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The "Rules" Keep Changing

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January 16, 2010 – Comments (10)

It is hard to predict anything with the way the rules keep changing.  Something I have been very confused about is how the US government has been able to keep selling it debt.

Well, something I read in John Mauldin just cleared up that confusion:

 Foreigners bought about $300 billion of the $1.5 trillion in new government debt. The rest came from the US, courtesy of the Fed buying mortgages. But that program stops (theoretically) at the end of March. The government still plans to run yet another $1.4-trillion-dollar deficit (give or take a few hundred billion). The question is, who will buy the debt? Foreigners will kick in another $300 billion, unless they decide to stop selling us stuff, or buy other less liquid or physical assets. So far there is no sign of that.

I have expected interest rates to rise, and in a free market they would have...  

It was 3 years ago this month that I figure big, big, big trouble was coming.  I don't think these measures will stop the "end game," rather they have just postponed it and probably made it a lot worse. What they have done is made it so those who live conservatively and invested conservatively now share huge risks. How can treasury bills be conservative when, well, it seems the entirety of market risk has been transferred to them?  OK, not the entirety, but an enormous amount of market risk. 

Tax payers weren't paying for existing programs before this garbage.  It is nonsense to think this can be covered.

10 Comments – Post Your Own

#1) On January 16, 2010 at 10:39 AM, dwot (69.85) wrote:

http://www.nakedcapitalism.com/2010/01/could-england-be-the-next-iceland.html

Could England be the next Iceland?  Personally, I think so.

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#2) On January 16, 2010 at 11:23 AM, catoismymotor (45.25) wrote:

I understand completely about your misgivings. I have them too. I look forward to reading the link about England.

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#3) On January 16, 2010 at 11:35 AM, catoismymotor (45.25) wrote:

dwot, I just read the link. England could become the next Iceland. Very scary. I am not a currency trader but I think if this happens the pound could be scooped up at a great discount and held for a good return a few years down the road. Not being a currency trader I am probably completely wrong.

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#4) On January 16, 2010 at 11:38 AM, alexxlea (59.20) wrote:

Sigh dwot, I'm with you on this one... I don't really have much at stake here other than being alive at the present moment, but yeah... big unhappy face as to what they've been doing.

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#5) On January 16, 2010 at 12:46 PM, starbucks4ever (97.18) wrote:

"How can treasury bills be conservative when, well, it seems the entirety of market risk has been transferred to them?"

That's right! Today, buying dividend-paying stocks IS conservative, whereas buying CDs and bonds is reckless. Should have been obvious even 3 years ago. 

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#6) On January 16, 2010 at 1:10 PM, GeneralDemon (23.28) wrote:

Hi Dwot,

Is't still the old "pain avoidance policy" of pushing everything into the future. When do you see the "end game" happening?

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#7) On January 16, 2010 at 1:10 PM, GeneralDemon (23.28) wrote:

It's

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#8) On January 17, 2010 at 7:30 AM, dbjella (< 20) wrote:

The question is, who will buy the debt? Foreigners will kick in another $300 billion, unless they decide to stop selling us stuff, or buy other less liquid or physical assets.

Do you think the US Federal Reserve "gives" or "lends" money to other foreign central banks so they can buy US Treasuries?  What would prevent them from doing this?  How would anyone know? 

 

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#9) On January 17, 2010 at 8:48 AM, TheClub55 (< 20) wrote:

Its not just 1.4 trllion, treasurey has to roll over 3 trillion of bonds this year.... so the question is who is buying the 2.7 trillion?  Maybe current holders will move even more to the short end, likely happing based on the short term demad.

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#10) On January 24, 2010 at 12:01 PM, dwot (69.85) wrote:

catoismymotor, I am not a currency trader either, but I do not see how the currency recovers under the current economic conditions.  When I lived there I could not believe how many 30-something year olds there were still living with mom and dad simply because the economy was that bad for them.  Also, as an educator, I saw the degree of cuts to education and there is a huge younger population coming through with really poor education.  They lost their manufacturing base way earlier then the loss of manufacturing base happened in North America.  The number of people using social programs is massive and the money going into social programs has basically bankrupted the country.  They have the highest teen pregnancy rate out of all European countries and I suspect it is because the best prospects for a teenage girl is to have a baby and go on welfare.  They will be provided with housing and an allowance that far exceeds the lifestyle they'd know working for minimum wage.  The currency doesn't recover with this crap, and the path to fixing this crap is going to be very long and painful for Britain, especially with how they have slaughered their future generation by cutting funding to education to the point that they are turning out whole schools of "graduates" where maybe 20% know their multiplication tables.  That isn't all schools, but that is the school that I taught in. 

GeneralDemon, that is a real hard question to answer because you just don't know what policy makers and/or investors will do next.  I think this next year policy makers will have no choice but to start dealing with the debt.  So, the false job creation should disappear and the programs extending benefits will have to end or be much more modest.  I don't think we have caught up to the excessive production yet and I don't think the resources are available to carry the economy over until production and consumption were in balance again, so consumption will have to take another hit, which in turn will make it take even longer to absorb excesses.  Maybe there isn't an end game, but instead a completely lost generation (or two) due to lack of opportunity.  Maybe North America goes British and today's teens are massive numbers of 30 something-year-olds in 20 years still living with mom and dad because of lack of opportunity.

TheClub55, rolling over the debt will be very interesting...

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