Posted on 03/20/2016 11:09:19 AM PDT by pilgrim
For years, the US government has been able to finance it's debt at cheap interest rates because there have always been plenty of enthusiastic buyers. As long as the Chinese, the Japanese, and others continue to hold and buy large amounts..
....then the US government would have to entice them and others to take on the debt by promising to pay a higher interest rate on it. In turn, this would require more spending on debt service by Congress.
If this should ever happen, it would require significant cuts to government programs — or tax increases, or both — in order to pay the larger amounts needed to keep paying the federal government's debts. Otherwise, the US government will default on its debts.
So, for some people who are actually paying attention, it is concerning that the Chinese government has been selling off it's US government debt. If this continues, all things being equal, the US Treasury will have to begin offering higher interest rates in its debt.
CNN reported this morning that foreign governments have been dumping US debt as record rates.
And it seems they're doing it for reasons other than spite.
For years, the discussion over a possible debt-dumping scenario has focused on the possibility that the Chinese and others would dump US debt and US dollar holdings as part of a geopolitical scheme to bankrupt and destabilize the US government. As I noted in this article, the scenario is not theoretical, and has happened to a major power in modern history. The British Empire ended not on a battlefield, but on a bank ledger when Eisenhower threatened to use financial warfare of this type against the United Kingdom if the UK did not withdraw from Egypt in 1956.
(Excerpt) Read more at businessinsider.com ...
Right —and we got to admit that’s where their business is, getting hits and pleasing you and me is a LOT farther down on their list. In the mean time they give us good practice digging out the info.
But I don't understand how you go from this:
The United States is however, insolvent.
To this:
The consequence is that more and more of the production and services that are domestic will move out of the country in search of return on investment. This has been going on for so long that it has become the norm. It is a slow but accelerating unwinding and mothballing of the world’s largest economy.
How does one lead to the other (I don't necessarily deny that the "consequence" is taking place - just wondering how it follows logically from the "insolvency").
Regards,
To do justice to the situation requires a background paper but it is enough to point to one factor in corporate bonds requiring higher yields to be attractive but they also need policy changes on the part of large investment banks which ultimately are driven by the Federal Reserve.
Because corporate bonds are in effect ‘frozen out’ of a large part of the government created bond bubble market, a vacuum is created that is filled by other nation’s policies.
For example, Banamex in Mexico is Citibank. The Mexican government meets with Banamex principles to set a policy that 40% of the bank’s bond purchases must be in Mexican government bonds. A special associated policy exemption may allow Banamex to purchase corporate bonds from a new industrial player, say Ford Mexico. And these bond yields are in large part guaranteed by the Mexican government which are usually backed by oil assets.
Hence, Banamex authorizes corporate bonds to be purchased for about 40 billion pesos ($2+ billion) for a new Ford plant. Where does Banamex get those funds? From its US parent in Citibank who in turn borrows the funds at zero percent from the Federal Reserve. Now you may understand why Donald Trumo is calling for the Fed to be audited.
For this one scenario out of hundreds and hundreds, the result is an American industry moved offshore for practically no cost by funds ultimately originating from computer created funds of the Federal Reserve.
The conditions set by low labor costs and very low startup costs with pro forma projections on ROI based mostly on USA market sales are so enticing that it would be foolish not to move. Politically it is also pushed by globalists who believe in the ‘equalization’ of societies. In other words, the trend aims at making American and Mexican societies look globally similar.
Donald Trump points out that the current financial and political policies described by the above are at the expense of Americans and are causing America to move towards third world status in the global ‘equalization’.
He calls for a 35% tax on imports of products made by American companies operating offshore.
And as pointed out above he’s calling for an audit of the Federal Reserve.
It should be very clear now why there are those calling for him to be stopped to the point of assassination if necessary. Just yesterday the Trump campaign announced they are beefing up security.
Ok, so. You give me a thousand dollars and I give you a promissory note, I.E. a bond that will pay you ~0.50% AND return your thousand Dollars after 6 months or whatever.
I pay you your 50 basis points and keep the thousand bucks and I'm not in default?
I think the rest of the world knows we’re getting close to that magic number when we default...
First off, authorized licensed and contracted bond traders have margin credit accounts with Fed member banks such as JPM, BAC, MS etc. which in turn have near 0% Fed cash (digitally created) to loan to the bond traders via their margin accounts.
It can be noted that the Fed has created cash at negative interest rates for selected members, i.e. the Fed pays selected members to park the cash. The free cash is then offered by favored member banks at very low-interest rates to their contracted bond traders. The trader’s margin loans are accompanied by policy instructions to the bond traders to buy government bonds.
The bond traders will borrow at X% and buy the treasuries at 2%. So they collect net 2%-X%, an income stream for which they have no skin in the game. And they have been getting rich for the longest time. Trump has already warned them that their free ride will be over.
As a result of a Fed decision to call back cash it has created for its member banks, the banks in turn call the margin accounts of the bond traders which means the traders have to come up with cash or turn over the collateral, the treasuries. A Fed member bank takes the bonds and turns them over to the Fed.
The Fed now hold the Bonds of the federal government. Because the bonds were purchased with cash (digitally created) originating with the Fed, the Fed can write off the debt obligation of the federal government. It would be similar to a bankruptcy discharge only there would be no bankruptcy court involved.
If the Fed did not ‘delete’ the obligations, the federal government would need to pay 2% to the Fed and if payments were not made, then yes, the federal government would be in default to the Fed which now holds the bonds. But the Fed created the originating purchase funds from nothing so there is no liability to address.
In sum, the money was created from nothing and was used to fund government (prop it up) and the same money obligations are extinguished back to nothing. It would be no different than delivering 10 trillion dollars in billion dollar notes in a suitcase to the US treasury and saying here you go, no need to pay it back. A one-time shot of liquidity to keep the government going.
The money is from nothing and returns to nothing. No one is in default.
All the above is possible but would only be done if there was a clear policy that the kite flying of money to the federal government was to wind down and stop or slow to a trickle. The intermediate carry trade created by the present scheme would cease to exist.
But an understanding that the kiting must end would leave the federal government scrambling to be more efficient. This is what is hoped that a Trump Administration will achieve. The kiting will not stop in one event, it must be a controlled descent as the Trump economy spurred by major tax reform, regulatory reform and trade restructuring brings a balanced and manageable budget.
Trump’s aim is to restore the middle class to its previous levels and to boost its wealth. If he winds down the government debt traffic through bond markets, the bond traders will need to find a new job which will be in corporate debt. Corporate debt means corporate expansion. A Trump administration would structure policies so that corporations would expand in the United States and its territories, not offshore.
The long and short is that the winding down of the government debt stream will force debt streams to flow from corporations rather than the US Treasury, and this will cause much needed economic growth to put a substantial number of the 90 million unemployed Americans back to work.
“Beijing is not being ransomed. Our parents’ and our own retirement and our children’s, and grandchildren’s and great-grandchildren’s futures are what is being ransomed. That debt is literally orders of magnitudes greater than the piddling bit we own to the Chinese.”
Does it change the result predicted by the article? That either government programs would be cut or taxes raised?
“It should be very clear now why there are those calling for him to be stopped to the point of assassination if necessary.”
Yup, there are a lot of people profiting off the taxpayers that don’t want their gravy train to stop.
Neither of those things are going to happen, per se.
The politicians will simply take the cowards way out by monetizing the debt. [Yes, I understand that this is effectively a tax on everyone.]
They have been preparing this route for a long time: First, by ditching the M3 money supply measure. This was the only measure not effectively under the control of the government and/or Fed. Second: by detaching inflation from most of the things we buy on a day-to-day basis. It was necessary to do this for at least two reasons: a) as more durable goods are manufactured oversees, it becomes much more difficult to say there is any inflation happening, especially as China and emerging 3rd world countries devalue their currency to stay competitive and b) It defeats the purpose of using inflation to pay for entitlements if COLA's are permitted to rise. Third, by applying downward wage pressure on US citizens, which makes them more likely to accept real-value reduced wages. Fourth, of course, by flooding the market with fake money, so increasingly worthless currency becomes the new norm.
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