Posted on 12/10/2009 10:25:56 AM PST by SeekAndFind
Edited on 12/10/2009 11:02:04 AM PST by Admin Moderator. [history]
President Barack Obama has recently unveiled bold new plans for government programs and tax breaks to try to boost the economy. These initiatives have no price tag yet, but they will require significant spending.
You can debate whether new highway and bridge projects and sundry tax breaks will help the economy. That's a political question. But as the U.S. government piles borrowing atop more borrowing, it begs a financial question that is not utterly ridiculous: Are your U.S. Treasury bonds safe?
(Excerpt) Read more at online.wsj.com ...
If Treasuries aren’t safe, we should be heading for the fallout shelters.
Yikers.
Couldn’t have said it better myself.
ping I didn’t post this but you shouldn’t miss this
Lori
Wait until word gets out they plan on perpetual bailouts for the TBTF and watch those rates go up.
http://www.economicpolicyjournal.com/2009/12/morphing-of-financial-reform-bill-into.html
Gold up today, yet GLD down...weird
1. The government is vastly more likely to use hyperinflation to get rid of the debt that it is to default on the debt outright. "So the government owes you $1.1 million for your bonds. Well, here's a nice crisp $1 million dollar bill and a shiny new aluminum $100,000 coin to pay it off."
2. Who is big enough to insure against a US default? If the government defaults, will the insurer still be around to pay off or will they default too? If not, then why bother paying for the insurance?
Government Bonds of all types are the biggest bubble that exists. Get rid of them with both hands.
The US Gov’t probably won’t default, as it owns the printing presses, but its possible many other Governments will. Even then, the FED can’t keep interest rates can’t at 0% forever, and with TRILLIONS in debt, suckers (I mean lenders) won’t give money foreover. Why would anyone loan money to Uncle Sam for 30 years for a miniscule 3%??
The value of your guns and ammo will be practical.
***... U.S. paper remains among the safest on the market. (Norway’s is considered even safer.) ***
Back in 1915-1916 American investment firms were selling one of the best and safest investments then. German Imperial War Bonds.
And how much food you can grow on your land will be more than an academic question.
If you don't mind getting paid back in worthless paper they are just fine. One piece of paper for another. With inflation factored in its basically a negative rate of return. Might as well put the money in the mattress.
Have you noticed something “different”
about the market in the last week?
Over the last year, every time stocks came
close to breaking down, some government
official stepped forward with promises of
more Stimulus money or bailouts. Every
time this happened, stocks were immediately
“off to the races.”
However, in this last week, something
changed in the markets.
A few days ago, Japan announced another
$81 billion in Stimulus... stocks did NOTHING.
President Obama promised to “spend our way
out of the recession” and held THREE job
soirees this week...stocks barely budged.
And yesterday, Treasury Secretary Tim Geithner
extended the Bailout Program until OCTOBER 2010
AND promised more Stimulus to consumers...
And stocks were STILL barely able to stay
in the black.
Nathaniel, let’s be blunt here, our Government
officials have essentially told Wall Street that they’ve
got a blank check to do whatever they want...
And stocks are NOT rallying any higher.
This means only one thing:
THE BOUNCE IS ENDING.
As you know, ALL stock Collapses
occur in three stages:
1) the initial drop
2) the bounce
3) the REAL fireworks
Stage #2, bounces are THE most frustrating time to invest because the bounce can always last longer and go higher
than you expect.
We’ve already seen stage #1 in late October.
We’ve been in stage #2 for a little over a month now.
But if this week’s action is any indicator, the
bounce is ending.
Indeed, if stocks CAN’T rally when Obama
and pals promise to throw everything they’ve
got at them...then you KNOW the good times
are ending.
I believe a MAJOR flight to safety has already
begun in the markets. You can see this as money
flows from smallcap stocks to bluechips and
investors start piling back into the Dollar.
In simple terms, the Big Money knows something
is up and has begun making major moves to protect
themselves.
I use it as a trading vehicle not a long term investment.
Hey, Godfather! Nothing like selling bonds to pay the interest on the bonds we’ve already sold!
Plenty of ETFs out there to play an increase in inflation.
‘Course, if T-bills, notes and bonds default, just about nothing else matters.
Ciao!
Don Rex
Second, as to fears of inflation, in normal years total credit outstanding in the US rises by about 6 or 7%. It is way below that these days, barely above zero. Yes, even with record treasury borrowing, because everyone else is contracting. (The only other positive line item in the total debt reports is government mortgage backed securities, which is expanding by less than the agency balance sheets themselves are shrinking).
It is a deflation. Yes, I said it is a deflation.
Whose is lending to the US treasury? Every financial institution on the planet, pretty much. They sure as hell don't want to lend to the private sector deadbeats who just stiffed them to the tune of many trillions of dollars.
Everyone is reducing their credit risk.
Personally I think loans to sound corporations, or even better the preferreds of some of them (still yielding 8-9%), are a better bet than US treasuries. But the headline following crowd that thinks it is a grand hyperinflation simply have no idea what they are talking about.
Bank balance sheets, contracting at a $650 billion per year annual rate. S&Ls and other smaller credit players, the same again. Finance companies, more than that again. Asset backed securities issuers, running off into cash at a $2.4 trillion a year annual rate - yes you read that correctly. GSEs own debts, running off at a $1.4 trillion annual rate, offset by equal issuance of mortgage backs (basically just a shift to Fannie and Freddie as guarantors but not direct debtors).
The Fed hasn't been changing its sheet size since last October, everything it has been buying has been funded by repayments of its emergency support to the banking system - which, see above, is being repaid. This isn't what hyperinflations look like.
Treasuries are perfectly safe as to interest and principal. The return is punk precisely because demand is off the charts enourmous - still. Auctions for paper 2 years and under come in 4 times oversubscribed with rates under 1%.
Why? Because people don't want to lend to deadbeats who just stiffed them and spout their hatred of every banker in existence from the rooftops. It's mutual.
The ideology of the free enterprise system might be a little more convincing if anyone actually paid their debts as contracted...
Your argument is well supported.
What happens though when interest rates rise? Will they rise? OR - are we in Japan situation - near 0% central bank rates for many years?
Also, will the FED now dare raise rates, even if the economy starts to grow, because of the resulting cost to Gov’t borrowing?
In contrast, US businesses almost immediately fired 8 million people. Productivity per remaining worker soared immediately as a direct result. Markets crashed on heavy volume, and new issuance (e.g. of corporate debt to refinance etc) recovered after that rapid price adjustment. American business lets go of real resources it cannot profitably use - that is exactly what Japan did *not* do in its own crisis. Basically, we have liquid capital and labor markets.
There is still some illiquidity in our real estate market, just in the nature of that beast. Also, it will take considerable time to take up all of the slack played out in the smash - employment will be slow to climb to previous levels, net debt issuance will remain subdued, etc. It is as those unused resources are taken up that you grow back the ground lost in the crisis.
What happened in Japan is the business sector froze and refused to let go of their existing assets, even when their profitability vanished. Unemployment remained around 3-4% in Japan for most of the 90s, and only began to rise in the Asia crisis late in the decade, 7-8 years after their crash. Mergers were practically non-existent in Japan, except corporate parents consolidating failing divisions to shore them up longer. All of those things mitigated immediate pain but prevented the real-side adjustments that cause renewed growth. We are not making those mistakes.
I expect moderate growth with subdued inflation for several years. It will seem halting and agonizingly slow. Inflation scares may happen in the meantime due to continued low rates, but they will prove flashes in the pan and fizzle. The total debt growth just isn't there to sustain anything like the doubled prices for major categories of goods or investment assets, that we've seen repeatedly in the commodity markets in recent years.
Felix Zulaf in Switzerland has been a prescient observor of this deflation, incidentally. He hasn't been right about everything, but he gets that it is a deflation. (So does Bill Gross, otherwise overly pessimistic in my opinion). YMMV...
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