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Peak Debt/ Peak Credit


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Link doesn't work, i found the article.

 

 

Published September 19, 2005

Collapse of US fund exposes global debt scam

Bayou seen caught in fraudsters' trap while trying to recoup losses.

 

By NEIL BEHRMANN

IN LONDON

 

COURT records of the US$440 million collapse of Bayou, the Connecticut US based hedge fund, have disclosed an international scam involving high yield debt.

 

In delving into the Bayou fraud, Arizona's Attorney General discovered that US$101 million was transferred from the US to banking accounts in Germany, London and Hong Kong then back to London and the US again.

 

The Arizona authorities, legal firms and traders allege that the founder of Bayou, Samuel Israel 111, and other executives overstated profits and understated losses of the hedge fund.

 

In an attempt to recoup losses, Mr Israel invested in high yield debt and was caught in what is known as 'prime bank instrument fraud', lawyers believe.

 

This type of fraud has trapped investors around the world and has been explained fully in court documents relating to the Bayou scandal. In markets where interest rates have fallen to historically low levels, the court documents show that Singapore and other investors must be wary of promises about so called 'prime' high yield long and short term bonds.

 

'Prime bank instruments' also known as 'high yield investment' programmes are mythical fraudulent debt or bank instruments. The global fraud has been going on for several years.

 

Fraudsters attract investors because they claim that they give them access to high yield debt that is only traded by large, 'prime' European or other banks.

 

To justify the high yields on so called 'prime' or top quality bonds, the fraudsters claim that the World Bank, IMF and even the Federal Reserve bank back the so called 'prime debt' and claim that the banks trade in such debt at deep discounts to help finance stricken Third World countries and other worthy causes. according to court documents.

 

Common characteristics of a 'prime bank instrument' contract include overly complex language. The fraudsters claim that annual returns could range from 12 per cent to 200 per cent because of high income and potential capital appreciation.

 

Documents display large investor lists of attorneys and accountants that fraudsters claim to be investors. The victims become part of a 'select group' of investors and they must keep their unusual deal secret.

 

The fraudsters tend to operate as a worldwide network of contacts and partners who provide each other with essential services, such as rapid transfer of funds to off-shore accounts.

 

After selling the investor the fraudulent, worthless high yield paper, members of the network shift the investment rapidly from account to account and country to country. Investors wishing to retrieve their investments when they find that their promised profits aren't forthcoming, have to trace their money through many international and secret bank accounts.

 

The labyrinth of offshore accounts and entities makes the chase futile for the original investors.

 

When they try and recover money lost from one of the fraudsters, other members of the fraud network come into play.

 

They claim that the person investors are attempting to hold responsible is also a 'victim'.

 

In any event there are no longer any funds in the account because the money has moved on.

 

Fraudulent operators sometimes encourage investors to sue financial institutions that have handled their funds. In this way, scammers shift the blame on to financial institutions. When the fraud is unravelled the embarrassed bank sometimes settles and doesn't take legal action against the fraudsters because it fears bad publicity, say the court documents.

 

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  • 2 years later...

Howdy,

 

 

Something way back at the start of this correction I went over and my view has evolved a bit from then is the credit bubble and asset bubble we have now.

 

We all accept the housing created bubble but none of the rest on the US side is allowed to surface yet the commercial property side rose harder and faster and the dead bodies out in corporate land via investment banks pretty little models and other forms as yet to even hit the consciousness of the US equity market.

 

For years and I mean years as a full time trader I watched the US numbers get worse and worse and worse with only a respite in the govt overspending via Clifton which he tried repairing which saw the US govt actually in surplus in 2000 only to disappear when Bush cut taxes and then increased spending in subsequent years. For 20 constant years we had a US govt deficit and a US trade deficit which post 2000 has reached new heights with each year.

 

As a non American I watched over the years various countries attacked for this very reason and their currencies and economies demolished as the world attacked their overspending ways and for some countries like Mexico it was not just one crisis but several. Latest spate of them started with the Russians about 10 years ago followed by the Thai's and other Asians and then the South Americans yet again.

 

So had and still do wonder when if ever USA gets a dose of its own and when the US fed went down this path of cutting rates my first response was are they mad ? They had been running extremely expansionary monetary policies prior to this all exploding late last year and with a trade number already at 5% of GDP and a government number up around 3% of GDP they were in effect running at 108% overspending. What brought on the problem I thought and not one mentioned was the fact that after running US rates post Sept. 11th at negative real rates and way below inflation they had let the cat out of the bag, inflation and it rose from the 1.5% level to 2% to 4% in 2007. As such raising rates from an absurd negative rate for 2002-2005 they were forced to raise it and when they did companies started toppling like drunken sailors . For 12 months June 2003 - June 2004 despite the US economy moving along ok they sat rates at 1% well below inflation and a massive expansionary stimulus.

 

Even when they started to raise it was too slow and too late because hindsight is a wonderful thing we can now go and look at the residential housing prices and go gee were they nuts ... For me being impartial and looking at all asset classes not just this single one which is causing so much pain but all the rest I am going was the central bank brain dead ? or asleep? Housing side is about half way I suspect through any correction, sadly I think the commercial side is not even close maybe 5% of the way to addressing the fact it rose harder and faster than the residential side. Commercial debt of normal companies doubling and so too financials debt both doubling in the post 2000 period don't even bear thinking about.

 

There is a point in time and its called a PEAK DEBT level and the maximum amount ever possible for an economy to borrow and I suspect strongly the US went thru that level some time ago. In effect I have mused as to whether the USA is actually broke. I suspect it is.

All forms of debt are about 55 trillion. On top of this is the contingent liability of unfunded and already spent social security and Medicare payments which between these two are 45 trillion of contingent liability. If you want this not talked about contingent liability put into perspective the total US tax take is under 1 trillion and the unfunded portion of these obligations is 45 trillion so if they doubled the rate of tax paid by US citizens maybe and maybe they can meet these obligations in the future . Unlikely and when the take on social security goes negative in 2012 its a bit late and when its minus 600 billion per annum in 2020 far to late and 1,200 billion by 2025 you get the gist.

 

Putting this aside.

Total debt of 55 trillion

Around 9.5 trillion federal and state stuff

Around 2.5 trill further state and local stuff

About 15 trillion form the financial sector

About 12 trillion just regular corporates

About 16 trillion from consumers main part of this mortgages

 

Sounds nice a mere 55 trillion if one forgets the other social secirity/medicare stuff.

 

With a GPD about 14.3 trillion vs a 55 trillion debt one gets the picture.

With the official govt all forms debt at 12 or so it alone approaches 90% of GDP

 

To piece together a real outlook is fairly hard for the USA because one set of numbers contradicts the other in totality and how much and what is owned to whom is not possible with any degree of accuracy since the US dollar is the base currency of the world and for a corporate to issue he issues in his home currency US dollars and the owner could be anyone and as such the level of NET FOREIGN debt the US holds ranges from an absurd 40% of GDP to 200% on the other extreme. Higher the NET debt they owe the rest of the world rises the more unlikely it is the country retains the ability to ever repay it and nothing is impossible long term when one remembers the total export side of the US economy makes up just 22% of things when your running at over 100% debt levels just serving the debt requires about 5% of GDP alone for the external debt, let alone the internal levels.

 

Accurate reads on this I will leave to others, however I believe the real US debt NET debt to the rest of the world is running up near the 100% mark and growing at 10% or so per annum. When you run a negative trade number of 5% of GDP and a govt deficit of the same it adds up to 10%. Someone has to fund it. What scares me even more is the mess and oblivious stance of the official US side to this problem and how far it has expanded in the past decade alone.

 

In some ways I think they have totally missed the point with all this the US fed or maybe they haven't and finally they have actually got the point and turned around and gone oh shoot ? Raw numbers the debt is 181,000 per every person in the country. Per working person its USD $278,000 and per working family its a staggering sum up around US $750,000- per family. Double this if one counts social security and Medicare contingent liabilities.

 

These levels are insane and to just service this sort of debt on a single income of US$50,000 or 40k after tax how does one fund a US$278 k loan for each working person at 5% ? It leaves not much to live on and not much chance of repayment at 5% rates. If they can get rates to 2% sure there is a chance but this is the debacle they have right now. Simple but scary.

 

In 1986 the total of all forms of debt was about double the GDP

In 1998 the total of all forms of debt was around 2.5 times the GDP

 

At the end of 2008 this number is approaching 4 times the GDP.

 

So in 10 short years to put this into perspective and encapsulate the problem the debt in the USA has risen by 1.5 times GDP . Or another way if you would like its 22 billion larger in 2008 dollars than it was.

 

10 years they racked up debt of 150% of GDP or 15% per annum from 1998 till 2007.

That's how far this expansion of credit has gone.

 

If I look at the awful US economic numbers produced the suggestion is the ratio of net debt the USA owes the rest of the world is not that much changed over this period. Amazingly I might say since for every year bar one they ran a govt deficit and every year was a trade deficit. Trying to estimate who owns what and where is not possible. Someone has funded this debt binge which is 150% of US GDP in the last 10 years and its not the Americans themselves. Sure some has come from domestic sides but ever increasing despite the official numbers the funds have come from overseas. Foreign ownership of the US debt is only possible to get a gauge on it via US treasuries and back in 1998 the ownership of the US govt. 4 trillion debt back then was a mere 12% by foreign govt.. In 2008 the latest number has them holding 2.5 trillion of the 9.45 trillion debt or 26.4%. I would expect similar numbers out in all debt classes. So the proud owners of explosion in recent times I suspect despite it being impossible to gauge are and have been foreign holders of this paper.

 

Scary I suppose when one looks at the trade surplus of Germany and Japan and then comes up with a number of US$350- billion and likely via the US govt deficit this year and a trade number form hell and arrives with the USA needing about USD$1,000- billion to fund its still buggered structural problems. As for any expansion in credit and the overall number I am still left with it growing the sum total and the money having to come from somewhere and the drain overall cannot go on. US fed can drop money all it likes from helicopters but it DOESN'T give it away and has no ability to do so. The problem and like how I saw the ability of the US equity market to recover was zero due to price rises the consumer was given no relief no new funds in reality despite the lower US fed funds rate the cost of their loan was if anything higher and to top it off price rises across the board from petrol to food to electricity took twice as much stimulus the tax refund gave them away. It was in effect not possible to see any out via a rebound on the consumer side.

 

Back to PEAK DEBT and I am fairly sure despite the numbers being messed with via the US fed reserves liquidity injection projects that the US debt side reached and peaked in terms of debt that is allowed and the numbers for the last 10 years have to be viewed in the light that the US in effect expanded the level of debt by 15% a year for the last 10 years and added oodles and oodles of debt to the picture and I am not sure in the end whether they made anything in the last 10 years other than a credit inspired binge. In 2008 banks are contracting the amount of credit they offer, not expanding. Consumers are trying like hell to pay down things but have no ability to repay it. Corporates same thing but again the level of debts they are holding are far too large and 100% higher than 10 year ago. Worst of all the financials and there debt rising at similar paces to hold 7.5 trillion more in debt than they did 10 years ago is quite chilling . Forget these taps to the market via banks trying to shore up their balance sheets and the totals so far are 200 billion to make the capital ratios not totally suck, to repair the stupidity of the last 10 years the needed amount looks to be around 800 billion so lets just say things have a ways to go.

 

All of this an aside to the market in general. Have had basically the same outlook on this for many months now. Question in the end does this explosion in credit turn totally toxic and the not addressed levels outside residential housing in things like commercial real estate or corporate debt in the US start getting some attention as time goes on. Even if it doesn't the structural problems post 2010 of the tax system in the US will force the hand either that of 40 million retiring baby boomers go broke and beg on the streets.

 

For me in many ways its a question of how bad and how soon. I missed the last low on the ASX 200 at 5,050 for this very reason. At present the market is addressing a single head of this 20 headed monster. Its looking at the EPS for June 2008 quarter and the expectations which were insane have been hosed down and as such the US and our market has fallen. It has still factored into it a tame CPI outlook which to be blunt is total bulldust. Suggesting oil goes from US$80 per barrel in Dec 2007 to here US$140- and US CPI remains at 4.1% vs 4.2% now is the stupidest thing I have seen in 25 years of being a trader. Just as bad is these absurd EPS numbers factored into the equity prices of US shares. Calling EPS to grow at 25% in the next 18 months is insane. Calling somehow for things to rebound to me at least utterly stupid.

 

What fueled a lot of the growth of the US for the last 10 years was credit and a credit binge from hell. PEAK CREDIT or PEAK DEBT is something which I ascribe to. US credit conditions are shocking and any expansion beyond the peak is just not possible. Banks in the US are faced with on the housing side with shrinking security on the loans already granted and as such are CONTRACTING credit not expanding it. The US home equity loans of 400 billion a year are a thing of the past. The equity the US homeowners have in their McMansions is contracting and has been for some time. If you take this out further similar tales of woe abound out there and without the 1.5 trillion more debt racked up each year to fuel the US economy any call of some magic rebound is just that.

 

So if things are so bad why hasn't the US stock market had a cow ? Beats me. To be a mere 20% off an all time high a high fueled by high octane debt is just not enough and why I have been mumbling for 9 months now the thing needs to go 33% ish or 4,700 for our market and then I will have a look at things. The outlook is bleak and has been bleak for me since they rallied it from 5,050 to 5,950 and back here again not much has changed to my underlying picture and outlook. Perceptions have been messed with in the extreme but the bottom line picture despite the market rallying 900 points was not getting better it was getting worse in leaps and bounds. Inflation and not just petrol or crude but this made up half of it just made the whole possibility of any recovery even stabilization not possible despite expert after expert being wheeled out telling us its all over not 8 weeks ago.

 

Bulldust I said then and I say now. This problem is massive and structural and even if they were able to let the air out of the housing side slowly it leaves 5 other types of overpriced asset classes to address and that still leaves the absolute size of the debt and ability to fund it. I don't think its possible so it scares me the inflation outlook and the unreported US CPI being so much higher after all these seasonal adjustments come out its insane. USA could not afford US fed funds at 5.25% and it imploded and leveraged companies started to topple so their solution was to save the equity side to lower rates when inflation doubled from 2% to 4% and the result is I suspect its now 6% if not 7%. US bond markets had rallied in response to the US feds cuts but of great concern to them of late is the total reversal of yields and what I thought then what idiot buys a 10 year bond at 3% when CPI is 4% and rising is so so true.

 

Remains to be seen what the inflation and reported CPI out of the USA does. People and bond markets around the world are in a bloody mood when they look at Europe and its inflation rising 0.8% in the last 6 months to 4% with a currency which has gone up and the USA without a currency cushion and much lower staring prices for oil and the effect about double on CPI reporting no ... NO inflation here in the USA. They are on the cusp of the abyss in many ways the old USA with this stuff they are pulling and a complete and total loss of confidence in US debt as a result is unlikely but a draconian marking up of rates charged to fund US debt is certainly on the cards. Already 1% onto a 10 year bond how about another 2% and back we go to US corporates toppling like our own did with the debt exposed and a lack of ability to fund it at realistic credit costs. Only a moron lends at 3% when CPI is 4% or 5% or 6%. At present the funders of US debt I view still despite the recent correction as total morons. Who lends at negative rates ? Only a moron.

 

Right now the poor old US consumer is trying to fund things on their credit card. They cant get a home equity loan and it was with dismay 6 months ago 1 million were in the foreclosure stages and dismay today that there are 3 million in default on their loans and heading the same way. US govt has spent its last credit and lowered rates all it can. Govt spending in reality if one takes out the money they are stealing from social security is up around 900 billion negative up from 600 or so last year but at this level overspending at 6.3% of GDP govt side and a trade number which looks to me to top 800 billion next 12 months if not more due to oil being here the required new funding of new debt from just govt and consumer trade accounts is a shocking sort of US$1- billion plus if not more since I am not too sure how much domestic funding will be available so hitting the rest of the world worst case for another 10% of GDP when I suspect the number already is 100% of GDP and if consumers are able to rack up a little bit more as they seem to be able to the whole thing takes on a quite surreal sort of outlook.

 

Its some spendaholic given their first credit card and with no limit or one that just keeps getting larger and larger.

 

Nothing much new on this from 6 months ago despite all the noise. Favored a fall from the peak for US equities to a minimum of 33% from the peak and that gave me a 4,700 ASX 200. Pretty happy with this call since their is little doubt we break the old lows here today.

 

Preferred the 4,100 as a realistic sort of correction level and it sounded insane when I first mentioned it at 6,300 on the ASX 200 late last year but when looking at previous sorts of peaks and corrections this remained me very very much of the oil shocks of the 1968 - 1986 sort of period and went thru the chart back then and the market peaked at 1,000 but eventually tested the 600 level for the Dow.

 

Do we get there ? On the ASX. Unknown and it is of course possible with such awful state of affairs on the US side the slide may even be worse than this. If they manage to address this one post 2010 the unfunded obligations spent by the govt are just as large a problem as the current crisis.

 

This is me being optimistic and whilst not pleasant its something which has to be looked at in the hard cold light of day. The growth of this credit post 1998 by 1.5 times GDP in 10 short years to levels which I think are PEAK DEBT or CREDIT levels has to be addressed. How much of everything is puffed up on credit cards and how inflated asset values are to reality and where it all ends is the million dollar question. However as insane as the explosion of debt was to have the market down a mere 20% from all time highs in the USA with EPS estimates of growth of 25% for the next 18 months keeping the thing alive its a choice which is more stupid. A realistic level of retreat I would say was 33% but I suspect the denial and fustigating the USA has engaged in for the last 9 months has not made things better its made them worse and the eventual outcome worse.

 

The last sort of crisis we had was the oil shock of the 1970's and it was not hiding inflation but tackling it head on they raised rates by 5% in the early 1970's and the economy went into serious contraction. USA was at the time the largest creditor nation on the planet and running massive trade surplus's . Not so in 2007 the total opposite. There was no asset bubble or credit bubble in 1968 when it peaked at 1,000 the Dow that is. Again the opposite. Some lessons have been learnt since then and the excuse for the fed lowering was used for this very reason but to do it and have an expansionary credit policy when your debt has exploded 15% per annum for the past decade and you have rising inflation and asset bubbles. Well for what we are about to receive I would like to thank Greenspan and George W. Clinton actually addressed the structural social security problem and in 2000 there was a US surplus for the govt. Then along came Sept. 11 and Bush's revision of the tax laws giving 300 billion per annum to the rich. The low rates and 1% Fed funds for so long is all history and no use crying over spilt milk.

 

Sadly there is so much denial going on that maybe even my outlandish 4,100- is not enuf and I cant honestly rule anything out here.

 

If you cant admit there is a credit problem what hope is there.

If you cant admit there is an inflation problem the same.

Govt debt level and contingent liabilities maxed out.

Consumer credit like a teenager with a credit card.

Corporate debt insane

Financials don't get me started on these investment bank monsters which have been created.

 

Before someone goes gee Australia and its net debt is X ... Its running at 56% of GDP of which 150 billion is mining projects and since state governments still own such things as electricity power grids and generators and water authorities and sewerage and fund these on debt take of another 100 billion and we have something like 35% of GDP as net debt compared to USA which comes in at I suspect a number close to 100% and growing at 10% per annum.

 

Our govt is saving at a rate of 3% or is it 5% of GDP not overspending and whilst our balance of payments is a minus and keeps us negative a lot of the drain is again mining expansion and a stupid oil policy which adds 1% negative to the equation when in reality if the clowns previously in govt forced them to develop LNG and export that to cover the ever increasing importing of oil a lot of the negative would not be there. Stupid call to go short 150 million barrels per annum at US$20- well done you dummies !!

 

Our outlook 2008 prices when the new iron ore and coking coal hits the current account the trade numbers go nuts ... Positive and overall I still expect it to be slightly negative in the region of 20 billion 2008/9 a far cry from the 60-70 number we have seen and eventually all things the same as the volume expansion goes on and the LNG comes on line and we trade LNG exports for oil imports the minus 20 billion hole form this disappears and by 2009/10 if prices remain here we are n surplus overall ..... And rising as more and more stuff come son line post 2010.

 

This of course presumes prices remain where they are roughly. Unlikely in the extreme mind you. What happens on the commodity side if the Us goes into the recession it has to have and the world growth outlook slows down a bit remains to be seen. Personally don't think it changes too much as time goes on. People will still drive their cars and consume electricity and things at the same pace and China I am not sure they can stop. India is just a mess always has been and never had too much hope for them, more hope for the rest of the world and the large population high GDP growth nations above the India factor.

 

US trade outlook is bleak especially oil at US$140-. No saviour in sight.

US govt deficit and outlook especially as the baby boomers age and draw down social security again awful.

 

I said yesterday at some stage we and the rest of the world detaches from the USA and where it happens in the equity cycle remains to be seen. Comparing Australia and our economy and ability to get our way out of any slowdown to the USA is like comparing North Korea to Japan in economic terms. USA is the new North Korea or Zimbabwe and my Dear friend Robert just elected again is so happy to be a paid advisor on the US economy and about to be elected the head of the US federal reserve.

 

Yes to some extent the rest of the world has seen some expansion in credit just like the USA but unlike them thankfully for most regions there has not been even close to the expansion seen in the US and the sad thing is a housing bubble was allowed to fester and happen for USA and to some extent the USA.

 

It all comes down to risk. Every time and this from an old FX dealer. Yesterday the market bottomed and not a whiff of fear as we touched the old March lows on the ASX 200. Out come these new fandangled systems and because the could the market rallied up like a zombie 2% off the lows as their lobotomized trading computer systems tell them to buy buy buy and like magic the banks all go bid up 2% up 3% and no human contact made with the computer it doesn't care it just goes what can I buy to drive the index higher lets pick on banks to get the bounce we need. Funny thing is not one week ago I was pointing out the insanity of this move or should I say stunt they pulled 10 days ago rallying Macquarie up 4% last week how you doing this week ? Look mum despite at one stage having it up 10% this week its all gone . All of it and I suspect today will not be pleasant for them.

 

No respect for risk any of them. Their little financial models built on how things work with assumptions and presumptions built into them that are totally insane. Prices don't keep going up forever at 10%, well maybe they do in these models and assuming always you can raise funds at 0.25% above govt debt despite being a swamp developer is amazing. In the end the last place I would want to be into what is about to happen is financials. Not with the US credit fiasco in denial mode still.

 

 

I suspect 4,700 minimum but more likely somewhere between that and 4,100 where we detach from the USA. Having rates at 7.5% vs inflation at 4.5% in Australia if needed we retain the ability to lower rates to stimulate things worst comes to worst. At 4% rates I thing the Australian economy will show serious signs of life. Similar govt spending is saving at 3% or 5% of GDP and to reverse this to say 5% deficit again a massive stimulus.

 

Eventually we do detach but not till the whole ball game reflects and shows some respect for risk especially on the US side. They have not much room to move anything to stimulate their economy , maybe a takeover via China is in order or merge with Mexico an idea.

 

Oh well happy happy 4th of July ... Seems someone let off their box of crackers early and on the poor USA.

 

So Today the 3rd of July as we break the old low of 5,039.6 on the ASX 200 its going to be an interesting remainder of 2008

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In reply to: kahuna1 on Thursday 03/07/08 09:23am

Exellent post....I am surprised the australian financials are not getting belted today...anz is up....my watchlist has red all over it and it is almost all oil companies......It all looks very ugly for the US.....I can only wonder whether or not at somepoint investors will wake up and we see a sharp correction in the dow, or whether it will slowly and painfully decline.. http://www.sharescene.com/html/emoticons/weirdsmiley.gif

cheers

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RBS issues global stock and credit crash alert

By Ambrose Evans-Pritchard, International Business Editor

Last Updated: 12:19am BST 19/06/2008

 

 

The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.

 

"A very nasty period is soon to be upon us - be prepared," said Bob Janjuah, the bank's credit strategist.

 

A report by the bank's research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as "all the chickens come home to roost" from the excesses of the global boom, with contagion spreading across Europe and emerging markets.

 

 

RBS warning: Be prepared for a 'nasty' period

Such a slide on world bourses would amount to one of the worst bear markets over the last century.

 

RBS alert: Quotes from the report

Fund managers react to RBS alert

Support for the euro is in doubt

RBS said the iTraxx index of high-grade corporate bonds could soar to 130/150 while the "Crossover" index of lower grade corporate bonds could reach 650/700 in a renewed bout of panic on the debt markets.

 

"I do not think I can be much blunter. If you have to be in credit, focus on quality, short durations, non-cyclical defensive names.

 

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"Cash is the key safe haven. This is about not losing your money, and not losing your job," said Mr Janjuah, who became a City star after his grim warnings last year about the credit crisis proved all too accurate.

 

RBS expects Wall Street to rally a little further into early July before short-lived momentum from America's fiscal boost begins to fizzle out, and the delayed effects of the oil spike inflict their damage.

 

"Globalisation was always going to risk putting G7 bankers into a dangerous corner at some point. We have got to that point," he said.

 

US Federal Reserve and the European Central Bank both face a Hobson's choice as workers start to lose their jobs in earnest and lenders cut off credit.

 

The authorities cannot respond with easy money because oil and food costs continue to push headline inflation to levels that are unsettling the markets. "The ugly spoiler is that we may need to see much lower global growth in order to get lower inflation," he said.

 

Morgan Stanley warns of catastrophe

More comment and analysis from the Telegraph

"The Fed is in panic mode. The massive credibility chasms down which the Fed and maybe even the ECB will plummet when they fail to hike rates in the face of higher inflation will combine to give us a big sell-off in risky assets," he said.

 

Kit Jukes, RBS's head of debt markets, said Europe would not be immune. "Economic weakness is spreading and the latest data on consumer demand and confidence are dire. The ECB is hell-bent on raising rates.

 

"The political fall-out could be substantial as finance ministers from the weaker economies rail at the ECB. Wider spreads between the German Bunds and peripheral markets seem assured," he said.

 

Ultimately, the bank expects the oil price spike to subside as the more powerful force of debt deflation takes hold next year.

 

 

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this is a very interesting post i copied from somewhere else.

the poster did not reference any article or website it was from,

so it my be his/her own musings.

---------------------------------------------------------------------------------

 

 

I have been following this saga for three years. I had anticipated big problems a couple of years ago, but they didn't manifest as optimism does tend to defy logic for some time.

 

When I first realized the size of the Derivatives market, I thought, wow, that is multiples of the worlds GDP - if this whole mess falls over, we are screwed. Now how can I make money shorting the market....

 

The problem with this strategy is that Central Banks can play a lot of tricks to keep the game going on...

 

The thing I have come to realize is that the Collapse of the Derivatives market is unlikely to ever happen. My rationale and potential outcome for this is as follows.

 

The FED and the central banks will not allow a collapse of the derivatives market. If derivatives were to seize up, no bank or entity would have any confidence to put their money anywhere. No body would know who was going to pay up on the large, calculated bets various entities were taking and hence the financial system of the world would literally seize up.

 

The Central banks can't allow for this to happen, hence they are more likely to bail out more Bear Sterns and Northern Rock catastrophes when they happen in my opinion.

 

Currently, the Fed is getting dangerously low on tangible cash and Treasuries on their own balance sheet. If there is another blow up, I am of the opinion that they will be forced to print money. I think a few people are already sensing this. (Note, unlike you might hear, the Fed is not printing money yet. They are loaning money out - vast quantities of it and for shady collateral - but all monies loaned are expected to be paid back).

 

So what does this mean? Well, if they print in earnest, then you would tend towards expecting massive hyperinflation in the US. Normally countries that attempt to get out of their current debt and poor financial situation that go to the printing press end up with hyperinflation. Germany, Zimbabwe - all the result of the printing press.

 

However, I don't think this is going to result in hyperinflation like everyone will expect. It is a bold claim, but my rationale is as follows.

 

Firstly, they will not be printing to hand money out to everyone. It will merely be to make sure that markets function and no huge entities collapse completely. But no-one will know this for sure, hence the act of starting the press for a few bucks will be the same as printing Billion dollar notes straight off the bat as the market is concerned.

 

As they start to do this (and I am hypothesizing that it is only a matter of time), oil and energy costs around the world are going to shoot to the moon. Speculators will move everything into energy because it is the only thing that will hold its value once the trust of a fiat system is broken. (A lot of people think Gold will be where the money goes - I think gold would do alright - but the supply of energy is the last truly universally exchangeable currency). I think we are already seeing this speculation occur. If it does happen, $150 oil will be considered cheap. Bonds will not get touched (why would you buy a Treasury that is going to yield 4% when you know full well more fiat currency is going to be printed at no cost in the future - you might as well burn your money now). This will spike interest rates. Equities and houses (which are overvalued by the huge credit being thrown around) will be sold by people loosing confidence and the smart money will all go into energy - the last safe haven of a truly shaky house of financial cards.

 

Thus, my thesis is that the US will be forced to start the printing press, but this will ultimately crush them due to a huge oil shock and spiking bond yields with a country that is far too indebted. This printing will mean that the derivatives market stays in tact (all bets on the market will get resolved), however, the act of starting the printing press will ultimately not result in hyperinflation, but will rather result in a huge wave of deflation as the money printed will not be able to work its way into the general economy before market forces have dealt with the problem.

 

It is going to be very interesting to see how this plays out. I don't know much about economics or finance, this is just my opinion at a high level and I would be interested in others opinion on the topic. Interesting times ahead..

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In reply to: datum on Thursday 10/07/08 12:20am

I think the US has completely lost it over the last 10 years. First it was the dotcom boom, flogging shares with absolutely no substance at 50 times future revenues and now flogging sub-prime loans that never should have been made and are now only backed by falling house prices, after Wall Street, the mortgage brokers and the rating agencies have all taken their cuts. Never mind; the bonuses have all been great and the termination payments out of this world. The bankers have been very careful to put their men into the Treasury function (Ruben and Paulson) over the the last 15 years and regulation has been minimal.

 

However, the Us dollar is the world' reserve currency and a mighty military power and at this point in time, despite the gold buffs push for that option, will remain that way for some considerable period. In the meantime, the rest of the world will be very wary of any paper emanating from that country which purports to be AAA or providing fantastic returns. I am sure most thinking Americans with a modicum of integrity, are absolutely horrified by what has happened but are frightened that the whole house of cards will collapse, as are the monetary authorities in other countries. It is in nobody's interest for further crises to develop.

 

Commodities, in my opinion, and particularly the largest, oil, will increase in price,becoming to some extent defacto currencies. This has the added benefit of allowing other currencies to revalue only to a limited extent against the US$, but those countries now will have higher inflation from the higher commodity prices, and the burden of the US's excesses will be shared around.

 

The US political system makes it hard for appropriate regulation of financial institutions, but not for the Europeans who will make sure ithe recent financial excesses donot occur again. Mind you Asia was not involved at all and indeed wil for this and other reasons will become the driving force of world growth.

 

When you think about it; isn't it a bit strange when your biggest industry (70%) is consumer spending? Doesn't call for much skill, just open your wallet and pull out a bit of plastic. Mind you the same thing is happening here and but for the grace of the minerals boom would Australia go!

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  • 1 year later...

Who's buying all that US debt?

In a recent note to clients, we discussed how much debt the US government would need to issue in order to balance the budget for fiscal 2009. We calculated they would need to sell $2.041 trillion in new debt ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã¢â‚¬Å“ or almost three times the new debt that was issued in fiscal 2008.

As a thought experiment, we separated all the various US Treasury owners and asked our readers whether each group could afford to increase their 2009 treasury purchases by 200 per cent. In the end, we surmised that most groups couldnÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢t, and prepared our readers for the worst. Almost seven months later, however, nothing particularly bad has happened on the US debt front.

There have been no failed auctions, no sovereign defaults, no downgrades of debt and no significant increase in rates: not so much as a hiccup in the treasury market. Knowing what we discussed this past June, we have to ask how it all went so smoothly. After all, it was pretty obvious that there wasnÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢t enough buying power to satisfy the auctions under ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Â¹Ãƒƒâ€Â¦ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã¢â‚¬Å“normalÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢ circumstances.

In the latest Treasury Bulletin (published in December 2009), ownership data reveals that the United States increased the public debt by $1.885 trillion dollars in fiscal 2009. So who bought all the new Treasury securities to finance the massive increase in expenditures? According to the same report, there were three distinct groups that bought more than they did in 2008. The first was ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Â¦ÃƒƒÂ¢Ãƒ¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…âہ“Foreign and International BuyersÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚ÂÂ, who purchased $697.5 billion worth of Treasury securities in fiscal 2009 ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã¢â‚¬Å“ representing about 23 per cent more than their respective purchases in fiscal 2008. The second group was the Federal Reserve itself. According to its published balance sheet, it increased its treasury holdings by $286 billion in 2009, representing a 60 per cent increase year-over-year. This increase appears to be a direct result of the Federal ReserveÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢s Quantitative Easing program announced this past March. Most of the other identified buyers in the Treasury Bulletin were either net sellers or small buyers in 2009.

While the Q4 data is not yet available, the Q1, Q2 and Q3 data suggests that the state and local governments and US savings bonds groups will be net sellers of US Treasury securities in 2009, while pension funds, insurance companies and depository institutions only increased their purchases by a negligible amount.

So who was the third large buyer? Drum roll please... it was ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Â¦ÃƒƒÂ¢Ãƒ¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…âہ“Other InvestorsÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚ÂÂ. After purchasing $90 billion in 2008, this group has purchased $510.1 billion of freshly minted treasury securities so far in the first three quarters of fiscal 2009. If you annualise this rate of purchase, they are on pace to buy $680 billion of US treasuries this year ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã¢â‚¬Å“ or more than seven times what they purchased in 2008.

This is undoubtedly the group that made the US deficit possible this year. But who are they? The Treasury Bulletin identifies ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Â¦ÃƒƒÂ¢Ãƒ¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…âہ“Other InvestorsÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚ as consisting of individuals, government-sponsored enterprises (GSE), brokers and dealers, bank personal trusts and estates, corporate and non-corporate businesses, individuals and other investors. Hmmm. Do you think anyone in that group had almost $700 billion to invest in the US Treasury market in fiscal 2009? We didnÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢t either.

To dig further, we turned to the Federal Reserve Board of Governors Flow of Funds Data, which provides a detailed breakdown of the owners of Treasury Securities to Q3 2009. Within this grouping, the GSEÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢s were small buyers of a mere $5 billion this year; broker and dealers were sellers of almost $80 billion; commercial banking were buyers of approximately $80 billion; corporate and non-corporate businesses, grouped together, were buyers of $11.6 billion, for a grand net purchase of $16.6 billion. So who really picked up the tab?

To our surprise, the only group to actually substantially increase their purchases in 2009 is defined in the Federal Reserve Flow of Funds Report as the ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Â¦ÃƒƒÂ¢Ãƒ¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…âہ“Household SectorÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚ÂÂ. This category of buyers bought $15 billion worth of treasuries in 2008, but by Q3 2009 had purchased a whopping $528.7 billion worth. At the end of Q3 this household sector category now owns more treasuries than the Federal Reserve itself.

 

So to summarise, the majority buyers of Treasury securities in 2009 were:

 

1. Foreign and international buyers, who purchased $697.5 billion.

2. The Federal Reserve, which bought $286 billion.

3. The household sector, which bought $528 billion to Q3 ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã¢â‚¬Å“ which puts them on track purchase $704 billion for fiscal 2009.

 

These three buying groups represent the lionÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢s share of the $1.885 trillion of debt that was issued by the US in fiscal 2009.

We must admit that we were surprised to discover that ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Â¦ÃƒƒÂ¢Ãƒ¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…âہ“householdsÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚ had bought so many Treasuries in 2009. They bought 35 times more government debt than they did in 2008. Given the financial condition of the average household in 2009, this makes little sense to us. With unemployment and foreclosures skyrocketing, who could afford to increase treasury investments to such a large degree?

For our more discerning readers, this enormous ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Â¦ÃƒƒÂ¢Ãƒ¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…âہ“householdÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚ investment was made outside of money market funds, mutual funds, ETFÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢s, life insurance companies, pension and retirement funds and closed-end funds, which are all separate reporting categories. This leaves a very important question: who makes up this household sector?

Amazingly, we discovered that the Household Sector is actually just a catch-all category. It represents the buyers left over who canÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢t be slotted into the other group headings. For most categories of financial assets and liabilities, the values for the household sector are calculated as residuals. That is, amounts held or owed by the other sectors are subtracted from known totals, and the remainders are assumed to be the amounts held or owed by the household sector.

To quote directly from the Flow of Funds Guide, ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Â¦ÃƒƒÂ¢Ãƒ¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…âہ“For example, the amounts of Treasury securities held by all other sectors, obtained from asset data reported by the companies or institutions themselves, are subtracted from total Treasury securities outstanding, obtained from the Monthly Treasury Statement of Receipts and Outlays of the United States Government and the balance is assigned to the household sector(emphasis ours)".

So to answer the question ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâ€Â¦ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã¢â‚¬Å“ who is the household sector? They are a PHANTOM. They donÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢t exist. They merely serve to balance the ledger in the Federal ReserveÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢s Flow of Funds report.

Our concern now is that this is all starting to resemble one giant ponzi scheme. We all know that the Fed has been active in the market for T-bills. As you can see from the table below, under the auspices of Quantitative Easing, they bought almost 50 per cent of the new Treasury issues in Q2 and almost 30 per cent in Q3. It serves to remember that the whole point of selling new US Treasury bonds is to attract outside capital to finance deficits or to pay off existing debts that are maturing. We are now in a situation, however, where the Fed is printing dollars to buy treasuries as a means of faking the TreasuryÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢s ability to attract outside capital. If our research proves anything, itÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢s that the regular buyers of US debt are no longer buying, and it amazes us that the US can successfully issue a record number of Treasuries in this environment without the slightest hiccup in the market.Bill Gross is co-chief investment officer at PIMCO and arguably one of the worldÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢s most powerful bond investors. He recently revealed that his bond fund has cut holdings of US government debt and boosted cash to the highest levels since 2008. Earlier this year he referred to the US as a ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Â¦ÃƒƒÂ¢Ãƒ¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…âہ“ponzi style economyÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚ and recommended that investors front run Uncle Sam and other world governments into government debt instruments of all forms. The fact that he is now selling US treasuries is a foreboding sign.

Foreign holders are also expressing concern over new Treasury purchases. In a recent discussion on the global role of the US dollar, Zhu Min, deputy governor of the PeopleÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢s Bank of China, told an academic audience that ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Â¦ÃƒƒÂ¢Ãƒ¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…âہ“the world does not have so much money to buy more US Treasuries.ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚ He went on to say, ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Â¦ÃƒƒÂ¢Ãƒ¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…âہ“the United States cannot force foreign governments to increase their holdings of TreasuriesÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚¦ Double the holdings? It is definitely impossible". Judging from these statements, it seems clear that the US cannot expect foreigners to continue to support their debt growth in this new economic environment. As US consumers buy fewer foreign goods, there are less US dollars available for foreigners to purchase future Treasury securities. Foreigners are the largest source of external capital that can be clearly identified in US Treasury data. If their support wanes in 2010, the US will require significant domestic support to fund future debt issuances. GrossÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢s recent comments suggest that their domestic support may already be weakening.

As we have seen so illustriously over the past year, all ponzi schemes eventually fail under their own weight. The US debt scheme is no different. 2009 has been witness to spectacular government intervention in almost all levels of the economy. This support requires outside capital to facilitate, and relies heavily on the US governmentÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢s ability to raise money in the debt market. The fact that the Federal Reserve and US Treasury cannot identify the second largest buyer of treasury securities this year proves that the traditional buyers are not keeping pace with the US governmentÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢s deficit spending. It makes us wonder if itÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢s all just a ponzi scheme.

http://www.businessspectator.com.au/bs.nsf...ent&src=amm

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