The Fed Is the Biggest Holder of US Debt

A fascinating set of circumstances has been created with the Fed’s ballooning of their balance sheet. With the end of QE2 in sight and, if we believe what we hear, the ‘non-probability’ of QE3 materializing, I believe that we shall experience some very interesting times ahead. With our country’s debt level, governmental spending habits, growing level of unfunded liabilities and our apparent proclivity to ignore peril until it is upon us, one could not ask for much better drama – the ultimate question being; how will the final act of this traveling show be resolved and how will that effect our country! Also, what will history have to say about our ‘unique’ times?
prb

June 9, 2011

The Fed Is the Biggest Holder of US Debt

This isn’t new news, but today’s flow of funds report has one nugget that is getting some attention today, so we might as well offer this reminder: The Fed is the world’s biggest holder of US debt.
UniCredit economist Harm Bandholz put together this chart that puts it in perspective.
China is not surprisingly the second-biggest holder of debt. In one hopeful sign, U.S. households are the third-biggest holders. This group includes hedge funds, so we’re not exactly talking the US version of Mrs. Watanabe here.
But you could argue that hedge funds represent wealthy households. And you could more easily argue that US households still hold fewer Treasurys than they did in the past. The hope is that their appetite for Treasurys picks up as they age, helping to make up for some of the demand that will inevitably fade from China and Japan in the years to come.

http://blogs.wsj.com/marketbeat/2011/06/09/the-fed-is-the-biggest-holder-of-us-debt/

Pushing the string

It appears that the yield curve will continue to remain in its current familiar surroundings, notwithstanding a ‘surprise occurrence’ in the financial markets of the world. It would appear that there is not much ‘good news’ around to change the status of ultra low yields on the short end of the curve. One of the key questions moving forward will be – who will buy our debt? With China continuing to ‘unload’, especially in the short end, who will step forward (other than the Fed)? Another interesting item to ponder at this time is: what does an interest rate stress test on the Fed’s currently ballooned balance sheet look like!
prb

Friday's weak jobs report will likely lead to the Fed maintaining the current target for the funds rate through this year and into early 2012. While most market participants had expected Fed policy to remain on hold through this year, the report showing anemic job growth led to those that had been holding out for an increase to start to throw in the towel.
According to the Fed Funds futures market, the probability of a hike in the funds rate to 0.50% by the end of this year has declined from 14.2% one-month ago to 11.4% now. Similarly, Eurodollar futures are projecting 3-month LIBOR to remain exceptionally low through mid-2012. The implied rate for 3-month LIBOR to March 2012 is 0.47% and through June 2012 is 0.61%.

(Stone & Youngberg Portfolio Strategy Group – June 6, 2011)

Cyrenaic Syndrome

According to Weldon Financial founder, “The EU, like the US, suffers from what we might call the ‘Cyrenaic Syndrome,’ a dynamic linked to the ancient Greek philosophers Aristippus and Hegesias of Cyrene, who, in third and fourth centuries BC, hypothesized that the goal of life was the avoidance of pain and suffering.

Addicts accomplish this through substance abuse. The EU [and the US, we would add] is trying to accomplish this thru pure denial, and an outright refusal to accept that austerity, like sobriety, is the ONLY way to actually deal with the problems it faces.”

Craig Dismuke, The Market Today ONLINE

The US government’s budget stalemate

The US government’s budget stalemate – It shall surely be interesting to see what our fearless (fearful) leaders 'accomplish' over the next several months as they attempt to hash out a budget for our federal government. A budget process that has thus far been less than efficient and effective and politics free!

It makes things interesting when you take into context the basic financial issues that our country currently faces –

1) the belief that government spending is always the first answer to any problem…and still more spending, even if it comes at the cost of significantly higher levels of leveraging our future, is always exponentially better!

2) the age of entitlement has been so ingrained in America's psyche over the last 60+ years thus creating a large and growing portion of our populace that truly believes that the government owes them (ie: is obligated to take care of them from birth to death)

3) the notion that the government has ALL the money available that we shall ever need or want and it will cost us nothing because fewer and fewer of our citizens really know, or even want to know, where the money actually comes from!

4) the role that special interest plays in the grand picture – money is power and power means accommodation and accommodation means the continuing sacrifice of freedoms for everyone else

5) iconic, ‘has been’ legislators that no longer know what daily life in America really is about – they have lost touch with the people who do the living and dying and working and raising kids and paying the bills and spending within their means! Many of these ‘long in the tooth’ congress people have been living in a congressional fantasy land for far too long…

6) and finally – who will be willing to relent in their desire, their drive, their addiction to gain power (the power that spending other people’s money and leveraging to the hilt brings) - the never ending struggle to gain more power and control…

Overview summary of the lessons gleaned from the Great Recession

We have been hearing quite a bit lately about what happened in and to our economy that produced the Great Recession. Numerous economic experts, in addition to a government- sponsored commission (which could not agree on a final report that stipulated their findings), have provided their unequivocally ‘unbiased’ findings and accounts of the debacle. Within all of the ‘findings of causation and fault’, I would say that there are bits of truth scattered among the reams of presented opinions. But only bits.

As a response from the peanut gallery (that’s me), after spending quite a bit of time pondering what really happened, I have put together my summary of the root causations and the lessons to be gleaned from this time of economic distress.

Overview summary of the lessons gleaned from the Great Recession:
Leverage ALWAYS has a limit – over-leverage ALWAYS has a price.

Bubbles ALWAYS deflate (pop) – the only question is the rapidity and the breadth of their destructive wake.

Economic cycles come and go – it’s only a matter of the height, depth, time span and finally, the amount of unemployed.

Rapid price appreciation in any asset class cannot exceed fundamentals for an extended period of time – no matter what the experts say – without a proceeding deflationary adjustment (i.e.: economic pain).

Government policy (fiscal and/or monetary) drives market economic decision- making, thus providing the motivation, or might I say, encouraging, asset value manipulation along the way.

Excesses occur when markets, motivated by policy, progress beyond, ahead of, and/or in spite of, fundamentals.

Government policy-making largess ensures bubble formation – past, present, and future.

Government policy-making is usually short-sighted, and in the instances of crises have a preference for topical, symptomatic band-aid fixes – and pledge to worry about the root causes when the next crisis arrives.

When you play the hyperbole of a heated economic lottery, very few end up winning.

Summation: Time, perseverance, minimal governmental intervention, and a return to foundational financial truths are the quickest way back to sound economic health.

2011 P.R. Barriball

What happens when the yield curve begins it's move upward! ! !

The Fed not only has pressure due to the low and slow GDP growth, the high level of unemployment and the high level of unused liquidity in the system but they also have the gargantun task of keeping rates low so that our government's debt load cost (interest expense on our borrowed money that is now over $14T) doesn't skyrocket...and totally 'bust the bank' as they say.....
So, my prognostication is that we will continue to hear that there is NO inflationary pressure - how long the markets buy that will be interesting to see....increasing price pressures for the things of daily living are hitting consumers from all sides (except housing) and that is inflationary. And with commodity bubbles forming all over the 'spill-over' effect will continue to add price pressures to the system.
prb

Never Has U.S. Borrowed So Much for So Little: Chart of the Day (attached)

By Brendan Moynihan - Jan 27, 2011 The U.S. government has been borrowing record amounts of money, though with little effect on interest rates. That may be about to change, according to Nouriel Roubini, the New York University economist who predicted the 2008 financial crisis.

“The fiscal problem is very serious,” Roubini said in a Bloomberg Television interview yesterday with Tom Keene from the World Economic Forum in Davos, Switzerland. “The bond vigilantes have not yet woken up in the U.S. in the way they have in the euro zone. Unless the U.S. addresses this fiscal problem, we’re going to see a train wreck.”

The CHART OF THE DAY shows total U.S. public debt outstanding soaring to record highs and approaching its $14.3 trillion ceiling, while interest rates and debt-service costs as a percent of gross domestic product fall to record lows. The average maturity of U.S. marketable debt outstanding is five years.

Treasury Secretary Timothy F. Geithner said Jan. 6 that lawmakers must raise the federal borrowing ceiling in the first quarter or risk a default on U.S. debt and a loss of access to credit markets. Geithner said it will reach that level between March 31 and May 15.

Economist Ed Yardeni coined the term “bond vigilantes” in 1983 for investors who protest inflationary monetary or fiscal policies by selling bonds and driving up government borrowing costs.

To contact the reporters on this story: Brendan Moynihan in Chicago, Illinois,
at bloomberg.net

two questions to ponder at this juncture

1) Is the current monetary policy agenda creating a ‘protectionist’ atmosphere that replays the events of the 1930’s?


2) And with the current policy activity that is devaluing the dollar to lower levels, what will happen to the level of appetite for our nation’s debt from abroad, especially Asia?