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Jim Cook



Every once in a while I switch the TV channel from Fox to CNBC to see what the liberals are saying.  After listening awhile I get a deep sense of hopelessness and foreboding for our country.  The most important thing for the left is giving money to people.  They are happy to see the growth of food stamps, disability payments, housing subsidies, free healthcare and all the other welfare benefits.  They utterly fail to see the damage it is doing to the recipients.  Whole cities that once flourished have deteriorated into rotting eyesores populated with shambling hulks of chemically dependent drones.  These people are no longer employable.  They have become incompetent and helpless and the liberals can’t see that it’s their doing.

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The Best of Jim Cook Archive

Best of Bill Buckler
August 25, 2010
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That is the headline of a article which was published on August 16. According to the article, some Treasury bond investors are now betting on a slide back to the dark days of late 2008 – early 2009. The catalyst? The Fed’s announcement of “QE2” on August 10. The Fed is said to have decided to keep the size of its balance sheet from shrinking AND to start buying Treasuries again in order to keep longer-term US interest rates low. It is certainly true that the Fed wants to keep longer-term US rates low.  It is also true that the Fed claims they are being driven by concern for the US economy as a whole.

Fixed long-term (30-year) US mortgage rates are already at all time lows. The Federal Housing
Administration (FHA) “conforming rate” (below $US 417,000) 30-year money is being offered at 4.00 percent. The yield on US Treasury 30-year debt paper only dipped below 4.00 on August 11. In essence, a US fixed mortgage in the US is now deemed as risk free as an equivalent loan to the government.

The fact is that nowadays, a US mortgage loan IS for all intents and purposes a loan to the government.  In 2009, Fannie and Freddie (the “government sponsored enterprises” wholly owned by the government) along with the FHA insured 97 percent of all US mortgages. But even with these all time low mortgage rates and the specific government guarantees, almost all of the activity in the mortgage market is the refinancing of existing loans at the lower rates now available, not the taking out of new ones.

Even record low rates of interest right across the yield curve in the US is NOT producing a new wave of either borrowing or spending in the private economy. Nor, are earnings in the economy which manufactures goods instead of money at a level where they produce any increase in government revenues. By ALL their actions, the federal government has no intention of cutting back on THEIR borrowing and spending. What they do want to do is to lengthen the maturity of their Treasury debt. That is the reason why the Fed wants to do all it can to get longer-term US yields as low as possible and keep them as low as possible for as long as possible. As long as possible, in this context, means until after the November midterm elections. If that takes another MASSIVE dose of Treasury buying, that is what the Fed will do. . .

At the height of the financial crisis in late 2008, the US Treasury (and most other global “Treasuries”) was selling HUGE amounts of short-term debt paper to “fund” the avalanche of stimulus programs and bailouts in the wake of the Lehman crisis. The result was that by the end of fiscal 2009 on September 30, the US government’s deficit had almost exactly tripled from the previous year. Most of that additional
debt was short-term, due to be rolled over inside two years. In late July 2010, the White House estimated
the deficit for fiscal 2010 was going to be $US 1.47 TRILLION - slightly higher than the 2009 number.

In early 2009, the prospect of rolling this gargantuan pile of debt over in the “short-term” was weighing on Treasury Secretary Geithner’s mind. He knew that the US government was going to be facing annual deficits in the $US TRILLIONS for years. He knew that at some point, this prospect would start to force up US interest rates. He knew that radical and immediate action was needed. So did Mr Bernanke over at the Fed. So a two-pronged plan of attack was launched. On March 5, 2009, the Governor of the Bank ofEngland “tested the waters” by announcing a “quantitative easing” (QE) plan for Britain. The financial world didn’t come to an end. So, just under two weeks after that in conjunction with a scheduled FOMC meeting, the Fed announced a $US 300 Billion QE plan for the US Treasury.

The UK announcement abruptly stopped the rot on world stock markets. The US announcement launched a spectacular rally on world stock markets. That, in its turn, provided the cover behind which the US powers that be started to talk up the “green shoots” and, after that, the US economic recovery. The Fed had demonstrated that it would ALWAYS be there as a buyer of last resort. The markets took their word.

Given this reprieve, the Treasury began the process of lengthening the average maturity of the debt it was issuing so that it could put off the day when it faced a massive “roll over”. The Fed’s job was to, by any means imaginable, hold down longer-term US rates. The contrived “sovereign debt crisis” in Europe helped mightily, until about June. But when Europe opted for “austerity”, the jig was up. This second go - QE2 - by the Fed is a last ditch attempt to hold down longer-term US rates so that the Treasury can continue to get the financing it MUST have to remain a “viable” institution.

A “bond vigilante” is defined as a buyer of government debt paper who protests either monetary or fiscal policies they consider dangerous to the health of their investment by selling bonds. Despite the documented evidence of China reducing its Treasury holdings with increasing speed, there has been little sign of these people on US bond markets for quite a while now.

According to EPFR Global, as of the week ending on August 13, US bond funds have seen net inflows in 72 of the previous 73 weeks. We don’t think it is much of a coincidence that if you go back 72 weeks from August 13, 2010, you end up very close to March 18, 2009 - the date when the Fed announced their first tranche of “quantitative easing”. In the US, as in most other “developed” nations, banks remain the largest domestic holders of government debt paper. But in recent weeks, and especially in the US, so called “retail investors” are catching up fast. Ironically but predictably enough, the stampede to “quality” is reaching a peak just as the actual “quality” of that being demanded is at historic lows.

The lack of “quality” of US Treasury debt paper is best illustrated by the Fed’s announcement that they are going to actively monetise it - AGAIN - for the second time in about 72 weeks.

One of the inevitable tragedies of the policies of economic interventionism is that they penalise REAL investment. A REAL investment is the placing of unconsumed wealth in the form of money into promising new ideas or existing enterprises which have a record of producing NEW wealth. This is what a “capitalist” does. A capitalist makes “capital” available to an entrepreneur. If the entrepreneur is successful, the reward to the capitalist is the earning of interest while the reward to the entrepreneur is the PROFIT earned on the successful use of the capital. That successful use results in new WEALTH - at the “expense” of no-one - which is the reward that everyone else gains from the process.

The absolute antithesis of this entire procedure is the placing of capital into the debt obligations of government. Since government produces nothing, the placement of capital with them can only result in capital consumption which makes everybody poorer. There is an economic maxim known as “crowding out” which states that any increase in government spending, whether financed by taxation and/or borrowing, will act to reduce private investment and consumption to a matching degree.

This is true as far as it goes, but it does not go nearly far enough. Far from being an investment, the buying of government bonds is an act of withdrawing from the market altogether. A capitalist invests unconsumed wealth knowing full well that because the future is uncertain, a profit is not guaranteed. The loss of part or all of the capital committed is possible. But a capitalist also knows that the only way that an economy can progress in real terms is one in which capital accumulation takes place at a faster pace than does the increase in population. More and better tools lead to more and cheaper production.

A government bond buyer is buying the argument that the future IS “certain” because a government can never go broke and will always retain the means to pay principal and interest on the funds which are lent to them by the bond buyers. That person totally ignores the fact that the only means that a government has of servicing debt in REAL (as opposed to money created out of thin air) terms is their ability to extract the wealth required out of those who produce it. The more capital that flows into government debt, the more hamstrung are the wealth producers and the less wealth they have to work with.

The Fed announced they are “financing” QE2 with the proceeds from the maturing toxic sludge on their balance sheet. Had the Fed not taken this stuff on its balance sheet, there would have been no “proceeds” because the paper would be worthless. Much more of this and the same will be true of Treasuries.


Ó 2009 – The Privateer

(reproduced with permission)


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