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The Harsh Reality ” Of “Economic Stimulus”

  • According to the Fed's own numbers "economic stimulus" has done irreparable damage to the US taxpayer and economy.
  • The only remaining solution to the US debt crisis is more "quantitative easing" monetization (dollar devaluation).
  • During "economic stimulus" the Fed's, U.S. Treasury and BLS.GOV credibility have all hit new lows.

Facts using Fed data and charts

During US "economic stimulus" savers and the free market economy were stripped of trillions of dollars in interest income by the largest negative rates of return in history to save the US Treasury the same amount in debt service cost. Deposit rates normally trade above the consumer price index (NYSEARCA:CPI) on the Fed chart below (red), any deposit rate below the CPI represents a negative rate of return.

See this Fed link for a current chart and all supporting historical data

US banks never lowered the prime rate it has remained unchanged at 3.25% since 2009.

Credit card rates never went down and have remained at 13.01% (20 year average 14.22%).

The same banks that facilitated the debt crisis after receiving trillions in Fed bailouts have enjoyed the largest gross profit margins on their borrowing costs in history. Not that Japan is an example to follow but at least when their deposit rates went to zero they had the conscience to lower their prime rate to 1.10% click here for the BOJ website here for a current chart and all supporting historical data.

Red = Fed funds bank borrowing rate
Black = Prime lending rate
Green = Average credit card rate

For a current chart and all supporting historical data see this Fed link.

During "economic stimulus" the US had the worst annual budget deficits in history which averaged 1.45 trillion from 2008 through 2014

Click here for the current Fed chart and all supporting historical data

The worst debt to tax receipt growth in history

From 2008-2014 the US national debt increased by 93% while tax receipts went up by only 28%.

Each US taxpayers portion of the national debt has skyrocketed from 67K to over 130K. When interest rates "normalize" each taxpayers portion of the national debt service cost will start at $6,630 annually or $552.50 monthly with further increases generated by future deficits for the remainder of their and their children's lives. Over the next 30 years debt service cost per taxpayer could easily exceed $250,000.

2008 national debt = 9.4 trillion
2008 tax receipts = 1.4 trillion

2014 national debt = 18.1 trillion
2014 total US tax receipts = 1.8 trillion

Each 1% increase in rates now consumes over 10% of total US tax receipts

Using the 2008 - 2014 average budget deficits of 1.45 trillion if rates "normalized" to be in line with the historical CPI to deposit rate ratio this additional 550 billion in debt service cost could increase annual budget deficits to over 2 trillion.

Red = National debt
Black = Personal income tax receipts
Blue= Corporate tax receipts

Click here for a current Fed chart and all supporting historical data

To put this into perspective $250,000 in debt service cost could currently purchase a home in the Northeast

Click here for the current Fed chart and data

"Economic stimulus" has left the US with the worst debt to GDP ratio in history.

Click here for the chart and all supporting historical data

The worst US trade deficits in history

Click here for the chart and all supporting historical data

The largest amount of emergency purchases of debt by the Federal Reserve in history.

Red= 2.46 trillion in US Treasuries that no one else would bid on at non competitive rates
Green= 1.73 trillion in bad mortgages from the banks that facilitated the debt crisis

Total 4.19 trillion dollars created with keypunch entries backed by no tangible asset or income flow.

Click here for the current Fed chart and all supporting historical data

The worst debt to personal income ratio in history.

Click here for a current Fed chart and all supporting historical data

The worst debt to employed population ratio in history.

Click here for a current chart and all supporting historical data

The worst debt to hourly earnings ratio in history

Click here for the current Fed chart and all supporting historical data

Mortgage delinquency rates are twice what they we're at the beginning of 2008 and remain twice the historical average.

Click here for the fed chart and all supporting historical data

The worst debt to GDP ratio relative to the world's second largest economy.

Click here for the chart and all supporting historical data

The worst growth ratio relative to the world's second largest economy.

Click here for the chart and all supporting historical data

The worst trade deficits relative the world's second largest economy.

Click here for the Fed current chart and supporting historical data

The worst deprecation on record for the USD against China's currency (Renminbi) -14.46% from 7.26 to 6.21 Renminbi to the USD.

The Renminbi is now on deck to become the 5th world reserve currency and further de-peg from the US dollar.

Click here for the chart and all supporting historical data

The worst spread between US and China's short term interest rates in history with China near 5.00% versus the US's 0.03%.

Click here for the chart and all historical data

The worst US debt rating in history.

12 countries now have higher debt ratings than the U.S. most have the same or higher deposit rates.

Click here for the supporting data

The largest amount of US Treasury debt held by non US investors in history.

Currently non US investors own over 6 trillion in US Treasuries alone, trillions more in US Muni and Corporate debt most with their finger on the sell trigger.

Currency risk for these non US investors is more in one day than annual yields.

Click here for the chart and all supporting historical data

Breakdown of who owns US Treasury debt

What many are forgetting is that until 2008 the market controlled Treasury rates not the Fed.

When a country like the US needed money to finance deficit spending it created debt instruments that were sold at auction with the buyers setting the rate at auctions based on a country's debt rating, credibility and economic outlook.

Click here for Treasury auction basics.

From 2008-2014 the Fed created trillions of dollars backed by no tangible assets or income flow the buy the majority of all new issues (up to 85 billion per month) to force and hold rates at artificial and unsustainable lows to save the US Treasury trillions in debt service costs at the expense of savers and had the audacity to call Quantitative Easing in the name of "economic stimulus"

Click here for the current Fed chart and all supporting historical data

This 1.020 trillion annually is more than twice the national debt in 1971 (424 billion) the year the US abandoned the Gold Standard when gold was trading at $35 per ounce

1.020 trillion is greater than the national debt was in 1980 (907 billion) when short term interest rates were closing in on 20%

High rates were caused by the 1980 US "debt crisis" in 1980 the US debt to GDP ratio was closing in on 40% (currently the US debt to GDP is over 100%)

Click here for the current Fed chart and all supporting historical data

If the CPI was calculated using BLS.GOV 1980 inflation calculation methods over 90% of all tax receipts would be currently be consumed by debt service cost alone.

Click here for the current chart and all supporting historical data

When the harsh reality of "economic stimulus" engages the US's status as "flight to quality safe house" could easily be questioned.

I see trades by non US investors starting unwind with them the dollar from it's near 10 year high.

Click here for the chart and all supporting historical data

There are alternatives to the USD.

12 countries currently have higher debt ratings than the US most have the same or higher short term deposit rates and greater up side currency potential (AUD & CAD)

Click here for ratings

When looking at the chart below you don't have to be a Rhodes Scholar to question the creditability of the BLS.GOV CPI numbers in orange.

One has to remember the BLS.GOV works for the .GOV, the more revisions the BLS.GOV can do to the inflation numbers to keep them contained saves their employer the .GOV not only trillions in debt service costs but trillions more in government expenditures that are tied to the "official CPI".

Click here for the current Fed chart and supporting historical data

Below are CPI numbers reported by BS.GOV in red relative to money supply (black) gold, median home prices (NASDAQ:BLUE) and tax receipts (green).

Click here to monitor this chart once the next round of "Qualitative Easing" engages.

The Fed will raise rates my guess is by 0.15% on the first hike expanding the top end of the Fed funds target range from 0.25% to 0.40%.

The additional rate hikes this time round won't be nearly as aggressive as the last tightening cycle in 2004-2006 when the Fed hiked the Fed funds rate by 0.25% 17 consecutive times over a 2 year period from 1.00% to 5.25%.

Click here to enlarge the rate, price valuation chart below
Click here for a current Fed chart and all historical data

I believe even with BLS.GOV revision magic the economy is still too fragile and a series of 0.25% hikes I believe it would generate very aggressive selling not only in stocks but bonds, notes, and short term rates as well.

When you look at what Greece did to the global markets an economy that is 2% of the euro zone's GDP (about the same Orange County California which did go BK) it's hard to fathom what unknowns the global markets face as the US debt crisis worsens.

I believe each additional hike will initially be 0.10% with the Fed getting more aggressive until they achieve their objective.

When the impact of higher rates finally engages I believe we'll see a hard short term sell off in stocks and US Treasuries initially set off by non US investors then igniting sales by domestic investors who will accelerate the move lower.

When this rate ignited sell off occurs the Federal Reserve will have the long awaited excuse they need to fire up the QE printing press with tenacity to cauterize the US financial hemorrhage.

By the numbers in this report the Federal Reserve, US Treasury and BLS.GOV have in my opinion irrevocably demonstrated their complete disregard for the US taxpayer, US debt depositor and US economy, as I see it their one and only focus during "economic stimulus" has been survival of their "system".

What the Fed has done over the last 7 years

Strip savers of trillions in interest income to save the US Treasury the same amount in debt service cost

Bail out their fellow bankers that facilitated the problem with trillions of dollars then let them indulge in the largest gross profit margins on their borrowing costs in history for the longest period of time in history.

The Fed has forced and held short term rates to near zero using trillions they created with keypunch entries backed by no tangible assets or income flow with complete disregard to the impact on the dollar and the true wealth of the US debt investor.

With the Fed forcing and holding short term rates near zero any depositor desperate for any interest income at all was "sucked into" longer dated durations (10+ years)

As these investors shifted from shorter to longer dated durations the Fed contained higher rates for longer dated durations using strategies like the maturity extension program.

What they did was force longer dated durations down as well using the same strategy of buying them at non competitive prices with money that was also created with keypunch entries depriving US debt depositors once again of a fair interest rate.

End result

Currently the average yield on a US Treasury is 2.38% indicating the average instrument duration owned is 10 + years.

Click here for current debt service cost

The Fed has enabled the US Treasury to FIX US debt service cost on the current 18.1 trillion at the lowest rates in history for the longest period of time in history.

Currently if true inflation went to 10% or higher the debt service cost on the current 18.1 trillion would remain FIXED for approximately 10 years at 430 billion per year.

Below is a chart showing the growth in the national debt in red far outpacing the growth of the US's debt service cost in green.

Click here for a current Fed chart and all supporting historical data.

With the US's debt service cost FIXED at 2.38% for approximately 10 years on the current 18.1 trillion the Fed and US Treasury have purchased 10 years of time to inflate out of the current debt crisis. (At the expense of the taxpayer, depositor and US economy)

Click here to monitor debt service costs as rates rise

US debt monetization (dollar devaluation) is squarely on deck and positioned for takeoff with higher inflation on the horizon that even BLS.GOV revision magic may not be able to contain.

How I believe debt monetization (dollar devaluation) will engage

The Fed will gradually raise rates from their current historic lows using BLS.GOV calculation magic and "economic recovery" to justify the hikes.

Click here to monitor hikes in the Fed funds rate currently at 0.13%

These rates hikes will eventually impact the market first motivating sales of US dollar denominated investments held by non US investors.

Non US investors are very concerned with their exposure to the USD currently near a 10 year high, Treasury notes, bonds and stocks all near record highs.

Momentum of this move will increase motivating all investors to aggressively sell US Treasury notes, bonds and stocks.

Using the Chicago Mercantile Exchange's site monitor these markets as the Fed Funds rate rises.

S&P 500 is currently trading at 1,938
Dow @ 16,237
NASDAQ 100 @ 4,278
Nikkei @ 17,715
30 year bond @ 154-27
10 year note @ 127-27
5 year note @ 109 13

With this sell off the Fed will now have the justification they need to fire up the "Quantitative Easing" printing press with tenacity to cauterize the next round of US financial hemorrhages.

The dollar will devalue against tangible assets and currencies like AUD, CAD and CHF

Metals
Commodities
USD against the majors

As the economic problems according to the Fed's own numbers are far worse than at the beginning of "economic stimulus" the next rounds of "Quantitative Easing" could easily total more than the 4.19 trillion we're already seen.

Click here to monitor future "Quantitative Easing" (the Fed's creation of money backed by nothing)

The BLS.GOV will continue to work their "revision magic" to contain inflation.

The chart below shows the national debt in red, tax receipts in green, money supply in blue and the BLS.GOV CPI numbers in orange.

Let's get some dialogue going on how many of us actually believe the BLS.GOV's CPI numbers are accurately reporting true consumer inflation.

Click here for the current Fed chart and all supporting historical data
Click here for inflation calculated using 1980 & 1990 calculation methods
Click here for the official BLS.GOV CPI numbers

As the prices of goods and services rise tax receipts will rise as well.

There is a 70 year correlation between an increase in money supply or Quantitative Easing (black) and tax receipts (green),

Up until the major revisions implemented to the BLS.GOV CPI calculations first in 1980 then again in 1990 there was a direct correlation between Money supply, tax receipts and inflation.

Click here for the current Fed chart and all supporting historical data

The stage is set for the US to monetize its debt which I believe is the only remaining solution to the US debt crisis.

Prepare and learn how to hedge both your long and short positions so you can sleep at night.

One example is to "collar your positions" = short the stock at 100, sell the 97 put against your short position collecting premium, using the collected premium purchase a 103 call to protect the position.

If the market stays the same you break even.

If the market rallies hard you're protected against anything above 103

If the market sells off your position will be called away at a profit and you can always reestablish it.

Risk is defined on the trade and for the duration of the trading period with no risk of being stopped out or having a margin call.

Click here for more on collars using equities, here #'s 2-11 currencies

Learn how to hedge instrument risk on your long term debt, click here for an example trade

Learn how to capture the inevitable move higher in rates and put what most traders are afraid of to work directly for you.

Contract valuation table for the March 2016 CME Fed Funds futures contract (ZQH16)

Currently trading at 0.38% contract value = $1,583

At 0.50%, contract value = $2,083 or +31.61%
At 0.75%, contract value = $3,125 or +97.42%
At 1.00%, contract value = $4,167 or +163.23%
At 1.50%, contract value = $6,250 or +294.85%

Click here for an example trade and risk/reward spreadsheet
Click here for an example of trading 3 month deposits rates higher

Disclosure: I am/we are short WITH HEDGED POSITIKONS TRADING RATES HIGHER.