Wrecking the World Through Debt

–First cab off the rank today is that Murray has just released his pre-Bernanke market update. It’s posted over on his YouTube Channel. You can find it here.

— Murray sent us a note about the update. FOMC, by the way, refers to the Federal Open Market Committee. That’s the unelected committee of bankers that determines the price of money in America:

Today I go through different scenarios relating to the outcome of the FOMC. Unless he [Bernanke] announces something that really surprises the market (QE3, buying European debt), which could lead to a big rally, my view is that any rally will encounter stiff overhead resistance between 1230-1260 in the S&P 500 and should be used as a selling opportunity if it eventuates.

If he [Bernanke] doesn’t surprise the market and only announces Operation Twist, which is already priced in, then watch out below. Key levels to watch are 1194 and then 1155. Below 1155 gives quick targets to 1100.

–Operation Twist, by the way, is the Fed’s plan to “bend” the US yield curve. The yield curve describes the chart pattern formed if you connected the dots between interest rates on various government bond issues. It’s called a curve because interest rates on short-term government bills and notes are generally lower than on long-term bonds. The result is usually a gently rising curve from left to right, a little like the chart of the current US yield curve below.

chart of the current US yield curve

–Why does the yield curve curve? Loaning your money to the government for 30 days is, generally speaking, less risky than loaning it to the government for 30 years. These days we’re not so sure we’d want to loan our money to the government – ever. But let’s lay that sentiment aside for a moment.

–The Fed seems to think that by keeping interest rates low for short- AND long-term debt, it will somehow encourage a recovery with more business spending and hiring. Somehow. Someway.

–To accomplish this, the Fed is trying to lessen the difference between short-term interest rates (3-month bills and 3-year notes) and long-term interest rates (10-30 year bonds). It allows its $1.65 trillion in bond holdings to shift from short-term debt to long-term debt. The short-term stuff matures and the Fed uses the proceeds to buy longer-term debt. The portfolio stays the same size but changes in terms of its composition.

–By “flattening” or “bending” the yield curve, the Fed lowers all borrowing costs in America, and by extension the world. And that is just what the world needs. More low-cost borrowing!

–Low-cost borrowing through 2013 is the sort of thing the Fed hopes will lead to…an improvement. Our guess? It will lead to more speculation. Lowering interest rates on bonds forces people to find a real return somewhere, anywhere. To find that return, they usually have to take greater risks – which is not the sort of thing you want to do right before you retire.

–Ben Bernanke should win an award for the thoroughness with which he is destroying America’s middle class. But if he wants an award, he’s going to have to get in line behind Australia’s own Wayne Swan! Congratulations to the Treasurer.

–They like him. They really like him!!

–In an announcement sure to make Kevin Rudd jealous, Treasurer Swan has won Euromoney Magazine’s award for the world’s best finance minister. Swan beat out finance ministers in Iceland, Ireland, Spain, Portugal, Italy, and Greece for the award.

–China’s role in supporting Australia’s economic performance was not mentioned. But we’re sure Swan will graciously acknowledge China’s $3 trillion credit and local government debt binge in his acceptance speech. After all, without China’s debt bubble, there would be no steady demand for Aussie coal and iron ore.

–But let’s not be churlish and deny the Minister his 15 minutes of fame. He better enjoy it while it lasts. It may even be 20 minutes! The International Monetary Fund went out of it way to salute Australia’s strong fiscal position and industrial-world-leading low public-debt-to-GDP ratio. The fact that Australia did not have a significant public debt before the Treasurer’s arrival wasn’t mentioned.

–This reminds us of an old joke: What’s the best way to become a millionaire in the stock market? Start with 10 million!

–With Wayne Swan at the helm, Australia’s federal budget has gone from surplus to deficit (the chart on the left). And Australia’s gross government debt-to-GDP ratio has gone from less than 10% to over 20% (the chart on the right). We’d love to find a job where you can win an award by spending money somebody else had saved up, and then, when you run out of that, spending money you don’t have and leaving the bill for someone else. Well done, Wayne!

Surplus is the goal & Australia Government Debt to GDP
Click here
to enlarge

–Maybe we’re being a bit unfair. The net government debt is smaller than 20%. And compared to countries like Japan, the US, the UK, and Italy, Australia’s government debt IS smaller. Still, Swan has won an award for taking the country from surplus to deficit and increasing public sector debt. That tells you something about the quality of the world’s finance ministers these days.

–The IMF seems most pleased that Australia’s relatively low level of public debt at the beginning of the financial crisis leaves it with lots of room to borrow more money. This is exactly the attitude you’d expect from people who are incapable of understanding that debt-based growth is not the solution to the crisis. It’s what caused it in the first place.

–Poor IMF chief economist Olivier Blanchard. He revised the world’s growth forecast down from 4.3% to 4%. And then apologised for not being able to predict the future. His faith in his economic models and theory are his weakness. As is his faith in centrally planned solutions.

–In his “mea culpa” introduction to the IMF paper, Blanchard said, “Strong policies are urgently needed to improve the outlook and reduce the risks…”policymakers don’t have the luxury of time.”

–Yes. What Italy really needs to reduce its €1.9 trillion in government debt – 120% of GDP – is a strong policy to improve the outlook and reduce the risks. Maybe a strong policy will lower the interest rate the Italians will have to pay on the €113 billion worth of debt that must be refinanced between now and the end of the year.

–Blanchard is an earnest and well-meaning nincompoop. He exhibits the dual faiths/faults of “policy makers”: the belief that statistically based models can forecast the future and the belief that government policy is required to produce economic prosperity.

–Newsflash Blanchard: your belief system is at odds with reality. Your belief system lies in tatters everywhere around the planet. You SHOULD apologise. And then quit. That would be the best policy and would instantly improve everyone’s outlook and reduce the risk that policymakers are going to rack up ever larger debts and destroy the value of people’s savings.

–But the likes of Blanchard never quit. They retire with public pensions, or accept director positions at the large corporations that benefit the most from government policy that encourages more debt. They’re not bad people. They mean well, in their academic way. But they are wrecking the world.

–If Rome wasn’t built in a day, it wasn’t wrecked in a day either. It took thousands of years for the Empire to debase itself into poverty. The demise of our modern financial system will undoubtedly happen a lot faster. It’s happening already. But you still have time to prepare your own “strong policy”. Look for more on that this weekend.

Dan Denning
for Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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3 Comments on "Wrecking the World Through Debt"

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No comment here on whether Dan believes TWIST and the 60’s accounts of it meeting its stated ends or not are correct. My loose understanding is that it didn’t work, but that some think it showed signs that it might have worked if they threw more at it. Even those aims and measures are only on the short term.


Apply for a reassignment, Dan. Gawd, imagine being given a mission like ‘SINK AUSTRALIA’ when our country utterly defies the spiraling sinkhole of the Northern Hemisphere!~

Tell Bill “Enough, I’m outa here!!~”

Go back to whatever US community (I erased cesspit, here) you call home and let Aussies enjoy our relative immunity from US banksters, doom’n’gloomers and carpetbaggers. Your country has lots of pluses (90c/litre gas, cheap groceries and loonie politicians) so why not give your kids the outstanding benefits of a _first-rate_ US education and a crack at the Great American Dream?!~ :)

Biker, Vancouver


The necessity and reason for increased public sector debt is simple. Public sector debt is repaid by the public. Keeping the public in debt servitude renders the public controlled, malleable and open, by necessity, to accept a new financial system. They wreck the world’s economies and then provide the fix. That’s their Plan Dan, so how do we get out the back, Jack?

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