Posts Tagged ‘US Debt’
By Pham-Duy Nguyen and Maria Kolesnikova
Jul 27, 2011 7:36 AM PT
Gold futures rose to a record $1,631.20 an ounce as the impasse on the U.S. debt ceiling boosted demand for the precious metal as a haven.
The cost of insuring U.S. debt rose to a 17-month high, and the dollar fell to a record against the Swiss franc as congressional leaders offered competing budget plans. Moody’s Investors Service, Standard & Poor’s and Fitch Ratings have said they will cut the U.S.’s top-level credit rating should a failure to raise the debt ceiling lead to a default.
“Government securities, the traditional area of safety, are now at risk, so that’s why you’re seeing gold grind higher,” Frank McGhee, the head dealer at Integrated Brokerage Services LLC in Chicago, said in a telephone interview. “The level of U.S. government borrowing has caused the erosion of the dollar and adds more fuel to the metal’s rally.”
Gold futures for December delivery rose $8.90, or 0.5 percent, to $1,628 at 10:33 a.m. on the Comex in New York. In July, the price has climbed 8.3 percent, heading for the biggest gain since November 2009.
Holdings of gold in exchange-traded products rose 0.3 percent to a record 2,128.229 metric tons yesterday, data compiled by Bloomberg show.
Silver futures for September delivery rose 57.7 cents, or 1.4 percent, to $41.275 an ounce on the Comex.
Platinum futures for October delivery gained $8.80, or 0.5 percent, to $1,816 an ounce on the New York Mercantile Exchange. Palladium futures for September delivery climbed $8.35, or 1 percent, to $844.45 an ounce.
Read the entire article HERE.
By Eamon Javers
Tuesday, 21 Jun 2011 | 7:30 PM ET
CNBC Washington, DC Correspondent
The New York Fed is refusing to tell investigators how many billions of dollars it shipped to Iraq during the early days of the US invasion there, the special inspector general for Iraq reconstruction told CNBC Tuesday.
The Fed’s lack of disclosure is making it difficult for the inspector general to follow the paper trail of billions of dollars that went missing in the chaotic rush to finance the Iraq occupation, and to determine how much of that money was stolen.
The New York Fed will not reveal details, the inspector general said, because the money initially came from an account at the Fed that was held on behalf of the people of Iraq and financed by cash from the Oil-for-Food program. Without authorization from the account holder, the Iraqi government itself, the inspector general’s office was told it can’t receive information about the account.
The problem is that critics of the Iraqi government believe highly placed officials there are among the people who may have made off with the money in the first place.
And some think that will make it highly unlikely the Iraqis will sign off on revealing the total dollar amount.
“My frustration is not with the New York Fed, it is with the Iraqis,” said Stuart Bowen Jr., the Special Inspector General for Iraq reconstruction (SIGIR). “They haven’t been sufficiently responsive.”
As for the New York Fed’s position of secrecy about the total amount transferred to Iraq, Bowen said, “We understand it in the sense that it’s a foreign account and the account holder, according to their own rules, must provide permission.”
A spokesman for the New York Fed issued a statement to CNBC Tuesday evening. “The New York Fed has cooperated closely with SIGIR during its investigations and will continue to do so, in accordance with our policies related to disclosing customer account information, which generally includes receiving the consent of the account holder,” the spokesman said.
The impasse comes as the inspector general continues a massive and years-long investigation into what happened to billions of dollars in cash that left the New York Fed and vanished during the US occupation.
It was one of the largest shipments of cash in history. And the inspector general says that if the money was stolen, that would represent the largest heist in history.
According to a 2007 investigative report by Donald L. Bartlett and James B. Steele in Vanity Fair magazine, the cash originated from a little-known Fed vault located at 100 Orchard Street in East Rutherford, NJ, the largest depository of American currency in the world.
On Tuesday, June 22, 2004, the duo reported, unmanned vehicles loaded a tractor-trailer truck with pallets of $100 bills — weighing 30 tons and worth $2.4 billion — and that truck headed out onto New Jersey Route 17 bound for Andrews Air Force Base outside of Washington, DC.
There, the money was transferred to a C-130 transport plane and flown to Baghdad.
The cash transfer on that one day was just one of several such shipments of currency to Iraq, and the inspector general is trying to determine just how much was sent, and how much was stolen once it arrived in Iraq.
“We don’t have access to the Federal Reserve account to know how much money actually came out of the Fed,” said Jason Venner, the inspector general’s chief auditor. “They won’t tell us.”
Venner said that the inspector general plans to make a formal request of the Iraqi government to release the account information during a meeting in Jordan next week of the International Advisory and Monitoring Board, the body that oversees development funds for Iraq.
Determining the total amount of money that has gone missing — and who was responsible for losing it — is much more than an academic question. Some Iraqi government officials have threatened to sue the United States over the missing money, arguing that the government had a fiduciary obligation to apply appropriate financial controls, and is therefore liable for any losses.
If that effort overcomes the many legal challenges it would face, the lost money would have to be replaced — at the US taxpayers’ expense.
Read the entire article HERE.
Jun 10, 2011
The Straits Times
BEIJING – A CHINESE ratings house has accused the United States of defaulting on its massive debt, state media said on Friday, a day after Beijing urged Washington to put its fiscal house in order.
‘In our opinion, the United States has already been defaulting,’ Guan Jianzhong, president of Dagong Global Credit Rating Co Ltd, the only Chinese agency that gives sovereign ratings, was quoted by the Global Times saying.
Washington had already defaulted on its loans by allowing the dollar to weaken against other currencies – eroding the wealth of creditors including China, Mr Guan said.
Mr Guan did not immediately respond to AFP requests for comment. The US government will run out of room to spend more on August 2 unless Congress bumps up the borrowing limit beyond US$14.29 trillion (S$17.57 trillion) – but Republicans are refusing to support such a move until a deficit cutting deal is reached.
Ratings agency Fitch on Wednesday joined Moody’s and Standard & Poor’s to warn the United States could lose its first-class credit rating if it fails to raise its debt ceiling to avoid defaulting on loans.
A downgrade could sharply raise US borrowing costs, worsening the country’s already dire fiscal position, and send shock waves through the financial world, which has long considered US debt a benchmark among safe-haven investments. — AFP
Read the entire article HERE.
By Terence P. Jeffrey
Friday, June 03, 2011
China has dropped 97 percent of its holdings in U.S. Treasury bills, decreasing its ownership of the short-term U.S. government securities from a peak of $210.4 billion in May 2009 to $5.69 billion in March 2011, the most recent month reported by the U.S. Treasury.
Treasury bills are securities that mature in one year or less that are sold by the U.S. Treasury Department to fund the nation’s debt.
Mainland Chinese holdings of U.S. Treasury bills are reported in column 9 of the Treasury report linked here.
Until October, the Chinese were generally making up for their decreasing holdings in Treasury bills by increasing their holdings of longer-term U.S. Treasury securities. Thus, until October, China’s overall holdings of U.S. debt continued to increase.
Since October, however, China has also started to divest from longer-term U.S. Treasury securities. Thus, as reported by the Treasury Department, China’s ownership of the U.S. national debt has decreased in each of the last five months on record, including November, December, January, February and March.
Prior to the fall of 2008, acccording to Treasury Department data, Chinese ownership of short-term Treasury bills was modest, standing at only $19.8 billion in August of that year. But when President George W. Bush signed legislation to authorize a $700-billion bailout of the U.S. financial industry in October 2008 and President Barack Obama signed a $787-billion economic stimulus law in February 2009, Chinese ownership of short-term U.S. Treasury bills skyrocketed.
By December 2008, China owned $165.2 billion in U.S. Treasury bills, according to the Treasury Department. By March 2009, Chinese Treasury bill holdings were at $191.1 billion. By May 2009, Chinese holdings of Treasury bills were peaking at $210.4 billion.
However, China’s overall appetite for U.S. debt increased over a longer span than did its appetite for short-term U.S. Treasury bills.
In August 2008, before the bank bailout and the stimulus law, overall Chinese holdings of U.S. debt stood at $573.7 billion. That number continued to escalate past May 2009– when China started to reduce its holdings in short-term Treasury bills–and ultimately peaked at $1.1753 trillion last October.
As of March 2011, overall Chinese holdings of U.S. debt had decreased to 1.1449 trillion.
Most of the U.S. national debt is made up of publicly marketable securities sold by the Treasury Department and I.O.U.s called “intragovernmental” bonds that the Treasury has given to so-called government trust funds—such as the Social Security trust funds—when it has spent the trust funds’ money on other government expenses.
The publicly marketable segment of the national debt includes Treasury bills, which (as defined by the Treasury) mature in terms of one-year or less; Treasury notes, which mature in terms of 2 to 10 years; Treasury Inflation-Protected Securities (TIPS), which mature in terms of 5, 10 and 30 years; and Treasury bonds, which mature in terms of 30 years.
At the end of August 2008, before the financial bailout and the stimulus, the publicly marketable segment of the U.S. national debt was 4.88 trillion. Of that, $2.56 trillion was in the intermediate-term Treasury notes, $1.22 trillion was in short-term Treasury bills, $582.8 billion was in long-term Treasury bonds, and $521.3 billion was in TIPS.
At the end of March 2011, by which time the Chinese had dropped their Treasury bill holdings 97 percent from their peak, the publicly marketable segment of the U.S. national debt had almost doubled from August 2008, hitting $9.11 trillion. Of that $9.11 trillion, $5.8 trillion was in intermediate-term Treasury notes, $1.7 trillion was in short-term Treasury bills; $931.5 billion was in long-term Treasury bonds, and $640.7 billion was in TIPS.
Before the end of March 2012, the Treasury must redeem all of the $1.7 trillion in Treasury bills that were extant as of March 2011 and find new or old buyers who will continue to invest in U.S. debt. But, for now, the Chinese at least do not appear to be bullish customers of short-term U.S. debt.
Treasury bills carry lower interest rates than longer-term Treasury notes and bonds, but the longer term notes and bonds are exposed to a greater risk of losing their value to inflation. To the degree that the $1.7 trillion in short-term U.S. Treasury bills extant as of March must be converted into longer-term U.S. Treasury securities, the U.S. government will be forced to pay a higher annual interest rate on the national debt.
As of the close of business on Thursday, the total U.S. debt was $14.34 trillion, according to the Daily Treasury Statement. Of that, approximately $9.74 trillion was debt held by the public and approximately $4.61 trillion was “intragovernmental” debt.
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 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.
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 Bloomberg News
May 17, 2011 8:55 AM PT
China, the biggest foreign owner of U.S. government debt, trimmed its holdings of Treasuries for a fifth straight month in March as lawmakers debate how to expand borrowing after reaching a statutory threshold. The Asian nation owns $1.145 trillion of the debt, down $9 billion, or less than 1 percent, from the previous month, according to Treasury data released yesterday. The holdings reached a record $1.175 trillion in October.
China’s concern that U.S. government securities may become more risky because of the nation’s deficits and debt burden prompted its call this month for President Barack Obama’s administration to lay “a solid fiscal foundation” for long- term growth. Former Chinese central bank adviser Yu Yongding said last month that China should stop buying Treasuries because of the risk that the U.S. may eventually default.
China may “gradually cut its U.S. Treasuries as it seeks to diversify its foreign-exchange holdings,” said Yao Wei, a Hong Kong-based economist with Societe Generale SA. She said “China is probably routing trades through other places such as London,” meaning U.S. data may not give a full picture.
Treasury data show holdings of U.S. government debt in the United Kingdom have increased $53.6 billion, or 20 percent so far this year, to $325.2 billion.
In the U.S., Republicans and Democrats have been arguing over when and how to raise a $14.3 trillion debt limit. Obama has said that a failure to act may disrupt the global financial system and plunge the nation into another recession.
China has offered critiques of U.S. fiscal and monetary policy while continuing to buy the debt. When the Fed announced in March 2009 it would buy $300 billion of Treasuries, the decision was called “irresponsible” by Li Xiangyang, of the government-backed Chinese Academy of Social Sciences, because it could weaken the dollar.
“We have lent a massive amount of capital to the United States, and of course we are concerned about the security of our assets,” Chinese Premier Wen Jiabao said in March 2009 after Obama signed his $787 billion stimulus package into law. “To speak truthfully, I do indeed have some worries.”
After the Fed announced its plan to purchase $600 billion of Treasuries through June to stoke inflation expectations and boost employment, China’s vice foreign minister, Cui Tiankai, said Nov. 5 “many countries are worried about the impact of the policy.”
China increased its Treasury position 23 percent to $894.8 billion in 2009 and 30 percent to $1.16 trillion in 2010, revised Treasury data show.
Year-end revisions to Treasury data on foreign holders of its debt led to a $268.5 billion increase in China’s position in the debt to $1.16 trillion and a $271 billion reduction in the holdings in the U.K. to $272.1 billion.
The discrepancy comes in part from the different methodology used in the monthly statistics and the annual revisions. The monthly figures collect holdings data based on the location of the counterparty at the time of purchase while the revised totals reflect the identity of the owner.
“A lot of central banks have operations in London,” said Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, one of 20 primary dealers that trade directly with the Fed. “A lot of transactions are based in London even though the beneficial owner might be a Middle Eastern central bank or an Asian central bank. That happens quite frequently.”
U.S. Treasury Secretary Timothy F. Geithner said yesterday that he has used accounting measures to extend the deadline until Aug. 2.
“China has kept on lending money to the U.S. to keep its export machine going, and to prevent losses” on its holdings of Treasuries, Yu said last month. “Perhaps it is too late to do anything about the existing stock without causing a serious political and financial backlash. But at least China should stop continuing building up its holdings.”
Officials including central bank adviser Li Daokui have urged diversification of the nation’s foreign exchange reserves away from U.S. debt.
Japan, the second-largest holder of Treasuries, increased its holdings by $17.6 billion to $907.9 billion in March from $890.3 billion in February. Hong Kong, counted separately from China, reduced its holdings by $2.5 billion to $122.1 billion from $124.6 billion.
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By Barry Wood
May 17, 2011
Was the oracle BRK.A -0.72% really suggesting that there is no chance that the U.S. will
ever experience a Greek-style debt meltdown where it couldn’t get financed and would have to turn to outsiders like the International Monetary Fund for help? Apparently, he was.
Harvard University historian Niall Ferguson, who has written extensively on debt, is aghast at what he calls Buffett’s highly simplistic view. “Buffett,” he says, “must know this is nonsense.” Ferguson continues, “Britain had complete monetary sovereignty in the mid-1970s and yet the IMF had to be called in. I could give numerous other examples. And then there is the inflation risk, which is implicit in his statement. We won’t have a debt crisis because we can print unlimited quantities of paper dollars. If that’s the good news, I don’t want to hear the bad.”
Other experts are similarly amazed by Buffett’s assertion. Carnegie Mellon business school professor Allan Meltzer, a pre-eminent scholar of monetary policy, agrees that having the world’s reserve currency gives the U.S. a huge advantage when issuing debt. But Meltzer adds, “We can have a crisis if the Chinese or Japanese start selling their mountains of dollar debt, or if the dollar collapses instead of declining, and if we get a big inflation.”
Desmond Lachman of the conservative American Enterprise Institute says Buffett is being disingenuous if he thinks debt won’t get the U.S. into deep trouble. “If the markets think that the U.S. public debt situation is out of control,” he says, “and that the Fed is going to print money to inflate the U.S. out of its debt problems, blood will be spilt in the bond market as people dump Treasuries UST10Y
-1.05% until interest rates rise very high
to compensate them for the inflation risk. That will be disastrous for the stock market and for the U.S. economy.”
To be fair, Buffett’s comment did specifically mention the possibility of inflating away debt by repaying bond holders with cheaper dollars, but since that implies high inflation, high interest rates and a collapsing dollar, doesn’t that in itself constitute a debt crisis?
Institute of International Finance chief economist Phil Suttle says it is all a matter a confidence. “If bondholders lose confidence in a country’s economic policies,” he says, “there will be a crisis, but the exact shape of it can vary. But it is a big myth to say it can’t happen here.”
Carmen Reinhart of the Peterson Institute for International Economics and co-author of a monumental study of debt (“This Time It’s Different”), says with gross public debt now equal to 94% of gross domestic product, the U.S. has become vulnerable to a crisis. She says the buildup of U.S. debt is unprecedented and that the necessary deleveraging has not yet begun. She warns policy makers “to expect the unexpected.”
The problem is that with debt exceeding $14 trillion and growing by $1 trillion annually, interest payments could rise from the current 1% of GDP to 13% within 20 years. Historically that kind of heavy debt burden results in a combination of anemic economic growth, high inflation and high interest rates. Billionaire philanthropist Pete Peterson, a long-time crusader on the issue, calls debt “the transcendent threat to the country.”
Is there a debt reckoning ahead? Former Sen. Alan Simpson, who co-chaired the bipartisan debt commission that last November recommended a set of spending cuts and tax increases to the president, says yes. Addressing an audience earlier this year, Simpson said a debt crisis could strike suddenly. “It won’t be the old slippery slope crap that we read about,” he said. “It’ll be very swift and very dramatic, like in Greece or Ireland or Portugal or Spain or wherever. I don’t know where this is going, but I tell you, it won’t take long.”
Economist Laurence Kotlikoff of Boston University believes Buffett is in denial. “On the face of it,” he says, “his statement is true right up to the point that it’s not. That is to say, we have some capacity to borrow, but it is not unlimited and the market will shortly make that clear, in my opinion.”
Sebastian Mallaby of the Council on Foreign Relations agrees that an eventual debt crisis is likely unless Congress and the administration agree on a substantive program of deficit reduction. Writing in the May 9 issue of Time magazine, Mallaby says the situation could deteriorate rapidly if China simply stops buying U.S. debt at its customary pace. If other players in the bond market thought, “Treasury prices were headed downward… every gunslinger on Wall Street would shoot his way toward the exit.” The result, he says, would be skyrocketing government borrowing costs, a plummeting dollar, and “cardiac arrest in the heart of the economy.”
With the debt stakes so high, Warren Buffett owes it to his legion of admirers and the public at large to explain more fully what he means in saying categorically, “the U.S. is not going to have a debt crisis.”
Read the entire article HERE.
By Rachelle Younglai
WASHINGTON | Sat May 14, 2011 5:52pm EDT
A divided Congress has run out of time to raise the debt limit before Monday’s deadline, forcing Geithner into an emergency reallocation of funds so the government can meet its obligations, including payments to Treasury bondholders.
Those measures are only expected to give the government until August 2 before it will start defaulting on payments including those on Treasury debt, an event that could trigger chaos in world financial markets.
“A default would inflict catastrophic, far-reaching damage on our nation’s economy, significantly reducing growth and increasing unemployment,” Geithner said in a letter, dated Friday, to Democratic Senator Michael Bennet.
The Obama administration and lawmakers are battling over how to curb the mounting U.S. debt, with Republicans refusing to increase the debt limit without deep spending cuts.
In some of his most stark language to lawmakers so far, Geithner said a default or missed payments would not only increase borrowing costs for the U.S. government but also for average Americans, businesses and local governments.
“An increase in Treasury rates would make it more costly for a family to buy a home, purchase a car or send a child to college,” he said. “It would make it more expensive for an entrepreneur to borrow money to start a new business or invest in new products and equipment.”
The world’s biggest economy is recovering only gradually after the 2007-09 financial crisis but some 13.7 million Americans are out of work and higher gasoline and food prices are threatening to slow the recovery.
If Congress does not increase the borrowing cap by August, Geithner will be forced to start choosing which payments to make first.
Missing or delaying payments on a host of obligations, including those to businesses for goods and services and bond payments to investors, would result in a massive and abrupt cut in federal spending and aggregate demand, the letter warned.
“The abrupt contraction would likely push us into a double-dip recession,” Geithner said.
The U.S. government bond market has so far remained calm about the risk of a default. But Geithner and Federal Reserve Chairman Ben Bernanke have repeatedly urged Congress to act quickly to raise the debt limit.
The U.S. government is borrowing approximately $125 billion per month. As of Thursday, the country was $38 billion below the debt ceiling.
Read the entire article HERE.