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June 28, 2010

When in Debt - Fudge the Books

When you don't like how much debt you have, leave off some debts to make things look better?  What way is this to run a household, a business, a country? 

Now that this nation's debts as a percentage of GDP are greater than 90% (a striking figure that has only occurred a couple of times during the worst of times in the history of the US), the politicos and their minions now have a new number that they quote...PUBLIC debt as a percentage of GDP.  Yes, leave out the money owed to the Social Security Trust Fund and, voila!, suddenly our national debt as a percentage of GDP is back in the 60s again!

Leave off your mortgage, you're not paying it anyway, and, voila!, suddenly you have money to eat out again!  

Is is really ok to simply leave out the debt owed to the Social Security system when adding up the national debt?  Why?  Isn't it a legitimate debt?   

I would imagine if you asked the people who have been making contributions to Social Security for the past 70 years they would probably say that debt is a valid debt and ought to be counted.  They would say, "That debt represents money I contributed, and I, for one, expect to be paid!" 

I, personally, just as so many Americans, have contributed hundreds of thousands of dollars to the social security system.  I didn't get a say in how the money was invested - entirely in US treasuries, btw.  What kind of diversified investment portfolio is that?  Had it truly been a separate trust, charged with creating a diversified portfolio, there wouldn't even be a shortfall today.  (But that's a topic for another day).

The G-20 met over the weekend and pledged to cut world deficits in half by 2013 and to 3% of global GDP by 2016.  The US agreed to comply. 

I guess if you don't count your debts properly it's easy to run the numbers wrong and make promises you can't hope to keep.  Don't count the $6 trillion owed to social security, don't count the $5 trillion in unfunded promises to cover the debts of Fannie Mae and Freddie Mac.  Don't count the quagmire in the Middle East.  Leave out graduating students who can't find jobs, the self-employed whose businesses have gone under, the under-employed who can't pay their bills and, voila!, US unemployment is under 10%!  Happy day!

Just because you don't open your credit card statements doesn't mean you don't owe the money.  Just because the baby boomers haven't begun retiring in droves yet doesn't mean they aren't ever going to. 

We are, individually and collectively, being totally dishonest about our debt situation.  And, one day, we are going to get a nasty surprise when we whip out our credit cards, try to use them, and get denied.






June 22, 2010

Who's Buying Treasuries? The Fed, That's Who.

In his Eye on the Market for March 30, 2010, Michael Cembalest, Chief Investment Officer for J.P. Morgan Private Banking made the following point:

· 2009 net issuance by Treasury, state, local, housing, asset-backed, high grade and high yield entities = $1.75 trillion
· 2009 Federal Reserve purchases of Treasuries and Agencies = $1.6 trillion

So, in other words, Fed demand accounted for 90% of all net US$ fixed income issuance in 2009. This is why we do not assume that 2009 bond or credit market conditions will persist in 2010 and 2011. Corporate de-leveraging reduced supply in 2009, but the longer tenors of upcoming Treasury issuance, and the lack of support from the Fed, suggest that the real challenges for Treasury supply absorption are just beginning. Only a continuation of Fed purchases could change that.


June 03, 2010

Global Debt Clock


Is the ability to borrow a finite resource?  The US mortgage crisis would indicate so, and yet you'd never know it by the projections for the expansion of public debt worldwide over the next 5 years.  Got to wonder...who will the buyers be?