Has Obama Run Out of Maneuvering Room Already?

Between the election of Barack Obama and the afternoon of June 10, the yield doubled to 4% from 2% for 10-year Treasury notes, the benchmark for long-term yields in the U.S. economy. Part of the sharp rise in yield was a snapback from levels that reflected fear of a deflationary breakdown of the banking system in the aftermath of Lehman Brothers’ failure last August. The improvement in the economic outlook from hysterical misery to ordinary happiness, paraphrasing Freud, adds about six-tenths of a percentage point to the Treasury yield, as measured by the increase in the yields of inflation-indexed Treasuries. Most of the two percentage point rise in Treasury yield stemmed from rising fear of inflation or decline in the dollar, which amount to the same thing.

Obama’s stimulus package and associated handouts to the auto industry, banks, and so forth have endangered the credit of the US and damaged the standing of the US dollar.

With the Treasury’s annual deficit financing requirement approaching an unheard-of $2 trillion, the largest international investors in Treasuries have expressed dismay about the threat to the long-term value of their investments. Although the measures taken to date by America’s creditors are purely symbolic, they also are without recent precedent, and bode ill for the recovery prospects of the US economy.

Yesterday several foreign central banks announced plans to purchase International Monetary Fund bonds denominated in a basket of currencies, as a diversification away from dollar reserves. Bloomberg News reported:

Russia and Brazil, seeking to reduce their dependence on the dollar, announced plans to buy $20 billion of bonds from the International Monetary Fund and diversify foreign-currency reserves. Russia’s central bank said it may cut investments in U.S. Treasuries, currently valued at as much as $140 billion, a week after China said it may reduce reliance on the dollar and American bonds. Brazil’s Finance Minister Guido Mantega said his country will purchase $10 billion of debt sold by the IMF, China will buy $50 billion and India may announce similar funding.

Just how does America finance a $1.8 trillion deficit? The most that overseas investors ever have invested in the US in a year is $400 billion, and it is unlikely that foreign governments will purchase this quantity of Treasury debt under present conditions. Assuming (optimistically) that foreigners buy $300 billion worth of Treasuries per year, that leaves $1.5 trillion to finance. For the American private sector to finance $1.5 trillion worth of Treasury debt, or about 11% of GDP, presumes a savings rate of 11% of GDP, something America has not seen since the early 1980s. The present recession has pushed the personal savings rate up to 6%, with painful economic consequences.

But even a return to the very high savings rates of the early 1980s would barely cover the Treasury’s financing needs. There would be nothing left over for corporate debt, mortgages, or any other financing requirements.

The economy, of course would crash under these circumstances. To make up the gap, the Federal Reserve has increased its balance sheet to provide credit to the economy by over $1 trillion since last August, including $600 billion of securities purchases.

The Federal Reserve can’t keep monetizing debt, that is, printing money in order to buy securities. The perception that it is coming close to the end of its tether is the proximate cause of the jump in interest rates.

Whether this results in more deflation (collapse in demand in the US resulting in lower asset prices, lower wealth, and ultimately lower prices for goods and services) or inflation (money printing by the Fed, a collapsing dollar, and an exchange of paper for stores of value in the form of commodities or other tangible assets) is difficult to predict – the market seems to be betting on the latter. In either case, Obama’s maneuvering room has been exhausted only a few months into his administration.

Comments

[Windsun33:]

This is starting to look more and more like a house of cards, ready to tumble big time at the first sign of bad news that the Obamaborgs can't put a spin on.

Jun 11 05:38 AM

[Dave Wrixon:]

Obama never had any room for maneuvering.

It is not clear whether he simply over played his hand or was playing liar poker, but either way the game is up.

Jun 11 05:39 AM

[Gastone Neri:]

Washington is now in a dilemma.
Officials want consumers to start to spend again.
But government leaders can hardly afford
to urge consumers to spend, spend, spend.
Excessive consumer spending for the
last 25 years is one of the main reasons
for the current financial mess and the
worst recession since the 1930s. So it’s
the classic catch 22.
If everyone saves and few
spend, the economy suffers , if we start again with excessive spending we never get out of this mess.
The solution , let the market forces sort out the situation. It will be painful but at the end the system will regenerate itself.
Gastone Ciucci Neri

Jun 11 06:14 AM

[Gastone Neri:]

Washington is now in a dilemma.
Officials want consumers to start to spend again.
But government leaders can hardly afford
to urge consumers to spend, spend, spend.
Excessive consumer spending for the
last 25 years is one of the main reasons
for the current financial mess and the
worst recession since the 1930s. So it’s
the classic catch 22.
If everyone saves and few
spend, the economy suffers , if we start again with excessive spending we never get out of this mess.
The solution , let the market forces sort out the situation. It will be painful but at the end the system will regenerate itself.

Jun 11 06:16 AM

[lex:]

jon voight was right

Jun 11 07:45 AM

[doubleguns:]

Washington simply does not understand the size and scope of the hole that we are in. WASHINGTON, STOP DIGGING!!!!

Jun 11 07:50 AM

[Vuke:]

Correct, the market is betting on a mysterious flood of new paper to cover and has headed for cover in commodities, particularly oil.

Old petrol dollars, for example, can be recycled home for debt then converted into new dollars by the sale of higher priced oil at twice the price. The only difference in the dollars is that new are worth half the value of the old.

Gold too, is part of the game. CB's will happily print new money to buy back gold previously sold at a fraction of the price. The consumer of the future will blink once or twice then get back into the game of making even more (he thinks) money.

In one form or another, this is the history of Big Government.

Jun 11 07:58 AM

[Rollerball:]

Hugo Chavez was right. Nationalize the oil oligopoly. That, or recall our Armed Forces, who have become little more than mercenaries for clandestine private interest. Obama can be a great leader, or he can be another Uncle Tom.

Jun 11 08:36 AM

[CaptainJJack:]

I find it amusing that all the new found deficit hawks come out when Obama gets elected. During the Bush years, "deficits didn't matter".

Well, here's a thought:

If you take the Bush administration final budget (including all the "supplementals", like war funding) and run it out using the same CBO assumptions, it develops TWICE the deficit of the Obama budget because of the unsustainable 2001 tax cuts.

And, it would have been great if Bush had left us with something other than a total disaster to show for it. Obama (or McCain, for that matter) can only do what is possible, and Bush saw to it that the options are all bad.

I supported Bush in the1999 and 2000 primary and the 2000 election, and I live to regret it to this day.

Jun 11 09:05 AM

[Windsun33:]

I did not vote for Bush or Obama, but eventually you will need to stop blaming Bush for all the current problems.


On Jun 11 09:05 AM CaptainJJack wrote:

> I find it amusing that all the new found deficit hawks come out when
> Obama gets elected. During the Bush years, "deficits didn't matter".

Jun 11 09:32 AM

[y1531y:]

He has, by printing money for us to spend.

Jun 11 10:20 AM

[aja8888:]

Forget which President is at fault as it does not matter now. What's more important to us readers is preparing for the upcoming high inflation.

Jun 11 11:50 AM

[Danny Newton:]

I think there is going to be a period of buyers remorse when ineffective spending fails to expand the wealth or reverse the GDP figures. The administration is trying to solve the toxic paper problem by issuing more toxic paper...hair of the dog that bit you?

Jun 11 12:24 PM

[Donald Ingram:]

An open letter to President Obama.
Dear Sir,
There are approximately 100 million 'first wave' baby boomers between the ages of 50 and 65. Instead of giving trillions more to banks and car companies, why not give 1 million dollars apiece to this group as severance pay on the following stipulations:
1. They MUST retire. Tens of millions of job openings. Unemployment fixed.
2. They MUST buy a brand new made in America car. Auto industry fixed.
3. They MUST either buy a house or pay off their mortgage. Housing crises fixed.
4. They MUST send their kids or grand kids to school/college/university - crime rate lowered.
5. They MUST buy $50 of alcohol/tobacco/gasoline per week. There's a good portion of your money back in duty/tax etc.

P.S. If more money is required have members of the senate and congress pay back their fat expense claims and pork barrel takings, along with the banksters obscenely high bonuses.
Thank You.

Jun 11 12:49 PM

[Donald Ingram:]

An open letter to President Obama.
Dear Sir,
There are approximately 100 million 'first wave' baby boomers between the ages of 50 and 65. Instead of giving trillions more to banks and car companies, why not give 1 million dollars apiece to this group as severance pay on the following stipulations:
1. They MUST retire. Tens of millions of job openings. Unemployment fixed.
2. They MUST buy a brand new made in America car. Auto industry fixed.
3. They MUST either buy a house or pay off their mortgage. Housing crises fixed.
4. They MUST send their kids or grand kids to school/college/university - crime rate lowered.
5. They MUST buy $50 of alcohol/tobacco/gasoline per week. There's a good portion of your money back in duty/tax etc.

P.S. If more money is required have members of the senate and congress pay back their fat expense claims and pork barrel takings, along with the banksters obscenely high bonuses.
Thank You.

Jun 11 12:50 PM

[Jimbo:]

Both political parties are responsible for our present predicament.Obama's party controls both houses of Congress and he will soon control the courts with his racial preference appointments. I supported the Bush tax cuts because I thought they would increase revenue.(They did). I opposed Bush's prolific spending. The temptation to buy votes is simply irresistible to elected officials. Congressional term limits and a stiff law making it a felony for ANY former member of Congress, or a former Federal official to lobby might help rein in some of this terrible abuse.

Jun 11 03:13 PM

[CaptainJJack:]

I will stop blaming the Bush policies when they are no longer the primary source of the problem we face.

Based on the enormous mess he left, it will be a long, long, long, long, long. long time.


On Jun 11 09:32 AM Windsun33 wrote:

> I did not vote for Bush or Obama, but eventually you will need to
> stop blaming Bush for all the current problems.

Jun 11 03:23 PM

[Bob 123:]

I just love articles like this that serve to throw red meat to the anti-Obama crowd. Yeah, as if he could solve all the messes in the first 100 days.

The ultimate solution is public financing and strict spending limits of all elections. As long as politicians of whatever political stripe are bought and paid for by corporate/special interest money, there will be no meaningful solutions or significant reforms.

Jun 11 03:51 PM

[CLH:]

Bob---No he cant solve the mess in 100 days or 1000 days. Obama never had a job or any leadership position. He came out of school and became a street organizer (the same as Hitler) and is now running the govt.. God help us because he is not capable of solving anything with his left wing radicalism.

Jun 11 04:39 PM

[Northstar10000:]

Obomber boys will turn a recession into a full scale route. They will continue to blame bush until the whole thing comes apart. It will break like a dam. One day Obomer boys will still be holding their own in the blame game and than like a small break in the dam the flood will overwhelm the country along with their god like worship.

Jun 11 07:25 PM

[Homer II:]

I have a simple question: how long do the demo-libs get to keep blaming all the CURRENT government shortcomings upon george Bush?

Jun 11 07:37 PM

[Windsun33:]

I never expected him to "solve" it, but I did not expect him to make it so much worse so fast, nor did I expect the rampant trampling of the constitution that has occurred. Bush raised the deficit to record levels. Obama has managed to double Bushes deficit in less than 4 months, and still counting.

That is not quite the kind of "change" I wanted to believe in.


On Jun 11 03:51 PM Bob 123 wrote:

> I just love articles like this that serve to throw red meat to the
> anti-Obama crowd. Yeah, as if he could solve all the messes in the
> first 100 days.

Jun 11 09:39 PM

[Bobco23:]

Small problem. 100 million times $1 million equals $1,000 trillion (with a "T"). That would cause the mother of all inflation. Just a back of the envelope calculation, but the dollar of today would be worth about 5 one hundredths of a cent. A better plan would be to just stop spending more than is taken in.


On Jun 11 12:50 PM Donald Ingram wrote:

> An open letter to President Obama.
> Dear Sir,
> There are approximately 100 million 'first wave' baby boomers between
> the ages of 50 and 65. Instead of giving trillions more to banks
> and car companies, why not give 1 million dollars apiece to this
> group as severance pay on the following stipulations:
> 1. They MUST retire. Tens of millions of job openings. Unemployment
> fixed.
> 2. They MUST buy a brand new made in America car. Auto industry fixed.
>
> 3. They MUST either buy a house or pay off their mortgage. Housing
> crises fixed.
> 4. They MUST send their kids or grand kids to school/college/university
> - crime rate lowered.
> 5. They MUST buy $50 of alcohol/tobacco/gasoline per week. There's
> a good portion of your money back in duty/tax etc.
>
> P.S. If more money is required have members of the senate and congress
> pay back their fat expense claims and pork barrel takings, along
> with the banksters obscenely high bonuses.
> Thank You.

Jun 11 11:15 PM

[dybydx:]

BRIC are important players, now we will have to see what OPEC says. They may not agree in what to replace the USD, but as long as they move the Fed will definitely monetize the debt.

Jun 12 12:12 AM