Tuesday, June 2, 2009

US debt issuance will find no takers soon..... and AIG is a CIA front ....

AIG is a CIA front.... has been a CIA front for Decades... and cannot be undone.....

The New American

The Obama administration’s efforts to borrow the U.S. economy into prosperity are meeting more and more skepticism on Wall Street as investors in the bond market are fleeing the U.S. debt market for greener investment pastures. The understandable skepticism of bond investors has forced the U.S. Treasury to increase the interest yields on 10-year Treasury notes, increasing the interest burden of new debt on taxpayers by more than 60 percent since December.

Ten-year Treasury notes sank to an historic low on December 18 of last year, with a yield of 2.13 percent as shell-shocked stock investors fled the stock market to hold onto what was left of their investments. Since that time, the yield the government has to promise on its 10-year notes has risen to 3.46 percent. That’s a 62 percent increase in the cost of new debt since December.

“We are in a bit of a freefall,” Kevin Giddis of the Memphis, Tennessee, brokerage firm Morgan Keegan Inc. told Bloomberg.com, putting it lightly. Edward Yardeni of Yardeni Research Inc. in Great Neck, New York put it more accurately: “The bond-market vigilantes are up in arms over the outlook for the federal deficit…. Ten trillion dollars over the next 10 years is just an indication that Washington is really out of control and that there is no fiscal discipline whatsoever.”

It’s hardly surprising that the federal government would have to increase the interest rate on its debt mechanisms, as they have been glutting the markets with debt, including an astronomical $101 billion in debt issued last week. The massive paper issuance by the federal government is now in direct competition with the stock market’s efforts to invest in an economic recovery. As yields increase on U.S. Treasury mechanisms, more investment will be lured from the recovery efforts in the stock market, choking off any possible recovery.

The flood of U.S. debt into the markets is so bad there’s even talk of the U.S. government losing its AAA rating with Moody’s, Standard & Poor’s and Crane’s rating services. Moreover, the Federal Reserve’s actions to create $1 trillion out of thin air this spring has led many bond investors to demand higher yields as a hedge against expected inflation. “There’s becoming an embedded inflationary premium in the bond market that wasn’t there six months ago,” Bill Gross of the Newport Beach, California-based Pacific Investment Management Co. told Bloomberg.com. -- ###

China held $768 billion in Treasury securities as of March, making it the single largest holder of US government debt.

It is estimated about 70 percent of China's $2 trillion foreign exchange reserves are held in US dollar-denominated assets.

Yet, the US government's rising debt and the Federal Reserve's quantitative easing, which in effect means printing money, may dent Chinese investment in the US.

Yu Yongding, an economist and former member of the monetary policy committee of the China central bank, said: "I do not know whether there will be enough demand for new issuances and hence I am worried about the direction of the prices of US government securities."

Wang Jian, secretary-general of the China Society of Macroeconomics, agreed. "Prospects for the US dollar and US Treasuries do not look good at the moment, and even worse in the long run....." --

Politics, Finance and utter corruption in DC for decades, combined with an Intelligence twist....

The government and defenders of the status quo are making two main arguments as to why we can't break up the big banks and financial giants such as AIG/CIA: AIG is CIA and has been a CIA front for decades.....

  1. The U.S. would have to take over the banks in order to break them up, and that would be socialism....

  2. The U.S. doesn't have legal authority to break up the big banks

I will address these in turn.

The Big Collapse Could Be Very Near : Can you imagine what would happen to the markets if it sensed long rates were beyond the control of the Fed?

Is Breaking Up a Financial Giant Socialism?

As you've heard ad nauseum, a lot of top economists and financial experts believe that the economy cannot recover unless the big banks are broken up in an orderly fashion. (If you haven't heard, here's a partial list:

  • The leading monetary economist and co-author with Milton Friedman of the leading treatise on the Great Depression, Anna Schwartz
  • Dean and professor of finance and economics at Columbia Business School, and chairman of the Council of Economic Advisers under President George W. Bush, R. Glenn Hubbard, and Professor of entrepreneurship and finance at the Chicago Booth School of Business, Luigi Zingales
But many argue that it would be wrong for the government to break up the banks, because it would have to take over the banks in order to break them up.

This is true. But government regulators in the U.S., Sweden and other countries which have broken up insolvent banks say that the government only has to take over banks for around 6 month before breaking them up.

In contrast, Bush and Obama's actions mean that the government is becoming the majority shareholder in the financial giants more or less permanently. That is - truly - socialism.

Breaking them up and selling off the parts to the highest bidder efficiently and in an orderly fashion would get us back to capitalism much quicker.

Does the Government Have the Power to Break Them Up?

The second main argument against breaking up the "too big to fails" is that the government doesn't have the legal authority to do so.

For example, Vice President Biden's chief economic policy adviser said today:
I think there is a lot to be said for the argument made by the Treasury Secretary and, for that matter, the chairman of the Federal Reserve that the authority to unwind an AIG simply doesn't exist...., because AIG is essentially the CIA....and has been for decades...."
But William K. Black - the senior regulator during the S&L crisis, and an Associate Professor of Economics and Law at the University of Missouri - says that the Prompt Corrective Action Law (PCA) - 12 U.S.C. § 1831o - not only authorizes the government to seize insolvent banks, it mandates it, and that the Bush and Obama administrations broke the law By refusing to close insolvent banks.

Others argue that the PCA does not apply to bank holding companies, and so the government really does not have the power to break up the big boys (see this, for example; but compare this).

Whether or not the financial giants can be broken up using the PCA, no one can doubt that the government could find a way to break them up if it wanted.

FDR seized gold during the Great Depression using a bogus argument that he could do so under the Trading With The Enemies Act.

Geithner and Bernanke have been using one loophole and "creative" legal interpretation after another to rationalize their various multi-trillion dollar programs in the face of opposition from the public and Congress (see this, for example).

So don't give me any of this "our hands are tied" malarkey. The government would break the too bigs up in a heartbeat if it had the will, and then justify it using some legal argument or other...

Economic news remains focused on banks and housing, while the threat mounts to the US dollar from massive federal budget deficits in fiscal years 2009 and 2010.

Earlier this year, the dollar’s exchange value rose against currencies such as the Euro, UK pound, and Swiss franc, against which the dollar had been steadily falling. The dollar’s rise made US policymakers complacent, even though the rise was due to flight from over-leveraged financial instruments and falling stock markets into “safe” Treasuries.

Since April, however, the dollar has steadily declined as investors and foreign central banks realize that the massive federal budget deficits are likely to be monetized.

What happens to the dollar will be the key driver of what lies ahead. The likely scenario could be nasty.

America’s trading partners do not have large enough trade surpluses to finance a federal budget deficit swollen to $2 trillion by gratuitous wars, recession, bailouts, and stimulus programs. Moreover, concern over the dollar’s future is causing America’s foreign creditors to seek alternatives to US debt in which to hold their foreign reserves.

According to a recent report in the online edition of Pravda, Russia’s central bank now holds a larger proportion of its reserves in euros than in US dollars. On May 18, the Financial Times reported that China and Brazil are considering bypassing the dollar and conducting their mutual trade in their own currencies. Other reports say that China has increased its gold reserves by 75 percent in recent years.

China’s premier, Wen Jiabao, has publicly expressed his concern about the future of the dollar. Arrogant, hubris-filled American officials and their yes-men economists discount Chinese warnings, arguing that the Chinese have no choice but to support the dollar by purchasing Washington’s red ink. Otherwise, they say, China stands to lose the value of its large dollar portfolio.

China sees it differently. It is obvious to Chinese officials that neither China nor the entire world has enough spare money to purchase $4 trillion of US Treasuries over the next two years. According to the London Telegraph on May 27, Dallas Federal Reserve Bank president Richard Fisher was repeatedly grilled by senior officials of the Chinese government during his recent visit about whether the Federal Reserve was going to finance the US budget deficit by printing money. According to Fisher, “I must have been asked about that a hundred times in China. I was asked at every single meeting about our purchases of Treasuries. That seemed to be the principal preoccupation of those that were invested with their surpluses mostly in the United States.”

US Treasury Secretary Timothy Geithner went to China to calm the fears. However, even before he arrived, a Chinese central bank spokesman gave Geithner the message that the US should not assume China will continue to finance Washington’s extravagant budgets. The governor of China’s central bank is calling for the abandonment of the dollar as reserve currency, using the International Monetary Fund’s Special Drawing Rights in its place.

President Lyndon Johnson’s “guns and butter” policy during the 1960s forced president Richard Nixon to eliminate the gold backing that the dollar had as world reserve currency, putting foreign central banks on the same fiat money standard as the US economy. In its first four months, the Obama administration has outdone President Johnson. Instead of ending the war, Obama has expanded America’s war of aggression in Afghanistan and spread it into Pakistan. War, bailouts, and stimulus plans have pushed the government’s annual operating budget 50 percent into the red.

Washington’s financial irresponsibility has brought pressure on the dollar and the US bond market. Federal Reserve Chairman Bernanke thought he could push down interest rates on Treasuries by purchasing $300 billion of them. However, the result was to cause a sharp drop in Treasury prices and a rise in interest rates.

As monetization of federal debt goes forward, US interest rates will continue to rise, worsening the problems in the real estate sector. The dollar will continue to lose value, making it harder for the US to finance its budget and trade deficits. Domestic inflation will raise its ugly head despite high unemployment.

The incompetents who manage US economic policy have created a perfect storm.

The Obama-Federal Reserve-Wall Street plan for the US to spend its way out of its problems is coming unglued. The reckless spending is pushing the dollar down and interest rates up.

Every sector of the US economy is in trouble. Former US manufacturing firms have been turned into marketing companies trying to sell their foreign-made goods to domestic consumers who have seen their jobs be moved offshore. Much of what is left of US manufacturing -- the auto industry -- is in bankruptcy. More decline awaits housing and commercial real estate. The dollar is sliding, and interest rates are rising, despite the Federal Reserve’s attempts to hold interest rates down.

When the Reagan administration cured stagflation, the result was a secular bull-market in US Treasuries that lasted 28 years. That bull market is over. Americans’ living standards are headed down. The American standard of living has been destroyed by wars, by offshoring of jobs, by financial deregulation, by trillion dollar handouts to financial gangsters who have, so far, destroyed half of Americans’ retirement savings, and by the monetization of debt.

The next shoe to drop will be the dollar’s loss of the reserve currency role. Then the US, an import-dependent country, will no longer be able to pay for its imports. Shortages will worsen price inflation and disrupt deliveries.

Life for most Americans will become truly stressful...


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