Search This Blog

Tuesday, June 25, 2013

Beware: The Western Economies Slide Down into the Debt Ditch.

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.


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 “"ho, previously held armmer, and 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.


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.

[1] ryck'Z rantZ: The US Heads for High Inflation and Probably Default. Spending Must be Cut.

[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.
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.

“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. 

Monday, June 24, 2013

The US Heads for High Inflation and Probably Default. Spending Must be Cu

The US Heads for High Inflation and Probably Default. Spending Must be Cut.

Originally published 3.27.2010

Abstract: Our government is spending us into unrecoverable debt and massive inflation. They will NOT cut spending and will NOT lower taxes for businesses. We are at the point where we cannot recover from the debt, the stimuli are failing to aid the GDP and more spending is envisioned by Obama and his leftists. Our currency is being debased by our cleptocratic [defined as the government stealing from its citizens] government using the obvious mechanism of inflation. Things are going to get a lot worse.

In a previous blog entitled Deflation and Defaults: The Path Downward from Debt and Excessive Spending,[1] I outlined some potential problems concerning deflation, inflation and the Fed’s printing of vast, and mostly unknown, amounts of money. In a more recent blog entitled Maximizing Both Tax Revenues and Economic Growth: The Folly of Government and the Generation of Phony Numbers and Class Warfare [2]problems with US Treasury bonds are emphasized. Our credit rating is bound to slip. We face a crisis.

The topics of inflations or deflation, in particular, always provoke a contentious political and economic dispute[3] consisting of those players who insist this phenomenon is in progress, and can actually prove the existence thereof, in a fierce battle with the opposing forces who insist we are inflating or other. The analysis process to solve this riddle is seemingly wrought with technical difficulties because there are many varied financial inputs and calculations that must be assessed by the jury in this trial until a final verdict is returned. It appears that even identical economic elements can be used to argue either case thus leading to a conundrum.  The proof, however, that we have transitioned, in part, from deflation to potential high inflation happens when we examine the US Treasury bond auctions.

This spending is what is driving our deficit into an ocean of debt[4] and we rank high amongst the list of other losers who may soon default on their sovereign debts:

Deficit as a % of GDP
United States 
Figures from OCED forecast in November 2009. [5]

The US debt is crushing our society. Since there are only 65 million workers to handle 12 trillion dollars in National Debt [soon to be 14 and rising] and only half of them pay taxes above the median of $32,000 then this works out to $192,000 each for these workers and that ignores Social Security, Medicare, Medicaid and state debts.[6][7] But, there is no signal to stop spending.  

Overspending, to bribe voters to keep socialists in power as we see in California[8][9][10][11] [Our National Leper[12][13]], New York, and other states, is testing the bond markets. California now hopes for a miracle in revenues and will ‘wait.’ The federal stimuli had a very short and shallow effect on the US economy but did send money to the states. They spent that and now want to spend and borrow much more. Attempts to provide federal “stimuli” lead to disasters like the previous ‘jobs’ program that spent $92,000 per job![14] And, then, we spent $24,000 per car on the Clunker Follies and a mere $43,000 per house on the housing scam. [15] This is a farce.

All along, we were reassured that inflation was not a problem and that we could unwind the Fed monies used to salvage our Zombie Banks, which are, to be frank, quite dead.

The Geithner Pledge:

"We have the deepest and most liquid markets for risk-free assets in the world. We're committed to bring our fiscal deficits down over time to a sustainable level.

"We believe in a strong dollar ... and we're going to make sure that we repair and reform the financial system so that we sustain confidence," he said.”[16]-- Geithner tells China its dollar assets are safe On Monday June 1, 2009 [Emphasis is mine in all quotes.]

We are already past the limit of sustainability of our currency values and the bond interest rates that just shot up a few days ago show that inflation concerns are now affecting into the market for US Treasuries. Inflation is on the rise.

US Treasury Sales:

For more than a year, analysts have been warning that record sized debt sales by the US Treasury were at odds with a 10-year yield sitting comfortably below 4 per cent. This week, the yield on 10-year notes jumped from 3.65 per cent to a peak of 3.92 per cent on Thursday. On Friday it was 3.87 per cent.

Falling inflation [deflation, ed] , rising unemployment, the housing market slump, the Federal Reserve’s policies of a near zero overnight borrowing rate and its purchase of up to $1,700bn in bonds have all helped keep Treasury yields near historic lows.”[17]-- Supply fears start to hit Treasuries By Michael Mackenzie in New York and David Oakley in London Published: March 26 2010 [Emphasis is mine in all quotes.]

The Fed has, we think, some 1. 7 trillion in bonds on their books  and what not, but we cannot know what the Open Market Committee is doing or what is happening in the Fed’s Off-Balance Sheet operations. We do know that Fannie Mae and Freddie Mac hold some 3-5 trillion dollars worth of worthless mortgages of the Toxic Asset type. We also need to understand that Barney Frank and other liberals want the banks to readjust interest and principal levels for many home owners who are ‘underwater’ and cannot make mortgage payments. The banks are asked to take massive loses. Mortgage defaults are still soaring and unemployment is still too high. Where is this money going to come from? The printing presses? Probably.

US and state budgets are out of control:

The spotlight on Greece only helped to reveal that the US’s kitchen – with Federal and state budget balances – was itself full of cockroaches,” says William O’Donnell, strategist at RBS Securities””-- Supply fears start to hit Treasuries [Emphasis is mine in all quotes.]

More massive spending.

The environment for debt auctions has turned negative,” says Rick Klingman, managing director at BNP Paribas. “Long-term rates are rising and it is no coincidence that this has occurred after the passage of healthcare reform and the end of Fed buy-backs.””--Supply fears start to hit Treasuries

Social Security is going broke:

Also rattling US investors this week was a report by the Congressional Budget Office that falling payroll taxes due to high unemployment, means that the social security programme will pay out more in benefits than it receives for this fiscal year.“”--Supply fears start to hit Treasuries [Emphasis is mine in all quotes.]

All this was predicted by me and many others although Paul  Krugman seems to think we can handle this and 9 trillion[18] more dollars to spend.[19]

So, what do we do about this?

Slow spending? Lower he deficits?

Actually, none of the above as the Obama Administration, Congress and many states will NOT STOP SPENDING.  Thus, we are crashing into a debt limit barrier that we cannot reverse without massive inflation. Soon, nobody will buy our debt.

Many bonds are ‘insured’ by interest rate swaps, a very complicated process that is mostly confined to sovereign bond markets.[20] Before such ‘insurance’ on debt was available in world markets, a bond holder was at risk of a default or a currency debasement, two favorite avenues for governments to take when they overspend and cannot meet their debt obligations [known as cleptocracy] as we read in the new book This Time is Different: Eight Centuries of Financial Folly[21] by Carmen Reinhart and Kenneth Rogoff. This tome reviews this very common process of overspending, massive debt, bank crises and inevitable defaults that plague California, Greece, New York and other entities and shows that such defaults are very common in the last several centuries. The US has no option but to default on this massive debt.

Now bonds for private issuance are now sold at lower rates than US 10-year bonds—a signal that the current notion of ‘safety’ of the US Treasury is not accepted:

For the first time since swaps emerged in the mid-1980s, the 10-year swap rate traded below that of the “risk free” 10-year Treasury yield. Analysts say this reflects how government debt issuance has altered the dynamics between “risk-free” yields and swaps, which reflect borrowing costs for non-sovereign borrowers.”--Supply fears start to hit Treasuries

Money markets and capital acquisition operations are now global and it appears that the massive spending and huge, unsustainable deficits in the US are showing up in market actions. Once the Fed stopped buying up stuff to keep the rates artificially low the market forces are driving up the interest rates and the US Treasury will have to offer debt at a higher rate. That means that our debt service, currently $191 billion on $12.1 billion in debt for an average  rate of only 1.5% will have to rise. That will, in turn, drive our deficits higher at constant spending and tax revenues. As bonds mature and are redeemed new bonds will have higher interest rates so the 1.5% will tend to double and with it the debt service of $191 billion will double too.

This starts off a spiral: if interest rates are trending higher then businesses will suffer in earnings and will not hire more people. They may have to lay off more workers to keep their bottom lines reasonable. The new Obamacare costs are now being incorporated into business plans and many companies like ATT, Deere and others have publicly given notice that they will have to raise prices. Fewer employed workers will buy less and default more on mortgages and the problem will become worse in time. Higher prices means inflation.

Spending must be halted at this time and new spending on illegal aliens, weird green things that may be only asset bubbles brewing[22], and avoiding massive tax increases like the Cap and Trade Taxes are all mandatory. There is no way to solve this problem with more spending as Krugman and other Keynesian economists advise. Tax cuts to allow businesses to hire more employees are the only way out of this and that avenue is not acceptable to the far left and their lackeys.

This massive spending by liberals, intoxicated by their own phony rhetoric, will sink our economy and we will return to the depression days of the 30s.

We MUST cut spending and furlough several government projects and reject EcoNazism[23][24] and Cap and Trade and other phony nostrums.



[6] The Fed Thinks of Ways to Claw Back Some of the Stimulus Money: This Will be A Disaster as Congress Will Continue to Spend and Spend.

[7] The Fed Thinks of Ways to Claw Back Some of the Stimulus Money: This Will be A Disaster as Congress Will Continue to Spend and Spend.

[16] Geithner tells China its dollar assets are safe On Monday June 1, 2009, By Glenn Somerville

[17] Supply fears start to hit Treasuries By Michael Mackenzie in New York and David Oakley in London Published: March 26 2010 19:18 | Last updated: March 26 2010 19:18 [Emphasis is mine in all quotes.]

[18] How big is $9 trillion? By Paul Krugman The Conscience of a Liberal, August 23, 2009, 5:54 PM

[19] Inefficiency in California, Greece and Other Places and the Socialist Disease of Parasitism: They will NOT stop spending and WILL default.

Krugman Offers an Essay on Misdirecting Political Power. We can Control the Banks and prevent the Next Crises, but No Details, Just give us Power.

[24] Reprinted from a previous blog: The Dollar Sags in Full View of the World This Invites a Run on the Dollar. Inflation Threatens US.