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U.S. Debt Crisis as Treasury Bond Prices Collapsing and Interest Rates Surging

Best Financial Markets Analysis ArticleMartin Weiss writes: Just as we’ve been warning, the United States Treasury is the next and largest victim of this great debt crisis.

Right now, the Treasury’s finances are collapsing … its bond prices plunging … its interest rates surging.

Indeed, the Treasury’s financial crisis looms so large, it could wreck more havoc on the economy and deliver more pain to average Americans than the subprime mortgage disaster, the housing bust, the banking crisis, and the collapse of General Motors put together …

It could create a rising tide of interest rates that wipes out the effects of any stimulus, undermines any recovery, and sabotages any new bailouts …

But unlike GM, Fannie Mae, Citigroup, AIG, and the many others that the U.S. Treasury has bailed out in recent months, there is no institution on the planet big or rich enough to bail out the U.S. Treasury itself.

Further, unlike all prior episodes in this great debt crisis, the Treasury’s financial troubles cannot be covered up, papered over, or kicked down the road like an empty tin can.

T-bond prices are plunging!

Already, Treasury bond prices are crashing, and doing so with greater speed that at any time in history.

Already, interest rates, which automatically go up when bond prices fall, are surging, with the rate on 10-year U.S. Treasuries nearly DOUBLING in a half year — the most dramatic surge during any recession since the founding of the Republic.

And already, the interest rates on 30-year fixed mortgages, auto loans, commercial loans, and other debt are going through the roof.

This Is a Game Changer!

If you’re not paying attention to this new phase of the debt crisis, you’re making a grave error. And if you’re not taking swift action to protect yourself, you’re taking your financial life in your hands.

In this issue, I’ll show why it’s going to get worse, why the Federal Reserve is powerless to stop it, how it will impact each major sector of the economy, and what you must do immediately to protect yourself and your family from the inevitable fallout.

Why This Is Just the Beginning of the Treasury’s Crisis. Why It’s Going to Get a Heck of a Lot Worse This Year. And Why It Could Continue for Years Beyond 2009.

It’s widely known that America’s federal deficit is out of control.

But so many dire deficit warnings have been issued so often, they now fall mostly on deaf ears. Wall Street pundits roll their eyes. Washington politicians laugh at those who would cry “wolf.â€

What they don’t realize is that this time, due to a series of devastating facts they’ve chosen to ignore, the day of reckoning is here:

Fact #1. Sheer size. According to the government’s official estimate, the federal deficit for fiscal year 2009 will be $1.84 trillion, or 13.4 percent of GDP!*

It is the worst deficit in U.S. history.

It means the deficit has now exploded to a level which is so far beyond the range of anything we’ve experienced before, it’s impossible to imagine any scenario in which it does not have a devastating impact.

Fact #2. The actual deficit could be much larger. The administration’s $1.84 trillion deficit forecast presupposes a dramatic turnaround in the economy, which, by definition, is virtually impossible with the government running trillion-dollar deficits!

How can the administration possibly predict an economic turnaround when its own Treasury Department is sucking nearly $2 trillion in funds out of credit markets — the same credit markets that derailed the economy late last year?

Similarly, how can the government predict a turnaround when its own borrowing frenzy is already driving up mortgage rates and undermining real estate, the one sector that’s most responsible for the economy’s decline in the first place?

Fact #3. No end in sight. Since the United States declared its independence nearly 233 years ago, the only time the federal deficit approached or exceeded 10 percent of GDP was during major wars — the Civil War, World War I, and World War II. But in each case, the deficit financing began promptly — and ended promptly — with the war.

Unfortunately, that’s not the case this time. Although the U.S. is fighting wars in Iraq and Afghanistan, their cost represents only a small fraction of the budget shortfall. Even if the Iraqi and Afghan wars could be ended tomorrow, America’s great budget crisis would still be just beginning.

Worst U.S. Deficit in History

Fact #4. Today’s deficits are far worse than those of the Great Depression. America’s first big, multi-year peacetime deficits came in the 1930s. Tax revenues plunged with the sinking economy. And in the years that ensued, government expenditures — mostly for a series of programs to bail out the economy — went through the roof.

But even with a 90 percent collapse in the stock market in 1929-32 and even after three years of double-digit GDP declines that make today’s look mild by comparison, the federal deficit in 1933 was just 3.27 percent of GDP, less than one-fourth of what’s projected for this year.

And subsequently, even when the U.S. government embarked on the most ambitious stimulus and bailout programs of its 150-year history, the biggest single deficit — in 1936 — was 4.76 percent of GDP, only about one-third the size of today’s.

Fact #5. Structural deficits. Our nation’s second encounter with giant peacetime deficits was in the 1980s, but with a big difference: This time, there was no Great Depression. This time, the government’s fiscal woes were mostly structural — deeply ingrained in the bloated size of government and in our society’s dependence on government for much of its sustenance.

And even then, the federal deficit never rose to more than 5.63 percent of GDP, less than HALF its size today.

The big difference today: Our current structural deficits are far larger than in the 1980s because the government is now liable for $65 trillion in future payments for Social Security, Medicare, government pension benefits, and other obligations that are now kicking in at a quickening pace.

Fact #6. Massive new commitments. Beyond the $1.84 trillion of red ink projected for 2009 and beyond the trillions more in future obligations, the U.S. government has just assumed responsibility for nearly $14 trillion in new loans, commitments, and guarantees to bail out brokers, banks, insurers, auto makers, and the broader economy.

If just one of these suffers greater-than-expected losses, we could see wave after wave of new demands on the government to honor its guarantees, bloating the deficit far further.

Why the Federal Reserve Can’t Stop Treasury Bonds from Falling

I can assure you, it’s not for lack of trying.

In a massive attempt to boost Treasury bond prices launched March 25, the Fed has now bought $145.5 billion in Treasury notes and bonds, the most ever in such a short period of time. But despite all the Fed’s buying, T-bond prices have continued to plunge and interest rates have continued to surge.

Plus, in an even larger effort to support mortgage prices — and to suppress mortgage rates — the Fed has poured a whopping $507 billion into direct purchases of mortgage-backed securities (MBSs). But again, even after spending more than a half trillion dollars to bid them up, mortgage prices have still collapsed and rates have still surged.

In sum, the U.S. Federal Reserve has failed to stop this new phase of the crisis, and one of the key reasons is obvious:

To buy bonds, the Fed must print money. But the more it prints, the more it fans inflation fears and the more it chases away bond investors, who realize they’ll be paid back in cheaper dollars.

Some pundits seem to think the Fed can simply print all the money it wants to finance the massive deficits. But in the real world, it doesn’t work that way.

The reason: As I explained last week, the government has not one, but TWO debt problems simultaneously:

A. The NEW debt problem:Massive Treasury borrowings of close to $2 trillion just to fill the gaping holes in the current federal budget.

B. The OLD debt problem: $14.5 trillion in Treasury securities, government agency securities, and MBSs outstanding.

The problem: If just 10 percent of those are dumped on the market, it would trigger the sale of $1.45 trillion worth, easily overwhelming the Fed’s purchases.

The dilemma: The main reasons investors sell — fear of inflation and damage to the U.S. government’s credit — are, themselves, fueled by the Fed’s money printing and bond buying.

End result: The more the Fed buys bonds, the more it risks triggering massive investor selling.

So if you’re counting on the Federal Reserve to bail out the U.S. Treasury Department, forget it.

In the government’s grand balance sheet, printing money does nothing more than shift debts from one government account to another. It does not create wealth. It certainly does not stop bond prices from plunging and interest rates from surging

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The treasury auction today was the most overbought in recent months, with 44% bought by Foreign institutions.

Seems that Mr MarketOracle is fighting the Chinese and the Chinese are winning at the moment.

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schiff on the coming US default

Michael Mussa* (the man that Peter is debating in this video) is with the Peterson Institute for International Economics.

"Peterson" as in Peter G. Peterson--a former chairman of the Council on Foreign Relations and a former chairman of the New York Federal Reserve Bank.

Here are a few of the folks on the Board of the Institute. Perhaps you might recognize some of their names:

David Rockefeller

Lynn Forester de Rothschild

Paul A. Volcker

Alan Greenspan (Honorary Director)

Not that there's anything in this to be suspicious of in Mr. Mussa's "expert" take on the current "free market"-caused economic crisis.

_______________________

*Wasn't it "refreshing," by the way, how Mr. Mussa thinks that one of the "great" things that Reagan did to "stimulate" the economy was increasing military spending?

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What point are you trying to make?

Do you know what an Ultrashort ETF actually is?

here:

http://www.proshares.com/funds/tbt.html

ProShares UltraShort 20+ Year Treasury seeks daily investment results, before fees and expenses and interest income earned on cash and financial instruments, that correspond to twice (200%) the inverse (opposite) of the daily performance of the Barclays Capital 20+ Year U.S. Treasury Index.

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cheers

some just need shooting

everyone wants treasurers no matter how many they issue, buyers are clamering for them.

But the demand is met via quantative easing, and even then the rates are rising

it would seem you really can fool most of the people most of the time

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cheers

some just need shooting

everyone wants treasurers no matter how many they issue, buyers are clamering for them.

But the demand is met via quantative easing, and even then the rates are rising

it would seem you really can fool most of the people most of the time

Why post a chart of (to quote Warren Buffett) a financial weapon of mass destruction. Because that ETF is a leverage product it accentuates the swings in price by a factor 2. Good for sensationalism in posts but obviously does not show the true picture.

The simple fact is that when the world thought the banks were going to collapse there was a rush to low risk assets i.e US treasuries which increased the price and so decreased yields. Now that risk appetite has returned money is flowing into riskier assets such as corporate bonds and equities means means that these prices are rising, lowering the yields and the price of treasuries is decrease because people are selling them so increasing the yields.

In a normal world treasuries yield higher than equities.

So the world is returning to normal, but some nutter with a blog does not understand this and to justify it another fool thinks that by posting charts of derivitives that accentuate the movements in price makes it correct. Oh dear.

Go shoot him.

Edited by ralphmalph

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Why post a chart of (to quote Warren Buffett) a financial weapon of mass destruction. Because that ETF is a leverage product it accentuates the swings in price by a factor 2. Good for sensationalism in posts but obviously does not show the true picture.

The simple fact is that when the world thought the banks were going to collapse there was a rush to low risk assets i.e US treasuries which increased the price and so decreased yields. Now that risk appetite has returned money is flowing into riskier assets such as corporate bonds and equities means means that these prices are rising, lowering the yields and the price of treasuries is decrease because people are selling them so increasing the yields.

In a normal world treasuries yield higher than equities.

So the world is returning to normal, but some nutter with a blog does not understand this and to justify it another fool thinks that by posting charts of derivitives that accentuate the movements in price makes it correct. Oh dear.

Go shoot him.

Another famous Buffet quote- "NEVER short the US". You people (and Schiff) who pronounce the doom of the dollar, the demise of the country, etc. etc. have probably never been here (Disney aint living here). Go ahead and bet against Uncle Sam in the long term. You had better have deep pockets.

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Another famous Buffet quote- "NEVER short the US". You people (and Schiff) who pronounce the doom of the dollar, the demise of the country, etc. etc. have probably never been here (Disney aint living here). Go ahead and bet against Uncle Sam in the long term. You had better have deep pockets.

just wanted to preserve that one

the £ used to be the world reserve currency apparently and Britain used to rule the waves

of course it wont happen to Amerika

Edited by lowrentyieldmakessense(honest!)

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Why post a chart of (to quote Warren Buffett) a financial weapon of mass destruction. Because that ETF is a leverage product it accentuates the swings in price by a factor 2. Good for sensationalism in posts but obviously does not show the true picture.

The simple fact is that when the world thought the banks were going to collapse there was a rush to low risk assets i.e US treasuries which increased the price and so decreased yields. Now that risk appetite has returned money is flowing into riskier assets such as corporate bonds and equities means means that these prices are rising, lowering the yields and the price of treasuries is decrease because people are selling them so increasing the yields.

In a normal world treasuries yield higher than equities.

So the world is returning to normal, but some nutter with a blog does not understand this and to justify it another fool thinks that by posting charts of derivitives that accentuate the movements in price makes it correct. Oh dear.

Go shoot him.

and that one

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Good article, those are the issues. I argue the fed needs to be willing to monetize the entire treasury float if neccessary. With the exception of the ones owned by the national governments like China.

The next announcement should be that the fed will increase buying of treasuries by 1 trillion $.

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you could even give them both huge odds imo.

It's a one way bet. :D

clown suit bet

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I have argued that we are facing at least a 20% contraction in GDP before we reach equilibrium. This, of course, horrifies economists and politicians, as they ramped up government spending at the same time, and firing government workers or not paying millionaire-size pensions to firefighters is politically difficult - at best.

Yet just as outsize spending creates more GDP increase than you'd think, so debt overhang creates more drain than you'd think.

The math works both ways.

Krugman has no chance of being correct. We haven't come anywhere near clearing the bad debt out of the economy, but we have to and further, we must reset downward economic output to match actual consumer demand.

Until we do any attempt to "deal with the recession" is an exercise in can-kicking, and the bond market is getting tired of the idea that government will spend double what it takes in via taxes - fast.

Obama might be able to fool you just as did George Bush, but neither can or will fool the bond market.

The Chinese, Saudis and others with actual money that we are attempting to borrow to kick that can once again have figured out our scam and they are headed for the exits.

Bernanke's "Quantitative Easing" is almost identical in intended effect to a program The Fed ran during and after WWII to try to keep people's war bonds from depreciating (due to increases in interest rates.)

It didn't work and The Fed abandoned the program in 1951.

The bottom line is that until austerity comes to the fore, bad debt is flushed and the economy is ratcheted down to a sustainable level of output there can be no durable recovery.

Housing MUST CONTRACT IN PRICE to a sustainable, affordable level. It has not finished doing so and until it does reach that equilibrium with interest rates in the 7-8% range we are not at the bottom.

As a direct consequence of the math, which is never wrong, I sent the following to Krugman by email this afternoon:

You were quoted on Bloomie this afternoon claiming it (the recession) would be over by September.

I'm the guy who writes http://market-ticker.org.

I'll bet you're wrong - not a snowball's chance in hell The Recession is over on or before September. We'll go with the NBER's official claim (even though I'd argue its flawed.)

The loser puts on a clown suit and either shows up at CNBC to wear it and admit they're wrong, or, if CNBC won't have the loser, does it on Youtube.

Game?

--

Karl Denninger

I'm willing to bet that I will get no reply to that challenge, because, of course, Krugman will claim he didn't actually make that prediction. He hedged his bet so that when (not if) what's left of the housing market implodes under higher interest rates he can claim that he "never said it would be over."

Yeah, right Paul.

And by the way - if you bought the market this afternoon into that ramp job?

Good luck.

You're going to need it.

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just wanted to preserve that one

the � used to be the world reserve currency apparently and Britain used to rule the waves

of course it wont happen to Amerika

Never really understood that spelling of America and what it implies. I just think you are naive. I would guess probably in your early thirties? Not to worry, by all means save that post and come back in maybe two years to see it play out. The other thing to note-if you think this is just about money then think again. You can't seperate the geo-political scene from the purely monetary one. Obama is not an imperialist-IMHO Taiwan will be the first sacrificial lamb to appease the Chinese. Others will follow.

As an example on the domestic economic front, I work in alternative energy. We DO have clean coal technology and enough reserves in the US to keep the lights on for three hundred years if needs be. Not ground-breaking news I know, just an example. CO2? We can make graphite from it-in as much quantity as you like. Look up graphite and see its uses. Things are a changin, and changing quickly. The Arabs can kiss my ass in a couple of years. Peak oil? Bullcrap.

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Never really understood that spelling of America and what it implies.

http://en.wikipedia.org/wiki/Amerika

I just think you are naive. I would guess probably in your early thirties?

make as many ad hominems as you like. it won't change the fact that the US is balance sheet insolvent.

Obama is not an imperialist-IMHO

course not, he just happens to be President of a country with military bases in 63 other countries.

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http://en.wikipedia.org/wiki/Amerika

make as many ad hominems as you like. it won't change the fact that the US is balance sheet insolvent.

course not, he just happens to be President of a country with military bases in 63 other countries.

So he can dismantle all the bases in six months eh? He has been in office since January. Balance sheet insovent? I agree but the asset side in terms of untapped natural resources is something that you are not qualified to comment on unless you have lived here for a considerable time ( I have), are in the industry (I am) and travel to most of the states in the lower 48 ( I do). To recap-"never short the US".

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So he can dismantle all the bases in six months eh? He has been in office since January. Balance sheet insovent? I agree but the asset side in terms of untapped natural resources is something that you are not qualified to comment on unless you have lived here for a considerable time ( I have), are in the industry (I am) and travel to most of the states in the lower 48 ( I do). To recap-"never short the US".

looks like im going bust then

but i doubt it

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So he can dismantle all the bases in six months eh? He has been in office since January.

an EO would do the job.

I agree but the asset side in terms of untapped natural resources is something that you are not qualified to comment on unless you have lived here for a considerable time ( I have), are in the industry (I am) and travel to most of the states in the lower 48 ( I do).

more ad hominen sh1te.

To recap-"never short the US".

always short collapsing command economies, including the US:

20090515.gif

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