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The deficit that no one talks about

This may be the deficit that will be the lynch pin that finally brings the whole system to its knees. At that point we as Americans will have to decide if we take the path of least resistance and give up our remaining sovereignty or will we stand for our natural rights of liberty. Only time will tell, but I don’t have much hope anymore. When our leaders decided to paper over the last mess that they created there is no way to know where all those dollars will flow. With the stock market here and around the world hitting all-time highs it’s not too hard to see where some of the fall out is happening. But that is only the side show to what is really happening. The Fed has created massive amounts of liquidity and built support in our treasury market, so we are not really living in a “free market” environment in the bond market. Through purchasing 45 billion of GSE’s and 40 billion in treasuries each month they are clearly signaling that any rates rises will not happen until they are completely comfortable with the idea. Everyone talks of a time when we will return to “interest rates normalization”, but it’s hard to say what that would look like. If you just look at the “official inflation gauge” of 2% CPI…… we currently have negative real interest rates on our 10 year treasury, which is just under 2% today. To return to a normal interest rate structure the 10 year treasury would have to be at least 2% and then some risk premium above that for locking up your money for 10 years, let us just say another 2%. What do you think a 4% 10 year treasury yield would do to this economy? How about a 5.5% 30 year fixed mortgage rate? How about the principle loss (both of Treasuries and Agency) on all those bank balance sheets that the Fed has worked so hard to repair over the last 3 years? What about the increase in interest payments that the USG has to pay on all the newly issued bonds to cover the insane trillion dollar budget deficits, not to mention the higher interest rates on all the debt that need to be rolled over. That alone could sky rocket the interest charges on the USG budget to 500 billion dollars or more. Granted most economists would say ….” if interest rates double from here then at that time the economy would be doing much better” and the “dollar would be much stronger and would be attracting much more capital from abroad”. And they would be somewhat right, according to the free flow of capital and under normal Keynesian circumstances.

There is a ticking time bomb out there that few talk about and even fewer understand. This is our “CURRENT ACCOUTN DEFICIT” What is this and why should you be concerned? For those of you that saw “Too Big Too Fail” the movie on HBO. If you remember when Paulson was in China for the Olympics’ and the Chinese representative turned the conversation to “the amount debt your country carries in a huge vulnerability”……”We were approached by the Russia’s about a coordinated dumping of massive amount of your debt on to the market”…….Paulson gulped….The world knows of this problem….they get it…..they live it……just ask the Greeks.
In 1994 as a broker my clients lost (at least for a short term, on paper about 30% of their portfolios) because of the Mexican Debt Crisis. This caught me completely off guard and I never wanted to be blindsided by something like this again. So I taught myself why countries go broke. I was on a quest for the truth……….AND OH MAN DID I DISCOVERED THE TRUTH …….I discovered that the US was really in worse position then Mexico, how could this be? Well it didn’t take long for me to decide that as a man of conscience it was going to be hard to stay in this business, how does the line from the song go “an honest man’s pillow is his peace of mind” So I did the only thing I could do and left the industry and just traded my own money. I hate losing money…….but I hate losing other people’s money even more. So I learned……from the 87 Crash, the massive blip sell off of the Russia Coup in 91, the 94 Mexican Debt Crises, through the Thailand Baht Crisis, Russia Debt Crisis, Long Term Capital Management, the Tech Bubble, the Fannie and Freddie beginning housing Bubble( until their accounting crisis in 94 which I was sure was the end) through the Private Label Housing Bubble…..this is one continuance bubble…..to today. What will the next crisis be called in the future……. either the US Treasury Bubble or the Dollar Crisis.
So what does our current account position really look like? Are we really that vulnerable?
The answer is in the Federal Reserve Flow of Funds report release every quarter. There are two sections that show the information. Usually in section F.106 and L.106. titled “REST OR THE WORLD” .The F series describes the actual quarterly flow of fund, while the L series describes the level of those accounts. This is where I am concentrating today and just on the position of this account as they closed out 2012. The historical data is available if you wish to see the growth of the imbalances but there is nothing to be gleamed from that information for today’s discussion.
The REST OF THE WORLD (ROW) owns 19,384.4 (in billions) of our assets. This includes bonds, stock, and countless other financial instruments along with fixed assets like plants and equipment. While we own just over 9,074.5 (in billions) of assets in other countries. So we have over a 10 trillion dollar deficit.
If you strip the fixed assets from the picture it does not get better. Because ROW owns more here than we do over there, you have to add to our net deficit position another 1.5 trillion dollars. The reason I am stripping out fixed investment is because these are stable investments and cannot be dumped on the market for quick liquidation……and this is the point. The ROW has 11,897.7 billion more financial asset then they do liabilities. If you are looking for the next crisis, look no further.
Why is this so important? What really caused the last crisis…..a loss in confidence? A loss in the fact that the Bear Sterns, the Lehman Brothers, the AIG’s of the world did not have the liquidity to make it when they were required to present cash as a payment. They failed not because their balance sheets were impaired; they failed because they did not have the cash in “reserve” when they needed it……AND THEY COULD NOT BORROW ANYMORE. Why was Mexico failing in 1994? Because they didn’t’ have enough “dollar cash reserves” to make it through the crisis when people want dollars…….and they all had to try and sell assets during the their crisis and could not find buyers during the “fire sale”. What do you think the USG and The Fed are going to do if only a small portion of these 19 TRILLION DOLLARS worth of assets hit our shores? With every country right now engaged in a currency war this problem cannot be remedied. If you want to learn about this YouTube “balance of payment”. But no one is talking about this, but they all know. The USG would rather rake JPM over the coals today then address the real problem of this country.
In time of financial turmoil everyone…….including countries and central banks want and need cash. The USG borrows about 40 cents out of every dollar…….how long until the credit card countries either raise our rates, or demand a huge cash payment……..they won’t be asking for dollars…….they will be asking for their currencies and we don’t have it.
According to the Treasury’s own data the U.S. International Reserve Position….. the USG only have 148,284,000 dollars in foreign reserves. YEAH THAT’S 148 MILLION DOLLARS to defend the dollar AGAINST OVER 11 TRILLION DOLLARS in case of attack on our currency. Currency wars are usually defined as a country devaluing it’s currency in order to boost exports when domestic growth is anemic. But tell that to Greece right now, this is exactly what is going on over there………there government was shielded from their irresponsible behavior until they gave their sovereignty to the EU. That exactly what we did as States when we were coerced into the so called Republic called the United States. But this game is about over, there is turmoil in Japan……..massive devaluation through inflation, Europe’s northern countries are trying to do the right thing and not inflate…..but the southern countries turmoil will probably eat them up…….according to some very well respected hedge funds China is a bubble that is already bursting……..when pressed for cash do you really think they are going to care about the dollar? And then you have the buffoon’s in Washington…..at this point we would be better off to chisel it off and set it out to sea……..and start over…….like the man said.
When in the Course of human events, it becomes necessary for one people to dissolve the political bands which have connected them with another, and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature's God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation.
We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.--That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, --That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness. Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn, that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security.

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Excellent article.

Excellent article.


for a new day

Lynch Pin

to the Final Solution.