The Second Dip of the "Double-Dip Hyperinflationary Depression is now here. Economic data, which had pointed to a weak recovery, is now showing renewed signs of falling off a cliff.
This downturn was not too difficult to anticipate. We have reapeatedly pointed out how the unprecedented annual drop in money supply aggregate M3 would, with virtual certainty, lead to a more severe and aggressive downturn. Despite all the stimulus and near ZERO interest rates, the horrendous worldwide debt levels are keeping consumers and business in check.
The April retail sales report was the first sign of a sputtering economy. While sales showed a gain of 0.4%, the pace of gain slowed from February and March. The April weakness was naturally blamed on factors such as the weather and an early Easter, which had the effect of pulling sales into March.
The upcoming report for May is scheduled for release on Friday, June 11th. Consensus data for May is indicating a gain of 0.2% versus an earlier estimate of 0.5%.
Topping off the disappointment parade was Friday's jobs report, which had a headline number of 431,000 added to payrolls. On the surface, a pretty good number. Unfortunately, all but 20,000 of these were temporary census workers who will be laid off at the end of the month.
The household survey, which counts the number of people with jobs, as opposed to the payroll survey that counts the number of jobs, showed a seasonally-adjusted monthly employment contraction of 35,000 in May, after adjusting for the census increase.
The Bureau of Labor Statitistics (BLS) has made a science of creating completely obfuscating employment data. One of their assumptions is that jobs created by start-up companies in this downturn have more than offset jobs lost by companies closing down. So, if a company fails to report its payrolls because it has gone out of business, the BLS assumes it still has its previously-reported employees and adjusts those numbers for the trend in the company’s industry. Huh?
The additional jobs created by start-up firms, which get added on to the payroll estimates each month, were revised lower in the most-recent benchmark revision. According to the econometric work of Dr. John Williams of ShadowStats (http://www.shadowstats.com/), this monthly bias should be negative by approximately 200,000 on average. Therefore, in Dr. Williams' estimation, the BLS continues regularly to overestimate monthly growth in payroll employment by roughly 200,000 jobs.
The one bright note is the recent jump in both new home sales and existing home sales. Reported numbers showed some increase in activity in April relative to March. Unfortunately, this appears to have been due primarily to the April 30th expiration of tax breaks for home buyers. A similar, but larger spike, was evident for existing home sales with the November 2009 expiration of initial tax incentives. To the extent this stimulus has pulled in sales from the future, monthly sales should fall off in the months ahead, starting with May 2010 reporting.
Of great concern, despite the blip in home sales, is foreclosure activity. The National Association of Realtors (NAR ) estimates that 33% of new home sales for April were in the "distressed" category. With foreclosures on the rise, price pressure remains on the pricing of new and existing homes.
The Obama Administration, despite their cheerleading of the April jobs gains, is busily preparing yet ANOTHER stimulus package. Reportedly being pushed by economic adviser Larry Summers, the new package is expected to be $200 million. The Federal Reserve has done all it can. The only remaining weapon is more fiscal spending, which, given a deficit already in the $1.5 Trillion range, will have some very nasty side effects.
Marko's Take
The top Federal personal tax rate is scheduled to increase to 39.6% from 35% in early 2011. For an interesting review of the consitutional issues regarding the income tax, we invite you to check out our You Tube video on "The Legality Of The Personal Income Tax" by clicking here http://www.youtube.com/markostaketv#p/u/2/1TInKnCIikg.
Showing posts with label Double Dip Hyper-Inflationary Depression. Show all posts
Showing posts with label Double Dip Hyper-Inflationary Depression. Show all posts
Monday, June 7, 2010
Friday, May 21, 2010
Banking Sector Problems Accelerate
While the banking sector reported a profitable quarter for the first 3 months of 2010, problems are continuing to escalate.
The Federal Deposit Insurance Corporation (FDIC) reported an aggregate profit of $18.0 billion in the first quarter of 2010 for the commercial banks and savings institutions it insures, which was a $12.5 billion increase from the $5.6 billion earned for the similar period of 2009.
A small majority of all institutions reported year-over-year improvements in their quarterly net income. Those reporting net losses for the quarter were 18.7%, compared to 22.3% a year earlier. The average return on assets (ROA) rose to 0.54% , from 0.16% a year ago. This is the highest quarterly ROA for the industry since the first quarter of 2008.
The primary factor contributing to the year-over-year improvement in quarterly earnings was a reduction in provisions for loan losses. While first-quarter provisions were still high at $51.3 billion, they were $10.2 billion (16.6%) lower than a year earlier.
The number of institutions on the FDIC's "Problem List" rose to 775, up from 702 at the end of 2009. This represents 10% of all insured entities and is a dramatic rise from 252 at the end of 2008.
The total assets of problem institutions rose approximately 7% during the quarter from $403 billion to $431 billion. These levels are the highest since June 30, 1993, when the number and assets of problem institutions totaled 793 and $467 billion, respectively, but the increase in the number of problem banks was the smallest in four quarters.
While The Deposit Insurance Fund (DIF) balance improved for the first time in two years, its net worth is still NEGATIVE $20.7 billion - a negligible increase from the $20.9 billion deficit at the end of 2009.
The fund balance includes a whopping $40.7 billion contingent loss reserve that has been set aside to cover anticipated future losses. Combining the fund balance with this contingent loss reserve shows total DIF reserves of $20 billion.
The FDIC's liquid resources stood at $63 billion at the end of the first quarter, a decline from $66 billion at year-end 2009. In order to maintain emergency liquidity, the FDIC Board approved a measure on November 12, 2009, that required most insured institutions to prepay approximately three years' worth of deposit insurance premiums – about $46 billion – at the end of last year.
Despite the sanguine nature of the FDIC report, major problems persist. Poor loan performance in other sectors continued to hurt banks, with the total number of loans at least 3 months past due climbing for the 16th consecutive quarter.
Banks have been hurt by non-performing loans and the continued recession, causing them to dramatically reduce their lending. Commercial and Industrial Loans are down 25% from their peak. The industry's total loan balances grew by 3% during the quarter, but the increase was due to accounting changes. Without taking into account these changes, lending would have declined for the 7th straight quarter, as banks cut back across most major lending categories.
While the FDIC believes that problem banks will peak this year and decline smoothly thereafter, their optimism appears to have little basis. As the economy slips into the "Second Dip" of this "Double-Dip Hyper-Inflationary Depression" and the crisis in debt within the Euro-Zone intensifies, it is hard to believe that we are anywhere close to a termination of problems in the financial sector.
Marko's Take
For new readers interested in more of a political bent, we have converted some of our written blogs to video format on You Tube. They can be accessed by clicing here http://www.youtube.com/markostaketv.
The Federal Deposit Insurance Corporation (FDIC) reported an aggregate profit of $18.0 billion in the first quarter of 2010 for the commercial banks and savings institutions it insures, which was a $12.5 billion increase from the $5.6 billion earned for the similar period of 2009.
A small majority of all institutions reported year-over-year improvements in their quarterly net income. Those reporting net losses for the quarter were 18.7%, compared to 22.3% a year earlier. The average return on assets (ROA) rose to 0.54% , from 0.16% a year ago. This is the highest quarterly ROA for the industry since the first quarter of 2008.
The primary factor contributing to the year-over-year improvement in quarterly earnings was a reduction in provisions for loan losses. While first-quarter provisions were still high at $51.3 billion, they were $10.2 billion (16.6%) lower than a year earlier.
The number of institutions on the FDIC's "Problem List" rose to 775, up from 702 at the end of 2009. This represents 10% of all insured entities and is a dramatic rise from 252 at the end of 2008.
The total assets of problem institutions rose approximately 7% during the quarter from $403 billion to $431 billion. These levels are the highest since June 30, 1993, when the number and assets of problem institutions totaled 793 and $467 billion, respectively, but the increase in the number of problem banks was the smallest in four quarters.
While The Deposit Insurance Fund (DIF) balance improved for the first time in two years, its net worth is still NEGATIVE $20.7 billion - a negligible increase from the $20.9 billion deficit at the end of 2009.
The fund balance includes a whopping $40.7 billion contingent loss reserve that has been set aside to cover anticipated future losses. Combining the fund balance with this contingent loss reserve shows total DIF reserves of $20 billion.
The FDIC's liquid resources stood at $63 billion at the end of the first quarter, a decline from $66 billion at year-end 2009. In order to maintain emergency liquidity, the FDIC Board approved a measure on November 12, 2009, that required most insured institutions to prepay approximately three years' worth of deposit insurance premiums – about $46 billion – at the end of last year.
Despite the sanguine nature of the FDIC report, major problems persist. Poor loan performance in other sectors continued to hurt banks, with the total number of loans at least 3 months past due climbing for the 16th consecutive quarter.
Banks have been hurt by non-performing loans and the continued recession, causing them to dramatically reduce their lending. Commercial and Industrial Loans are down 25% from their peak. The industry's total loan balances grew by 3% during the quarter, but the increase was due to accounting changes. Without taking into account these changes, lending would have declined for the 7th straight quarter, as banks cut back across most major lending categories.
While the FDIC believes that problem banks will peak this year and decline smoothly thereafter, their optimism appears to have little basis. As the economy slips into the "Second Dip" of this "Double-Dip Hyper-Inflationary Depression" and the crisis in debt within the Euro-Zone intensifies, it is hard to believe that we are anywhere close to a termination of problems in the financial sector.
Marko's Take
For new readers interested in more of a political bent, we have converted some of our written blogs to video format on You Tube. They can be accessed by clicing here http://www.youtube.com/markostaketv.
Wednesday, May 19, 2010
Is The Second Dip Imminent?
For a while, we have expected the "Second Dip" of this Double-Dip Hyper-Inflationary Depression to materialize. It sure looks like it's here.
While the economic statistics suggesting at least some economic recovery continue to pour in, behind the numbers, a much darker picture is being drawn.
The main culprit in the imminent downturn is the ongoing systemic evaporation of liquidity. The canaries in the coal mine are the world stock markets, which have suddenly begun to plunge precipitously along with world credit markets.
In addition, there are plenty of excellent and accurate leading indicators that have been screaming that a more vigorous downturn is immediately ahead.
The most ominous is the unprecedented shrink in the broad aggregates of our money supply.
Real M3, the broadest measure of money and liquidity has dropped by an unprecented 7% in the last 12 months, according to Shadow Stats (http://www.shadowstats.com/). While there have been instances when the economy has fallen into recession without money supply contracting first, there are NO examples of a prolonged drop in money which has NOT been followed by a sharp economic crunch.
Whenever real M3 has contracted on a year-to-year basis, the economy always has followed, either falling into recession, or if already in recession, intensifying. If liquidity contracts, the broad economy will inevitably suffer. The present contraction in broad liquidity is the deepest of the post-World War II era. Historically, the lead time between the liquidity signal and economic activity is roughly six-to-nine months.
A major component of money creation is the Commercial and Industrial Loan market, which according to the Federal Reserve Board, has fallen by a mind-numbing 25% from its peak in late 2008! If the economy were truly healthy and business expanding, this data set would be turning up rather than plunging. Commercial Paper outstanding has dropped by a staggering 50% since its peak in 2007!
These are both foretelling more problems in the banking sector with the reductions demonstrating just how poor the condition of the credit markets are.
The other issue to consider is that the Obama Adminstration, Federal Reserve (FED) and Department of Treasury are completely out of bullets. Given the combination of extra-ordinary stimulus packages, ZERO interest rates and aggressive market bail-outs like TARP, the economy ought to be humming along. At this point, there are few options left.
Add to that, the meltdown in Sovereign Debt in Europe, the massive worldwide budget deficits and runaway entitlement programs and it's obvious that further policy measures are not likely to be successful without experiencing a very painful period of economic adjustment.
One must ask the obvious question. Will the economic downturn bring down hard assets like GOLD? Temporarily perhaps, but ultimately the financial authorities will be forced to employ more desperate measures to restore liquidity. These measures will absolutely spark the embers of hyper-inflation which will provide a very beneficial environment to trigger the next mania in precious metals and the underlying mining stocks.
Marko's Take
For our solution to the Budget Deficit, we proposed a two-part program last weekend. The blogs can be read by clicking http://markostake.blogspot.com/2010/05/fixing-budget-mess-part-1-negative.html and http://markostake.blogspot.com/2010/05/fixing-budget-deficit-part-2.html.
While the economic statistics suggesting at least some economic recovery continue to pour in, behind the numbers, a much darker picture is being drawn.
The main culprit in the imminent downturn is the ongoing systemic evaporation of liquidity. The canaries in the coal mine are the world stock markets, which have suddenly begun to plunge precipitously along with world credit markets.
In addition, there are plenty of excellent and accurate leading indicators that have been screaming that a more vigorous downturn is immediately ahead.
The most ominous is the unprecedented shrink in the broad aggregates of our money supply.
Real M3, the broadest measure of money and liquidity has dropped by an unprecented 7% in the last 12 months, according to Shadow Stats (http://www.shadowstats.com/). While there have been instances when the economy has fallen into recession without money supply contracting first, there are NO examples of a prolonged drop in money which has NOT been followed by a sharp economic crunch.
Whenever real M3 has contracted on a year-to-year basis, the economy always has followed, either falling into recession, or if already in recession, intensifying. If liquidity contracts, the broad economy will inevitably suffer. The present contraction in broad liquidity is the deepest of the post-World War II era. Historically, the lead time between the liquidity signal and economic activity is roughly six-to-nine months.
A major component of money creation is the Commercial and Industrial Loan market, which according to the Federal Reserve Board, has fallen by a mind-numbing 25% from its peak in late 2008! If the economy were truly healthy and business expanding, this data set would be turning up rather than plunging. Commercial Paper outstanding has dropped by a staggering 50% since its peak in 2007!
These are both foretelling more problems in the banking sector with the reductions demonstrating just how poor the condition of the credit markets are.
The other issue to consider is that the Obama Adminstration, Federal Reserve (FED) and Department of Treasury are completely out of bullets. Given the combination of extra-ordinary stimulus packages, ZERO interest rates and aggressive market bail-outs like TARP, the economy ought to be humming along. At this point, there are few options left.
Add to that, the meltdown in Sovereign Debt in Europe, the massive worldwide budget deficits and runaway entitlement programs and it's obvious that further policy measures are not likely to be successful without experiencing a very painful period of economic adjustment.
One must ask the obvious question. Will the economic downturn bring down hard assets like GOLD? Temporarily perhaps, but ultimately the financial authorities will be forced to employ more desperate measures to restore liquidity. These measures will absolutely spark the embers of hyper-inflation which will provide a very beneficial environment to trigger the next mania in precious metals and the underlying mining stocks.
Marko's Take
For our solution to the Budget Deficit, we proposed a two-part program last weekend. The blogs can be read by clicking http://markostake.blogspot.com/2010/05/fixing-budget-mess-part-1-negative.html and http://markostake.blogspot.com/2010/05/fixing-budget-deficit-part-2.html.
Saturday, April 24, 2010
Producer Prices Producing Signs Of Inflation
The recently released Producer Price Index (PPI) is beginning to show signs of the inevitable wave of hyper-inflation (http://www.bls.gov/news.release/archives/ppi_04222010.pdf).
The PPI for Finished Goods rose 0.7% from February to March, seasonally-adjusted, following a 0.6% decline in February and a 1.4% increase in January.
In March, more than 70% of the increase in the finished goods index can be attributed to a 2.4% jump in prices for consumer foods. The index for finished energy goods advanced 0.7% and prices for finished goods, other than foods and energy, edged up 0.1%.
Excluding seasonal adjustments, the March PPI rose by 1.1%. On a year-to-year basis, March’s annual PPI rose to 6.0%, up from the 4.4% annual inflation reported for February. The March 2010 annual inflation rate was the highest since the 8.8% annual rate in September 2008, when the systemic solvency/financial crisis reached its peak.
Rising prices of commodities is the driver. Of 15 major commodity price indexes, 13 were higher month-to-month (data are reported not seasonally adjusted). The PPI All Commodities Price Index was up year-to-year in March 2010 by 9.0%, versus a 6.9% annual gain in February and was at its highest growth rate since September 2008. Similarly, the March Purchasing Managers survey had shown its highest "Prices-Paid" index readings since August 2008 for manufacturing and since September 2008 for non-manufacturing industries.
Obviously, the inflation-creep is bullish for Gold and Silver. Recent auctions for Treasuries have become more problematic as the result of poor yields. The Federal Reserve has no choice but to keep rates low as long as possible, especially as the non-existent "economic recovery" sputters. This leaves no choice but for the Washington cabal to monetize our debt and fan the flames of inflation.
As we've mentioned in prior blogs, inflation has a lag effect and, once started, is incredibly difficult to thwart. The only solution is to endure a sustained period of economic hardship. Paul Volcker, former head of the Federal Reserve, resorted to raising interest rates to nearly 20%. This was followed by a severe recession until the Reagan tax cuts provided enough economic stimulus to set the stage for a prolonged period of sustained growth.
Marko's Take
Please visit us on YouTube. Our latest video blog on the Legality of the Personal Income Tax can be accessed by clicking here (http://www.youtube.com/markostaketv#p/u/0/1TInKnCIikg). In addition, if you have any interest in 3D applications for your cell phone, visit our new website at (http://www.e3dlabs.com/).
The PPI for Finished Goods rose 0.7% from February to March, seasonally-adjusted, following a 0.6% decline in February and a 1.4% increase in January.
In March, more than 70% of the increase in the finished goods index can be attributed to a 2.4% jump in prices for consumer foods. The index for finished energy goods advanced 0.7% and prices for finished goods, other than foods and energy, edged up 0.1%.
Excluding seasonal adjustments, the March PPI rose by 1.1%. On a year-to-year basis, March’s annual PPI rose to 6.0%, up from the 4.4% annual inflation reported for February. The March 2010 annual inflation rate was the highest since the 8.8% annual rate in September 2008, when the systemic solvency/financial crisis reached its peak.
Rising prices of commodities is the driver. Of 15 major commodity price indexes, 13 were higher month-to-month (data are reported not seasonally adjusted). The PPI All Commodities Price Index was up year-to-year in March 2010 by 9.0%, versus a 6.9% annual gain in February and was at its highest growth rate since September 2008. Similarly, the March Purchasing Managers survey had shown its highest "Prices-Paid" index readings since August 2008 for manufacturing and since September 2008 for non-manufacturing industries.
Obviously, the inflation-creep is bullish for Gold and Silver. Recent auctions for Treasuries have become more problematic as the result of poor yields. The Federal Reserve has no choice but to keep rates low as long as possible, especially as the non-existent "economic recovery" sputters. This leaves no choice but for the Washington cabal to monetize our debt and fan the flames of inflation.
As we've mentioned in prior blogs, inflation has a lag effect and, once started, is incredibly difficult to thwart. The only solution is to endure a sustained period of economic hardship. Paul Volcker, former head of the Federal Reserve, resorted to raising interest rates to nearly 20%. This was followed by a severe recession until the Reagan tax cuts provided enough economic stimulus to set the stage for a prolonged period of sustained growth.
Marko's Take
Please visit us on YouTube. Our latest video blog on the Legality of the Personal Income Tax can be accessed by clicking here (http://www.youtube.com/markostaketv#p/u/0/1TInKnCIikg). In addition, if you have any interest in 3D applications for your cell phone, visit our new website at (http://www.e3dlabs.com/).
Sunday, February 21, 2010
Bank Lending Plummets: Further Evidence Of Economic Downturn Ahead!
In order for an economy to grow, access to the capital markets is essential. In the mid-2000's, banks were tripping all over themselves to lend money to anyone for any half-cocked reason. The penduluum has swung to the other side. Bank lending standards have become so tight that they are certain to choke off hope of an economic recovery.
David Rosenberg from Gluskin Sheff said lending has fallen by over $100 billion since January, plummeting at an annual rate of 16%! “Since the credit crisis began, $740 billion of bank credit has evaporated. This is a record 10% decline,” (http://canadafreepress.com/index.php/article/20164).
Mr. Rosenberg said it is tempting fate for the Fed to turn off the monetary spigot in such circumstances. “The shrinking in banking sector balance sheets renders any talk of an exit strategy premature.”
So far, this year alone, U.S. bank-lending has fallen by over $100 billion – from the extremely depressed levels of 2008. Thus, not only is U.S. bank-lending falling at the fastest rate in history, but it is doing so from a level which was already far lower than bank-lending before Wall Street destroyed the U.S. economy. So what else is new?
The problem is not soley the result of bank stinginess. As the result of the banks' profligacy in the mid-2000s, new regulations have drastically tightened lending standards, thus precluding loans that might have been made otherwise. In addition, credit demand has plummeted.
An important question is "to what extent is the decline due to tightened lending standards rather than falling demand?" Demand shortfalls may be a key component at this point; while the National Federal of Independent Business continues to warn of tight credit conditions. Its latest discussion of small business conditions indicated that the biggest problem facing small employers is a "shortage of customers".
Without a functional and vibrant credit market, no economic recovery is possible. In fact, the latest trends point to an imminent second dip in the "Double-Dip Hyper-Inflationary Depression".
Unfortunately, the unavailabity of credit for small business is the most significant aspect. Small business, especially those companies under 100 employees, have proven to be the engine of growth. By cutting off their lifeblood, ongoing high unemployment is assured. And, as a result, we can expect absolutely NO economic recovery.
Disagree? Agree? TAKE ME ON!
Marko's Take
Please visit our new video blog site: http://youtube.com/markostaketv
David Rosenberg from Gluskin Sheff said lending has fallen by over $100 billion since January, plummeting at an annual rate of 16%! “Since the credit crisis began, $740 billion of bank credit has evaporated. This is a record 10% decline,” (http://canadafreepress.com/index.php/article/20164).
Mr. Rosenberg said it is tempting fate for the Fed to turn off the monetary spigot in such circumstances. “The shrinking in banking sector balance sheets renders any talk of an exit strategy premature.”
So far, this year alone, U.S. bank-lending has fallen by over $100 billion – from the extremely depressed levels of 2008. Thus, not only is U.S. bank-lending falling at the fastest rate in history, but it is doing so from a level which was already far lower than bank-lending before Wall Street destroyed the U.S. economy. So what else is new?
The problem is not soley the result of bank stinginess. As the result of the banks' profligacy in the mid-2000s, new regulations have drastically tightened lending standards, thus precluding loans that might have been made otherwise. In addition, credit demand has plummeted.
An important question is "to what extent is the decline due to tightened lending standards rather than falling demand?" Demand shortfalls may be a key component at this point; while the National Federal of Independent Business continues to warn of tight credit conditions. Its latest discussion of small business conditions indicated that the biggest problem facing small employers is a "shortage of customers".
Without a functional and vibrant credit market, no economic recovery is possible. In fact, the latest trends point to an imminent second dip in the "Double-Dip Hyper-Inflationary Depression".
Unfortunately, the unavailabity of credit for small business is the most significant aspect. Small business, especially those companies under 100 employees, have proven to be the engine of growth. By cutting off their lifeblood, ongoing high unemployment is assured. And, as a result, we can expect absolutely NO economic recovery.
Disagree? Agree? TAKE ME ON!
Marko's Take
Please visit our new video blog site: http://youtube.com/markostaketv
Friday, February 19, 2010
Fed Raises Rates... Or Did They?
In a move that had already been well telegraphed, the Federal Reserve (FED) raised the discount rate from .50% to .75%. Is this the beginning of a new tightening cycle? NO! What readers of "Marko's Take" already know is that any major upward move in rates is not in the cards for 2010.
Reason 1 is the size of the National Debt, which had its ceiling recently raised by Congress to in excess of $14 Trillion! A 1% increase in rates translates into an additonal $140 billion per year increase in our budget deficit! Reason 2 is that the economy is NOT in a recovery, but slipping into the second dip of this "Double Dip Hyper-Inflationary Depression". Any material increase in rates is just not going to happen.
Furthermore, for any "tightening" to occur, the FED must raise rates FASTER than the increase in inflation. The "real" interest rate is defined as the prevailing interest rate MINUS the ongoing inflation rate. Historically, real rates have been slightly positive - about 2%. However, at the present, real rates are NEGATIVE and given the latest release in the Producer Price Index (PPI), a meager .25% increase in rates still keeps the FED way behind the curve.
Negative real rates were a FED policy blunder in the 1970's. The result was Stagflation and a mania in Gold. Fast forward to the 2010's and HISTORY WILL REPEAT!
The FED's move may also have been a token measure to appease China, which has been vocal in its displeasure with U.S. monetary policy and the debasement of the dollar.
Foreign owners of US government debt reduced their holdings by the largest monthly amount ever in December, with China offloading so many Treasury securities that it is no longer the largest foreign holder! Total foreign holdings of treasury securities plunged by $53 billion in December. China led the sell-off, reducing its holdings by $34 billion, while Japan increased its holdings by $11 billion to become the new largest foreign holder of Treasuries.
China has increased their holdings of U.S. Treasuries eight-fold over the past decade, so this latest dumping is relatively small in the grand scheme of things. It is newsworthy only in the fact that China is no longer the largest holder of Treasuries and this could be the beginning of a much larger trend to divest of U.S. debt.
The discount-rate move didn't affect the FED's main policy tool, the federal-funds rate, a FED-influenced rate that banks charge each other on overnight loans. That benchmark rate filters through to other market rates. The FED on Thursday reiterated the fed funds rate will remain near zero for an "extended period," which means at least a few more months.
So, while the FED has taken this rather minor move, the big picture remains unchanged. The FED is far more concerned about NOT derailing the incipient "recovery" it maintains is taking place. What recovery?
Love the FED? Hate the FED? TAKE ME ON!
Marko's Take
Please visit our new YouTube channel at http://youtube.com/markostaketv. We will have a schedule of upcoming episodes posted shortly.
Reason 1 is the size of the National Debt, which had its ceiling recently raised by Congress to in excess of $14 Trillion! A 1% increase in rates translates into an additonal $140 billion per year increase in our budget deficit! Reason 2 is that the economy is NOT in a recovery, but slipping into the second dip of this "Double Dip Hyper-Inflationary Depression". Any material increase in rates is just not going to happen.
Furthermore, for any "tightening" to occur, the FED must raise rates FASTER than the increase in inflation. The "real" interest rate is defined as the prevailing interest rate MINUS the ongoing inflation rate. Historically, real rates have been slightly positive - about 2%. However, at the present, real rates are NEGATIVE and given the latest release in the Producer Price Index (PPI), a meager .25% increase in rates still keeps the FED way behind the curve.
Negative real rates were a FED policy blunder in the 1970's. The result was Stagflation and a mania in Gold. Fast forward to the 2010's and HISTORY WILL REPEAT!
The FED's move may also have been a token measure to appease China, which has been vocal in its displeasure with U.S. monetary policy and the debasement of the dollar.
Foreign owners of US government debt reduced their holdings by the largest monthly amount ever in December, with China offloading so many Treasury securities that it is no longer the largest foreign holder! Total foreign holdings of treasury securities plunged by $53 billion in December. China led the sell-off, reducing its holdings by $34 billion, while Japan increased its holdings by $11 billion to become the new largest foreign holder of Treasuries.
China has increased their holdings of U.S. Treasuries eight-fold over the past decade, so this latest dumping is relatively small in the grand scheme of things. It is newsworthy only in the fact that China is no longer the largest holder of Treasuries and this could be the beginning of a much larger trend to divest of U.S. debt.
The discount-rate move didn't affect the FED's main policy tool, the federal-funds rate, a FED-influenced rate that banks charge each other on overnight loans. That benchmark rate filters through to other market rates. The FED on Thursday reiterated the fed funds rate will remain near zero for an "extended period," which means at least a few more months.
So, while the FED has taken this rather minor move, the big picture remains unchanged. The FED is far more concerned about NOT derailing the incipient "recovery" it maintains is taking place. What recovery?
Love the FED? Hate the FED? TAKE ME ON!
Marko's Take
Please visit our new YouTube channel at http://youtube.com/markostaketv. We will have a schedule of upcoming episodes posted shortly.
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