Archive for October, 2008
Michael S. Rozeff predicts:
“… The lobby for more debt is unstoppable. Not too far down the road, the result is going to be higher interest rates (lower bond prices). It will be the only way to induce savers to supply the additional funds that will be needed to pay for the consumption inherent in the social programs like Medicare.
The real rate of interest will rise. The risk premium on government debt will rise because the debt is growing relative to national income. The inflation premium will rise because there is more of a threat of inflation when there is more debt. Productive investments will face higher costs of capital, and this will crimp the stock market and economic growth. It’s not a pretty picture…”
Comment: Well, looks like that’s what we’re heading for. I at least also cannot see it any other way.
Oct. 29 (Bloomberg) — The Federal Reserve cut its benchmark interest rate by half a percentage point to 1 percent, matching a half-century low, in an effort to avert the worst U.S. economic downturn in the postwar era…”
Comment: Monetary policy has degenerated into a sport of banging the economy until it gets crushed. Monetary policy has never been so artless and so primitive as it is now. While it has always been more witchcraft than science, recent monetary policy has become only primitive, brutal and brutish. With its magic gone, it has also lost its force.
Stanley White reports: Oct. 29 (Bloomberg) –
– The dollar fell for a second day against the euro on bets the Federal Reserve will lower interest rates by as much as three quarters of a percentage point today.
The U.S. currency also declined against the yen and the British pound on speculation the central bank will continue lowering borrowing costs as rising unemployment and sliding home values cause the world’s largest economy to contract. U.S. consumer confidence slumped to a record low this month as stocks plunged and banks shut off credit, a report showed yesterday.
“When the dust settles, the dollar’s fundamentals will pressure it to go lower,'’ said Masahiro Sato, joint general manager of the treasury division in Tokyo at Mizuho Trust & Banking Co., a unit of Japan’s second-largest publicly listed lender. “Traders will focus more on falling rates and the rising costs of fixing the U.S. economy.'’
The dollar weakened to $1.2718 per euro at 10:45 a.m. in Tokyo from $1.2683 late yesterday in New York. It fell to 97.14 yen from 98.03. The euro declined to 123.53 yen from 124.32. The dollar may drop to 90 yen by year-end, Sato said…–
Oct. 28 (Bloomberg) — Coordinated efforts by central banks to boost liquidity in global markets are failing as lenders hoard cash, according to an index compiled by the Bank of England for its semi-annual financial stability report…–
Peter Schiff has some sobering truths to tell about the towering government debt:
Dakin Campbell reports: Oct. 27 (Bloomberg) –
– Treasuries declined, led by two-year notes, as the government began selling $64 billion in short-term U.S. securities as part of its efforts to fund its rescue of the financial system.
Two-year note yields fell the most in almost two weeks ahead of a $34 billion sale of the notes tomorrow and a $24 billion auction of five-year debt Oct. 30…–
Comment: The Greenspan-Bernanke era will be remembered as the time of the rolling bubbles. It’s a kind of mad money doctors cure. Cure one illness by infecting the patient with another, even bigger, illness. This way Greenspan “cured” the fallout from the dot.com bubble with the real estate bubble, and Bernanke tries to “cure” the real estate bubble by creating the bond bubble. It seems that people still haven’t lost enough. Bernanke is now after the rest. After the value of stocks and houses has evaporated, the only wealth left are bonds, and that’s where the next bubble may pop.
“…That malaise grew particularly after credit ratings agency Moody’s Investors Service in the last half-hour of trading Monday downgraded General Motors Corp. further into “junk” status, pointing to the sharp contraction of the U.S. auto market. Shares of GM, one of the 30 Dow components, sank 50 cents, or 8.4 percent, to $5.45…”
“…The bundling of consumer loans and home mortgages into packages of securities — a process known as securitization — was the biggest U.S. export business of the 21st century. More than $27 trillion of these securities have been sold since 2001, according to the Securities Industry Financial Markets Association, an industry trade group. That’s almost twice last year’s U.S. gross domestic product of $13.8 trillion.
The growth over the past decade was made possible by overseas banks, which saw the profits U.S. financial institutions were making and coveted the made-in-America technology, much as consumers around the world craved other emblems of American ingenuity from Coca-Cola to Hollywood movies. Wall Street obliged, with disastrous results: two-thirds of a trillion dollars in bank losses, about 40 percent of them outside the U.S.
“Securitization was based on the premise that a fool was born every minute,'’ Joseph Stiglitz, a professor of economics at Columbia University in New York, told a congressional committee on Oct. 21. “Globalization meant that there was a global landscape on which they could search for those fools — and they found them everywhere.'’
European banks, in particular, were eager adopters. Securitizations in Europe increased almost sixfold between 2000 and 2007, from 78 billion euros ($98 billion) to 453 billion euros, according to the European Securitization Forum, a trade organization.
Three Icelandic banks borrowed enough to buy $228 billion of assets, most of them securitizations, turning the country’s financial system into a hedge fund. All three banks have been nationalized by the government, leading Prime Minister Geir Haarde to advise citizens to switch from finance to fishing…”