munKNEE.com Your Key to Making Money
So says Andy Sutton (www.sutton-associates.net) in edited excerpts from his original article*.
[Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has edited the article below for length and clarity – see Editor’s Note at the bottom of the page. This paragraph must be included in any article re-posting to avoid copyright infringement.]
Sutton goes on to say, in part:
Credit Downgrades a Self-inforcing Cycle in Europe but NOT America
The headlines have been filled with story after story about how the major rating agencies…have been literally wrecking EU nations for their inability to get a handle on their fiscal affairs. This has created a self-reinforcing cycle.
- Agencies cut the ratings, [see chart below]
- which prompts bond investors to demand higher yields,
- which makes it even less likely that the nations will be able to meet payment obligations,
- which leads to further downgrades and so forth.
Wash, rinse, repeat. Not only have the nations themselves been hit, but their banks have been hit as well – and deservedly so. In truth, the entire Eurozone, save for Germany, should be rated below investment-grade; and quite a few of them should be rated as junk.
Which brings us to America. The inability of our government to do much of anything without further borrowing is now well documented. Uncle Sam borrows nearly 50 cents of every dollar spent, and despite massive stimulus via heavy deficit spending, the U.S. economy is dead in the water. There is a huge paradigm shift going on in the labor market right now:
- jobs are available, but for the most part they’re of the variety of which two (or more) are needed to create a manageable situation for a family,
- families are back on the credit card (and this writer must wonder how much of that debt accumulation is out of necessity rather than a need for largesse),
- there is a bubble in student loan debt and
- both Social Security and Medicare are in serious trouble.
Last August S&P, citing these and other factors, dropped the government’s rating a single notch. Generally when ratings go down, yields go up. Quite the opposite has happened in our case. Yields are now at all-time lows.
The False Paradigm Continues
1. [Bond Yields are Too Low: With yields at such levels it] continues, and even reinforces, the notion that America is somehow immune from the laws of economics…. Somehow we can borrow and spend as much money as we want without fear of negative repercussions. In fact, not only won’t we be punished, we’ll be rewarded by having to pay lower interest rates.
Does it make any sense though that the average credit card rate for individuals is somewhere in the mid 13% range and the average American’s finances – as bad as they are – are still several orders of magnitude better than that of the U.S. government, which is treated to the lowest rates in history?
2. [Interest Rates Are Too Low:] The near-zero interest rates being paid by banks and other savings vehicles are so low that it actually discourages people from saving when they need to be doing it most….The average of the handful of money market funds I looked at was .06%. That is six cents a year for every hundred dollars invested. Incredible, and when you figure that veritable fortune is taxed, well, what’s the point of even saving? Unfortunately, many people are taking that attitude. If we’re not going to be compensated, why bother? A quick look at the savings averages for people nearing retirement is downright scary. Granted, this has been going on an awful long time.
People appear to be under the false notion that the government is going to take care of them and that their Social Security (which is anything but) will carry them through. Many are now finding out the hard way that this simply isn’t the case.
3. [Social Assistance is Too Prevalent:] The persistently poor economy, which by several authentic non-GDP based metrics has now been in recession for nearly 6 years, has created an entire class of people who are dependent on the government for either all, or nearly all, of their sustenance. Social Security Disability claims are at an all-time high. Food stamp subscriptions are at an all-time high, as are energy assistance, and Medicaid use. We are Europe, plain and simple.
While our politicians and Mr. Geithner sit here and lecture the Europeans on fiscal responsibility, we’ve got our very own Titanic that is listing from a huge gash in its side caused by the overriding welfare mentality and a complete lack of leadership over the past half century.
Much like many of the Eurozone nation-states, we have lost our own sense of personal responsibility. Somebody else will take care of it. Someone else will pay for it. Someone else will clean up our mess.
4. [The Bailout Mentality is Too Prevalent:] As the money flies out of Greek banks, and the Eurozone in general, so fast that it can barely be counted, there aren’t a lot of viable places to stash it.
- Global stock markets have been in a correction over the past month or so.
- Commodities are stagnant as financial agents attack prices at every turn in a vain attempt to contain the effects of all the monetary inflation going on around the globe.
- U.S. Treasuries have been one parking place, but really, given the fundamentals of America’s finances, stashing your capital in U.S. Treasuries is the equivalent of jumping from the frying pan directly into the fire.
5. [There is a Complete Lack of Moral Hazard:] This is where the final component of the false paradigm comes into play: the complete lack of moral hazard. The bailout mentality, like the welfare mentality, is firmly in place.
- We taught banks and hedge funds back in 2008 (and even before) that the U.S. taxpayer is always willing, able, and ready to back up any losses experienced as a result of poor risk management, gambling, and outright irresponsible behavior.
- We’ve taught people that they can behave irresponsibly and buy homes they have no hope of ever affording and while millions have lost those homes, millions more have been bailed out.
Conclusion
Make no mistake about it; the bubble blowing up in U.S. Treasuries is the mother of all bubbles to date, eclipsed only by the even larger bubble being blown up in OTC derivatives.…Who is going to do the bailing out when… [these] bubbles burst? There isn’t enough capital in America to cover the Treasury mess and there isn’t enough capital in the universe to cover the OTC casino gambling of financial agents around the globe. In plain English, this will not end well – enjoy it while it lasts….Got gold?
*http://news.goldseek.com/GoldSeek/1339766580.php (To access the above article please copy the URL and paste it into your browser.)
[Editor’s Note: The above article may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.]
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