Free Sign Up
FORGOT
YOUR PASSWORD?
Click Image
Archives of August 2010
Morgan Stanley Says Government Defaults Inevitable
Matthew Brown, www.bloomberg.com, 08/25/2010
Investors face defaults on government bonds given the burden of aging populations and the difficulty of increasing tax revenue, according to a Morgan Stanley executive director.
“Governments will impose a loss on some of their stakeholders,” Arnaud Mares in the firm’s London office wrote in a research report today. “The question is not whether they will renege on their promises, but rather upon which of their promises they will renege, and what form this default will take.” The sovereign-debt crisis is global “and it is not over,” he wrote.
Rather than miss principal and interest payments, governments may choose a “soft” default in which they pay back debts with devalued currencies resulting from faster inflation or force creditors to take lower returns, Mares said in an interview.
Ron Paul Calls for Audit of US Gold Reserves
24 August 2010, 5:24 p.m.
By Daniela Cambone
Of Kitco News
Texas (Kitco News) — U.S. Rep. Ron Paul , R-Tex., plans to introduce a new bill next year that will allow for an audit of US gold reserves, he told Kitco News in an exclusive interview.
Paul dropped the news in the interview, indicating that the bill still does not have an official name yet but will be unveiled at the start of the new U.S. Congress.
“If there was no question about the gold being there, you think they would be anxious to prove gold is there,” he said of the Federal Reserve. Read more»
Doug Noland’s Credit Bubble Bulletin
www.prudentbear.com, 08/21/2010
[Selected News Notes]
August 17 – Bloomberg (Wes Goodman and Daniel Kruger): “China cut its holdings of Treasury notes and bonds by the most ever, raising speculation a plunge in U.S. yields that sent two-year rates to a record low has made government securities unattractive. The Asian nation’s holdings of long-term Treasuries fell by $21.2 billion in June to $839.7 billion… Total Chinese investment in U.S. debt declined 2.8% to $843.7 billion, the least in a year, following a 3.6% slide in May.”
August 20 – Bloomberg (David Wilson): “Nationalizing the U.S. mortgage- finance system would turn taxpayers into servants of the ‘housing investment and debt complex,’ according to David Stockman, a former head of the Office of Management and Budget. This shift would complete a transformation that started during the 1970s, when federal housing subsidies were expanded, Stockman wrote… ‘All principled political opposition to Pimco-style crony capitalism has been extinguished,’ wrote Stockman, a senior managing director at Heartland Industrial Partners… ‘Indeed, the magnitude of the burden already created is staggering.’”
August 20 – Bloomberg (Dunstan McNichol): “Taxpayers must cover at least a third of a $3 trillion bill for public employee pensions even if lawmakers eliminate cost-of-living increases and raise the retirement age, according to an academic study. ‘Even if states uniformly eliminated generous early retirement deals and raised the retirement age to 74, the unfunded liability for promises already made would still be more than $1 trillion,’ Joshua D. Rauh, associate professor of finance at Northwestern University’s Kellogg School… said…”
Let’s Change the Debate
Doug Noland, www.prudentbear.com, 08/21/2010
The critical issue these days is whether global debt markets have succumbed to Bubble Dynamics…Are central bankers and markets accommodating history’s greatest expansion/inflation of non-productive government debt?
Nowhere from this (“inflationists”) camp do we see any recognition of the potentially catastrophic Bubble that – after years of migrating from one market to the next – has finally found its home right in the heart of our monetary system.
August 19 – Bloomberg (Laura Litvan): “The U.S. Congressional Budget Office predicted the budget deficit for fiscal year 2011 will be $1.066 trillion, revised up from an estimate of $996 billion in March… CBO Director Doug Elmendorf said the agency’s projections haven’t changed significantly since its March forecast… ‘Unfortunately, this is a case where no news is not good news,’ Elmendorf said. ‘The country faces serious budget problems and serious economic problems.’ …The CBO said… the deficit for the current fiscal year ending Sept. 30 will be $1.34 trillion. That is 9.1% of GDP, or the second largest shortfall in the past 65 years, exceeded only by last year’s 9.9%.”
Print, Baby, Print!
Steve Saville, www.speculative-investor.com, 08/11/2010
According to an article by Jonathan Laing in the latest issue of Barrons magazine:
“The Fed should, and probably will change its tune by the fall and fire up the printing presses. Its current stance of watchful waiting in the face of slowing economic growth, inflation cycling below its preferred target rate of 1.7% to 2% and naggingly elevated unemployment strikes some observers as nothing short of mind-boggling. With good reason, these critics are pushing the Fed to adopt the deflation-fighting strategy that Bernanke mentioned in 2002, when he was a newly minted Fed governor. He suggested that the Fed could always buy long-term government bonds and corporate debt to mainline more liquidity into the financial system to counteract incipient deflation.”
Bernanke was correct back in 2002 when he pointed out that the Fed could always devalue the dollar by increasing its supply, but as far as we can tell that’s the only important economics concept he has ever been correct about. The problem with the whole approach of mainlining “more liquidity into the financial system to counteract incipient deflation” is manifold. First, creating more money doesn’t create more wealth or more real savings. Money, after all, is simply the medium of exchange. Second, when money is devalued by inflation (that is, by increasing its supply) the devaluation isn’t uniform; rather, some prices rise more than others. In fact, in the early stages of an inflation-driven monetary devaluation some prices — often the prices that the central bank and government are trying to support — will not rise at all or will continue to fall. These distortions of relative prices lead to mal-investments, which, in turn, lead to the destruction of real wealth. In other words, not only does increasing the money supply fail to expand the size of the ‘wealth pie’, it eventually brings about a reduction in the size of the pie. Third, devaluing money by increasing its supply punishes savers and anyone on a fixed income. This is not just misguided from a pragmatic economics perspective; it is ethically wrong. Read more»
Fed’s Hoenig: Keeping Rates Too Low ‘Dangerous Gamble’
Published: Friday, 13 Aug 2010 | 12:31 PM ET
By: Reuters
The Federal Reserve is undertaking a “dangerous gamble” by keeping rates at near zero for so long, and must start raising rates or risk damaging the nascent U.S. recovery, a top Federal Reserve official said on Friday.
“To be clear, I am not advocating a tight monetary policy,” Kansas City Reserve Bank President Thomas Hoenig said in the text of a speech to the Lincoln, Nebraska, Chamber of Commerce. “I am advocating a policy that remains accommodative but slowly firms as the economy itself expands and moves toward more balance.”
Hoenig has been the lone dissenter on the Fed’s policy-setting panel, which on Tuesday repeated the U.S. central bank’s pledge to keep interest rates extraordinarily low for an “extended period.” Read more»
Bill Black: U.S. Using “Really Stupid Strategy” to Hide Bank Losses
Posted Aug 11, 2010 02:14pm EDT by Peter Gorenstein
109 U.S. banks have failed so far this year, 23 in this quarter alone. These failures may not cost depositors, but they do come at a steep cost to the FDIC. As discussed here with ValuEngine’s Richard Suttmeier, the FDIC Deposit Insurance has already spent $18.93 billion this year, “well above the $15.33 billion prepaid assessments for all of 2010.”
The situation is likely even worse than the FDIC portrays, says William Black Associate Professor of Economics and Law at the University of Missouri-Kansas City.
“The FDIC is sitting there knowing that it has both the residential disaster and the commercial real estate disaster [and] knowing it doesn’t have remotely enough funds to pay for it,” he says. Read more»
Doug Noland’s Credit Bubble Bulletin
www.prudentbear.com, 08/13/2010
[Weekly News Review - Selections]
August 9 – Bloomberg (Zeke Faux and Jody Shenn): “Wall Street banks are creating the ‘next investment bubble’ by selling opaque and unregulated structured notes to investors hunting for yield, according to Christopher Whalen, managing director of Institutional Risk Analytics. Using the same ‘loophole’ that allowed over-the-counter sales of collateralized debt obligations and auction-rate securities, firms are pitching illiquid structured notes whose value is partly derived from bets on interest rates… ‘The only trouble is that the firms originating these ersatz securities, as with the case of auction-rate municipal securities, have no obligation to make markets in these OTC structured assets or even show clients a low-ball bid,’ Whalen wrote.”
August 11 – Bloomberg (Bob Willis): “The trade deficit in the U.S. unexpectedly widened in June to the highest level since October 2008 as consumer goods imports rose to a record and exports declined. The gap expanded $7.9 billion, the most since record-keeping began in 1992, to $49.9 billion in June… Exports from the U.S. decreased to $150.5 billion from $152.4 billion, reflecting fewer shipments abroad of semiconductors, computers and steelmaking materials. Imports increased in June to $200.3 billion from $194.4 billion…”
So Much for the Exit Strategy
Doug Noland, www.prudentbear.com, 08/13/2010
Not many weeks ago the focus was on the Fed’s “exit strategy.” Apparently, policymakers now recognize that there is no way out.
Today, extreme activist fiscal and monetary policies inflate the Global Government Finance Bubble… Instead of a well-functioning marketplace (and central bank) working to discipline a profligate Washington, dysfunctional monetary and market environments continue to accommodate perilous Credit excess.
Tuesday’s announcement from the Federal Open Market Committee (FOMC) further emboldened a highly-speculative fixed-income marketplace.
Some analysts argue that the Fed’s move to reinvest cash receipts from its MBS portfolio into Treasurys is no big deal; the decision will not involve sums of Treasury purchases sufficient to move market and economic needles. A former Federal Reserve Governor – and noted “Fed watcher” – commented on CNBC that this amounts to “neutral” monetary policy. It is his view that it would be a case of “tight” policy if the Fed’s balance sheet were allowed to shrink with a drawdown in its MBS portfolio. Conversely, Federal Reserve holdings would need to expand for monetary policy to remain loose. The size of the Fed’s balance sheet is now viewed as a key policy tool. Read more»