Here is a short summary I found on the progress to date on the massive bond auction that has been going on for the past few days.
The government managed to auction $39 billion worth of 5-year debt yesterday (7/29)… barely. Wednesday’s debt sale drew a bid-to-cover ratio of 1.92, the lowest investor demand since September 2008. Low demand forced Uncle Sam to jack up interest rates at the last minute in two separate bond auctions this week -- yesterday’s sale and Tuesday’s $42 billion auction of 2-year notes.
So what’s an indebted government to do? Manipulate the market, of course. Bond yields have given back yesterday’s spike partly thanks to the Federal Reserve, which bought $3 billion in U.S. bonds yesterday. They’ve announced their intention to buy again today (7/30), which will bump its total purchases of U.S. Treasuries to over $222 billion since March 25.
The U.S. government has already shoved more than $1 trillion in bonds down the market’s throat this year. They’ll likely issue another trillion before 2010. Another $28 billion in 7-year notes will be pawned off today (7/30)… might be worth keeping an eye on.
Keep an eye on this ball, folks. This is real stuff here, not imagination, not interpretation, not opinion. I have offered my opinion on the consequences of these actions by our Government. But the actions are now a matter of history. As I say, let’s see what happens.
Thursday, July 30, 2009
Saturday, July 25, 2009
Almost a Quarter Trillion Dollars!
Starting on Friday, July 24th, the US Treasury is auctioning the following:
70-day CMBs, $30 billion (July 24th)
13-week Bills, $32 billion (July 27th)
26-week Bills, $31 billion (July 27th)
52-week Bills, $27 billion (July 28th)
2-year Notes, $42 billion (July 28th)
5-year Notes, $39 billion (July 29th)
7-year Notes, $28 billion (July 30th)
19-year, 6-month TIPS (reopened), $6 billion (July 27th)
Add it all up and you get $235 billion over the next week. This is an unprecedented amount in such a short time period. Who is going to step up to the window and purchase these? I suggest we all pay attention to the news this week and see how this turns out. It will be a very, very big signal about the timing of the coming inflation. If the Federal Reserve has to step up to cover these debts I would say that the coming inflation is very near. Protect yourself.
70-day CMBs, $30 billion (July 24th)
13-week Bills, $32 billion (July 27th)
26-week Bills, $31 billion (July 27th)
52-week Bills, $27 billion (July 28th)
2-year Notes, $42 billion (July 28th)
5-year Notes, $39 billion (July 29th)
7-year Notes, $28 billion (July 30th)
19-year, 6-month TIPS (reopened), $6 billion (July 27th)
Add it all up and you get $235 billion over the next week. This is an unprecedented amount in such a short time period. Who is going to step up to the window and purchase these? I suggest we all pay attention to the news this week and see how this turns out. It will be a very, very big signal about the timing of the coming inflation. If the Federal Reserve has to step up to cover these debts I would say that the coming inflation is very near. Protect yourself.
Saturday, July 18, 2009
More on Inflation
One last thought about the expansion of the US money supply, and this has to do with interest rates. The Fed has announced that they intend to employ quantitative easing as one of their tools to alleviate the current economic crisis. As I’ve explained, this is basically the creation of money out of thin air. Recently the US Treasury Secretary was in China, and he was laughed at by students there when he tried to explain that the US was committed to following a responsible fiscal policy. Can you believe this? We all know how important it is in Oriental culture to show respect. There can be only two explanations for this apparent breach of etiquette. Either the students thought the Secretary was making a joke, therefore they laughed, or the statement was so preposterous and unbelievable that Mr. Geithner lost their respect immediately and there was no longer any social restraint to prevent them from laughing in the face of a fool.
The Fed has to walk a very fine line with their purchases of US Treasuries at auction. If they purchase too much, too often, then the world will see it as an unrestrained effort to debase the value of the dollar (by inflating the supply of money). To protect themselves they will probably begin to unload some of the trillions of dollars they hold in US Treasuries, causing the price of those bonds to drop (due to the expanding supply), which results in an increase in interest rates. Higher interest rates will destroy an already weak economy and inflation will begin to rise to very unpleasant levels. Does anyone remember the late 70’s or early 80’s? I do. I do not know whether this particular risk will materialize. If it does, then lots of other countries will suffer from this run on the bank, so to speak. So there is some pressure on the international community to avoid this situation. By the way, this is the “nuclear option” that the Chinese have hinted at in trade discussions with the US. It will be interesting to see how this unfolds. But it can very easily happen.
I urge you in the most strenuous way to make provision for the coming inflation. The usual path taken in anticipation of inflation is to purchase precious metals, such as gold or silver. Historically these metals have provided a good hedge against inflation, though for different reasons. Yes, both metals have in the past been used as money. I’ll have to admit that I don’t believe this is likely to be the case in the future. (This is only a realistic option for gold, and given the amount of metal available the price of an ounce would have to multiply several times over in order to supply the kind of liquidity that would be necessary.) Nevertheless, each metal has something to recommend it as an inflation hedge.
Let’s start with silver. This metal is primarily an industrial metal. It has some significant use in coinage and jewelry and investment. But the largest usage is for industrial purposes. Silver is practically unique in its physical properties and it is used in literally hundreds of industrial applications. Its relatively low cost, coupled with its unique properties, has made it a material of choice in all aspects of modern life. The driver for silver in the current environment will be its relative rarity. Not many people are aware of the fact that there is essentially no inventory of above ground silver. The governments of the world still hold inventories of gold, but nobody today is holding silver. And as we use silver in various industrial applications it essentially gets used up. Not that it disappears, but it gets rendered into a concentration that isn’t economically recoverable. At least, not at current prices.
The other feature of silver is that a large percentage of its mining is done as a consequence of going after some other metal, such as copper or zinc. There are few purely silver mines in the world. The recent economic slowdown has curtailed the mining of most base metals, since their prices have dropped. This has impacted the supply of silver, as well. So far we haven’t seen a supply issue because the industrial demand for silver has dropped along with everything else. At some point, however, the lack of silver supply from the mines will create a silver shortage that cannot be mitigated by an inventory of above ground silver, because there isn’t any. The nominal price of silver will take off to the moon. Silver is a very good hedge for the coming months.
Then there is gold. Gold is primarily an investment metal. It also has a significant usage in coins and jewelry. It has some industrial applications, but this is a minor part of the gold story. Virtually all the gold that has ever been mined over the course of human history is still above ground and recoverable. Gold has a long history of use as money. Governments around the world still hold sizeable amounts of gold in reserve. China has lately been adding significantly to their gold holdings. Let’s face it, gold is unique in its ability to attract the attention of men. They have always desired it and they will continue to desire it. It is pretty. It can be easily manipulated into all kinds of pretty and decorative and desirable forms and shapes. I don’t believe gold will ever lose its appeal. I can confidently state that because of this feature, gold will always have some intrinsic value. Men will always desire it and will be willing to trade goods and services for it. This is the very definition of money. When the inflationary tide finally hits, the price of gold will also fly. It might not fly as high, relatively speaking, as silver. But if you are holding any amount of gold you will not be disappointed. I urge you to consider holding some gold.
In the current environment I think it is a very low risk to purchase gold or silver. Yes, the price will fluctuate daily as a consequence of any number of things that hit the news. Forget about that high-frequency noise. Look at the longer term. If you buy an ounce of gold or silver for $X today it will very likely be worth about $X a year from now, assuming we don’t enter into the inevitable inflationary spiral by then. But the whole point of buying that ounce isn’t to sell it in a year. You must think instead that when you buy that ounce you do not intend to EVER sell it. Ownership of gold and silver is all about wealth preservation, not about short-term trading profits. Get that whole concept out of your brain. When you put your money down on the counter to purchase that quantity of metal you are going to take your metal and go home and bury it in the back yard (figuratively speaking). You will only take it out in the most dire of situations. But if you find yourself in that kind of dire situation you can believe me that you will be very, very glad that you have some precious metals to fall back to.
Think very hard about this.
The Fed has to walk a very fine line with their purchases of US Treasuries at auction. If they purchase too much, too often, then the world will see it as an unrestrained effort to debase the value of the dollar (by inflating the supply of money). To protect themselves they will probably begin to unload some of the trillions of dollars they hold in US Treasuries, causing the price of those bonds to drop (due to the expanding supply), which results in an increase in interest rates. Higher interest rates will destroy an already weak economy and inflation will begin to rise to very unpleasant levels. Does anyone remember the late 70’s or early 80’s? I do. I do not know whether this particular risk will materialize. If it does, then lots of other countries will suffer from this run on the bank, so to speak. So there is some pressure on the international community to avoid this situation. By the way, this is the “nuclear option” that the Chinese have hinted at in trade discussions with the US. It will be interesting to see how this unfolds. But it can very easily happen.
I urge you in the most strenuous way to make provision for the coming inflation. The usual path taken in anticipation of inflation is to purchase precious metals, such as gold or silver. Historically these metals have provided a good hedge against inflation, though for different reasons. Yes, both metals have in the past been used as money. I’ll have to admit that I don’t believe this is likely to be the case in the future. (This is only a realistic option for gold, and given the amount of metal available the price of an ounce would have to multiply several times over in order to supply the kind of liquidity that would be necessary.) Nevertheless, each metal has something to recommend it as an inflation hedge.
Let’s start with silver. This metal is primarily an industrial metal. It has some significant use in coinage and jewelry and investment. But the largest usage is for industrial purposes. Silver is practically unique in its physical properties and it is used in literally hundreds of industrial applications. Its relatively low cost, coupled with its unique properties, has made it a material of choice in all aspects of modern life. The driver for silver in the current environment will be its relative rarity. Not many people are aware of the fact that there is essentially no inventory of above ground silver. The governments of the world still hold inventories of gold, but nobody today is holding silver. And as we use silver in various industrial applications it essentially gets used up. Not that it disappears, but it gets rendered into a concentration that isn’t economically recoverable. At least, not at current prices.
The other feature of silver is that a large percentage of its mining is done as a consequence of going after some other metal, such as copper or zinc. There are few purely silver mines in the world. The recent economic slowdown has curtailed the mining of most base metals, since their prices have dropped. This has impacted the supply of silver, as well. So far we haven’t seen a supply issue because the industrial demand for silver has dropped along with everything else. At some point, however, the lack of silver supply from the mines will create a silver shortage that cannot be mitigated by an inventory of above ground silver, because there isn’t any. The nominal price of silver will take off to the moon. Silver is a very good hedge for the coming months.
Then there is gold. Gold is primarily an investment metal. It also has a significant usage in coins and jewelry. It has some industrial applications, but this is a minor part of the gold story. Virtually all the gold that has ever been mined over the course of human history is still above ground and recoverable. Gold has a long history of use as money. Governments around the world still hold sizeable amounts of gold in reserve. China has lately been adding significantly to their gold holdings. Let’s face it, gold is unique in its ability to attract the attention of men. They have always desired it and they will continue to desire it. It is pretty. It can be easily manipulated into all kinds of pretty and decorative and desirable forms and shapes. I don’t believe gold will ever lose its appeal. I can confidently state that because of this feature, gold will always have some intrinsic value. Men will always desire it and will be willing to trade goods and services for it. This is the very definition of money. When the inflationary tide finally hits, the price of gold will also fly. It might not fly as high, relatively speaking, as silver. But if you are holding any amount of gold you will not be disappointed. I urge you to consider holding some gold.
In the current environment I think it is a very low risk to purchase gold or silver. Yes, the price will fluctuate daily as a consequence of any number of things that hit the news. Forget about that high-frequency noise. Look at the longer term. If you buy an ounce of gold or silver for $X today it will very likely be worth about $X a year from now, assuming we don’t enter into the inevitable inflationary spiral by then. But the whole point of buying that ounce isn’t to sell it in a year. You must think instead that when you buy that ounce you do not intend to EVER sell it. Ownership of gold and silver is all about wealth preservation, not about short-term trading profits. Get that whole concept out of your brain. When you put your money down on the counter to purchase that quantity of metal you are going to take your metal and go home and bury it in the back yard (figuratively speaking). You will only take it out in the most dire of situations. But if you find yourself in that kind of dire situation you can believe me that you will be very, very glad that you have some precious metals to fall back to.
Think very hard about this.
By the way, this graph says volumes. I should just shut up and show you pictures in order to make my point. It is particularly interesting if you look at how things have gone since the creation of the Federal Reserve in 1913. Hmmm.
Friday, July 10, 2009
More on the economy
Okay. So the US Treasury is holding its auction and everyone who wants to buy US debt is finished bidding. But there's lots more debt sitting on the table to be sold. So what do we do? Here comes the Federal Reserve to the rescue! In order to obscure the real nature of what they are doing they've come up with a clever term that means nothing. Quantitative easing. Sounds so scientific. But it isn't scientific, it is diabolical. The Fed shows up to the auction window and says, "I'll buy up all the debt you have left." In order to accomplish this they have to literally create money out of thin air. The bank balance of the US Treasury goes up after the sale, the investment portfolio of the Fed goes up by the amount of money they just printed (magically) and everyone is happy. This is an incredible event. I cannot imagine that the Japanese or the Chinese or the oil sheiks are happy about it, at all. One branch of the US government just bought billions of dollars of US debt from another branch of the US government, and everyone pretends that this is a legitimate business transaction. The result is that there are billions of dollars in the money supply that never existed before, until the transaction. This reduces the purchasing power of each of the original dollars, and these foreign countries hold billions of them. I can’t imagine they are okay with this.
Let's pause for a moment to talk about inflation. Let's limit ourselves to ideal systems for the moment. In an ideal economic system with a fixed amount of money and a fixed amount of goods and services, an equilibrium will be reached. The "price" of any good or service in this system will remain stable, because there will always be the same number of dollars to apply to a given amount of goods or service. If the amount of money in the system is increased, but the economic output remains fixed, then the larger number of dollars chasing after the fixed amount of goods/services will ultimately equilibrate at a point where a given amount of goods will require a higher amount of dollars, which we call price inflation. The opposite effect works, as well. In our situation, with the Fed creating extra dollars out of thin air we should expect this to ultimately result in price inflation. Those extra dollars are running around in our economic system and they will demand a price increase so that the extra dollars get "used up". The only other thing to mention here is that this outcome takes a little time to become evident. But it is inevitable. So, here are some facts. The Fed has engaged in quantitative easing, or creating money out of thin air. They will most likely have to continue this because we need to sell $2 trillion dollars of US debt, and there just aren’t that many buyers out there right now. The end result of this activity is that there will be inflation.
But is that the end of the story? Not really. In a beautiful example of positive feedback, higher inflation will result in investors (China, Japan, etc.) who demand a higher return on their investments. That means that interest rates on US debt will have to rise. Which will mean that the US government will have to actually borrow more in order to pay for the borrowing they are already doing (this is not a good trend), and the higher level of borrowing will feedback into higher interest rates and higher borrowing etc., ad infinitum. Making things even worse, at some point the foreign investors will begin to wonder whether the US government is really going to be good for its debts. That loss of confidence in the US government will be a bad thing.
In order to give you the whole picture I must talk a bit about deflation. There are many economists today who are primarily concerned about deflation, rather than inflation. And the fact is that we have been in a largely deflationary environment for the past year, which explains why we haven’t yet seen the runaway inflation that would normally be expected with the introduction of so many new dollars into the economy. Deflation is basically the inverse of inflation, and can be simply defined as the decrease in the available dollars in an economic system to cover a fixed amount of goods and services. In this scenario each dollar becomes more valuable, so the price of goods and services goes down. As we all know, there has been an enormous amount of value destruction in the past year. Housing prices and stock prices have decreased markedly. These price decreases have resulted in the virtual evaporation of large quantities of dollars. To the extent that these realized losses have made their way into the money supply we have experienced deflation. The actions of the US government have been patently inflationary. When combined with the current deflationary environment the observed effect is that things have basically stayed the same as usual.
In theory, and the Federal Reserve is betting everything on this theory, once the deflationary pressure is lifted from the economy the Fed can simultaneously lift the inflationary pressure and we are back to normal and everyone is happy. The fly in this particular ointment is that there is virtually no way that the Fed will be able to stop their inflationary activities. The US government will not suddenly stop spending money like there is no tomorrow. From a political perspective, they cannot suddenly start taxing everyone in sight. They have to maintain the fiction that they won’t raise taxes on the regular Joe. And they cannot entertain a reduction in the services that the nanny state provides to boobus americanus. So when deflationary value destruction ceases to be a predominant force in the economy all we’ll be left with is the inflationary activity of the US government. And we are talking about an inflationary flood that will dwarf anything we have ever seen before in this country. So, inflation is inevitable although it may not be imminent.
Let's pause for a moment to talk about inflation. Let's limit ourselves to ideal systems for the moment. In an ideal economic system with a fixed amount of money and a fixed amount of goods and services, an equilibrium will be reached. The "price" of any good or service in this system will remain stable, because there will always be the same number of dollars to apply to a given amount of goods or service. If the amount of money in the system is increased, but the economic output remains fixed, then the larger number of dollars chasing after the fixed amount of goods/services will ultimately equilibrate at a point where a given amount of goods will require a higher amount of dollars, which we call price inflation. The opposite effect works, as well. In our situation, with the Fed creating extra dollars out of thin air we should expect this to ultimately result in price inflation. Those extra dollars are running around in our economic system and they will demand a price increase so that the extra dollars get "used up". The only other thing to mention here is that this outcome takes a little time to become evident. But it is inevitable. So, here are some facts. The Fed has engaged in quantitative easing, or creating money out of thin air. They will most likely have to continue this because we need to sell $2 trillion dollars of US debt, and there just aren’t that many buyers out there right now. The end result of this activity is that there will be inflation.
But is that the end of the story? Not really. In a beautiful example of positive feedback, higher inflation will result in investors (China, Japan, etc.) who demand a higher return on their investments. That means that interest rates on US debt will have to rise. Which will mean that the US government will have to actually borrow more in order to pay for the borrowing they are already doing (this is not a good trend), and the higher level of borrowing will feedback into higher interest rates and higher borrowing etc., ad infinitum. Making things even worse, at some point the foreign investors will begin to wonder whether the US government is really going to be good for its debts. That loss of confidence in the US government will be a bad thing.
In order to give you the whole picture I must talk a bit about deflation. There are many economists today who are primarily concerned about deflation, rather than inflation. And the fact is that we have been in a largely deflationary environment for the past year, which explains why we haven’t yet seen the runaway inflation that would normally be expected with the introduction of so many new dollars into the economy. Deflation is basically the inverse of inflation, and can be simply defined as the decrease in the available dollars in an economic system to cover a fixed amount of goods and services. In this scenario each dollar becomes more valuable, so the price of goods and services goes down. As we all know, there has been an enormous amount of value destruction in the past year. Housing prices and stock prices have decreased markedly. These price decreases have resulted in the virtual evaporation of large quantities of dollars. To the extent that these realized losses have made their way into the money supply we have experienced deflation. The actions of the US government have been patently inflationary. When combined with the current deflationary environment the observed effect is that things have basically stayed the same as usual.
In theory, and the Federal Reserve is betting everything on this theory, once the deflationary pressure is lifted from the economy the Fed can simultaneously lift the inflationary pressure and we are back to normal and everyone is happy. The fly in this particular ointment is that there is virtually no way that the Fed will be able to stop their inflationary activities. The US government will not suddenly stop spending money like there is no tomorrow. From a political perspective, they cannot suddenly start taxing everyone in sight. They have to maintain the fiction that they won’t raise taxes on the regular Joe. And they cannot entertain a reduction in the services that the nanny state provides to boobus americanus. So when deflationary value destruction ceases to be a predominant force in the economy all we’ll be left with is the inflationary activity of the US government. And we are talking about an inflationary flood that will dwarf anything we have ever seen before in this country. So, inflation is inevitable although it may not be imminent.
Thursday, July 9, 2009
What a mess! There are so many things going on right now that affect so many different areas of interest. We have domestic and internation political issues. We have domestic and international economic issues. We have social issues. We have religious issues. Everywhere I look, I see issues. Recently I have begun to wonder whether or not these individual issues can be pulled together to create a bigger picture. Is there something more going on around us, or are these just interesting times, as they say? It is hard to know where to start, and right now I frankly don't know where my musings and cogitations are going to take me. But I feel compelled to try to make sense of everything I see happening. In the interests of full disclosure I must tell you that I believe that there is a "grand plan", that events aren't happening as a series of cosmic accidents. Rather, it is God who "works out everything in conformity with the purpose of his
will" (Eph 1:11 NIV). So for me the real question is whether these days are close to the time when he starts wrapping it all up. Let's see what I come up with.
In light of recent events I think I'd like to start with the economy. That is a pretty big topic, so it will take a few paragraphs to get through it. If I start to bore you with details that you're already comfortable with, then please feel free to skip ahead. As we all know, the economy is in the midst of a recession. What isn't talked about to broadly here in the US is that this recession is being felt around the world. Global trade has been hit hard. Banks around the world are failing and those who are still in business are not eagerly lending money right now. So business, in a global sense, is have a really tough time. Adding to the mix, central banks are pretty much
all spending money like drunken sailors. And given the fact that there is not a single nation anywhere which has a currency tied to a hard commodity (such as gold or silver), we are looking at a global situation that has no historical parallel. The entire world is ripe for a cataclysmic financial disaster where confidence in paper money is lost universally, causing widespread disruption of trade and commerce. I don't think many Americans think about this very much, but the fact is that most of us, a huge majority of us, live far from the land, so to speak. I'm not so much thinking about distance in miles traveled as I am thinking distance in economic terms. Do you know how dependent you are on global and local commerce to make sure that there is bread and milk and eggs and vegetables at your local supermarket? Next time you're in the produce section take a close look at the labels on the goods. Lots and lots of fresh food comes to us from far, far away. Think about the consequences of global economic disruption on an historic scale.
Moving on, I'd like to explore a little more deeply the impact of current US economic policies on our currency, world trade and our way of life. The US government is spending money at a staggering rate. It is spending money that it has not collected in taxes. How is this possible? Well, they borrow it. The most obvious question to ask, then, is "Who has that kind of money?" Because we are talking about trillions of dollars, with a T. I'm about to explain, in simplistic terms, how the US government gets the money that they then go out and spend. You might recall hearing on the news about something called a Treasury Auction. That is something held on a regular basis where the US Treasury sells bonds, of varying lengths of maturity, to whoever wishes to buy them. Some times there is a high demand for these bonds, some times there isn't such a high demand. When the demand is high, the bonds will sell for a higher price, following the law of supply and demand quite faithfully. When the demand is low, the bond price goes lower in order to elicit enough demand to get all the bonds sold. The interest rate that the bonds pay is inversely related to price. So higher bond prices (caused by higher demand for those
bonds) bring about lower interest rates and vice versa. In order to make up the gap between the money the US government takes in through taxes and the money the US government spends on various programs the US Treasury sells bonds. This gap is what is called the deficit. In the current fiscal year the deficit will likely come out to be close to $2 trillion dollars (if not more, as some believe). That is more than 3 times greater than any previous deficit in US history.
So how on earth will the US government be able to sell that many bonds? In all likelihood they won't be able to, at least not to anyone else. But I'll get to that later. First of all I want to talk about foreign reserves, balance of trade and the world's reserve currency. Maybe you've heard that the US dollar is the world's reserve currency. What does that mean? Simply, it means that international trade is settled in terms of US dollars. When a farmer in Argentina sells a boatload of wheat to China, someone in China deposits US dollars into the farmer's Argentinean bank account. In the simplest of terms that is what it means to be the world's reserve currency. So for the last several decades it has been advantageous for foreign countries to hold some US dollars, because this made it possible for them to conduct international trade more easily. The US dollars that are held by these countries are what is referred to as foreign reserves. Some
countries have lots of foreign reserves (Japan, China, the Arab oil countries). These reserves have built up over time because they have enjoyed a positive balance of trade with the US. In other words, we bought more from them than they bought from us. So they ended up with
excess dollars. Their problem then becomes one of where to put those dollars? Along comes the US Treasury with such a deal!
For the last several years these countries with excess foreign reserves (excess over what they need to support their level of international trade) have showed up at the US Treasury Auction to buy some good ol' US Treasury bonds. Why not? The US is a stable country, they pay their debts, essentially it has been considered to be an investment of zero risk. Well, not so much anymore. Lately two things have been happening. These foreign buyers of US debt have been buying less and they have been buying more on the short end of the maturity curve. Let's look at the maturity issue first. What is the long term consequence to the US if more and more of it's outstanding debt is of short maturity? Well, when the bond matures in 1 or 2 years it is usually rolled over into another bond. When this happens the new bond may carry a different interest rate, which might be higher or it might be lower. In case you haven't been paying attention to these things, the current interest rates for US government debt are about as low as they have ever been in history. They are about as close to zero as they will ever come. So which direction do you think is the most likely one for those rates to go in the future? If you said, "higher", then pat yourself on the back. You've obviously been paying attention. So this interest rate risk presents a future problem for the US. If rates rise, which will likely happen because of poor economic conditions, this will be a double whammy that will only serve to make the bad situation even worse.
But the other thing that is happening right now is that the foreign countries with money to spend are actually spending less at the US Treasury Auction. There are a couple of reasons for this, but the reasons are less important than the consequence that results. Let me just touch on the reasons. First of all, because of the current global economic slowdown, these foreign countries have fewer US dollars to spend at the auction. They already hold billions of dollars of US bonds, but their current income of US dollars has dropped because of the global recession, so obviously they are spending less at the auction. The second cause is more troubling. These countries are now beginning to wonder if it is such a good thing for them to be buying US debt. They are wondering if it really is such a zero-risk investment. In fact, some of these countries are beginning to divert some of their excess US dollars into a stockpile of hard commodities, such as copper or iron or gold. This is really happening, right now. I believe that the trend will increase, rather than decrease or stay the same. It doesn't work out well for the US.
It is time for a recap. The US is spending more money than it has. It is borrowing the excess from foreign countries who have extra dollars to lend back to us. The amount of money that the US needs to borrow in the future is huge, compared to what we've borrowed in the past. The amount of money that foreign countries have to loan us (or are willing to loan us) appears to be decreasing, rather than increasing. This is not good.
will" (Eph 1:11 NIV). So for me the real question is whether these days are close to the time when he starts wrapping it all up. Let's see what I come up with.
In light of recent events I think I'd like to start with the economy. That is a pretty big topic, so it will take a few paragraphs to get through it. If I start to bore you with details that you're already comfortable with, then please feel free to skip ahead. As we all know, the economy is in the midst of a recession. What isn't talked about to broadly here in the US is that this recession is being felt around the world. Global trade has been hit hard. Banks around the world are failing and those who are still in business are not eagerly lending money right now. So business, in a global sense, is have a really tough time. Adding to the mix, central banks are pretty much
all spending money like drunken sailors. And given the fact that there is not a single nation anywhere which has a currency tied to a hard commodity (such as gold or silver), we are looking at a global situation that has no historical parallel. The entire world is ripe for a cataclysmic financial disaster where confidence in paper money is lost universally, causing widespread disruption of trade and commerce. I don't think many Americans think about this very much, but the fact is that most of us, a huge majority of us, live far from the land, so to speak. I'm not so much thinking about distance in miles traveled as I am thinking distance in economic terms. Do you know how dependent you are on global and local commerce to make sure that there is bread and milk and eggs and vegetables at your local supermarket? Next time you're in the produce section take a close look at the labels on the goods. Lots and lots of fresh food comes to us from far, far away. Think about the consequences of global economic disruption on an historic scale.
Moving on, I'd like to explore a little more deeply the impact of current US economic policies on our currency, world trade and our way of life. The US government is spending money at a staggering rate. It is spending money that it has not collected in taxes. How is this possible? Well, they borrow it. The most obvious question to ask, then, is "Who has that kind of money?" Because we are talking about trillions of dollars, with a T. I'm about to explain, in simplistic terms, how the US government gets the money that they then go out and spend. You might recall hearing on the news about something called a Treasury Auction. That is something held on a regular basis where the US Treasury sells bonds, of varying lengths of maturity, to whoever wishes to buy them. Some times there is a high demand for these bonds, some times there isn't such a high demand. When the demand is high, the bonds will sell for a higher price, following the law of supply and demand quite faithfully. When the demand is low, the bond price goes lower in order to elicit enough demand to get all the bonds sold. The interest rate that the bonds pay is inversely related to price. So higher bond prices (caused by higher demand for those
bonds) bring about lower interest rates and vice versa. In order to make up the gap between the money the US government takes in through taxes and the money the US government spends on various programs the US Treasury sells bonds. This gap is what is called the deficit. In the current fiscal year the deficit will likely come out to be close to $2 trillion dollars (if not more, as some believe). That is more than 3 times greater than any previous deficit in US history.
So how on earth will the US government be able to sell that many bonds? In all likelihood they won't be able to, at least not to anyone else. But I'll get to that later. First of all I want to talk about foreign reserves, balance of trade and the world's reserve currency. Maybe you've heard that the US dollar is the world's reserve currency. What does that mean? Simply, it means that international trade is settled in terms of US dollars. When a farmer in Argentina sells a boatload of wheat to China, someone in China deposits US dollars into the farmer's Argentinean bank account. In the simplest of terms that is what it means to be the world's reserve currency. So for the last several decades it has been advantageous for foreign countries to hold some US dollars, because this made it possible for them to conduct international trade more easily. The US dollars that are held by these countries are what is referred to as foreign reserves. Some
countries have lots of foreign reserves (Japan, China, the Arab oil countries). These reserves have built up over time because they have enjoyed a positive balance of trade with the US. In other words, we bought more from them than they bought from us. So they ended up with
excess dollars. Their problem then becomes one of where to put those dollars? Along comes the US Treasury with such a deal!
For the last several years these countries with excess foreign reserves (excess over what they need to support their level of international trade) have showed up at the US Treasury Auction to buy some good ol' US Treasury bonds. Why not? The US is a stable country, they pay their debts, essentially it has been considered to be an investment of zero risk. Well, not so much anymore. Lately two things have been happening. These foreign buyers of US debt have been buying less and they have been buying more on the short end of the maturity curve. Let's look at the maturity issue first. What is the long term consequence to the US if more and more of it's outstanding debt is of short maturity? Well, when the bond matures in 1 or 2 years it is usually rolled over into another bond. When this happens the new bond may carry a different interest rate, which might be higher or it might be lower. In case you haven't been paying attention to these things, the current interest rates for US government debt are about as low as they have ever been in history. They are about as close to zero as they will ever come. So which direction do you think is the most likely one for those rates to go in the future? If you said, "higher", then pat yourself on the back. You've obviously been paying attention. So this interest rate risk presents a future problem for the US. If rates rise, which will likely happen because of poor economic conditions, this will be a double whammy that will only serve to make the bad situation even worse.
But the other thing that is happening right now is that the foreign countries with money to spend are actually spending less at the US Treasury Auction. There are a couple of reasons for this, but the reasons are less important than the consequence that results. Let me just touch on the reasons. First of all, because of the current global economic slowdown, these foreign countries have fewer US dollars to spend at the auction. They already hold billions of dollars of US bonds, but their current income of US dollars has dropped because of the global recession, so obviously they are spending less at the auction. The second cause is more troubling. These countries are now beginning to wonder if it is such a good thing for them to be buying US debt. They are wondering if it really is such a zero-risk investment. In fact, some of these countries are beginning to divert some of their excess US dollars into a stockpile of hard commodities, such as copper or iron or gold. This is really happening, right now. I believe that the trend will increase, rather than decrease or stay the same. It doesn't work out well for the US.
It is time for a recap. The US is spending more money than it has. It is borrowing the excess from foreign countries who have extra dollars to lend back to us. The amount of money that the US needs to borrow in the future is huge, compared to what we've borrowed in the past. The amount of money that foreign countries have to loan us (or are willing to loan us) appears to be decreasing, rather than increasing. This is not good.
Tuesday, July 7, 2009
Anniversary Dinner
Well, Mary and I celebrated our 24th wedding anniversary on Monday. We decided to go out to dinner as part of our celebration. I had heard about Elle Wine Country Restaurant a couple of years ago and have long wanted to try it. Their commercials play all the time on the radio and it always "sounded" delicious. So, now was the time to finally try one of Tucson's Originals. Things started out okay, we arrived just before six to an almost empty restaurant and were seated promptly. Service was prompt, of course it was almost empty after all, and the wait staff was friendly. Here's where things started to go downhill. The small bread plates we used for our olive oil & balsamic vinegar dip and our single forks stayed with us through our bruschetta appetizer and our meals. One might think it customary for these items to be replaced at finer dining establishments, not Elle. Our dinners were not all that great either, maybe "just okay". Mary ordered the grilled beef tenderloin medallions medium and I ordered the pan seared ahi tuna rare. The medallions were tender, but overcooked. The grilled red potatoes that accompanied them were way over cooked, almost burnt. My ahi was prepared just right, but the cut of tuna was off. I'm not sure what it was - cheap tuna, old tuna, maybe frozen tuna, I'm not quite sure. One thing I do know is good tuna, having feasted on it many times on my trips to Hawaii. Now, I'm not saying that the tuna in Tucson should be as good as the tuna one gets in Hawaii, caught fresh that morning, but I have seen better pieces of tuna in this town. Bottom line, we won't go back. For all the hype in the commercials, the slick web site, and it being a Tucson Original, Elle Wine Country Restaurant was a big let down.
Sunday, July 5, 2009
Is it near?
Thinking about the end of the world this week. Actually, it seems I trip over that subject more often these days. The tenor of the news doesn't seem to help. I read through Matthew 24, where Jesus responded to the questions of his disciples about what would be the signs of the end of the age. There are many different opinions about the end of the world, but I still think that we can take a few valid points away from this passage, independent of your particular brand of eschatology.
First, we are warned to give no heed to those who claim "Christ is here" or "Christ is there". In v 30 he says, "At that time...they will see the Son of Man coming on the clouds...". So, it will be evident to all, you won't need anyone else to tell you that Jesus is here.
Second, Jesus confirms the validity of the prophecies of Daniel in v 15. There are many opinions about the book of Daniel, but I'll stick with Jesus on this one. As another point, the Apostle Paul also refers to the coming "lawless one" in 2 Thessalonians. I might have more to say about this subject in a later post, but not right now.
Third, we are to be faithful to His calling. We must not think we can delay our obligations just because we don't think he is coming anytime soon.
Fourth, the time may be unknowable, but we should be able to recognize the season. There will be signs.
As for recognizing the season, the signs of the times, I think there are abundant reasons to say that the time of His appearing draws near. What is near? 2 years? 10 years? 50 years? I don't know, but I can't see it being 50, probably much close to 10. Why do I say that? Think about the power that now exists to destroy. This is unique in history. At no other time has it been so easy to achieve the destruction of all life. The religious and racial hatred has been with us from time immemorial, but not the means to destroy. And the geopolitical forces currently in play will not allow a significant pause in conflict. The Muslim world is growing larger every day, the "Christian" West is in decline. The godless Chinese are wanting to take the leading role in the world economy. And Russia is not ready to become a footnote of history. And then there is Iran. Is it so difficult to imagine an alignment of Russia and Iran that gets hostile against Israel?
And Israel is the key. I cannot imagine God allowing that nation to be destroyed, yet the forces arrayed against it are poised to do just that (if their rhetoric is to be believed).
So I'm thinking we are in the season of the end. Watch world events very closely. Interpret them through the lens of scripture, and particularly with a view toward how things will affect Israel.
First, we are warned to give no heed to those who claim "Christ is here" or "Christ is there". In v 30 he says, "At that time...they will see the Son of Man coming on the clouds...". So, it will be evident to all, you won't need anyone else to tell you that Jesus is here.
Second, Jesus confirms the validity of the prophecies of Daniel in v 15. There are many opinions about the book of Daniel, but I'll stick with Jesus on this one. As another point, the Apostle Paul also refers to the coming "lawless one" in 2 Thessalonians. I might have more to say about this subject in a later post, but not right now.
Third, we are to be faithful to His calling. We must not think we can delay our obligations just because we don't think he is coming anytime soon.
Fourth, the time may be unknowable, but we should be able to recognize the season. There will be signs.
As for recognizing the season, the signs of the times, I think there are abundant reasons to say that the time of His appearing draws near. What is near? 2 years? 10 years? 50 years? I don't know, but I can't see it being 50, probably much close to 10. Why do I say that? Think about the power that now exists to destroy. This is unique in history. At no other time has it been so easy to achieve the destruction of all life. The religious and racial hatred has been with us from time immemorial, but not the means to destroy. And the geopolitical forces currently in play will not allow a significant pause in conflict. The Muslim world is growing larger every day, the "Christian" West is in decline. The godless Chinese are wanting to take the leading role in the world economy. And Russia is not ready to become a footnote of history. And then there is Iran. Is it so difficult to imagine an alignment of Russia and Iran that gets hostile against Israel?
And Israel is the key. I cannot imagine God allowing that nation to be destroyed, yet the forces arrayed against it are poised to do just that (if their rhetoric is to be believed).
So I'm thinking we are in the season of the end. Watch world events very closely. Interpret them through the lens of scripture, and particularly with a view toward how things will affect Israel.
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