Hello MSauer:
I’m sure we have assett price "deflation" now as the result of less available funds for purchases (i.e. pulled cc lines, pulled HELOC lines etc.)
My concern about cash being king is when it dies the door to convert it into something more healthy will be a crowded one.
Take care…
Tom,
I found what you are looking for.
Here’s the "chart of the day" on this matter…
This shows the trailing 12 months change in foreign purchases of total US financial assets, corporate bonds and agency debt.
The bubble in US financing took a turn for the skies in 1998 and peak in late 2006.
It is clear that this game is over now. It is easy to feel like an entitled superpower that hit a triple when the world is shoveling more than 80% of its collective savings back into your financial markets.
What comes next, however, is that the US will discover it was actually born on third base and will have to largely give back everything that was handed to it either in the form of hard assets (think of Japan buying US real estate icons int he late 1980’s) or a serious decline in its standard of living.
Great chart, thanks! Looks like not just a shift from US Agency to Corporate Bond purchases but rather dramtic declines in both, with a net outflow from US bonds now. So are we about at Peak Credit now? Are foreign entities putting money elsewhere or do they just have less money to send us? What past specific past historical examples of this in other countries are there and what can we learn from them?
Tom
The amazing thing is that in spite of these dire numbers, the Obama administration wants to increase the national debt by an unprecedented amount. Surely, frugality is in order and expenses should be slashed, not increased.
One thing the US could do to reduce the amount of debt would be to pay off the debt we owe the private Federal Reserve Bank. I’m not sure how much of debt they hold at this time but suspect it is around $5 trillion dollars.
The US treasury could directly issue the dollars - without incurring further debt - and then use the money to pay off the debt to the Fed electronically. This would extinguish the loan, so effectively the money would cease to exist.
This would reduce our national debt by somewhere around 40% - and would lessen the stress on the remaining debt which might make our investment instruments more attractive to foreigners.
Larry
Indeed, thanks for the info Chris.
If this net outflow of money continues, it will be bad news for the USA.
And Larry (DrKrbyLuv), I agree!
The Fed is largely to blame for our current predicament.
The horribly unfortunate thing is that our government is now planning to give the Fed EVEN MORE power. This is from a recent article in the Wall Street Journal:
What ever happened to the idea that "Power corrupts"?
Was that idea not very important to the people who founded our country?
[quote] But one of the core teachings I took from the crash course was that money was created, in fact then multiplied, when debt was created. Why would it not be destroyed when debt was erased? [/quote]
Firstly, in case of a default less money is destroyed, than would be if the debt was fully repayed. Secondly, when a debt is repayed, the banks loose a source of income. Before the crisis, the banks made sure to create and lend more money than was payed back, in order to increase their income. So defaults don’t cause deflation. Bearish banks do.
Chris: Any chance you could post a link with that chart? I find it very interesting and I want to poke around a little more. Thanks for all your information!
Larry, I don’t think there’s some things quite right in your post above. If I’m using the right link for the Federal Reserve balance sheet…
http://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab8
The Fed has about $474 Billion in Treasuries as assets right now, but has increased its balance sheet significantly in the past few months by buying up additional "toxic assets" with all these bailouts. The only way for the Treasury get dollars to issue is to collect taxes from you and me or to auction off bills, notes, and bonds (more debt). The Government owes the social security trust fund about $23T plus $2.6 T interest right now too.
Hey all, This article is (as far as I can tell) the Fed’s response to these problems noted here…just when you think they are done making horrible decisions…
http://www.nytimes.com/2009/03/19/business/economy/19fed.html?_r=1
Thanks to Dr. Chris and Davos and all youse other People With Knowledge & Ideas. This is a fascinating (if routinely hair-raising) education for me.
Viva – Sager
No, sorry. That comes off a Bloomberg terminal.
That’s a quite pricey subscription service and there’s just no way to link to it.
Woodman said:Larry, I don’t think there’s some things quite right in your post
above. If I’m using the right link for the Federal Reserve balance
sheet.
Thanks for taking the time to review my post. I was guessing at the number and it is probably wrong at $5 trillion. I based my guess on this Dollardaze chart from 2007 results - I guessed that the numbers would be much higher now, but I sure could be wrong.
Woodman said:
The only way for the Treasury get dollars to issue is to collect taxes
from you and me or to auction off bills, notes, and bonds (more debt).
The US government, through the treasury, has the power and authority to issue bonds and/or to issue currency without paying interest - and they can eliminate the need to repay the loan. Lincoln issued greenbacks to help win the civil war rather than to deal with the European central bankers who would charge 20-30%.
So, why can’t we issue the money owed to the Fed (basically for free) to extinguish all debt - the money would basically cease to exist after repayment. I’m sure the mechanics would be more involved but you get my point.
It would not be this easy to get rid of the portion of our debt that we owe private lenders and foreign nations (this represents over half of our $11 trillion dollar national debt). It could result in adding too much money to our circulation - this could cause the value of money to drop which should be avoided.
Woodman said:
The Government owes the social security trust fund about $23T plus $2.6 T interest right now too.
As far as our future liabilities are concerned, you’re right, we will owe social security much more when the entitlements come due. That’s why it is imperative that we take back control of our monetary system.
Larry
U.N. panel says world should ditch dollar
By Jeremy Gaunt, European Investment Correspondent
LUXEMBOURG (Reuters) - A U.N. panel will next week recommend that the world ditch the dollar as its reserve currency in favor of a shared basket of currencies, a member of the panel said on Wednesday, adding to pressure on the dollar.
Currency specialist Avinash Persaud, a member of the panel of experts, told a Reuters Funds Summit in Luxembourg that the proposal was to create something like the old Ecu, or European currency unit, that was a hard-traded, weighted basket. Persaud, chairman of consultants Intelligence Capital and a former currency chief at JPMorgan, said the recommendation would be one of a number delivered to the United Nations on March 25 by the U.N. Commission of Experts on International Financial Reform.
"It is a good moment to move to a shared reserve currency," he said.
Central banks hold their reserves in a variety of currencies and gold, but the dollar has dominated as the most convincing store of value – though its rate has wavered in recent years as the United States ran up huge twin budget and external deficits. Some analysts said news of the U.N. panel’s recommendation extended dollar losses because it fed into concerns about the future of the greenback as the main global reserve currency, raising the chances of central bank sales of dollar holdings.
"Speculation that major central banks would begin rebalancing their FX reserves has risen since the intensification of the dollar’s slide between 2002 and mid-2008," CMC Markets said in a note. Russia is also planning to propose the creation of a new reserve currency, to be issued by international financial institutions, at the April G20 meeting, according to the text of its proposals published on Monday.
It has significantly reduced the dollar’s share in its own reserves in recent years.
GOOD TIME
Persaud said that the United States was concerned that holding the reserve currency made it impossible to run policy, while the rest of world was also unhappy with the generally declining dollar.
"There is a moment that can be grasped for change," he said.
"Today the Americans complain that when the world wants to save, it means a deficit. A shared (reserve) would reduce the possibility of global imbalances." Persaud said the panel had been looking at using something like an expanded Special Drawing Right, originally created by the International Monetary Fund in 1969 but now used mainly as an accounting unit within similar organizations.
The SDR and the old Ecu are essentially combinations of currencies, weighted to a constituent’s economic clout, which can be valued against other currencies and indeed against those inside the basket. Continued at Reuters site…
http://www.reuters.com/article/Funds09/idUSTRE52H2CY20090318
[quote=Rob Z]
…U.N. panel says world should ditch dollar…
[/quote]
Holy smokes…it seems to me a lot of this is happening a lot faster than I thought it would…we all knew this was coming, but I at least hoped we had the next 1-3 years…hmmm
in regards to the money destruction caused by deflation argument i would like to add:
banks lend out $9000 for every $1000 they receive. that’s how money is created, it is destroyed by the loan being paid off.
from the hypothetical example from above of an $800K house that goes into default and is resold for $500K and the bank writes the $300K off as a loss against it’s reserve capital. the $300K is not destroyed because the seller of the house has that money. Where the money is destroyed is that $300K was taken as a loss against reserve capital. money that would otherwise be lent out is being used to recapitalize.
this is exactly where we were (and maybe are still) two months ago. where banks were scrambling for money to recapitalize after all their losses. the money coming in was being used to secure the base of their loans, get their reserve-to-loans ratio back into line because of the amount of defaults (and also because what were once assets are now valued at zero).
In conclusion, defaults are deflationary! because it inhibits banks to extend credit.
John Mauldin (excuse any spelling mistake) agrees with you. He forecasts significant deflation. My personal interpretation is that deflation will lead to a bottom, and any turnaround will lead to hyperinflation, as banks will begin lending. The money multiplier effect will do the rest. The interesting part will be that the Feds will try and reduce the money supply when this inflation takes hold. Then, the gov will be issuing debt securities to fund itself, AND the Fed will be selling debt securities to reduce the money supply. Hence the idea of betting on a fall in gov issued debt security prices… massive oversupply.
kemosavvy,
Defaults and bankruptcies are not an entirely new phenomenon. There have been a lot of defaults all of the time and nonetheless, the money supply was steadily inflated. So that banks are inhibited in extending credit, because of defaults is something completely new. It seems that that is a position they have put themselves in by betting a lot of their money on mortgages. Still, all the money lost in defaults by banks has ended up somewhere, and probably in a place that some banks can acces it. But they’re not extending credit either. So defaults don’t cause deflation. Bearish banks do.
That would be the case, if the gov’t was not bailing out all of the losses. The bailouts are inflationary, especially now that the Fed needs to print money to prop up go’vt deficits and pay for the bailouts.The gov’t is also extending credit using the GSEs and giving money to banks and hedge funds to use to create new loans to consumers.
[quote=DrKrbyLuv]
Woodman said:
The only way for the Treasury get dollars to issue is to collect taxes from you and me or to auction off bills, notes, and bonds (more debt).
The US government, through the treasury, has the power and authority to issue bonds and/or to issue currency without paying interest - and they can eliminate the need to repay the loan. Lincoln issued greenbacks to help win the civil war rather than to deal with the European central bankers who would charge 20-30%.
So, why can’t we issue the money owed to the Fed (basically for free) to extinguish all debt - the money would basically cease to exist after repayment. I’m sure the mechanics would be more involved but you get my point.
It would not be this easy to get rid of the portion of our debt that we owe private lenders and foreign nations (this represents over half of our $11 trillion dollar national debt). It could result in adding too much money to our circulation - this could cause the value of money to drop which should be avoided.
Woodman said:
The Government owes the social security trust fund about $23T plus $2.6 T interest right now too.
As far as our future liabilities are concerned, you’re right, we will owe social security much more when the entitlements come due. That’s why it is imperative that we take back control of our monetary system.
Larry
[/quote]
I don’t quite follow why it would make much difference whether the Fed or the Treasury prints money; it seems to be all out of thin air. Greenbacks were issued by the Treasury to use inflation to fund the war I assume because the Federal Reserve didn’t exist yet then.
To clarify the social security obligation numbers I quoted above, that came from the present value of revenues and interests expected to be transfered back from the General Fund for the next 75 year period. (See 2008 US Financial Statements supplemental Info page 136 Table 5). The projected date when SS revenues no longer exceed expenses, and no surplus can be loaned to the General Fund is 2017 officially and probably will be even sooner.
Tom
Woodman said:I don’t quite follow why it would make much difference whether the Fed
or the Treasury prints money; it seems to be all out of thin air.
Greenbacks were issued by the Treasury to use inflation to fund the war
I assume because the Federal Reserve didn’t exist yet then.
Tom, I think the big difference is that if the Treasury simply printed dollars instead of bonds, we would not have to pay any interest on our debt. Instead the Treasury prints bonds which are bought by the Fed with dollars they create via a printing press. The private, neither government owned or controlled, Federal Reserve Bank collects interest on the bonds with money they create for free. And, yes, both the bond and the dollar are created "out of thin air."
Thomas Edison explained this when he said "It is absurd to say that
our country can issue $30 million in bonds and not $30 million in
currency. Both are promises to pay, but one fattens the usurers and the
other helps the people. If the currency issued by the Government was no
good, then the bonds would be no good either. It is a terrible situation
when the Government, to increase the national wealth, must go into debt
and submit to ruinous interest charges."
The Federal Reserve Bank is nothing more than a parasite that steals from the real economy. Lincoln issued "greenbacks" as interest free and debt free money - he did not have, nor want, a central bank, like the Federal Reserve, to usurp our nations most important power. Lincoln said "The
Government should create, issue, and circulate all the currency and
credits needed to satisfy the spending power of the Government and the
buying power of consumers. By the adoption of these principles, the
taxpayers will be saved immense sums of interest. Money will cease to be
master and become the servant of humanity."
We have the power to fix, or at least diffuse, the current financial crisis - End the Fed
Larry