This
morning, the Treasury Department almost gleefully and proudly announced that
foreign holdings of US Debt had hit a record high during the month of April
and that bond heavyweight China had upped its holdings after trimming for two
straight months. This dovetails nicely with a story that was published
earlier this week about the federal reserve and its own holdings of US Debt,
which have increased over 450% in the past three years. And no, that is not a
typo. The federal reserve now holds over $1.6 Trillion in USGovt
debt. Obviously the establishment is thrilled with these developments because
it helps maintain the status quo of the dollar standard era. However, there
are some serious ramifications that few are paying attention to and are
getting almost zero coverage from traditional media outlets. From the AP this
morning:
“China
boosted its holdings 0.1 percent to $1.15 trillion in April. That followed a
1 percent drop in March and a 0.9 percent decline in February. March's
figures were revised down from the government's initial estimate a month ago
that China had boosted its holdings in March. Japan, the second-largest buyer
of Treasury debt, trimmed its holdings 0.9 percent to $1.07 trillion. Brazil,
the third-largest buyer of Treasury debt, boosted its holdings 5.3 percent to
$246.7 billion.”
The
US Government and its catastrophic fiscal morass are now viewed by the world
as a ‘safe haven’? This would easily qualify for a comedy shtick
if it weren’t so serious.
Where
is the ‘Eurozone Effect’ in USGovt Debt?
The
headlines have been filled with story after story about how the major rating
agencies (S&P, Moody’s and Fitch in particular) have been literally
wrecking EU nations for their inability to get a handle on their fiscal
affairs. This has created a self-reinforcing cycle. Agencies cut the ratings,
which prompts bond investors to demand higher yields, which makes it even
less likely that the nations will be able to meet payment obligations, which
leads to further downgrades and so forth. Wash, rinse, repeat. Not only have
the nations themselves been hit, but their banks have been hit as well
– and deservedly so. In truth, the entire Eurozone, save for Germany,
should be rated below investment-grade; and quite a few of them should be
rated as junk.
Which brings us to America. The inability of our government to do
much of anything without further borrowing is now well documented. Uncle Sam
borrows nearly 50 cents of every dollar spent, and despite massive stimulus
via heavy deficit spending, the USEconomy is dead
in the water. There is a huge paradigm shift going on in the labor market
right now. Jobs are available, but for the most part they’re of the
variety of which two (or more) are needed to create a manageable situation
for a family. Families are back on the credit card and this writer must
wonder how much of that debt accumulation is out of necessity rather than a
need for largesse. There is a bubble in student loan debt and both Social
Security and Medicare are in serious trouble. Last August S&P, citing
these and other factors, dropped the government’s rating a single
notch. Generally when ratings go down, yields go up. Quite the opposite has
happened in our case. Yields are now at
all-time lows.
The
False Paradigm Continues
First,
this continues and even reinforces the notion that America is somehow immune
from the laws of economics (and common sense for that matter). Somehow we can
borrow and spend as much money as we want without fear of negative
repercussions. In fact, not only won’t we be punished, we’ll be
rewarded by having to pay lower interest rates. Does it make any sense though
that the average credit card rate for individuals is somewhere in the mid 13%
range and the average American’s finances – as bad as they are
– are still several orders of magnitude better than that of the US Govt, which is treated to the lowest rates in history?
Make
no mistake about it; the bubble blowing up in USTreasuries
is the mother of all bubbles to date, eclipsed only by the even larger bubble
being blown up in OTC derivatives, which almost NOBODY is talking about. In
plain English, this will not end well – enjoy it while it lasts.
Why Save?
Secondly,
the near-zero interest rates being paid by banks and other savings vehicles
are so low that it actually discourages people from saving when they need to
be doing it most. I had the severe displeasure of scanning rates on money
market funds for a client the other day and found that the average of the
handful of money market funds I looked at was .06%. That is six cents a year
for every hundred dollars invested. Incredible. And when you figure that
veritable fortune is taxed? Well, what’s the point of even saving?
Unfortunately, many people are taking that attitude. If we’re not going
to be compensated, why bother? A quick look at the savings averages for
people nearing retirement is downright scary. Granted, this has been going on
an awful long time. People appear to be under the false notion that the
government is going to take care of them and that their Social Security
(which is anything but) will carry them through. Many are now finding out the
hard way that this simply isn’t the case.
We
are Europe
Thirdly,
the persistently poor economy, which by several authentic non-GDP based
metrics has now been in recession for nearly 6 years, has created and entire
class of people who are dependent on the government for either all or nearly
all of their sustenance. Social Security Disability claims are at an all-time
high. Food stamp subscriptions are at an all-time high, as are energy
assistance, and Medicaid use. We are Europe, plain and simple. While our
politicians and Mr. Geithner sit here and lecture the Europeans on fiscal
responsibility, we’ve got our very own Titanic that is listing from a
huge gash in its side caused by the overriding welfare mentality and a
complete lack of leadership over the past half century. Much like many of the
Eurozone nation-states, we have lost our own sense of personal
responsibility. Somebody else will take care of it. Someone else will pay for
it. Someone else will clean up our mess.
As
the money flies out of Greek banks and the Eurozone in general so fast that
it can barely be counted, there aren’t a lot of viable places to stash
it. One must wonder where it is all going. Global stock markets have been in
a correction over the past month or so. Commodities are stagnant as financial
agents attack prices at every turn in a vain attempt to contain the effects
of all the monetary inflation going on around the globe. USTreasuries
have been one parking place, but really, given the fundamentals of
America’s finances, stashing your capital in USTreasuries
is the equivalent of jumping from the frying pan directly into the fire.
This
is where the final component of the false paradigm comes into play: the
complete lack of moral hazard. The bailout mentality, like the welfare
mentality, is firmly in place. We taught banks and hedge funds back in 2008
(and even before) that the USTaxpayer is always
willing, able, and ready to back up any losses experienced as a result of
poor risk management, gambling, and outright irresponsible behavior.
We’ve taught people that they can behave irresponsibly and buy homes
they have no hope of ever affording and while millions have lost those homes,
millions more have been bailed out.
The
real question becomes who is going to do the bailing out when the USTreasury and OTC Derivative bubbles burst? There
isn’t enough capital in America to cover the Treasury mess and there
isn’t enough capital in the universe to cover the OTC casino gambling
of financial agents around the globe. Got gold?
Until Next Time,
Andrew W. Sutton, MBA
Chief Market Strategist
Sutton &
Associates, LLC
Interested in what is going on in the markets and
the economy? Read Andy Sutton's weekly market and economic commentary 'My Two
Cents' - go to www.my2centsonline.com