US Dollar/Debt

Exponentially rising US debt threatens the dollar and economy. 

 

August 2008

[Aug/14/2008]

Consumer prices rise at 10.6% rate and real earnings fall at 9.4% rate

Rex Nutting of Marketwatch reports:

Over the past year, consumer prices were up 5.6%, the biggest on-year increase since January 1991. The CPI has surged at a 10.6% annualized rate in the past three months, the second-worst spike in inflation in the past 26 years.

and:

Adjusted for inflation, real weekly earnings dropped 0.8% in July and are down 3.1% in the past year, the second fastest decline in 26 years. In the past three months, real weekly earnings were falling at a 9.4% annual pace.

 

June 2008

[June/9/2008]

Consequences of our debt showing 

Ambrose Evans-Pritchard warns:

The West is in the full grip of a debt deflation as years of credit abuse come back to haunt it.

... 

America is going from bad to worse. A net 861,000 people joined the dole in May, pushing the unemployment rate from 5pc to 5.5pc. US house prices have fallen 14.4pc over the past year (Case-Shiller index). Miami is off 25pc.

The Mortgage Bankers Association says 8.8pc of all US house loans are in default or arrears. Negative equity has engulfed 11m households.

The "AA" rated tranches of 2007 sub-prime mortgage debt are now trading at 12pc of face value (ABX index); the "BBB" grades are down to 5pc. The debacle is reaching the 2004 vintage debt. We moved a step closer to a meltdown in the US municipal bond market last week when the "monoline" insurers Ambac and MBIA lost their "AAA" rating from Standard & Poor's.

...

We are in uncharted waters. The easy trade-off between growth and inflation that so flattered asset prices for a quarter century is over. The monetary lords can no longer shield us from the full consequences of our debts. Nor do they want to.

 

May 2008

[May/19/2008]

Government Numbers Racket

The government has been "cooking" the numbers, hiding the true financial situation of the United States reports Paul Farrell:

How bad is it? "The real numbers ... would be a face full of cold water," says Phillips. "Based on the criteria in place a quarter century ago, today's U.S. unemployment rate is somewhere between 9% and 12%; the inflation rate is as high as 7% or even 10%; economics growth since the recession of 2001 has been mediocre, despite the surge in wealth and incomes of the superrich, and we are falling back into recession."


[May/14/2008]

Growing Deficits Threaten Public Pensions

The Washington Post reporter, David Cho, reports on the pension threat from growing deficits:

The funds that pay pension and health benefits to police officers, teachers and millions of other public employees across the country are facing a shortfall that could soon run into trillions of dollars.

Mr. Cho reports that analysts claim the problem is:

... shaping up to be a massive breach of faith with a generation of public employees.

Public pension plans do NOT follow the requirements imposed on private plans in recent years, requiring more realistic projections and higher funding rates for pension obligations.

Such "accounting nonsense" has been "pushing the envelope -- or worse -- in its attempt to report the highest number possible" for their investment returns, wrote billionaire investor Warren E. Buffett in a recent letter analyzing pensions for shareholders of his company. Taxpayers ultimately will pay the price when these forecasts prove wrong.

Lets hope that, when that happens, the public is in good enough financial shape to cover the massive obligations that will be dropped on them!


April 2008

[Apr/15/2008]

The Producer Price Index SOARED by 1.1% in the month of March! [123jump].  

The US government doesn't count food and fuel in the "core" measure of inflation, a decision which lets them avoid performing cost-of-living adjustments upwards for retirees or increasing the yield on TIPS for investors in these "inflation protected" US government bonds.  US consumers, however, ARE affected by the PPI's increasingly rapid rise and by the soaring cost of both food and fuel, and are finding it increasingly difficult to maintain their standard of living.

 

[Apr/7/2008 ]

The widespread credit market turmoil has created great opportunities for speculators.  One measure of the wealth potential is the 2007 income of John Paulson, a hedge fund manager.

Paulson's income last year was $3 Billion dollars, a new record according to the Guardian.

A hedge fund manager who successfully bet on the slump in the US housing market, John Paulson, has come out top in the trading world, taking home a record-breaking $3bn (£1.5bn) in earnings last year.

... 

Analysts said Paulson set a new record for payouts on Wall Street. He anticipated the nationwide decline in US house prices and record defaults on investment-grade mortgage bonds.

I guess this means he is WAY smarter than Alan Greenspan who claims he couldn't have foreseen this problem.


This great disparity seems to be a seamless part of the current situation.  There are those reaping enormous wealth by betting against our increasingly dysfunctional economic system (finally freed of much of its government regulation intended to prevent such problems!).  At the same time our society is experiencing rapidly rising social problems such as runaways.  Runaway children are increasing in number, decreasing in age and dealing with more serious problems that in previous times.

National Runaway Switchboard data provided exclusively to The Associated Press shows that the overall number of young callers facing crises that jeopardized their safety rose from 13,650 in 2000 to 15,857 last year.

...

The [National Runaway Switchboard]'s statistics showed that callers are getting younger and that 6,884 crisis callers last year said they had been abused or neglected, compared with 3,860 in 2000. That is a 78 percent increase.

...

"The population is much more disturbed than the runaways who were being seen 20 or 30 years ago," says Victoria Wagner, chief executive of the National Network for Youth, a coalition of agencies that serve troubled young people. "There are more mental health issues, more substance abuse, more coming from violent home situations."

 

[Apr/5/2008 ]

The Airline Industry is suffering from a weak dollar which, with passing 'peak oil', is pushing up their fuel costs.

As reported by MarketWatch:

Skybus Airlines announced it was shutting down Saturday, with the low-cost airline blaming the "insurmountable" pressures of rising jet fuel costs and a slowing economic environment.

Columbus, Ohio-based Skybus became the fourth airline this week to close or announce plans to do so.

Two 0ther airlines that have failed are two that serivce Hawaii, ATA and Aloha.

Both ATA and Aloha have filed for bankruptcy, blaming their plight on the obvious: exorbitant jet fuel prices and tough competition.

The source of the problem  is, primarily, the tripling of their fuel costs.  Major airlines, such as Delta, are anticipating spending an additional $2 Billion/yr for jet fuel.   Other significant problems add to their challenges.

Most of the industry's current problems are not new. For years, a poisonous combination of high costs, overcapacity, ageing fleets and public dissatisfaction has beset U.S. airlines. Now, a financial market meltdown and a weakening economy are chewing into the industry's financial resources and forcing carriers into uncharted territory as they struggle to survive.

 


March 2008

[Mar/28/2008 ]

The Financial Times reports that South Korea's National Pension Service, the fifth largest pension fund in the world, has declared:

The Fed continues to cut interest rates. We are still making profits from the Treasuries that we bought in the past but we think we’d better dispose of them and had better buy higher-yielding European-government debt.”

Central banks from 16 Asian countries said last weekend at a meeting in Jakarta that they might invest more of their $1,000bn of official reserves in one another’s sovereign bonds instead of US Treasuries, given the dollar’s volatility.

“[The Korean decision] is symptomatic of the times and the problems that the US is facing,” said David Cohen, head of Asian economic forecasting at Action Economics in Singapore.

“This is the sort of pressure the US is facing after running this big current account deficit for years. Lots of people have said it’s unsustainable.”

 

[Mar/25/2008 ]

Minyanville has an article warning of the risks the Federal Reserve is taking in trying to support the economy:

In printing money to save the financial system from collapse, the Fed risks hyperinflation and total debasement of the currency.

Further dollar declines could set off massive sales of foreign-held U.S. Treasuries, pushing up interest rates right into the teeth of a recession. There are no easy answers, and central bankers continue to walk a very fine line.


[Mar/17/2008 ]

Foreign investors, to a large extent, stopped buying US treasury bonds at the latest government auction!

Asian, Mid East and European investors stood aside at last week's auction of 10-year US Treasury notes. "It was a disaster," said Ray Attrill from 4castweb. "We may be close to the point where the uglier consequences of benign neglect towards the currency are revealed."

The share of foreign buyers ("indirect bidders") plummeted to 5.8pc, from an average 25pc over the last eight weeks. On the Richter Scale of unfolding dramas, this matches the death of Bear Stearns.

For the United States, dependent upon borrowed money for both the operation of its government and for the continued spending of consumers (with a national negative savings rate) this represents a possible donneybrook situation.

 [Ambrose Evans-Pritchard; Foreign Investors Veto Fed Rescue]

 

[Mar/13/2008 ]

US Treasury Secretary: Paulson admits deregulation has failed us all.

Paulson spared no one in his criticism Thursday of the excesses of deregulation that has now created the worst global financial crisis in a generation, threatening the health of the U.S. economy, the savings of millions of Americans, and the survival of some of the biggest financial institutions in the world.

...

The housing bubble wasn't a flaw; it was a predictable outcome of a system that rewarded smart people small fortunes for conjuring up ways to persuade people to borrow more than they could ever hope to pay back. All the profits were taken off the table quickly, but the staggering costs are only now being paid by homeowners, shareholders, builders and the rest of society.

 

[Mar/12/2008 ]

Peter Brimelow asks:

Is the  dollar's decline about to accelerate?

Foreign holdings of federal debt were low in the early 1980s, and falling. They bottomed at 13.4% at the end of the fiscal year in October 1984.

But when we last looked, the wolf was at the door. Foreign holdings of federal debt had reached 37.3% at the end of fiscal 2003.
Now the wolf is in the door. Foreign holdings of federal debt in 2007 reached a record: 45%.
 
We can see no precedent for this situation in the data.

 

[Mar/3/2008 ]

The British paper, the Telegraph, has declared:

The Federal Reserve's rescue has failed

in an article by Ambrose Evans-Pritchard.

Sub-prime debt is plumbing new depths. A-rated securities issued in early 2007 fell to a record 12.72pc of face value on Friday. The BBB tier fetched 10.42pc. The "toxic" tranches are worthless.

It seems that the British are not constrained by the political considerations that keep president Bush saying that the economy is "sound".

 

Bill Donoghue has written an article titled:

The ultimate sell signal: Part II 

The Federal Deposit Insurance Corp. is planning to beef up its division of resolutions and receiverships, which handles failed banks, by 40% this year. The division currently has 233 employees. Considering that only three banks failed last year, why do they need more examiners?

The FDIC's challenge means you should confine your bank accounts to insured deposits exclusively. Other safe harbors are Treasury-only money-market funds, money funds owned by large institutions (even banks) and maybe short-term Treasury bills.


February 2008

[Feb/26/2008 ]

"Got a feeling something ain't right."  Eleven (11 - count 'em) reasons the current economic problems will last until (at least?) 2011.

The plunge in housing prices is accelerating, having already cost US homeowners $ 1.8 Trillion lost value in 2007 !  This is based on a "housing stock valuation" of $21 Trillion [Freddie Mac housing data] and the 2007 price decline of 8.9% [Case-Shiller data].  Is it any wonder that "Consumer Confidence" has plunged to a 17-year low in February? [Conference Board]

A good review of the United States Housing Bubble shows the inflation of the bubble (the extent of housing price expansion) and the current popping of the bubble (falling home prices).

At the same time(!) that falling housing prices leave homeowners with less wealth, inflation in other areas is picking up steam [Producer Prices Increase 1% in January].  This rise indicates further sharp increases ahead in the prices consumers will have to pay, especially for food (flour cost DOUBLES in the past few weeks!) and fuel (NOT optional expenses), increasing financial stresses on families.


[Feb/25/2008 ]

The resignation of David Walker, the Comptroller General of the GAO, is being called "...the ultimate sell signal on America."

He has criticized supporting Iraq's dysfunctional government, pork barrel spending by Congress, unrealistic "universal health care plans" we can ill-afford or support, the escalating risks of huge deficits, fiscal vulnerability to hostile foreign governments, and a lack of will to reform our government.

Walker will head a newly formed foundation, the Peter G. Peterson Foundation, with $1 Billion backing:

Facing indifference on the Hill and unrealistic spending promises, Walker is resigning with five years still remaining in his term to head the newly formed Peter G. Peterson Foundation. Peterson, senior chairman of The Blackstone Group and Commerce secretary in the Nixon administration, has pledged an astounding startup budget for the foundation of $1 billion.

Peterson, describing the foundation's purpose:

"I have been around a very long time, and I have never seen so many simultaneous challenges that I would describe as undeniable, unsustainable and virtually untouchable politically," Peterson said in a prepared statement.

 [Bill Donoghue: The Ultimate Sell Signal]

Meanwhile, ChartOfTheDay presents a graph of the baear market we have already been in for 8 years (inflation does matter):

 

 

[Feb/19/2008 ]

Banks recently borrowed $50 Billion(!) via the new Federal Reserve "Term Auction Facility" designed to ease the current credit situation.

“The TAF ... allows the banks to borrow money against all sort of dodgy collateral,” says Christopher Wood, analyst at CLSA. “The banks are increasingly giving the Fed the garbage collateral nobody else wants to take ... [this] suggests a perilous condition for America’s banking system.”

[Gillian Tett: US Banks Borrow $50bn]

 

Banks haven't seen the end of their credit problems according to one writer.

The losses keep piling up. Leading brokerage firms are likely to write down the value of $200 billion of loans they have made to corporate clients by $10 billion to $14 billion during the first quarter of this year, Meredith Whitney, an analyst at Oppenheimer, wrote in a research report last week.

Those institutions and global banks could suffer an additional $20 billion in losses this year on commercial mortgage-backed securities and other debt instruments tied to commercial mortgages, according to Goldman Sachs, which predicts commercial property prices will decline by as much as 26 percent.

Analysts at UBS go further, predicting the world’s largest banks could ultimately take $123 billion to $203 billion of additional write-downs on subprime-related securities, structured investment vehicles, leveraged loans and commercial mortgage lending. The higher estimate assumes that the troubled bond insurance companies fail, a possibility that, for now, is relatively remote.


[Jenny Anderson: Wall St. Banks Confront a String of Writedowns]

 

[Feb/18/2008 ]

Chinese imports have been a major force holding back inflation in the US.  Currently however China is experiencing rapidly rising inflation, dubbed AgFlation, due to rapidly rising food prices there.  Bad weather, rising fuel prices and the increasing use of food crops to produce 'green' energy are pushing up food prices around the globe.

If there is significant inflation in China there will be less of a 'brake' effect on US companies to raising their own prices resulting in higher inflation in the US also.

Inflation is now being driven almost exclusively by increases in the price of food, in particular the staple meat, pork, which has spiked 60 percent year-on-year.

Price increases have been seen in food items ranging from cooking oil to apple juice, as China's growth and global demand creates what economists have dubbed "agflation" referring specifically to rises in prices of agricultural commodities.

[Staff Writers; China Struggles to Avoid Past Mistakes in Controlling Food Prices]  

 

[Feb/13/2008 ]

Inflation is unkind at Valentine's Day as it slams CHOCOLATE prices!

Cocoa hits 23-year high.

Class 4 milk, used in chocolate, is up 58% in the last year...

 [Laura Mandalo; Cocoa Hits 23 Year High]

It seems the Grinch is now after Valentine's Day !!

 

[Feb/11/2008 ]

As an indication of both the casino like nature of our current financial markets AND the stunning price increases taking place in wheat trading, the exchanges today increased the daily limit on price increases after SIX consecutive days when trading was halted due to hitting the maximum price increase of 30 cents/bushel shortly after trading opened each day.

Late on Friday, the CME Group Inc., the Minneapolis Grain Exchange, the Kansas City Board of Trade and the U.S. Commodity Futures Trading Commission jointly announced an increase in the daily price limit of wheat to 60 cents per bushel, doubling the previous limit of 30 cents.
Also, the trading limits will expand 50 percent to 90 cents per bushel on the next business day and another 50 percent on each subsequent day when two or more contracts in the same crop year close limit-up, the exchanges and the CFTC said.
[Sam Nelson; U.S. Wheat soars]

A measure of the wheat shortage was the drop in U.S. supplies to a 48 year low:

Stockpiles in the world's biggest exporter [U.S.] will drop to 272 million bushels at the end of May, 6.8 percent less than expected a month ago and down 40 percent from a year earlier, the U.S. Department of Agriculture said in a report Feb. 8. Inventories will be the lowest since 1948 when farmers grew less and shipped supplies overseas to help countries rebuild after World War II.

 [Jae Hur and Marianne Stigset; U.S. Stockpiles Head for 60-Year Low]

 

[Feb/8/2008 ]

An investment newsletter editor says, in effect, ditch the dollar.  His advice is based upon the same observation that I made in the Jan/30 entry (below). As he says:

To earn a 22% gain on your money last year, all you had to do was open a checking account in Canada.

...

Last year, the best and easiest way to make money may have been to invest in foreign currency. The U.S. eagle has been trampled by loons, kangaroos and even French poodles. The Canadian dollar (decorated with the loon and called the "loonie"), the Australian dollar and the euro all posted double-digit returns over the greenback in the past 12 months.

...

Most of the foreign currencies I mentioned have earned double-digit returns in the past year, and are now coming off corrections. But the Fed is not even trying to strengthen the dollar, so most of these are likely to give you more than a typical money fund. 

[Bill Donoghoe; Dollar Daze]

 

Inflation should be the REAL worry of the Federal Reserve but they seem to believe their rigged numbers which ignore the sharply rising prices of food and fuel when calculating inflation!

Food prices have been rising and that rise seems to be accelerating as reflected in the wheat market:

Wheat futures hit a record high for a third day Friday, soaring near $11 a bushel in Chicago after a U.S. government report confirmed dwindling stockpiles of the grain used to make bread, pasta and other foods.

...

Wheat prices have surged to historic highs as bad weather has battered crop after crop around the globe, most recently in India and Canada.  [global climate change?]

...

Unprecedented demand for agricultural products from fast-growing countries including China and India has exacerbated the supply crunch for wheat, which has more than doubled in price since last year.

[Stevenson Jacobs; Wheat Hits Record...]

Fuel prices have been holding steady in the region of $90/bbl with another sharp recovery to above that level today.  With declining reserves [see Peak Oil] and rising demand this should not be surprising, but it feeds back to the price of food as large quantities of fuel are needed for agricultural machinery and petrochemicals used for fertilizer and pesticides.  

With rising demand (population and wealth in developing countries), falling supplies (drought and storms) and increasing costs (fuel) the outlook for food costs is dire indeed - especially for the poorest people.

Crude for March delivery rallied $3.66, or 4.2%, to close at $91.77 a barrel on the New York Mercantile Exchange, the highest closing level in more than a week. The market hasn't seen such a big daily gain since October. Friday's rally helped the contract end the week with a gain of $2.81, or 3.2%.

Rather than increasing output OPEC is actually discussing cutting oil output! This is not a surprise because they have no choice as their reserves and well output experience declines that they have no control over.

Oil prices played off the OPEC news, said Phil Flynn, vice president of futures brokerage Alaron Trading. "The OPEC cartel is once again showing that they have no regard for the world economy," Flynn said.

...

Deteriorating security situations and lack of infrastructure maintenance could lead oil production in Nigeria, Africa's biggest oil producer, to fall by as much as 1 million barrels a day, the Associated Press reported.

Here again, as with food, free market forces, so esteemed by conservatives, are inexorably driving these price moves.  Lower supplies and greater demand will continue to push up prices on food and fuel.

[Moming Zhou & Polya Lesova; Crude Surges over 4% on OPEC talk]

 

[Feb/5/2008 ]

The January "Non-Manufacturing Index" was released early by the ISM (Institute for Supply Management) "due to a possible breach of information".


The ISM non-manufacturing index showed the sharpest drop ever recorded!  Dropping from the previous reading of 54.4% in December, the index fell far below the 53% expected by economists to the stunning level of 41.9% !  Readings below the 50% level indicate that most firms are contracting.

[Greg Robb: Marketwatch]

[Feb/1/2008 ]

While the Federal Reserve abandons the fight against inflation, in order to "stimulate the economy", signs of increasing inflation continue to appear.

The price of hot-rolled steel in China, the world's biggest user, averaged 14 percent higher in January from a year earlier, according to Beijing Antaike Information Development Co. Prices will reach ``new highs'' this year, Sajjan Jindal, vice chairman of JSW Steel Ltd., India's fourth biggest producer, said Jan. 28.

Iron ore costs have tripled in five years because of Chinese demand, and contract prices may jump as much as 70 percent from April, Credit Suisse said. Shipping rates more than doubled last year based on the Baltic Dry Index.

[Debarati Roy, Bloomberg: Tata Steel Raises Prices for a Second Month on Demand]

 

At the same time that inflation is picking up and the government is trying to stimulate the economy new payroll numbers show an unexpected decrease in employment.

Non-farm employment posted a 17,000 decrease in January, when the experts had advanced increases between 50,000 and 100,000.

[www.fxstreet.com: US Non-farm Payrolls decrease by 17,000 in January]

 

The recent trend in the non-farm payroll numbers is consistent with the early phases of a recession as can be seen from historic data:


January 2008

[ Jan/30/2008 ]

The Federal Reserve today cut interest rates another half percent to 3 % for the fed funds rate.  With recent increases in inflation this means that, effectively, money is now "FREE" of interest charges(!).   By borrowing dollars at 3 % in the US, selling the dollars for euros and investing in bonds of the European Central Bank at their current rate of 4 % one could make one percent in interest plus profit when converting the stronger euro back into (falling) dollars when the loan is paid off.  (the "carry trade")

If inflation continues to rise, the Fed has a problem on its hands."  [Michael Woolfolk, senior currency strategist at the Bank of New York]

Carry trades involve borrowing currencies from countries with low interest rates, such as Japan and Switzerland, and investing the funds in higher-yielding assets elsewhere. Carry-trade beneficiaries are usually the euro and currencies of countries with high interest rates.

"Carry trade is not really a flavor of the market at this point," said Dan Katzive, a senior currency strategist with Credit Suisse. "If you did see a situation where risk appetite started to recover ... then you'd see the dollar weaken in a big way."

 

 [ Jan/21/2008 ]

Shipping index drop presages decline in the US and World economy. 

Declines in shipping appear in the data at an earlier point that declines in profits, the basis for the Dow Theory's use of railroads coupled with industrial stocks to predict economic turning points.

In the modern, global, economy this role has been taken over by international shipping, moving goods around the world.  Investors look at the Baltic Dry Index to judge changes in this activity:

The gauge, which tracks freight rates on the mammoth vessels that carry tons of soybeans, corn, coal and metals across the globe, is used by economists to get an early read on global trade and growth trends. When demand for those basic materials shrinks, freight rates drop and the index tumbles. The trend provides an early snapshot of trade volumes before governments compute reports.
 
"It's fallen quite significantly," said Bernard Baumohl, managing director at The Economic Outlook Group in Princeton, N.J. "It points to a slowing in the global economy."


 

[ Jan/18/2008 ]

Did a FOURTH SHOE (Bond Insurer Problems) in the ongoing economic crisis just drop?  Ambac Financial and MBIA are having their AAA financial rating threatened by the current credit/debt market turmoil (defaults in sub-prime loans, credit cards and car loans).

There are $2.5 trillion to $3 trillion of muni bonds. Roughly half of those are insured by bond, or "monoline," insurers like Ambac and MBIA.
 
So more than $1 trillion of muni bonds are now in danger of being downgraded. That could trigger losses for muni-bond investors.
 
"Assuming the "monoline" insurers lose their triple-A ratings, underlying insured muni bonds could be susceptible to downgrades and downward repricing, leading to losses for muni-bond mutual funds," Michael Kim, an analyst at Sandler O'Neill, told investors in a note Friday.


 [ Jan/15/2008 ]

 The news on the economy gets worse and worse.  We now seem to have entered the "stagflation" phase; economic stagnation combined with inflation.

WHOLESALE INFLATION:

Wholesale inflation last year shot up by the largest amount in 26 years while retailers suffered their worst December shopping season in five years as mounting economic woes caused consumers to put away their wallets.

The Labor Department reported that wholesale inflation was up 6.3 percent for all of 2007, reflecting a huge increase for the year in various types of energy costs ranging from gasoline to home heating oil.

 CLIMBING FOREIGN CURRENCIES: (pushing up import costs)

The yen climbed 13 percent against the dollar in the past six months

ECONOMIC STAGNATION:

Frugal shoppers cut back on their spending at the nation's retailers by 0.4 percent in December, the most in six months, in a gloomy report that fanned fears of a recession.

BANKS WRITING DOWN BILLIONS:

U.S. stocks were moving toward a lower opening Tuesday after Citigroup Inc. announced a hefty $18.1 billion writedown for bad mortgage assets and slashed its dividend.

CONSUMERS IN MORTGAGE TROUBLE:

The Homeownership Preservation Foundation said its Homeowner's HOPE hotline received 143,000 calls in the September-December period, double the previous quarter and 10 times the volume in the first quarter of 2007.

 

[ Jan/8/2008 ]

The news today covered a government report that total Health Care Spending in 2006 reached $2 Trillion.  This figure makes the debate over "single payer" (government paid ?) health care an especially difficult challenge - given to poor state of the Federal Government's finances.

(That this spending occurs at the same time the US is ranked LAST among industrialized nations on preventable deaths is another subject!) 


In particular, the Federal Budget in 2005:

 had TOTAL SPENDING of $2.47 Trillion.  The payments on the Federal Debt, given in the budget breakdown for 2005, were over $400 Billion:

Removing payments on the Federal Debt from the 2005 Federal Budget, the ENTIRE REMAINING FEDERAL BUDGET, would be needed to pay for the Health Care spending of the American people this year.  If the Federal Government is to pay for all health care coverage of Americans it will require a doubling of the Tax Revenue that the government collects!


The Federal Budget has only been in surplus for an extended period of time twice in the country's history, the Roaring 20's and the Roaring 90's (the internet boom / or bubble):

The roaring 20's ended in the depression of the 30's AND in chronic deficits which continued since, with the exception of the internet bubble of the 90's, and which has led us to a Federal Debt of $9.1 Trillion.


The current, growing, Federal Debt, with continuing budget deficits, and the rising Comsumer Debt (the government reported that the Debt Service Ratio, percentage of income to pay debt reached a high of 14.3% in 2007) means that there is little chance that either government or private spending increases will support economic growth. Indeed the sub-prime mortgage problems and increasing energy costs
will cause continued pressure on the dollar and economic problems in the US.

 

"Legendary Investor" Jim Rogers has declared the "Death of the Dollar" and will have moved ALL of his investments into other currencies:

Jim Rogers, the veteran investor who predicted the 1999 commodities rally, declared that the US economy was "in recession" as he said he would take flight from the dollar and switch his investments into currencies including the Chinese yuan.

This move by Jim Rogers carries a bit more weight than the move by supermodel Gisele Bundschen (see below [11/14/2007]).  In either case, however, the economic future for the US looks like it will soon include a difficult period near term.


[1/2/2008]

The year starts off with soaring credit card defaults and creditors zapping late-payers with 'default rates' of up to 30% on their balances.  The start of the consumer meltdown?

Lenders are now confronting rising defaults on the $920 billion that the Federal Reserve estimates Americans currently carry in credit-card debt. Delinquencies of 90 days or more -- which lenders generally write off -- rose 18% to $961 million in October from a year earlier at 17 trusts holding 45% of U.S. credit-card debt, according to an Associated Press analysis of Securities and Exchange Commission filings.

 [Chris Pummer, Marketwatch: Cracking the Whip]

 And if credit cards weren't bad enough, or the sub-prime mortgage crisis, there is a growing problem in the automobile finance industry too:

In October, the average amount financed hit $30,738, up $3,500 in just a year.

AND: The length of the average automobile loan hit five years, four months in October, up more than six months from 2002.  

Today, the typical car owner owes $4,221 more than the vehicle is worth.

[Marty Jerome, Wired / Los Angeles Times: You Probably Owe...]


December 2007

[12/22/2007]

The 'sub-prime crisis' is still playing itself out as the Treasury injects another $40 BILLION into the credit market.  The problem is claimed to be "liquidity" BUT what if the real problem is "solvency" ?

LIQUIDITY:

Suppose that there's a nasty rumor about the First Bank of Pottersville: people say that the bank made a huge loan to the president's brother-in-law, who squandered the money on a failed business venture.

But the Fed can come to the rescue. If the rumor is false, the bank has enough assets to cover its debts; all it lacks is liquidity - the ability to raise cash on short notice. And the Fed can solve that problem by giving the bank a temporary loan, tiding it over until things calm down.

SOLVENCY:

Matters are very different, however, if the rumor is true: the bank really did make a big bad loan. Then the problem isn't how to restore confidence; it's how to deal with the fact that the bank is really, truly insolvent, that is, busted.

THE SIZE OF THE PROBLEM:

And the numbers are huge. The financial blog Calculated Risk, using data from First American CoreLogic, estimates that if home prices fall 20 percent there will be 13.7 million homeowners with negative equity. If prices fall 30 percent, that number would rise to more than 20 million.

That translates into a lot of losses, and explains why liquidity has dried up. What's going on in the markets isn't an irrational panic. It's a wholly rational panic, because there's a lot of bad debt out there, and you don't know how much of that bad debt is held by the guy who wants to borrow your money.

How will it all end? Markets won't start functioning normally until investors are reasonably sure that they know where the bodies - I mean, the bad debts - are buried. And that probably won't happen until house prices have finished falling and financial institutions have come clean about all their losses. All of this will probably take years.

[Paul Krugman, NYT: After the Money's Gone]

The irrational optimism above (?!) is that financial problems are only related to homeowners.  The U.S. Federal government is also sitting on a growing, enormous and (quickly becoming) unmanageable debt!   A recession in the U.S. would reduce government income at the same time it would increase the demand for government social expenditures (to help those in need).  The U.S. government is likely to find itself in great difficulty managing its own problems just when others need help.

 

[12/18/2007]

The European Community may be giving some indication of the seriousness of the "Sub-Prime" credit crisis in the U.S.   To reduce the problems that the U.S. crisis has caused Europe's banks the European Central Bank pumped $547 BILLION into the EU money market and bank funds today!

"It's a huge amount, really significant...but liquidity needs are also significant," Nathalie Fillet, a strategist at BNP Paribas in London told Dow Jones Newswires. "It will have the most impact for rates between two weeks and one month."

But, warned Tony Crescenzi of Miller Tabak and Co., the large amount sought by banks may lead to fears that funding needs are still problematic.

"It is a simple case of supply and demand. In essence, therefore, in light of the injections it could be said that the central banks are merely forming a bridge to a time when it is hoped that problems at the root of the short-term funding problem will begin to diminish," he said. "In 2008, many of these problems will in fact fade, barring a recession, albeit very slowly."

[MATT MORE, AP: E U Opens Liquidity Taps Wide]

The action emphasizes the seriousness of the problem and also the inability of governments to do more than try and delay its pain for as long as possible.


[12/17/2007]

There is a $45 Trillion dollar gap in U.S. benefits according to the Bush administration's "Financial Report of the United States Government" for 2006.

The government is promising $45 trillion more than it can deliver on Social Security, Medicare and other benefit programs.

 ...

"Our government has made a whole lot of promises in the long-term that it cannot possibly keep," Comptroller General David M. Walker, the head of the Government Accountability Office, said Monday.

[MARTIN CRUTSINGER, AP Economics Writer: $45 Trillion Gap Seen in US Benefits]

 

[12/11/2007]

The Bush administration "voluntary" bailout plan for sub-prime mortgates won't stop a recession.  Beyond that the scheme will worsen the international standing of the U.S. dollar, making all future financing of U.S. debt more difficult and costly; for both private and governmental borrowing:

#2. U.S. dollar loses more credibility
 
Can it get worse? Yes, the dollar will sink lower. Martin Feldman, former chairman of Reagan's Council of Economic Advisers, recommends doing nothing in a Wall Street Journal OpEd piece: "Arbitrarily changing the terms of mortgages held by investors around the world would destroy the credibility of American private debt." But they're doing it anyway. They got greedy, sold junk. Now people don't trust us anymore.

 

[12/9/2007]

Iran has completely stopped accepting dollars for the sale of oil:

Major crude producer Iran has completely stopped carrying out its oil transactions in dollars, Oil Minister Gholam Hossein Nozari said on Saturday, labeling the greenback an "unreliable" currency.
 

Iran has reduced its assets in dollars held in foreign banks and urged OPEC to take collective action to price oil in other currencies such as the euro, instead of the U.S. currency which is used across the world at present.

The decline of the dollar, which has weakened considerably against the euro and other currencies in the past 12 months, has affected the revenues of OPEC members because most of them price and sell their oil exports in the U.S. currency.

 

[12/7/2007]

The "sub-prime" problem is just the tip of the iceberg.  Historically low interest rates encouraged borrowing by ALL income levels (and governments too).  Soon even the "prime" loans will begin defaulting too:

How will they explain foreclosures in wealthy cities across the nation involving borrowers with 750 scores when their loan adjusts higher or terms change overnight because they reached their maximum negative potential on a neg-am Pay Option ARM for instance?

[Mark Hanson quoted by Herb Green: Straight Talk...]

 

[12/4/2007] 

The U.S. debt crisis is both governmental and personal.  A graphic representation of the housing (personal) area is the current housing price trend:

While housing prices boomed a Trillion dollars was loaned out in new mortages and home equity loans.  Now that housing prices are dropping sharply much of the equity that supported these loans has vanished, leading to a growing wave of foreclosures:

... over 10,000 families - one in eight of all owner occupiers in Cleveland - will face eviction this year - and the number is expected to rise.

[Steve Schifferes: Foreclosure Wave Sweeps America]

 

[12/3/2007]

Forbes discusses the debt trap that the U.S. government is in:

Like a ticking time bomb, the national debt is an explosion waiting to happen. It's expanding by about $1.4 billion a day - or nearly $1 million a minute. 

The rising debt isn't just due to our current (profligate) spending.  It is also due to the continually increasing interest payments that the country must make as this growing debt total continues to build up.

... the government is fast straining resources needed to meet interest payments on the national debt, which stands at a mind-numbing $9.13 trillion.

The 'debt trap' exists because this debt reduces the U.S. financial standing and caused the dollar to fall 35% since 2001.  The falling dollar both drives up costs for tangible things such as imported oil and of intangible things such as the cost of future borrowing. Investors demand a higher return on assets held in a falling currency.  This is similar to the situation homeowners are in:

And like homeowners who took out adjustable-rate mortgages, the government faces the prospect of seeing this debt - now at relatively low interest rates - rolling over to higher rates, multiplying the financial pain.

The debt is even growing as a portion of the national economy:

Despite vows in both parties to restrain federal spending, the national debt as a percentage of the U.S. Gross Domestic Product has grown from about 35 percent in 1975 to around 65 percent today.

 Even senators, partially responsible for the continued deficit spending realize that the problem is a huge risk:

"Borrowing hundreds of billions of dollars from China and OPEC puts not only our future economy, but also our national security, at risk. It is critical that we ensure that countries that control our debt do not control our future," said Sen. George Voinovich of Ohio, a Republican budget hawk.

[Tom Raum: Forbes

 November 2007

11/27/2007] 

In my previous post I quoted a reference to the U.S.'s new "sharecropper economy."  The news today about Citigroup selling a large piece of equity to Abu Dhabi for $7.5 bln, to shore up its capital, shows that not only is that taking place but it is being done at fire sale prices:

The U.S. will gladly accept the international community's assistance in working out its problems. Of course, this comes at a price and that is a transfer of this wealth at an incredible discount. If a foreign currency has increased in value against the U.S. dollar by 30% and a corporation like Citigroup has fallen by 45%, is it too simple to assume that this equity is being transferred for 25 cents on the dollar or a 75% discount?

[Quint Tatro: minyanville]

 

[11/20/2007] 

Is the U.S. selling off its productive capacity to foreigners due to debt?

We're moving to a sharecropper economy.  [foreigners] are going to be owning, and we're going to be working for them.

[article: Wall Street Journal

 

[11/14/2007] 

Paul B. Farrell reported today that the "subprime crisis" was forseen, but was ignored (as so many unpleasant things are by those in power):

A former Federal Reserve governor, Ed Gramlich, started warning Alan Greenspan as early as 2000 about the coming subprime problems. The New York Times' Paul Krugman says Gramlich wrote that: "Increased subprime lending has been associated with high levels of delinquencies, foreclosure and, in some cases, abusive lending practices." But he was ignored.

[full article at: Brazilian supermodel's wake-up call to U.S.]

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The decline of the dollar isn't a new event but a process that the US government and citizens have both ignored as they put themselves deeper in debt.  The current trend  can be viewed graphically:

 [current chart at: USD in EUR]

The American Citizen's contribution to the current financial disaster:

At the same time Americans were pulling more-and-more money out of their "home equity" ("Cash from Homes" in the chart above) the value of their homes was artificially inflated due to the "housing boom".  Now that prices have started to retreat towards pre-boom levels those "home equity" loans have caused REAL home equity to vanish!

 [from: Irrational Exuberance by Robert J. Schiller]

 The American Government contribution has pushed the level of TOTAL AMERICAN DEBT to the current astronomical level ($48 TRILLION Dollars!):

[full discussion at: Grandfather Economic Report]

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Supermodels moving their financial reserves from the US dollar (see below) are being joined by central bankers, notably in China:

Cheng Siwei, vice chairman of the Standing Committee of the National People's Congress, was quoted by wire services as saying China should shift more of its $1.43 trillion of currency reserves into "stronger currencies," such as the euro, to offset "weak" currencies like the dollar.

[reported on MarketWatch, Nov 7, 2007]

As is often the case with human beings there is a "crowd mentality" which makes denial of problems not only easy but fashionable, at least until the fashion changes, as currently seems to be the case with the shift of the perception of the dollar as a strong reserve currency to a weak currency.  

Once the shift begins it quickly becomes a rush and then a stampede.  We're not that far genetically from the buffalo which the Indians used to stampede off a cliff, to their death, to make their hunting easier.  Lets hope we wake up early enough to avoid the consequences the buffalo experienced as commemorated at places like "Head-Smashed-In" Buffalo Jump, a UNESCO World Heritage site.

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Supermodel Gisele Bundchen, the model with the highest income in the industry, shows that she has brains as well as beauty by refusing payment for her services in dollars.

Perhaps she was listening to Bill Gross, the chief investment officer of Pacific Investment Management Co. in Newport Beach, California, and manager of the world's biggest bond fund:

"We've told all of our clients that if you only had one idea, one investment, it would be to buy an investment in a non- dollar currency, that should be on top of the list."

[reported in Bloomberg, Nov 5, 2007]

Perhaps if expert investors such as Warren Buffet and Bill Gross have had their ranks joined by supermodels we MAY  be nearing the time when the 'big brains' (using Kurt Vonnegut's term) in Washington may begin to sense that something needs to change.  :-(

October 2007

The head of the International Monetary Fund (IMF) warns of a possible "abrupt fall" of the dollar. (Oct 22, 2007)

"There are risks that an abrupt fall in the dollar could either be triggered by, or itself trigger, a loss of confidence in dollar assets," Rato told the IMF board of governors.

The US dollar is falling sharply in relation to other currencies, which can also bee seen in the rising price of gold (in dollars):

As the dollar falls (gold rises) the soaring price of oil (in dollars) becomes relatively cheaper for other countries, since oil is priced in dollars.  The falling dollar not only adds to the rising cost of oil, but of ALL comodities that the US imports - creating a strong "cost push" inflation pressure.

The "sub-prime" mortgage crisis creates pressure to reduce interest rates, but the falling dollar creates pressure to raise interest rates.  How this will play out is anyones guess.  We've dug ourselves into a hole and, turn Right or Left, we're still in the hole.


 August 2007

The US balance of payments deficit abuses the world as well as ourselves explains this author from the Netherlands. 

Watching the US National Debt Clock may give some perspective on the magnitude of the problem - especially the "Your Family's Share" number.