Postponing an Inevitable Financial Doomsday
The US has a total debt pile of almost $17 trillion, which is expected to rise to almost $23tn in the next five years.
The United States public debt is the amount owed by the federal government of the United States. The measure of the public debt is the value of the Treasury securities that have been issued by the Treasury and other federal government agencies and which are outstanding at that point of time. Gross public debt consists of two components:
- Debt held by the public, such as Treasury securities held by investors outside the federal government, including that held by individuals, corporations, the Federal Reserve System and foreign, state and local governments.
- Debt held by government accounts or intragovernmental debt, such as non-marketable Treasury securities held in accounts administered by the federal government that are owed to program beneficiaries, such as the Social Security Trust Fund. Debt held by government accounts represents the cumulative surpluses, including interest earnings, of these accounts that have been invested in Treasury securities.
In general, public debt increases as a result of government spending and decreases as a result of government tax or other receipts, though in practice Treasury securities are not issued or redeemed on a day-by-day basis. The amount that Treasury can borrow is limited by the United States debt ceiling. [ Read more about National Debt of the U.S. >> ]
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Buying time: US budget deal postpones financial doomsday
October 17, 2013
President Obama and Congress have signed off on extending the debt ceiling through to February. The new legislation only temporarily solves the US budget dispute, begging the question if America will ever limit its borrowing.
The extension deal will reopen the government after 16 days of partial shutdown and fund spending through January 15 while extending the $16.7 trillion debt ceiling through to February 7. The next major deadline is the December 13 target date for budget negotiations
In three months’ time, US policymakers will again rehash the budget and the debt limit, which billionaire Warren Buffett called a “political weapon of mass destruction” in an interview with CNBC, saying it shouldn’t be used by politicians to settle budget disputes, as it brings real financial harm.
Although US policymakers haven’t specified the new borrowing limit, the Bipartisan Policy Centre think tank estimated the debt limit should be raised by another $1.1 trillion to help Washington cover its obligations through to December 2014.
Standard & Poor’s estimates the shutdown cost the US economy $24 billion, or $1.5 billion per day, the rating agency said on Wednesday. The agency also believes the shutdown will pare fourth quarter GDP by 0.6 percent.
Even though the White House and lawmakers nearly avoided a technical debt default this time around, the solution is only temporary.
Wall Street rejoiced after news broke the Senate reached a deal to avert a default, the Dow Jones Industrial Average soared 200 points. At the close of the New York Exchange, the Dow Jones climbed 1.36 percent nearly reaching a record, the S&P 500 increased 1.38 percent, and the NASDAQ Composite jumped 1.20 percent.
Asian floors met the news with split enthusiasm, but general market sentiment was high on news the world’s largest economy wouldn’t experience a sovereign debt default.
“There will be resurgence in global markets until we come to the next round of discussions in February next year,” Malcolm Coates, a partner at Deloitte CIS, wrote in a note to RT.
“Can the US afford to default? The answer is a resounding no. There is nothing to gain from a default,”Coates told RT.
The sky is falling!
“The short turnaround for politicians to negotiate some sort of lasting deal will likely weigh on consumer confidence,” S&P wrote.
The political stalemate in Washington has already prompted consumers to devalue their outlook of the American economy, and hit its sharpest one-week drop since the collapse of Lehman Brothers.
“If people are afraid that the government policy brinkmanship will resurface again, and with it the risk of another shutdown or worse, they’ll remain afraid to open up their check books. That points to another Humbug holiday season,” the agency said in their report.
When Congress neared the ‘fiscal cliff’ in the summer of 2011, consumer confidence fell to a 31-year low in August.
The beauty of the debt is its payment
Coming very close to defaulting on their debt and a last minute limit increase isn’t a new practice in Washington. The US debt ceiling has been in place for nearly a century, and the country’s policymakers have always raised their spending powers, simply borrowing money and writing a big ‘IOU’ to the American people.
America’s debt ceiling, or the amount of debt the government can hold, has been increased 79 times since 1960, under both Democratic and Republican Presidential administrations. The outstanding debt of the world’s largest economy is currently $16.7 trillion, and is spread through domestic and foreign debt.
“Nobody’s ever been this deep in debt and its going higher and higher,” said Jim Rogers, chairman of Singapore-based Rogers Holdings, told RT.
Investors and central banks shouldn’t continue fixating on the politics, but on the growing danger of the debt itself, Martin W. Hennecke, chief economist at Henley Group Ltd, told RT.
“…the real problem is not a debt ceiling, the problem is a debt. And a real issue, from our point of view, the investors and the central banks should be looking at is the danger of it growing and now, more recently, it’s coupled together with the issue of rising interest rates,” Henley Group said.
Rising interest rates will be important to watch because if Treasuries rise, paying off debt will be more expensive for the US.
“Any further increase in the interest rates, generally and on Treasuries, would send the United States into default, not just by disagreement, just because they run out of money,” Hennecke said.
PS Thumbs down: Chinese rating agency downgrades US
Despite a temporary budget compromise in Washington, China’s Dagong agency has downgraded the United States. Dangong maintains a negative outlook on the sovereign credit, as revenue and GDP fail to keep up with the country’s massive debts.
The Beijing-based Dagong agency, one of the few notable non-US based credit rating agencies, has downgraded America to an ‘A -‘rating from ‘A’.
The move came shortly after Congress and President Obama narrowly averted a technical default. Fear the world’s largest economy may default on its widely dispersed Treasury Bonds is making investors re-evaluate political and financial stability in the US.
“The government is still approaching the verge of a default crisis, a situation that cannot be substantially alleviated in the foreseeable future,” the Dagong agency said in a press release.
Ratings by Dagong are not internationally recognized, and will likely hold only symbolic, and not market, implications.
According the Chairman of Dagong, Guan Jianzhong, current agencies tend to arbitrarily favor developed economies.
On Tuesday, Fitch Agency put the United States’ Triple A rating under a negative watch. The debt ceiling debacle in 2011 prompted a drop in the superpower’s rating from AAA to AA+.
Standard and Poor’s hasn’t issued a warning or downgrade, but released a statement Wednesday calculating the government shutdown didn’t save, but rather cost the US $24 billion.
“The bottom line is the government shutdown has hurt the U.S. economy,” the S&P statement said.
Dagong thinks the US government debt, currently $16.7 trillion, and spread domestically and internationally, is rated too high.
60 percent of foreign currency holdings are in dollars, with a total dollar equivalent of $6 trillion.
If the US were to renege on its debt obligations, central banks around the world that hold Treasury Bonds as reserves would be in trouble.
China, which holds roughly $1.3 trillion in US Treasury bonds, and is quite vulnerable to a US economic collapse, criticized lawmakers handling of the debt ceiling debate. State-owned Chinese media lambasted it as a ‘manufactured crisis’.
Russia, the 11th largest holder of US debt with $131.6 billion, has significantly reduced its stake in Treasury Bonds.
According to Bloomberg, Russia has trimmed its holdings by 25 percent from a record high on October 31, 2010.
“Such events result not only in short-term jumps in volatility, but also an erosion of trust in the dollar as a reserve currency and the American financial system as a whole,” Nabiullina told Bloomberg in an emailed statement on October 15.
Russia’s central bank, though not currently reducing US reserves, is looking to diversify their currency reserves to Australian dollars and New Zealand dollars.
Political ping pong in Washington may affect future Central Bank reliance on US Treasuries, but for now, most banks are stuck with what they have.
“For governments and central banks that already hold a lot of treasuries, it’s already too late to exit, from an investment point of view,” Martin W. Hennecke, chief economist at Henley Group Ltd, told RT.
If China or any country starts selling their treasuries, it would send the debt servicing price up, which could quickly inject into markets and kill the sale of all remaining bonds, essentially creating a bubble.
“China is trying to buy more gold, they actually imported over 2 dozen tons of gold over the last two years through HK, and they are trying to increase the gold part of their reserves. It’s difficult for them to do this without driving prices up. Russia and China are both buying,” the Henley Group expert said.
“China understands they made have to eventually write off part of their US Treasury bond part of their reserve currencies,” Hennecke said.
Barofsky discloses how, in serving the interests of the banks, Treasury Secretary Timothy Geithner and his team worked with Wall Street executives to design programs that would funnel vast amounts of taxpayer money to their firms and would have allowed them to game the markets and make huge profits with almost no risk and no accountability, while repeatedly fighting Barofsky’s efforts to put the necessary fraud protections in place. His investigations also uncovered abject mismanagement of the bailout of insurance giant AIG and Geithner’s decision to allow the payment of millions of dollars in bonuses—including $7,700 to a kitchen worker and $7,000 to a mail room assistant—and that the Obama administration’s “TARP czar” lobbied for the executives to retain their high pay.
Providing stark details about how, meanwhile, the interests of homeowners and the broader public were betrayed, Barofsky recounts how Geithner and his team steadfastly failed to fix glaring flaws in the Obama administration’s homeowner relief program pointed out by Barofsky and other bailout watchdogs, rejecting anti-fraud measures, which unleashed a wave of abuses by mortgage providers against homeowners, even causing some who would not have lost their homes otherwise to go into foreclosure. Ultimately only a small fraction (just $1.4 billion at the time he stepped down) of the $50 billion allocated to help homeowners was spent, while the funds expended to prop up the financial system—as Barofsky discloses—totaled $4.7 trillion. As Barofsky raised the alarm about the bailout failures, he met with obstruction of his investigations, and he recounts in blow-by-blow detail how an increasingly aggressive war was waged against his efforts, with even the White House launching a broadside against him. Bailout is a riveting account of his plunge into the political meat grinder of Washington, as well as a vital revelation of just how captured by Wall Street our political system is and why the too-big-to-fail banks have only become bigger and more dangerous in the wake of the crisis.
A former watchdog in the federal government attacks the officials who perpetuated the financial meltdown by kowtowing to behemoth banks and Wall Street firms while abandoning the public interest.
Barofsky was a federal prosecutor in New York in 2008 when his boss encouraged him to apply for a newly created position in Washington, D.C., as inspector general overseeing the Troubled Asset Relief Program. Created during the waning months of the Bush administration and inherited by President Barack Obama, TARP allocated hundreds of billions of dollars of taxpayer money to allegedly stabilize too-big-to-fail banks, strengthen investment firms and rescue homeowners from foreclosure. Ignorant of cutthroat Washington politics, Barofsky, a Democrat, won confirmation by the U.S. Senate despite Republican Party dominance and set out to account for the TARP spending in a transparent, nonpartisan manner. However, as he demonstrates in his energetically written first-person account, he and his staff met resistance every time they tried to share the truth with Congress, the White House and the American public. The villains are numerous, with Treasury Secretary Timothy Geithner at the top of the list. Of course, it’s possible that some of the negative characterizations shared by Barofsky involve score-settling or well-intentioned differences. That seems unlikely, however, since the author provides copious evidence of the petty attacks on his office by Geithner, other Treasury Department officials, White House staff members, senators and representatives, coddled journalists and ill-informed bloggers. Barofsky’s account contains enough self-deprecation that he does not come off as a holier-than-thou hero. A courageous, insightful book that offers no cause for optimism. [from Kirkus review]
The further we dug into the way TARP was being administered, the more obvious it became that Treasury applied a consistent double standard. In the late fall of 2009, as I began receiving the results of two of our most important audits, the contradiction couldn’t have been more glaring. When providing the largest financial institutions with bailout money, Treasury made almost no effort to hold them accountable, and the bounteous terms delivered by the government seemed to border on being corrupt. For those institutions, no effort was spared, with government officials often defending their generosity by kneeling at the altar of the “sanctity of contracts.” Meanwhile, an entirely different set of rules applied for home- owners and businesses that were most assuredly small enough to fail.
Nowhere was the favoritism toward Wall Street more evident than with the government’s approach to AIG, where inviolable contract terms were cited to justify the absurd executive bonus payments as well as far richer payouts provided to the megabank counterparties to AIG’s CDS deals, honoring even their most reckless bets. For homeowners and small business owners, though, contracts went from being sacrosanct to inconvenient irrelevancies. So when mortgage servicers blatantly disregarded HAMP contracts by trampling over homeowners’ rights, Treasury turned to an endless series of excuses to justify its refusal to hold them accountable. Similarly, for more than two thousand auto dealerships, Treasury’s auto bailout team sought to void the contractual rights granted them under state franchise laws to shut them down.
- Committing National Suicide
- Peering Over the Fiscal Cliff
- Where has All the Money Gone?
Another Link to the above video: http://youtu.be/hYIC0eZYEtI
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