 PM rockingandrolling wrote:
> I don't see interest rates rising anytime soon. Bond rates will fluctuate
> within a livable range....
>
> Mortgage rates will have to drop even more - because the current
> level 5% is not creating demand. The majority of homeowners already
> have a fixed rate mortgage near the 5-6% level. The rate should be
> somewhere between 2.5 to 3%. This would facilitate refinancing and
> home purchasing, and would put much needed extra money into our economy!
>
>
> I'm afriad that without a further reduction in mortgage rates -housing
> prices will to continue to decline as they still have not reached
> a true price/value ratio. Historically housing prices increased in
> the range of 2% per year. In the 5 years leading up to the housing
> bubble they increased anywhere from 10-25% per year....this inflated
> value will have to be corrected. I hate to say it but, we can lose
> another 20 to 40% of home value depending on location.
I was making (2) primary points about intrest rates and housing and I will again state the following:
Housing prices must continue to decline as they are still overvalued - too expensive in todays market. (Most people don't want to hear this)
Most homeowners with mortgages that aren't "under water" which is the majority of homeowners - currently already have a current interest rate averaging 5%. Since the Fed is providing money (tax payer money) to the banks at 0% the banks should offer existing homeowners and prospective buyers a rate of say 3%. This would help to free up capitol for the average person and would create spending and business developement.
Right now the economy including housing is "dead in the water" there is no forward movement.
In summary: with the economy still sliding backwards, unemployeement increasing, and housing and commercial real estate dead - I can't see a strong case for inflation.
What is your suggestion to get our economy and housing moving again?
On May 23 01:16 PM mikebrah wrote:
> Ahh, but you misunderstand the market. The problem with mortgage
> rates at 4-5% is it's not creating SUPPLY. The Fed has subsidized
> overly-low interest rates. In the process, it has driven most private
> lending out of the mortgage market.
>
> Would you personally give any of the shaky individuals applying for
> mortgage loans today a 30 year loan at 3%? That is a negative real
> interest rate, on a likely depreciating asset, and it would be given
> to a high-risk borrower. An all-around terrible proposition to any
> sane creditor.
>
> That is the problem. Unless it is backed by taxpayers, no one is
> going to loan any money at these ridiculous rates. And taxpayer-backed
> loans are a fraudulent concept. Continuing to push rates lower only
> EXACERBATES the problem.
>
> Lack of supply is the problem, not lack of demand.
>
> MM
>
There is lack of demand.....
On May 23 01:16 PM mikebrah wrote:
> Ahh, but you misunderstand the market. The problem with mortgage
> rates at 4-5% is it's not creating SUPPLY. The Fed has subsidized
> overly-low interest rates. In the process, it has driven most private
> lending out of the mortgage market.
>
> Would you personally give any of the shaky individuals applying for
> mortgage loans today a 30 year loan at 3%? That is a negative real
> interest rate, on a likely depreciating asset, and it would be given
> to a high-risk borrower. An all-around terrible proposition to any
> sane creditor.
>
> That is the problem. Unless it is backed by taxpayers, no one is
> going to loan any money at these ridiculous rates. And taxpayer-backed
> loans are a fraudulent concept. Continuing to push rates lower only
> EXACERBATES the problem.
>
> Lack of supply is the problem, not lack of demand.
>
> MM
>
I have one:
It is easy to figure out the cost per person for SS and Medicare combined. The baby boomers are getting ready to redeem these entitlements.
What if the US were to offer everybody over the age of 65 one half the net present value of all of their individual estimated entitlements in exchange for their agreement to leave the US and renounce their citizenship? Most of these folks are seperate for cash right now and would probably jump at the chance to cash in and move to Costa Rica or Panama...........
Anyone have a better idea?
So it's a bit of a paradox. The only people who can get loans are the people that don't really need them. These people were never the issue, so the slight benefit they may receive from a slightly lower interest rate is going to be more than offset by the heftier tax burden coming their way.
The problems all stem from individuals and companies with terrible balance sheets. But none of these people are going to qualify for a low, fixed-rate mortgage or business loan.
Despite the Fed's best effort, there is a massive credit shortage. And the Fed's response to this shortage has been to fix prices BELOW the market rate. The laws of supply and demand apply to interest rates the same way they do to every other commodity in nature. Fixing prices below market creates a shortage.
If the Fed simply got out of the way, market forces would take interest rates probably up to the low double digits. This would then bring on a massive (and very much needed) liquidation. It would rapidly bring housing prices to the correct level. Painful, yes, but very very swift. Every business built on a shoddy business model over the last 10 years would fold, and everything left standing would be exponentially stronger. The remaining companies would start hiring as they picked up market share, and new businesses would emerge with sounder business plans.
MM
On May 23 02:48 PM rockingandrolling wrote:
> I disagree -there is no lack of housing SUPPLY. The last time I
> checked there was about 1/12 to 2 years of SUPPLY of housing in the
> market - including existing homes and new construction .....
>
> There is lack of demand.....
With that said; we will agree to disagreee.
On May 23 09:10 PM mikebrah wrote:
> If the Fed simply got out of the way, market forces would take interest
> rates probably up to the low double digits. This would then bring
> on a massive (and very much needed) liquidation. It would rapidly
> bring housing prices to the correct level. Painful, yes, but very
> very swift. Every business built on a shoddy business model over
> the last 10 years would fold, and everything left standing would
> be exponentially stronger. The remaining companies would start hiring
> as they picked up market share, and new businesses would emerge with
> sounder business plans.
>
> MM
Lets go back a decade ago when the gravy train was rolling along with all the humty dumpties boarding on ARMs, CDOs, Derivatives on derivatives, Madoffs,etc.. coaches ( you buy the ticket class that you are boarding). This gravy train then accelerated and so did the number of passengers that came on board- some upgraded to Madoff premium class. Who should pull the brakes of this train ? Apparently, no one in his/her right frame of mind would or should - the train has got no destination - its just shuttling around Wall Street and the Fed, stopping off in between at London, Frankfurt, Tokyo, Sydney, Beijing, Dubai, Singapore, Geneve. At each stop, passengers alight and board.
Unfortunately, someone forgot to tell the passengers that this train is a nuclear powered train with a faulty reactor.Now, you may seems puzzled - weren't the USA, the leader in Science and Technology ? Yes, it still is except that your best and brightest are on Wall Street designing complex financial time bombs - in the word of Warren Buffett, complex derivatives. Now, that the financial nuclear bomb has exploded, wiping out some of Wall Street's biggest names and the rest, living by with radioactive contaimination - your toxic assets, the government's moral choice was to pump in USD 787 billion to scrub down the radioactive assets and hoping to accerlerate the half lives of the isotopes.
Now, remember, there are non US nationality passengers too and they are badly affected from this radioactive fallout. Do you think, they will continue to come on board the Wall Street / FED/ Treasury train, just because the train now has a driver call the Treasury ?
Where did the USD 787 billion come from ? Where will the funds to work the Federal and State budget going to come from ? So, Wall Street got working again and came out with an ingenious illusion - TARP, the mother of all steriods - its suppose to kill the residual half life isotopes that are still clinging onto the "too big to fail banks". Problem with this treatment - they need blood transfusion - clean blood in exchange for contaiminated - all 787 billion litres of clean blood. Well, you don't need to be a genius to figure out from where these is coming from - you, every single one of you. When Wall Street is back in its pink of health, they can start creaming premiums all over again and reinvent new "financial bombs". The misallocation continues and the market inefficiencies are perpetuated. You and the government, have no control of this gravy train unless, it takes on a new route, bypassing Wall Street - that wouldn't be easy as Wall Street is dictated by the shrewdest in this world - unfortunately, this Administration have missed this once in a century opportunity to fix this but lost it when its point men - Geithner, Summers, Bernanke were accessories to this very problem as they were partisan to having not pulled the brakes and still aren't pulling the brakes!