Archive for May, 2011
By Wu Yiyao
Updated: 2011-05-31 07:08
SHANGHAI – The impacts of China’s worst drought in 50 years have been served up on the nation’s dining tables as the price of rice and vegetables from drought-hit provinces have skyrocketed.
The average price of staple foods in 50 cities has increased significantly, and the price of some leaf vegetables has jumped 16 percent in one month, according to data from the National Bureau of Statistics.
Decreased production because of the drought has been cited as the major reason for price increases, and the prices of rice and vegetables may not drop soon, according to a report by the Ministry of Agriculture.
Statistics from the Office of State Flood Control and Drought Relief Headquarters show that an area of nearly 7 million hectares of arable land has been affected by the drought, with Hubei, Hunan, Jiangxi, Anhui and Jiangsu provinces most seriously affected.
“I didn’t buy many leaf vegetables in the last week because the price is getting crazy,” said Zhang Weirong, a 67-year-old Shanghai resident.
“Cabbage used to be as cheap as paper, and for 5 yuan (77 cents) you would get too many cabbages to carry home,” she said.
She has had to switch to melons and pumpkins, which are getting cheaper this year.
She also changed from eating porridge for breakfast to noodles.
“My grandson said he doesn’t like the dishes I cook these days, but what else can I do?” she said.
Shoppers at a supermarket in Shanghai’s Huangpu district complained that the price of rice produced in Hubei increased 20 percent in one month to 2.6 yuan a kg. Lotus root produced in Hunan also climbed 20 percent during the same period to 4.2 yuan a kg.
In Wuhan, capital of drought-hit Hubei, the average price of 20 monitored vegetables climbed 7.3 percent in one month. The price of cabbage almost doubled in May to 2.22 yuan a kg, according to the Ministry of Agriculture.
The price of freshwater fish, crab and shrimp also witnessed a surge in the past week. Freshwater fish production in several provinces has reached bottom as lakes and rivers are drying up.
If food prices continue to soar during the summer, the increase may exceed 20 percent, which will push up inflation in the short term, Liu Ligang, an economist for the Greater China area with the ANZ Bank, said in his column for Financial Times.
On another note, Gao Wenqi, a researcher with the Shanghai Agricultural Technology Extension and Service Center, said the drought has provided better conditions for aphids to reproduce.
Aphids can produce a new generation in days with no rain, said Gao.
Read the entire article HERE.
When Faith In U.S. Dollars And U.S. Debt Is Dead The Game Is Over – And That Day Is Closer Than You May Think
May 27th, 2011
A day is coming when the rest of the world will decide that it no longer has faith in U.S. dollars or in U.S. debt. When that day arrives, the game will be over. Traditionally, two of the biggest things that the U.S. economy has had going for it were the U.S. dollar and U.S. Treasuries. The U.S. dollar has been the default reserve currency of the world for decades. All over the globe it was seen as a strong, stable currency that was desirable for international trade. U.S. government debt has long been considered the “safest debt” in the entire world. Whenever there was a major crisis, investors would flock to U.S. Treasuries because they were considered a rock. Sadly, all of this is now changing. Today the rest of the world is losing faith in the U.S. financial system. In fact, even the United Nations is now warning of the collapse of the dollar. But if the U.S. dollar and U.S. Treasuries collapse, that will be an absolute nightmare for the U.S. economy. If the rest of the world does not want our dollars someday, then what are we going to give them in exchange for all of the oil and all of the cheap imported goods they send us? If the rest of the world does not want our debt someday, then how in the world are we going to be able to continue to consume far, far more wealth than we produce?
The rest of the world is watching the U.S. government run up record-setting budget deficits and they are watching the Federal Reserve print money like there is no tomorrow and they realize that the U.S. financial system is slowly imploding.
As mentioned above, now even the United Nations is warning that the U.S. dollar could collapse. The following is a brief excerpt from a recent news report put out by Reuters….
The United Nations warned on Wednesday of a possible crisis of confidence in, and even a “collapse” of, the U.S. dollar if its value against other currencies continued to decline.
In a mid-year review of the world economy, the UN economic division said such a development, stemming from the falling value of foreign dollar holdings, would imperil the global financial system.
But it is not just the United Nations that is concerned about the U.S. dollar.
On April 18th, Standard & Poor’s altered its outlook on U.S. government debt from “stable” to “negative” and warned that the U.S. could soon lose its prized AAA rating.
At one time, it would have been unthinkable for Standard & Poor’s to do such a thing.
But today it is amazing that it has taken them so long to make such a move. U.S. government finances are falling apart.
When the credit rating of U.S. government debt starts declining, interest rates will go up. Just ask the government of Greece how painful that can be. Today, Greece is paying over 16 percent on 10 year bonds.
The following is what John Williams of Shadow Government Statistics recently had to say about why Standard & Poor’s issued such a warning about U.S. government debt….
S&P is noting the U.S. government’s long-range fiscal problems. Generally, you’ll find that the accounting for unfunded liabilities for Social Security, Medicare and other programs on a net-present-value (NPV) basis indicates total federal debt and obligations of about $75 trillion. That’s 15 times the gross domestic product (GDP). The debt and obligations are increasing at a pace of about $5 trillion a year, which is neither sustainable nor containable. If the U.S. was a corporation on a parallel basis, it would be headed into bankruptcy rather quickly.
Look, the rest of the world is not stupid. They know that the U.S. government is hurtling towards financial disaster. The appetite among foreigners for U.S. government debt is decreasing rapidly.
In fact, according to Zero Hedge, foreigners are dumping U.S. debt at a very rapid pace right now.
In addition, the cost to insure U.S. debt has risen sharply in recent days.
Right now, the Federal Reserve has been buying up most new U.S. government debt with dollars that it has created out of thin air. This is a giant Ponzi scheme, and it is a major contributing factor to the decline of faith in the U.S. dollar.
The dollar has fallen by 17 percent compared to other major national currencies since 2009. What makes that fact even sadder is that all major currencies have been rapidly losing value compared to hard assets over that time period. The dollar is just sliding faster than almost all of the other global currencies that are constantly losing value as well.
Anyone with half a brain could have seen that this would be the end result of reckless government borrowing, but unfortunately our politicians have been ignoring this problem for decades.
Now a day or reckoning is fast approaching and it is going to be very painful.
The U.S. government has piled up the biggest mountain of debt in the history of the world. Just consider a few shocking facts about this unprecedented debt….
*If the U.S. national debt (more than 14 trillion dollars) was reduced to a stack of 5 dollar bills, it would reach three quarters of the way to the moon.
*The U.S. government borrows about 168 million dollars every single hour.
*If Bill Gates gave every penny of his fortune to the U.S. government, it would only cover the U.S. budget deficit for 15 days.
*It is now being projected that by the year 2021, interest payments on the national debt will amount to $1.1 trillion dollars a year.
In a previous article on The American Dream, I detailed some more absolutely horrifying statistics about U.S. government debt….
#1 If you divide the national debt up equally among all U.S. households, each one owes a staggering $125,475.18.
#2 The federal government has borrowed 29,660 more dollars per household since Barack Obama signed the economic stimulus law two years ago.
#3 During Barack Obama’s first two years in office, the U.S. government added more to the U.S. national debt than the first 100 U.S. Congresses combined.
#4 In the new budget that the Obama administration has proposed, the U.S. government would spend 3.7 trillion dollars in 2012 and by 2021 the U.S. government would be spending a whopping 5.6 trillion dollars per year.
#5 The U.S. government currently has to borrow approximately 41 cents of every single dollar that it spends.
#6 The total compensation that the federal government workforce earned last year came to a grand total of approximately 447 billion dollars.
#7 The U.S. national debt is currently rising by well over 4 billion dollars every single day.
#8 The U.S. government is borrowing over 2 million more dollars every single minute.
#9 The U.S. national debt is over 14 times larger than it was just 30 years ago.
#10 Unfunded liabilities for entitlement programs such as Social Security and Medicare are estimated to be well over $100 trillion, and nobody in the U.S. government seems to have any idea how we are actually even going to come close to meeting all of those obligations.
#11 If you were alive when Christ was born and you spent one million dollars every single day since that point, you still would not have spent one trillion dollars by now. But this year alone the U.S. government is going to go about 1.6 trillion dollars more into debt.
#12 If the federal government began right at this moment to repay the U.S. national debt at a rate of one dollar per second, it would take over 440,000 years to pay off the national debt.
So have our politicians learned anything from the mistakes of the past?
The U.S. government continues to spend money on some of the most ridiculous things imaginable. For example, the Department of Health and Human Services has just announced a brand new $500 million program that will, among other things, seek to solve the problem of 5-year-old children that “can’t sit still” in a kindergarten classroom.
Isn’t it good to see the government investing our hard-earned tax dollars so wisely?
Of course if our kids weren’t being constantly fed foods packed with sugar, high fructose corn syrup and aspartame we wouldn’t have to spend 500 million dollars to deal with this problem.
When it comes to government waste, nobody seems to do it any better than the U.S. government.
Our politicians continue to assume that the rest of the world will always want our dollars and our debt, but that is simply not the case.
Over the past couple of years, global leader after global leader has publicly talked about the need for a new world reserve currency.
In fact, globalist institutions such as the IMF and the World Bank have been very busy discussing what the world is going to use as a global reserve currency after the death of the dollar.
The rest of the world is not sitting around waiting to see if the U.S. financial system is going to recover. They are already making plans for the demise of the dollar. They are increasingly using other currencies to trade with. They are becoming more hesitant to buy more of our debt. They are realizing that the days of U.S. dominance are coming to an end.
So what is that going to mean for us?
It is going to be a complete and total disaster.
Right now, we live far, far beyond our means. We borrow gigantic piles of money to make up the difference between what we produce and what we consume. We are absolutely dependent on the fact that the rest of the world will take our dollars in exchange for the things that we need.
The current situation is not sustainable.
It will come to an end.
When it does, our standard of living is going to feel like it has changed overnight.
Read the entire article HERE.
Road To Hyperinflation: James Turk
By Patrick Worsnip
May 25, 2011 – 2:17 PM ET
Updated: May 26, 2011 8:15 AM ET
UNITED NATIONS – The United Nations warned on Wednesday of a possible crisis of confidence in, and even a “collapse” of, the U.S. dollar if its value against other currencies continued to decline.
In a mid-year review of the world economy, the UN economic division said such a development, stemming from the falling value of foreign dollar holdings, would imperil the global financial system.
The report, an update of the UN “World Economic Situation and Prospects 2011” report first issued in December, noted that the dollar exchange rate against a basket of other key currencies had reached its lowest level since the 1970s.
This trend, it said, had recently been driven in part by interest rate differentials between the United States and other major economies and growing concern about the sustainability of the U.S. public debt, half of which is held by foreigners.
“As a result, further (expected) losses of the book value of the vast foreign reserve holdings could trigger a crisis of confidence in the reserve currency, which would put the entire global financial system at risk,” it said.
The 17-page report referred at another point to the “still looming risk of a collapse of the United States dollar.”
Rob Vos, a senior UN economist involved with the report, said if emerging markets “massively start selling off dollars, then you can have this risk of a slide in the dollar.
“We’re not saying the collapse is imminent, but the factors are further building up that we could quickly come to that stage if other things are not improving quickly on other fronts — like the risk of the U.S. not being able to service its obligations,” he told Reuters.
UN economists have for some time queried whether the dollar should continue to be the world’s sole reserve currency. Others have also expressed concerns about U.S. finances.
Standard & Poor’s threatened on April 18 to downgrade the United States’ prized AAA credit rating unless the Obama administration and Congress found a way to slash the yawning federal budget deficit within two years.
A downgrade would erode the status of the United States as the world’s most powerful economy and the dollar’s role as the dominant global currency.
Treasury Secretary Timothy Geithner said on Wednesday the U.S. government would “never default on its obligations.”
Assessing the broader global economy, the UN report said recovery from the 2008 financial crisis continued to be led by China, India and Brazil, but that their growth outlook was moderating due to fears of inflation and domestic asset price bubbles.
It took a slightly more optimistic view of world growth prospects than it did six months ago, forecasting 3.3% expansion this year and 3.6% in 2012, compared with 3.1% and 3.5% respectively.
The United Nations uses a different exchange rate calculation than the International Monetary Fund and the Organization for Economic Cooperation and Development, making its global growth figures slightly lower.
It boosted its forecast for U.S. gross domestic product growth this year from 2.2% to 2.6% but kept next year’s estimate steady at 2.8%.
The report cut Japan’s growth outlook this year by more than a third to 0.7% following March’s catastrophic earthquake, tsunami and nuclear plant crisis. It put damage to buildings and infrastructure at about 25 trillion yen (US$305-billion) or 5% of GDP.
Despite a recent surge in oil prices, it predicted that barring major disruptions from political unrest in the Middle East, they would level off at an average $99 a barrel this year — close to the price of U.S. crude on Wednesday — and fall to an average of US$90 next year.
“Supply and demand conditions do not warrant a continued upward trend,” it said.
Food prices have also been soaring but the report said better harvests were expected to moderate them in the second half of this year.
Read the entire article HERE.
by Puru Saxena
Editor and Founder at Money Matters and Puru Saxena Limited
Over the past few weeks, we have spent a lot of time digging into the macro data pertaining to the world’s developed economies. After careful analysis, our research has convinced us that quantitative easing (money creation out of thin air) will not end anytime soon.
In fact, we believe that quantitative easing will only end when there is a run on one, or some of the world’s major currencies. Remember, the world is governed by short-sighted politicians and as long as the policymakers continue to ‘kick the can down the road’, quantitative easing (destruction of the purchasing power of money) cannot and will not end.
Figure 1 captures the state of the American currency. It shows that the US Dollar Index has recently broken below an important support level and is currently in free-fall. Furthermore, it is notable that the US Dollar’s downtrend commenced last summer when the Federal Reserve announced the second round of quantitative easing. Now, the Federal Reserve may continue to argue that its quantitative easing program is not inflationary but the market clearly does not like the dilution of the existing money stock.
It is notable that since the credit crisis in 2008, the Federal Reserve has created over US$2 trillion new dollars via its various programs. Some of this newly created money was spent on buying dubious mortgage backed securities from the banks at inflated prices. More recently, a large percentage of the money was lent directly to the US government. In fact, PIMCO believes that since last summer, approximately 70% of newly issued US Treasury securities have been bought by the Federal Reserve!
With the latest round of quantitative easing ending in June, the market is now waiting for the Federal Reserve’s next move. However, if a recent Bloomberg news release is any guide, the central bank plans to continue lending money to the US government (by purchasing additional US Treasury securities from the proceeds of the maturing mortgage backed securities).
So, based on the Federal Reserve’s intentions, it should be clear to everyone that Mr. Bernanke will keep financing the American government’s deficit. Given the fact that foreign demand for US Treasury securities is waning and China has been a net seller for four consecutive months, it is hardly surprising that the Federal Reserve has stepped up as the lender of last resort. After all, Mr. Bernanke knows full well that if he stops lending money to the US government, interest rates will rise significantly which in turn will exert tremendous pressure on the American public. If interest rates surge anytime soon, millions of indebted Americans may default on their debt; thereby bankrupting the American financial institutions.
More importantly, rising interest rates will also exert tremendous pressure on the American government. It is noteworthy that America’s federal debt has already climbed to US$14.2 trillion and every one percentage point increase in the cost of capital will cost an extra US$142 billion annually in interest payments alone. Therefore, if short-term interest rates moved up to even 4%, the American government’s annual interest expense will rise by a staggering US$568 billion. Furthermore, when you consider the fact that the American government’s 2011 revenue is expected to be in the region of US$2.3 trillion, you begin to realise that America has a problem on its hands. The reality is plain and simple – America cannot afford higher interest rates.
Thus, in order to keep short-term interest rates artificially low, the Federal Reserve will have to continue with its policy of creating new dollars and lending them to the American government. Our assessment suggests that if the American stock market wavers in the summer, the Federal Reserve will promptly announce another round of quantitative easing. The truth is that once a heavily indebted nation has embarked on a zero interest rate policy, it is very difficult to remove the punch bowl.
To complicate matters even further, the American government continues to spend way more than its revenue permits and this year, its budget deficit will come in at US$1.4 trillion or 10% of America’s GDP! If the White House spends US$1.4 trillion more than its tax receipts in 2011, then it will have to borrow this money from somewhere; thereby adding to the nation’s federal debt. It goes without saying that at record low interest rates, America’s foreign friends are not too keen on lending money to Mr. Obama’s administration. Therefore, it is inevitable that the Federal Reserve will continue to provide cheap funding.
Unfortunately, there is no such thing as a free lunch and the Federal Reserve’s mindless money creation will have dire consequences. If the central bank continues to create new dollars out of thin air and finance Mr. Obama’s deficit spending, the end game will be a severe decline in the value of the American Dollar.
Under ‘normal’ circumstances, if America was the only guilty party, its currency would have collapsed against other major currencies (which it has to a certain extent). However, in today’s ‘modern’ day and age, most of the developed countries are in the same sinking boat, thus it is very difficult to forecast which currencies will emerge as the winners.
Consider Europe’s financial health. Defying logic, the Euro area’s debt has increased over the past 3 years. When the house of cards collapsed in 2008, any sane person would have expected debt deleveraging to occur. However, the genius of European ‘bailouts’ and ‘stimulus’ has managed to achieve just the opposite – Euro area’s federal debt has now climbed to 85.3% of GDP! Finally, as far as Japan’s developed economy goes, its federal debt has surged to almost 200% of GDP!
Although federal debt to GDP is a popular yardstick often used by economists to measure a nation’s pulse, a US based hedge fund firm (Hayman Capital) argues that it may be better to compare the debt overhang in each nation with the government’s revenue. In this respect, Figure 2 does a good job of summarising the predicament of the developed world. As you can see, Japan tops this infamous list and its federal debt is over 1900% of the government’s annual revenue. Note that America’s debt burden is very similar to Greece – yet its government debt securities enjoy the highest credit rating!
Look. As long as the politicians refuse to restructure debt and continue to run large deficits with artificially suppressed interest rates, the purchasing power of all currencies will plummet over the years ahead. The unintended consequence of pursuing reckless monetary and fiscal policies will be extreme inflation and a currency crisis.
Perhaps this is the reason why one of the Chinese officials recently opined that China must reduce its foreign exchange reserves by an astonishing 65% to US$ 1 trillion. Interestingly, only a couple of days later, the Chinese media reported that its policymakers are in the process of setting up investment funds specifically to acquire precious metals and energy.
As it turns out, the Chinese are not alone in understanding the true impact of money creation and deficit spending. Ironically, in an article published in 1966, Mr. Greenspan (who later became one of the biggest money printers in history) had the following to say about deficit spending:
“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.”
Given the ridiculous debt overhang in the developed world, the ongoing deficit spending programs, artificially low interest rates and the endless quantitative easing, we believe there is a genuine risk of very high inflation.
Accordingly, from an investment standpoint, we have allocated a reasonable portion of our managed capital to precious metals. If our assessment proves to be correct and the price of gold and silver sky-rockets over the next 2-3 years, our directional bets will produce very large gains.
Read the entire article HERE.
Rolling Stones Matt Taibbi
The fact that those responsible for the recent economic crisis have not been held accountable is setting a very dangerous trend, believes investigative journalist Matt Taibbi, author and contributing editor to Rolling Stone magazine.
If you listen to Ben Bernanke, Barack Obama and the mainstream media long enough, and if you didn’t know any better, you might be tempted to think that the economic crisis is long gone and that we are in the midst of a burgeoning economic recovery. Unfortunately, the truth is that the economic crisis is far from over. In 2010, more homes were repossessed than ever before, more Americans were on food stamps than ever before and a smaller percentage of American men had jobs than ever before. The reality is that the United States is an economic basket case and all of these natural disasters certainly are not helping things. The Federal Reserve has been printing gigantic piles of money and the U.S. government has been borrowing and spending cash at a dizzying pace in an all-out effort to stabilize things. They have succeeded for the moment, but our long-term economic problems are worse then ever. We are still in the middle of a full-blown economic crisis and things are about to get even worse.
If you know someone that is foolish enough to believe that the economic crisis is over and that our economic problems are behind us, just ask that person the following questions….
#1 During the 23 months of the “Obama recovery”, an average of about 23,000 jobs a month have been created. It takes somewhere in the neighborhood of 150,000 jobs a month just to keep up with population growth. So shouldn’t we hold off a bit before we declare the economic crisis to be over?
#2 During the “recession”, somewhere between 6.3 million and 7.5 million jobs were lost. During the “Obama recovery”, approximately 535,000 jobs have been added. When will the rest of the jobs finally come back?
#3 Of the 535,000 jobs that have been created during the “Obama recovery”, only about 35,000 of them are permanent full-time jobs. Today, “low income jobs” account for 41 percent of all jobs in the United States. If our economy is recovering, then why can’t it produce large numbers of good jobs that will enable people to provide for their families?
#4 Agricultural commodities have been absolutely soaring this decade. The combined price of cotton, wheat, gasoline and hogs is now more than 3 times higher than it was back in 2002. So how in the world can the Federal Reserve claim that inflation has been at minimal levels all this time?
#5 Back in 2008, banks had a total of 27 billion dollars in excess reserves at the Fed. Today, banks have a total of approximately 1.5 trillion dollars in excess reserves at the Fed. So what is going to happen when all of this money eventually hits the economy?….
#6 If the U.S. economy is recovering, then why are shipments by U.S. factories still substantially below 2008 levels?
#7 Why are imports of goods from overseas growing much more rapidly than shipments of goods from U.S. factories?
#8 According to Zillow, the average price of a home in the U.S. is about 8 percent lower than it was a year ago and that it continues to fall about 1 percent a month. During the first quarter of 2011, home values declined at the fastest rate since late 2008. So can we really talk about a “recovery” when the real estate crisis continues to get worse?
#9 According to a shocking new survey, 54 percent of Americans believe that a housing recovery is “unlikely” until at least 2014. So how is the housing industry supposed to improve if so many people are convinced that it will not?
#10 The latest GDP numbers out of Japan are a complete and total disaster. During the first quarter GDP declined by a stunning 3.7 percent. Of course I have been saying for months that the Japanese economy is collapsing, but most mainstream economists were absolutely stunned by the latest figures. So will the rest of the world be able to avoid slipping into a recession as well?
#11 Next week, Republicans in the House of Representatives are going to allow a vote on raising the debt ceiling. Everyone knows that this is an opportunity for Republican lawmakers to “look tough” to their constituents (the vast majority of which do not want the debt ceiling raised). Everyone also knows that eventually the Republicans are almost certainly going to cave on the debt ceiling after minimal concessions by the Democrats. The truth is that neither “establishment Republicans” nor “establishment Democrats” are actually serious about significantly cutting government debt. So why do we need all of this political theater?
#12 Why are so many of our once great manufacturing cities being transformed into hellholes? In the city of Detroit today, there are over 33,000 abandoned houses, 70 schools are being permanently closed down, the mayor wants to bulldoze one-fourth of the city and you can literally buy a house for one dollar in the worst areas.
#13 According to one new survey, about half of all Baby Boomers fear that when they retire they are going to end up living in poverty. So who is going to take care of them all when the money runs out?
#14 According to the U.S. Bureau of Labor Statistics, an average of about 5 million Americans were being hired every single month during 2006. Today, an average of about 3.5 million Americans are being hired every single month. So why are our politicians talking about “economic recovery” instead of “the collapse of the economy” when hiring remains about 50 percent below normal?
#15 Since August, 2 million more Americans have left the labor force. But the entire period from August to today was supposed to have been a time of economic growth and recovery. So why are so many Americans giving up on looking for a job?
#16 According to Gallup, 41 percent of Americans believed that the economy was “getting better” at this time last year. Today, that number is at just 27 percent. Are Americans losing faith in the U.S. economy?
#17 According to the U.S. Census, the number of children living in poverty has gone up by about 2 million in just the past 2 years, and one out of every four American children is currently on food stamps. During this same time period, Barack Obama and Ben Bernanke have told us over and over that the U.S. economy has been getting better. So what is the truth?
#18 America has become absolutely addicted to government money. 59 percent of all Americans now receive money from the federal government in one form or another. U.S. households are now receiving more income from the U.S. government than they are paying to the government in taxes. Americans hate having their taxes raised and they hate having their government benefits cut. So is there any hope that this will ever be turned around before disaster strikes?
#19 The combined debt of the major GSEs (Fannie Mae, Freddie Mac and Sallie Mae) has increased from 3.2 trillion in 2008 to 6.4 trillion in 2011. How in the world is the U.S. government going to be able to afford to guarantee all of that debt on top of everything else?
#20 If the U.S. national debt (more than 14 trillion dollars) was reduced to a stack of 5 dollar bills, it would reach three quarters of the way to the moon. The U.S. government borrows about 168 million dollars every single hour. If Bill Gates gave every penny of his fortune to the U.S. government, it would only cover the U.S. budget deficit for 15 days. So how in the world can our politicians tell us that everything is going to be okay?
Read the entire article HERE.
By Jonathan Chen
Benzinga Staff Writer
May 26, 2011 9:24 AM
Marc Faber of the “Gloom, Boom & Doom” report spoke at the Ira Sohn Conference yesterday, and talked about the destructive nature of U.S. monetary and fiscal policy, and a way to play it.
Faber said that U.S. monetary and fiscal policy has created more volatility, and we can expect more of that going forward. Faber mentioned the Long Term Capital bailout, the liquidity that rushed in during Y2K, and the end result. The NASDAQ crashed, falling some 50%, and it still has not come close to those levels.
Faber said that not all growth in the country has occurred during inflationary environments, despite what the Federal Reserve wants you to believe. The U.S. grew from 4 million to 80 million people, and new industries were created during a deflationary environment. He mentioned industries such as railroads that prospered during the deflationary environment, and even mentioned that incomes rose during this time.
He is not confident that the Federal Reserve will be able to get it right this time, as it has not gotten it right before. The Fed missed raising rates by 3 years after the NASDAQ crash. The economy started to grow in November 2001, and the Fed started raising in June 2004, despite the need for it three years prior. The Fed is also slow to realize problems of containment, specifically in subprime, which obviously was not contained.
The Federal Reserve created excessive growth in the system, as evidenced by the debt to GDP ratio, which has increased rapidly over the past few years. To get out of this, the Fed has two options: tight monetary policy, or print and print. Faber says the Fed will not pursue tight monetary policy, so the printing press will just keep running.
Of course, the Fed can’t control what we do with the money, which is why bubbles continue to form. Both Alan Greenspan and Ben Bernanke have created massive bubbles, including equities, commodities, bonds, wages, and sometimes currencies. From 2002-2008, Greenspan and Bernanke have created massive bubbles.
To play this, Faber said that cash and bonds are undesirable in this environment, and you should not own U.S. debt. One way to play this is to own ProShares UltraShort 20+ Year Trea ETF (NYSE: TBT). He said that even if the deflationists are right, you should not own government debt.
Faber concluded by saying that he thinks we should prepare for the next war time, and gold might go ballistic. He said having gold all over the world is a safe hedge from potential confiscation.
Read the entire article HERE.
May 26, 2011
In a revelation that should surprise no one, lending records of the Federal Reserve Bank of New York released by a March court order show that the Fed made cut-rate emergency loans of up to $30 billion each to major banks in 2008 without informing Congress, shareholders or the American public.
Why did financial officials keep the loans—which were as low as .01 percent at a time when the Fed regularly charged 0.5 percent—a secret? Because the purchasing public might “inaccurately” lose faith in a bank openly seeking assistance, vice president of the New York Fed’s markets group says, in what looks to be a brazen act of Orwellian doublethink. —ARK
By Bob Ivry
May 26, 2011
Credit Suisse Group AG (CS), Goldman Sachs Group Inc. (GS) and Royal Bank of Scotland Group Plc (RBS) each borrowed at least $30 billion in 2008 from a Federal Reserve emergency lending program whose details weren’t revealed to shareholders, members of Congress or the public.
The $80 billion initiative, called single-tranche open- market operations, or ST OMO, made 28-day loans from March through December 2008, a period in which confidence in global credit markets collapsed after the Sept. 15 bankruptcy of Lehman Brothers Holdings Inc.
Units of 20 banks were required to bid at auctions for the cash. They paid interest rates as low as 0.01 percent that December, when the Fed’s main lending facility charged 0.5 percent.
“This was a pure subsidy,” said Robert A. Eisenbeis, former head of research at the Federal Reserve Bank of Atlanta and now chief monetary economist at Sarasota, Florida-based Cumberland Advisors Inc. “The Fed hasn’t been forthcoming with disclosures overall. Why should this be any different?”
The Federal Reserve Bank of New York, which oversaw ST OMO, posted aggregate data about the program on its website after each auction, said Jeffrey V. Smith, a New York Fed spokesman. By increasing the availability of short-term financing when private lenders were under pressure, “this program helped alleviate strains in financial markets and support the flow of credit to U.S. households and businesses,” he said.
Not in Dodd-Frank
Congress overlooked ST OMO when lawmakers required the central bank to publish its emergency lending data last year under the Dodd-Frank law.
“I wasn’t aware of this program until now,” said U.S. Representative Barney Frank, the Massachusetts Democrat who chaired the House Financial Services Committee in 2008 and co- authored the legislation overhauling financial regulation. The law does require the Fed to release details of any open-market operations undertaken after July 2010, after a two-year lag.
Records of the 2008 lending, released in March under court orders, show how the central bank adapted an existing tool for adjusting the U.S. money supply into an emergency source of cash. Zurich-based Credit Suisse borrowed as much as $45 billion, according to bar graphs that appear on 27 of 29,000 pages the central bank provided to media organizations that sued the Fed Board of Governors for public disclosure.
New York-based Goldman Sachs’s borrowing peaked at about $30 billion, the records show, as did the program’s loans to RBS, based in Edinburgh. Deutsche Bank AG (DBK), Barclays Plc (BARC) and UBS AG (UBSN) each borrowed at least $15 billion, according to the graphs, which reflect deals made by 12 of the 20 eligible banks during the last four months of 2008.
No Exact Amounts
The records don’t provide exact loan amounts for each bank. Smith, the New York Fed spokesman, would not disclose those details. Amounts cited in this article are estimates based on the graphs.
One effect of the program was to spur trading in mortgage- backed securities, said Lou Crandall, chief U.S. economist at Jersey City, New Jersey-based Wrightson ICAP LLC, a research company specializing in Fed operations. The 20 banks — previously designated as primary dealers to trade government securities directly with the New York Fed — posted mortgage securities guaranteed by government-sponsored enterprises such as Fannie Mae or Freddie Mac in exchange for the Fed’s cash.
ST OMO aimed to thaw a frozen short-term funding market and not necessarily to aid individual banks, Crandall said. Still, primary dealers earned spreads by using the program to help customers, such as hedge funds, finance their mortgage securities, he said.
“Spreads vary from one transaction to another,” making any calculation of dealers’ profits on the Fed loans impossible, Crandall said.
The Fed opposed disclosing details of its open market operations because doing so would probably cause borrowers “substantial competitive harm,” according to a March 2009 declaration by Christopher R. Burke, vice president of the New York Fed’s markets group. The declaration is filed in federal court.
Revealing the borrowing “could lead market participants to inaccurately speculate that the primary dealer was having difficulty finding term funding against its collateral in the open market and that the dealer itself must therefore be in financial trouble,” Burke said in opposing a media request for records about the borrowing.
Bidding Interest Rates
The New York Fed conducted 44 ST OMO auctions, from March through December 2008, according to its website. Banks bid the interest rate they were willing to pay for the loans, which had terms of 28 days. That was an expansion of longstanding open- market operations, which offered cash for up to two weeks.
Outstanding ST OMO loans from April 2008 to January 2009 stayed at $80 billion. The average loan amount during that time was $19.4 billion, more than three times the average for the 7 1/2 years prior, according to New York Fed data. By comparison, borrowing from the Fed’s discount window, its main lending program for banks since 1914, peaked at $113.7 billion in October 2008, Fed data show.
In March 2008, ST OMO was “desperately needed,” because of the shaken state of short-term credit markets, said Michael Greenberger, a professor at the University of Maryland School of Law in Baltimore and former director of the division of markets and trading at the Commodities Futures Trading Commission. After the Fed created other lending mechanisms and the Treasury Department began distributing money from the Troubled Asset Relief Program in October, ST OMO became “just a way for banks to have at it,” he said.
“At such low interest rates, it’s no longer a rescue, it’s a profit-making enterprise,” Greenberger said. “By December, a lot of money was made off this program.”
Goldman Sachs, led by Chief Executive Officer Lloyd C. Blankfein, tapped the program most in December 2008, when data on the New York Fed website show the loans were least expensive. The lowest winning bid at an ST OMO auction declined to 0.01 percent on Dec. 30, 2008, New York Fed data show. At the time, the rate charged at the discount window was 0.5 percent.
Stephen Cohen, a spokesman for Goldman Sachs, declined to comment.
As its ST OMO loans peaked in December 2008, Goldman Sachs’s borrowing from other Fed facilities topped out at $43.5 billion, the 15th highest peak of all banks assisted by the Fed, according to data compiled by Bloomberg. That month, the bank’s Fixed Income, Currencies and Commodities trading unit lost $320 million, according to a May 6, 2009, regulatory filing.
Under ST OMO, cash changed hands through repos, or repurchase agreements, which the central bank has used to move money in and out of the banking system for at least 60 years. In a repo, the dealer sells securities to the Fed and agrees to buy them back for a higher price after a set period of time.
Open-market operations traditionally use repos to influence the federal funds rate, which is banks’ cost of short-term borrowing, said Sherrill Shaffer, the officer in charge of the discount window at the Federal Reserve Bank of Philadelphia from 1994 to 1997. He’s now a banking professor at the University of Wyoming in Laramie.
When the central bank increases the money supply — by paying cash for securities in repos — interest rates tend to fall. When it drains cash from the system by selling securities in reverse repos, rates can climb.
Pedal to Metal
Using repos to provide emergency cash, a step the Fed announced on March 7, 2008, was a departure from that process, said John H. Cochrane, a finance professor at the University of Chicago Booth School of Business.
“The Fed was slamming the pedal to the metal in the lender-of-last-resort category,” Cochrane said. “What they did was so far from what we conventionally think of as monetary policy.”
Credit Suisse’s borrowing peaked at about $45 billion in September 2008, the Fed charts show. Steven Vames, a Credit Suisse spokesman in New York, declined to comment.
RBS’s use of ST OMO hit about $30 billion in October 2008. The U.K. government has had a stake in the bank since Oct. 13, 2008. “RBS no longer makes any use of these emergency Federal Reserve lending programs and all money borrowed from the Fed has been repaid in full with interest,” said Michael Geller, a spokesman for RBS Global Banking & Markets in Stamford, Connecticut.
Frankfurt-based Deutsche Bank’s use peaked at about $20 billion in October 2008, its chart shows. The bank had 87 billion euros ($122 billion) in repurchase agreements with all central banks as of the end of 2008, according to its annual report. John Gallagher, a bank spokesman, declined to comment.
London-based Barclays’s peak reached about $20 billion in December 2008, the chart said. Mark Lane, a Barclays spokesman, declined to comment.
UBS, based in Zurich, borrowed as much as about $15 billion in late 2008, the chart shows.
“UBS’s usage of those facilities should be seen in the context of our overall desire to maintain flexibility and diversification in our funding sources, even during the crisis,” said Kelly Smith, a spokeswoman for UBS in New York. “Given UBS’s substantial presence and commitment to U.S. dollar-denominated markets, utilization of such facilities was relatively modest.”
Other banks listed in the Fed charts borrowed less than their peers. New York-based Morgan Stanley (MS) and Paris-based BNP Paribas (BNP), France’s biggest bank by assets, took no more than about $10 billion. Citigroup Inc. (C), JPMorgan Chase & Co. and Merrill Lynch & Co., which is now part of Bank of America Corp. (BAC), borrowed less than $5 billion each.
Mary Claire Delaney, a spokeswoman for Morgan Stanley, Jon Diat, a Citigroup spokesman in New York, Howard Opinsky, a spokesman for New York-based JPMorgan Chase, and Megan Stinson, a spokeswoman in New York for BNP Paribas, declined to comment on their banks’ borrowings.
“Look at it in hindsight and these programs did exactly what they were intended to do — stabilize the financial system, provide liquidity and instill confidence,” said Jerry Dubrowski, a spokesman for Charlotte, North Carolina-based Bank of America.
The bar charts were included in the Fed’s court-ordered March 31 disclosure under the Freedom of Information Act. The release was mandated after the U.S. Supreme Court rejected an industry group’s attempt to block it. Bloomberg LP, the parent company of Bloomberg News, and News Corp. (NWS)’s Fox News Network LLC had sued the central bank after it refused to release lending records under the FOIA.
Read the entire article HERE.
Read the original blog post HERE.
Submitted by Tyler Durden
05/20/2011 14:57 -0400
It seems like it was only yesterday that the Fed passed the $1 trillion mark in total Treasury holdings (actually it was on that memorable Winter Solstice of 2010 but who’s counting). Well it is not even 5 full months later, and the Fed has already added $500 billion in holdings. Following today’s $6.94 billion Pomo, total Fed holdings of US Treasurys have now passed $1.5 trillion (which is ironic because the net new cash tendered to the Treasury per total Bond, Note and Bill issuance and redemption in 2011 through the most recent settled auction is $350 billion, in other words the Fed has funded about 140% of the total Treasury cash needs). As a reminder there is just under 6 weeks left until QE2 ends, at which poin the Fed’s Treasury holdings will be about $1.6 trillion, and the Treasury will be without its primary (over and above the maximum) source of capital.
The Fed’s lead over China continues. It is probably irrelevant that official Chinese holdings of US debt have now declined for the 5th consecutive month.
-Total holdings increased by $21.2 billion in the week, as Treasury holdings increased by $29 billion, offset by $7.8 billion in MBS/Agency repayments.
-Excess reserves declined by $8 billion, even as the Adjusted Monetary Base increased once again, albeit this is delayed so rather irrelevant.
-Total foreign custodial holdings declined by $11.1 billion primarily due to a $16 billion reduction in Agency debt.
For those concerned about the surge in excess reserves in recent weeks, as we have noted there has been nothing odd about this (the SFP unwind was the primary driver). In fact, the cumulative change in reserves and Fed asset holdings is now precisely zero, meaning the two are in perfect alignment.
Repayments of Agency and MBS holdings continue to be at a very slow rate. Once again, just as we expected.
And lastly, while “Other Fed Assets” dipped in the last week by $6.3 billion, although this appears to be a bimonthly event, where there seems to be a reindexing event occuring. Look for a jump in this series next week.
Read the entire article HERE.
By BEN WHITE
5/17/11 9:39 AM EDT
Updated: 5/17/11 4:25 PM EDT
The U.S. hit its debt ceiling on Monday, and there’s no deal on the horizon to raise it ahead of the August drop-dead deadline. But Treasury Secretary Timothy Geithner is done issuing dire warnings — for now.
In remarks at the Harvard Club of New York on Tuesday, Geithner shifted his message back toward discussing how to reduce the deficit.
He said the debt limit is “about the past,” a tone shift that was not meant to downplay the potentially disastrous impact a debt default could have.
Instead, the message reflects a desire to make it clear that raising the ceiling simply honors commitments the government has already made and is not connected to decisions about future spending.
The time has come to make tough choices about federal spending, Geithner said, and not get mired in a debate about funds that past Congresses and administrations have already committed and spent.
The change in tone also reflects a belief within Treasury that Geithner has pulled all the emergency levers he can to give Congress until early August to raise the debt limit without putting the nation into default.
Treasury has begun borrowing from federal pension plans and curtailing certain efforts to assist states to keep making interest payments on outstanding federal debt — efforts Geithner said will be effective only through Aug. 2.
Though similar measures have been used in the past, the debt ceiling was always raised in time to avoid default or even the appearance of default. Treasury interest rates have not risen significantly in recent weeks, indicating the market believes a deal will be made. If one isn’t, it could damage global financial markets and drive up the cost of borrowing for the government and private citizens.
Republican congressional leaders, especially House Speaker John Boehner, are demanding cuts of at least $2 trillion in return for an increase of $2 trillion in the debt ceiling without raising taxes. Democrats say they would never accept such a formula.
The rhetoric has been similarly heated in the past prior to forging a deal. And the political party in the White House often rings alarm bells for raising the debt limit. In 1983, President Ronald Reagan sent a letter to the Democratic-controlled Senate warning of the catastrophic consequences if the debt ceiling were not raised. Eventually, it was.
If somehow the expected endgame — a last-minute, pre-summer recess agreement — does not occur, administration officials are not backing off from their predictions of the devastating impact of a default.
Geithner reiterated his warnings in a letter to Colorado Sen. Michael Bennet in which he said missing the Aug. 2 deadline “would inflict catastrophic, far-reaching damage on our nation’s economy, significantly reducing growth and increasing unemployment.”
Read the entire article HERE.
05/22/2011 07:43 -0400
They call the red metal “Dr. Copper” because of its uncanny ability to forecast the future direction of the global economy. Well, this year, he has been right again. The sudden sell off in crude has also created some spill over selling in other hard assets. That the long term case for copper is still compelling. (CU), (FCX).
No one has been singing louder the praises of the predictive power of copper prices (CU) louder than me this year. They call the red metal “Dr. Copper” because of its uncanny ability to forecast the future direction of the global economy.
Look at the charts below and it is clear that the eminent professor has been crying “watch out below” since February. Ditto for top copper producer, Freeport McMoRan. It wasn’t until three months later that US GDP growth had suddenly and surprisingly downshifted from 3.1% to 1.8%.
So it is with the greatest interest that I picked up some comments this forming from my old friend, FCX CEO, Dan Adkerson. He believes that the recent weakness in copper is not the beginning of a new bear market, but merely short term profit taking driven by speculators. Chinese tightening has been a drag, which accounts for 35%-40% of global demand. It’s clear that the sudden sell off in crude has also created some spill over selling in other hard assets.
However, Adkerson argues that the long term case for copper is still compelling. The Chinese drive for a higher standard of living is irresistible, and that requires enormous amounts of copper for roads, construction, and shipbuilding. A burgeoning global hybrid and electric car industry is also increasing demand for copper.
Adkerson’s big challenge is how to meet all this demand. The enormous capital requirements and long lead times essential for the opening of new mines means that his company must think not in terms of weeks, months or even years, but in decades. He has no problem making those commitments. FCX already produces 4 million pounds of copper per year. With a current production cost of $1 per pound, it can easily handle the recent decline from $4.70 to $3.92.
there is no doubt that copper has been leading the charge to the downside in this global “RISK OFF”, environment. But when it runs its course, copper and FCX are going to be some of the first positions that I step back into.
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.
Read the entire article HERE.