Abstract: Previous blogs by my person have emphasized fundamental imperfections in
finance and debt in the US, UK and EZ and little has improved since my last
series of blogs. The Fed has now lost control of the 10-year note as gravely predicted.
This will hike government costs and force more debt. The US deficit continues
to run out of control pushing the debt from its current 107% of GDP at a rate
of about %6 additional debt increments each year to unknown heights in the next
decade. Greece went down at about %145. The Obama Administration continues to
fawn and coo upon the crashing European Union driven by mindless political
dogma and the willingness to spend all they can grab or steal to save socialism;
we follow these fools into the economic latrines. The Fed now stammers about
its QE and that has sent the equity markets into a nose-dive. This blog also
references a very good mathematical analysis of the world debt mess by Grant
Williams as a special reference to watch. Things are not doing well --so
prepare for worse times that we have seen.
Preamble: Published 6.25.2013
I have abstained from
publishing any blogs for a few months since from an analysis of my previous
blogs as I have continued to express my concern and issue warnings about such
pertinent economic metrics such as interest rates and the intractable massive
debt owed by the United States and Europe. Nothing has changed since then except for the
worst. It is time to sound the alarms again if anybody is listening.
In this current
communication I'm going to try to assemble a series of metrics from statements
charts and other references that will support my previous predictions that things
are not doing well and perhaps clarify a bit what is to come in the near
future. We are heading for bankruptcy or default.
Interest Rates:
In previous blogs[1][2] I
have posed a probable problem where the Federal Reserve or other central banks
and other countries might have initially directly influenced the interest rates
much to the downside and trending toward zero but with the continuing
possibility and probability that they might lose operative control of such
measures and that people trading in those markets would dominate the Fed’s
purchases and those interest rates might rise in in spite of any government controls.
What has happened lately is that the Fed's 10 year note has risen in the rate
from %1.49 to the current %2.63 today in
spite of the Fed’s attempt to keep those interest rates as low as possible. A lower interest
rate is supposed to stimulate the economy and it might be doing that, perhaps,
but a more important factor must be considered and studies show, clearly, that it keeps government borrowing rates very
low and also keeps the debt service very low because all the Western countries
are running a relatively sick economies along with hefty deficits. These higher
rates transform into higher government costs of all sorts. Thus, higher rates
and higher deficits encourage government to increase revenues by any and all
means and that hurts business and employment. Given the current socialist mind-set
of the US there is no limit to high they would wish to tax us.
Deficit:
The US deficit is 40% of GDP
and this 40% goes directly into debt and hikes the current 107% debt to GDP
ratio 6% every year so it should be obvious that a mere decade of this
performance will push us toward 180% debt to GDP, which is way beyond where
Greece Cyprus, Argentina and other countries crashed in fiscal chaos. The loss
of control of the Fed’s 10 year note, which was %1.49 last summer, and which is
perceived and universally declared to be the cost of capital, is clearly due to
selling-off by bondholders who, previously held some strange notion that bonds are “quite
safe”, when they are clearly not, because the price of the bond varies
inversely as the interest rate therefore if interest rates were to double, for
example, the current price of the bond would fall 50%. This increase in the
rate forces governments to pay higher debt service and ultimately to pay higher
interest rates on their borrowings hence increasing the cost of government. Of
the original intent of the Fed, we presume, was to, in the words of Tim Geithner,
reflate certain assets by
inflation that would then lessen the government's burden in borrowing and debt
service because they would pay off the debt in the future at a much lower rate.
Now, we currently don't have much “core” inflation—as defined by the Fed who
ignores food and energy, but now we have high interest rates and this tends to
suggest that we are proceeding toward a dark area of stagflation with the
inflation yet to manifest itself as they saw the Jimmy Carter days. The debt
rises to intractable levels. We have no meaningful growth projections to handle
this debt in the near or medium term future.
The Mindless Adoration of the EU:
For some strange reason the
United States favorably and dogmatically views the European Union, particularly
the European zone where the euro is the single currency, in all they do and we stubbornly
attempt to emulate their government processes, control regulations and banking
practices. We wish for environmental controls that have broken several
industries in the EU in the hope that we can have the highest cost energy
prices on the planet. But given a cursory look at the cascading failure of
several of the members[3] of the easy European zone such as Greece, Cyprus,
Ireland, Spain, Portugal--soon Italy and perhaps France in the not-too-distant
future, clearly gives us critical information and theory on how not to finance
a nation. Phony social panel follies almost busted Spain.[4]
In each of these cases the debts and deficits have risen to prohibitively high
and dangerous levels which lead directly to intractable bank reserve levels,
deteriorating bank assets and now multiple bank failures. The Cyprus mess is of
more interest than that of Greece because in Greece they merrily performed
haircuts on the bondholders, mostly foreign. But in Cyprus the European Union with Germany
and France leading rolled the customer deposits into this dead pool and forced closure
and failure in the primary Cypriot bank. 80% or more of customer deposits
vanished. This is a new process known as a “bail-in[5]” and was discussed recently on the Daily Telegraph in
London[6] by several authors. Added into this barbarian process is
the notion, carefully being waved at this time, by the leaders of the EU to
incorporate a phenomenon known as a negative interest
rate. Such a process would
attempt to put the tax on all deposits in excess of €100,000 point meaning that
they would be asking the rich to pay for the bank’s failure, its reconstitution,
rehabilitation, restructuring and reestablishment. The problem with this theory
is that there are very few rich people and if all it takes to avoid having an
account that could be attacked by such a wealth tax would be by moving half of
that account to a different bank, thus going below €50,000, would be an obvious
outlet. The people who brand such rules are raw ideological creatures, certainly,
a bit vicious, but they're not patently senseless. They must realize that
flight of capital is the very first issue to be scrutinized by the rich and
such flights of capital destroy financial backing of whole countries and banks
as they happen and must be avoided if possible. Negative interest rates will
just drive away precious capital, bearing the necessary to real growth, into
foreign accounts. People will stuff mattresses with their monies or buy small
safes.
The EU is morally,
financially, socially, politically and intuitively bankrupt; but the US admires
their oppressive style. Nobody voted for the EU leaders. Even France rejected
the phony Treaty of Lisbon with its rubber language.
The Fed Mumbles about Moderating QE:
With the Bernanke
pronouncement that we might ‘taper’ the Fed’s QE [quantitative easing, a deceiving
euphemism for bald printing of money] the stock market has reacted violently
offering us some ugly options [but no good ones] to switch our assets from cash
to gold or to bonds or out of bonds or whatever depending on whom you might
listen to. This tightening of the purse
strings also brings along the specter of deflation as well.[7] A
fear of deflation would prompt our government to spend larger and larger
amounts of money to ‘fix the problem’ pushing the debt levels to stratospheric
heights and leading to a terminal fiscal scenario.
A Special Mathematical Analysis of the world debt mess by
Grant Williams:
Grant Williams is a mathematician
of note who has prepared a series of ‘problems’ [May 21, 2013] with the current
world economy and presents charts showing some devastating consequences.[8]
The case is well-presented and only conclusions are necessary here to prompt
people from viewing this for themselves. He shows clearly that [1] China cannot
possibly be growing at some %7.7 rate, [2] That France cannot sustain its
fiscal position given the payments she must make to the EU and [3] That Germany
is ‘screwed.’ Scroll down to Bart on the chart that says “Central Bankers know
EXACTLY what they are doing.” This is highly recommended.
Conclusion:
Taken as a whole, the future
does not look good for the globe as rising rates and soaring debts via deficits are terminal as long as those annual
deficits continue to exceed the annual rate of real growth, and they do. Governments
depend on debt to fund their social programs to buy votes so they will not
cease spending and growing government to preserve their power base. Thus, the
debt, now used to fund these phony social programs that are expensive and
inefficient, will continue to grow and sack the economies of the EZ and most US
states and large cities. Perhaps our phony government will incorporate some
negative interest rates on deposits or bail-ins
in our banks to get more money to support the Party of Democrats. They are
frantic for any more money they can grab.
Our financial system is
crashing and if other measures to stimulate real growth, such as tax cuts and
lower business regulations, might help the situation they are not presently politically
acceptable. It appears that the left wing is ready to oversee a crash in the economy
dwarfing what happened in 1929 and have an agenda to not only survive but to
take over everything, a vision of Lenin we might recall. Beware.
[2] More
Big Government and Maniacal Mortgage Manipulation from The New York Times Posted by rycK on Wednesday, February 27,
2008 10:29:21 AM
This describes various attempts by government to
allow bankruptcy courts to alter interest rates and adjust principal to levels
that are politically advantageous to the progressive left.
[3] Known now as SICPIGS which stands for Slovenia,
Italy, Cyprus, Ireland, Greece and Spain so far.
[4] Spain’s
Solar Energy Bubble Bursts. California is Next. The First of a Series of GanGreen
Asset Bubbles Bursting.http://ryckki.blogspot.com/2012/10/spains-solar-energy-bubble-bursts_18.html
Abstract: Well-meaning
but idiotic government workers in Spain subsidized a hopeless solar power
project that is now essentially worthless. The cost was astronomical and the
government is now withdrawing the subsidies as even the most dedicated leftist
can work the numbers and see that this project is terminal and will never work
out. This is a classic debt-driven asset bubble formation folly and now it
comes crashing down in disgrace. Clumsy excuses are offered for this mess by
the Times and we are encouraged to hear that the government regulators in Spain
are still ‘learning’ how to subsidize a worthless project. Maybe some of them
can rush over to California and show them some new tricks before that state
crashes in debt.
[5]'Bail-in’
that throws the euro’s future into doubt.
'This sucker could go down.” So
said George W Bush back in 2008, at the height of the global financial storm. http://www.telegraph.co.uk/finance/comment/liamhalligan/9963272/Bail-in-that-throws-the-euros-future-into-doubt.html
“At
Laiki Bank [Cyprus], the island’s second-largest, deposits above €100,000 are
being slashed by up to 80pc. Similarly, uninsured deposits at Bank of Cyprus,
the biggest bank in the country, will suffer 40pc losses. All savers,
meanwhile, are subject to stringent controls on withdrawals, including a €5,000
monthly limit. Cypriots travelling abroad can take just €1,000 with them and
import payments must be approved by the central bank.
Cyprus
marks the first eurozone banking crisis that is being “resolved” without a
seemingly limitless reliance on taxpayers’ money from other member states. A
distinction is being made between solvent and insolvent banks, with bondholders
at the latter taking a very big hit. That is how it should be. Next time, such
investors will pay more attention to the financial health of the institutions
they back.”
[7] The Bernanke Fed is
playing with deflationary fire
“I hope
the Fed knows what it is doing.
It has chosen to tighten monetary policy
even though core PCE inflation is actually lower right now than it was when the
Fed previously thought it dangerous enough to launch further QE. America is one
shock away from a slide into outright deflation, and the eurozone is half a
shock away.”-- By Ambrose Evans-Pritchard Economics Last updated: June 24th,
2013.
[8] Grant Williams:
"Do The Math!"
[scroll
down to Bart character and push the arrow button to start the presentation.
