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What's New

2011-03-01 14:39:00

Our borrowed existence - series (for the first article in this series, refer to March ’11 issue)

Question: What’s new?

Answer: Like I always say…I’m glad to be asked. I believe there are some very serious things that are happening in this country and in the world that are not being talked about by nearly enough people. I feel they must be brought to the forefront…now. I would prefer a person or persons with much more knowledge in these areas than myself to do so, but unless this is done very quickly, it may be too late. Perhaps it’s already too late…but I will do what I can. I am not an economist. I am not a politician. I do not have an agenda…other than using this column to inform as many people as I can of the things I see and have researched, in the hope that something can be done. These things will take some time and space to cover properly, thus the reason why my articles on this subject will be a series over the next few months, or until I am “shut down” for whatever reason or reasons. As I will do with each article in this series, I will tell you the information I will present has come from several sources, including but not limited to, Stansberry & Associates, Kiplinger, Weiss Research, the Wall Street Journal, the New York Times, the Congressional Budget Office, the National Inflation Association, the Center on Budget and Policy Priorities, several others…as well as my own analysis...for what it is worth. Last month we talked about some positioning that needed to be done for this series, mostly dispelling the fact that it would be written from a perspective of hate. Hopefully this has been accomplished. I have two more items of positioning before we get started: 1) While most everything in this series is going to be brought to your attention for what would appear to be solely for the sake of materialism…it is not. We will all come to find out sooner or later that materialism is not the answer. We all came into this world naked and we will all leave naked. There will never be anything that is worth suffering the loss of the only prize that matters. When local and state governments and the Federal government are in the trouble that they are, and people’s life savings and way of life are threatened, improprieties of many natures are rampant and the devil has his best days. Unforeseen losses, chaos and stress breed bad things. This series’ primary focus is therefore not on preservation, profit and survival, as much as it is on the avoidance of these bad things. It begins with everyone being informed and brought up to speed with the same set of facts. Only after this is accomplished, can we talk about what can be done. If you cannot or will not accept these facts for whatever reason or reasons…I don’t expect you to be with us at the end when we talk about what can be done to solve the problem…and that’s okay. If what this series offers is not of enough to interest to enough people, for the right reasons, it will not move off “start” anyway. 2) Several people in our country are writing, talking and reporting on whether organized labor is right or the state governments are right insofar as wages, collective bargaining, benefits and so forth; whether it is best to redistribute wealth or not; whether we need Obamacare or not…or some modified version; and a host of other topics. While I have expressed my opinions several times on these issues, this series will attempt to rise above all of the partisanship and ideology of these issues and talk about the one problem that is the basis for all that you will read. When you are really…totally…out of money…and have no credit…it doesn’t matter whether you want to study the habitat of the southeast Asian orangutan, build a new fighter jet or provide food to the poor…you can’t do it. I have had the most difficult time understanding the actions of people who have been demonstrating over the past several weeks in states like Wisconsin, Indiana, Maryland, New York, Ohio and others, against governments who say they are broke and do not have the funds to meet the obligations promised to the public employees, without increased contributions and lessened benefits. Yes, I know they were promises, but things change. There is no money. Do these demonstrators think there is money and someone’s hiding it? This can be the only logical answer to their demonstrations. You see, if they agree and understand there is no more money, yet they keep asking for these promises to be kept, without any changes…well, it just doesn’t make sense…to me. And if demonstrators in these few states are doing this, what is to come with the over $100 trillion in unfunded liabilities of the Federal government to the private sector? This is the “heart of the matter,” and unless solved…by all of us…my belief is: •This problem will threaten every American’s way of life. •The savings of millions will be more at risk than ever before. •It will change your business and your work. •It will drastically affect your investments and retirement. I know, you are doing all that you can do to resist calling the authorities to come and get me. But I stand by my statement…unless this problem is solved…and quickly…the above list of items is not if but when. For more than 50 years, we have been blessed with having the United States Dollar (“USD”) as the world’s reserve currency. This status is a “borrowed existence.” So many of us take this and what it means for granted. Let me tell you what it means, and while all of the “dots” may not connect for you immediately, I promise you…they will at the end. Having the USD as the world’s reserve currency is what has allowed us to function as the world’s leader and as a super nation for more than 60 years. Countries that do not have a gold standard…which at this point in history includes all of them…must still back their currencies with something. These “reserves” create confidence. The Federal Reserve typically uses United States (“U.S.”) Treasury securities, aka U.S. Treasuries, as reserves, although it also holds many mortgage-backed securities these days. A U.S. Treasury security is government debt issued by the United States Department of the Treasury through the Bureau of the Public Debt. Treasury securities are the debt financing instruments of the United States Federal government. The Fed makes a profit on these holdings and turns them over to the government. The European Central Bank also holds the sovereign debt of its member countries and turns their earnings over to member governments. Emerging-market, central banks have a choice of what to hold as reserves, and they will always make the one that maximizes earnings and creates the most confidence in their currencies. That’s why China links its currency to the USD and holds mostly U.S. Treasuries…as reserves. No one forces a foreign, central bank to buy U.S. Treasuries. Each country would prefer to have its central bank buy its own local government debt as reserves. But who would trust these currencies if they were backed by local government debt? Imagine Thailand trying to encourage the use of its currency if it was backed only by Thai government debt. And if fewer people held the currency, the central bank would generate lower profits to hand over to the government. In other words, the international role of the USD is a by-product of profit-seeking, central banks pursuing their own self-interest. And that’s not going to change anytime soon. There is simply no other instrument issued by anyone or any country in the world that has the liquidity and certainty of payment of U.S. Treasury debt. Moreover, as emerging markets keep growing, their central banks will issue more local currency, which will continue to elevate the demand for U.S. Treasury debt. So while other countries must learn to accept the USD’s role, Americans must learn to accept that, over time, the share of our debt owned by foreigners is likely to keep rising…and that the demand for U.S. debt helps generate large U.S. trade deficits. Federal Reserve holdings of U.S. Treasuries now exceed China’s, with the Fed owning $1,108 billion and China owning $896 billion, according to data released February 2nd, 2011. Japan holds another $877 billion. By June, according to one analyst, the Fed will have accumulated $1.6 trillion in Treasury issues, a number likely to match China’s and Japan’s combined holdings at that time. You might add the two together and ask, “They have nearly $1.8 trillion in U.S. Treasuries, why do you say they will match the Federal Reserve’s holdings of $1.6 trillion?” It is because I think you will see China and Japan reduce their holdings of the same by then, even with the recent devastation in Japan. Why? Here’s an interesting note…on March 9th, 2011, it was announced that Pimco, the world’s largest mutual fund, reduced their holdings of U.S. Treasuries to zero. Why do you suppose they did this? Could it be that they don’t want to be caught holding them if things go badly…real badly? Just how did the Fed come to own all these securities? The Fed’s hoard of Treasuries resulted primarily from QE1 and QE2. This stands for the Federal Reserve’s program of “Quantitative Easing” in buying U. S. Treasuries. QE1 began in 2008 with an announced purchase of $600 billion in assets; however, by March 2009 the amount was increased to $1.7 trillion of Treasury debt, mortgage-backed securities and debt backed by Government Sponsored Enterprises (“GSEs”) such as Fannie Mae and Freddie Mac. Now, as the Fed liquidates some of the mortgages purchased under QE1, $30 billion a month is being poured into U.S. Treasuries on top of QE2. Under QE2, the Fed has indicated that it will buy $500 billion to $1 trillion in U. S. Treasuries, at a pace of about $250 billion or so a quarter. Yet some economists forecast the Fed ultimately will buy $1.5 trillion to $2 trillion under QE2. Understand, there is no legal limit as to how much the Fed can buy. Regardless, by June, the Fed likely will have $1.6 trillion in U.S. Treasuries, matching or topping the combined holdings of China and Japan. This development was reported in the February 2, 2011 edition of Financial Times. Undoubtedly, it was also reported in many other financial publications. However, here is what the Times did not report and what most other Establishment media outlets are not likely to report: There is a vast difference between how China and Japan came to own their U.S. Treasuries and how the Fed came to own its hoard. China and Japan came to own their U.S. Treasuries because both countries produced goods that Americans wanted to buy. The Fed came to own its hoard by simply turning on what Federal Reserve Head Ben Bernanke has called the “equivalent of an electronic printing press.” The Fed did not have to produce anything tangible, anything with any intrinsic value. No goods were produced, no trade was done. The Fed simply created, via Bernanke’s “electronic printing press,” the dollars with which it bought…and is buying…massive quantities of U.S. Treasuries. There just is no other way to categorize this other than massive inflation…in its classic definition. Check with any economist…if this is massive inflation, there can be nothing else coming but massive price inflation. Please believe me. I am not organizing a rally or a political demonstration. I just do not feel most Americans understand and are knowledgeable of what we are facing. In whatever capacity you will allow, let me furnish you with as much information as I can. The U.S. Government has been borrowing so much money over the last few years, most of the time using short-term loans that are never repaid, that soon, it will not even be able to afford the interest on these loans. Do you need a little “impetus” to keep reading? Let me give you a fact put out by the National Inflation Association. “Even if all U.S. citizens were taxed at 100% of their income, it still would not be enough to balance the Federal budget for the 2011 fiscal year!” I hope you’re reading this after you have digested your breakfast, because I wouldn’t want to make you ill. But if you will, go to www.usdebtclock.org. Have you ever seen anything like this? How do you feel watching this clock? Click on the World Debt link and see how we compare with the rest of the world. What did President Obama say in his State of the Union address in late January? He proposed freezing spending at current levels for the next 5 years. We are more than $14.2 trillion in debt at this writing. Freezing spending at an annual $1.3 trillion deficit only adds to this debt, along with the interest. What do you suppose he is thinking? This will not work. It is not sustainable. Who would invest in a business that projected an ever-increasing operational loss for the next five years, while already sitting on a mountain of debt they could not repay? In the banking collapse of 2008, the world’s governments absorbed all of the bad debt. For example, when Fannie Mae and Freddie Mac collapsed in the Summer of 2008, the U.S. Government responded by guaranteeing all of their outstanding debt. Since then, they have recorded hundreds of billions of losses, all passed onto the U.S. Government. Yes, you can still get a mortgage today, and yes, Fannie and Freddie are still in business, but these losses and trillions in private obligations are now the responsibility of the U.S. Government. The problem is that even before all of this, the U.S. Government was deeply in debt. With each additional commitment, we sink further and further into debt, quickly approaching the time we can no longer afford even the interest payment on our obligations. So, when Portugal, Italy, Greece, Ireland, Spain, Belgium and other countries around the world have defaulted on their debt, why hasn’t the U.S. Government? There is only one thing that has saved us. With the world’s reserve currency being the USD, the U.S. Government is the only debtor in the world who can legally print the USD. Let me repeat this, the U.S. Government is the only debtor in the world who can legally print USDs. The USD forms the basis of the world’s financial system. It is what banks around the world hold in reserve against their loans. This may be the biggest problem we have. Politicians in Washington know that as things stand now, the U.S. cannot go broke because all it has to do is to print more USDs to pay for its bad debt. This is precisely what it has been doing since March of 2009. That may sound good…and it is indeed a blessing…until things change. You see, the U.S. is also the only country in the world that doesn’t have to pay for its imports with a foreign currency. Let me give you a lead-in for next month’s article. Germany needs to buy oil from a Middle Eastern country. They cannot use German Marks to pay for it. Oil is priced in USDs. So first, Germany has to buy the USDs, then it has to buy the oil. This means the value of the German currency is always of great importance to the German government. In order for it to maintain its value, Germans must produce at least as much as they consume from around the world, otherwise the value of its currency will begin to fall causing prices to rise and its standard of living to decline. What if we had to pay for our oil with a foreign currency? That would be the first time we would all find out together just how valuable the USD is today, and how many of them it would take to buy the foreign currency, in order to buy the oil. This is where we will pick things up again next month.