2007 All Over Again, Part 7: Borrowers Start Scamming Desperate Lenders

By John Rubino – Re-Blogged From Dollar Collapse

One of the hallmarks of late-stage bubbles is a shift of power from lenders to borrowers. As asset prices soar and interest rates plunge it becomes harder to generate a decent yield on bonds and other fixed income securities, so people with money to lend (like pension funds and bond mutual funds) are forced to accept ever-less-favorable and therefore far-more-risky terms.

Recall the liar loans that were popular towards the end of the 2000s housing bubble and you get the idea. Lenders were so desperate for paper to feed the securitization machine that they literally stopped asking mortgage borrowers to prove that they could cover the interest.

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US Margin Debt Now Equal The Economy Of Taiwan

By Graham Summers – Re-Blogged From http://www.Gold-Eagle.com

When Central Banks attempted to corner the sovereign bond market via ZIRP and QE, they forced ALL risk in the financial system to adjust lower.

Remember, in a fiat-based monetary system such as the one used by the world today, sovereign bonds NOT gold are the ultimate backstop for the financial system.

And for the US, which controls the reserve currency of the world, sovereign bonds, also called Treasuries, represent the “risk-free” rate of return for the entire world.

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Soaring Deficits Force Treasury into Foolish Gamble

By Michael Pento – Re-Blogged From http://www.pentoport.com

As mentioned last week in Part I, the U.S. National debt is now at a record $20.5 trillion. And the first month of fiscal 2018 showed a deficit increase of nearly 38% over fiscal 2017. The total amount of Non-Financial Debt is up nearly $15 trillion during the 2007-2017 timeframe. In addition, the Federal Reserve Bank of New York reported that household debt totaled $13 trillion in the third quarter ended September 30th, which is a record high and the 13th straight quarterly increase. And, CNBC recently reported that the debt of nonfinancial corporations has grown by $1 trillion in just the last two years and now totals over $8.7 trillion, which is also a record 45% of GDP.

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America’s Stagflation

By Alasdair Macleod – Re-Blogged From http://www.Gold-Eagle.com

The accumulation of monetary policy errors by the Fed is increasingly certain to culminate in the credit crisis that always marks the end of the credit cycle. Credit crises are the result of globally coordinated monetary policies nowadays, so the timing of the forthcoming crunch is not only dependant on the Fed’s actions, but is equally likely to be triggered from elsewhere. Candidates for triggering a global credit crisis include economic and financial developments in Europe, Japan and China.

The next crisis is set to be more serious than the global crisis of 2008/09, given the greater level of debt involved, and the exceptionally high rate of monetary inflation since. It is a story I have covered elsewhere. This article will concentrate on the prospects for the US economy ahead of the next credit crisis, and the implications for the dollar and its associated financial markets.

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Revelation Numbers

By Michael Pento – Re-Blogged From PentoPort

The federal budget deficit widened in the fiscal year 2017 to the sixth highest on record, creating a budget shortfall of $666 billion. That is up $80 billion, or 14%, from the fiscal year 2016. The overspend resulted primarily from an increase in spending for Social Security, Medicare, and Medicaid, as well as higher interest payments on the debt due to rising rates that drove up outlays to $4 trillion, which was 3% higher than the previous fiscal year.

The deficit as a percentage of gross domestic product (GDP), totaled 3.5%, up from 3.2% the year prior. This budget gap will be piled on to the ballooning National Debt that in the fiscal year of 2016 grew to whopping 106% of GDP.

But the Trump administration isn’t spending a lot of time tweeting about the looming debt crisis. In fact, they would like us to believe that their recently proposed tax reform will not only pay for itself but will actually reduce debt and deficits. Treasury Secretary Steven Mnuchin noted recently that, “Through a combination of tax reform and regulatory relief, this country can return to higher levels of GDP growth, helping to erase our fiscal deficit.”

But the truth is that the proposed tax reform will not completely pay for itself–let alone reduce the deficit or pay down the debt. The Senate has recently congratulated themselves for approving a budget resolution that would allow Congress to collect $1.5 trillion less in federal revenues over the next ten years, yet they are still in search of new revenue to pass tax reform.

And since there are still some remnants of the fiscal hawks in Congress, Republicans are in a frenzy to find new revenue opportunities to get the necessary votes; in search of an elusive “sacred cow” that isn’t that sacred.

Following the election of Donald Trump, the House supported a Border Adjustment Tax (BAT); a cash windfall that dovetailed brilliantly with Trump’s America first agenda. However, it didn’t take long for lobbying groups to crush that proposal, and the BAT tax wound up biting the dust.

The next target was the deductibility of state and local taxes and the mortgage interest deduction–but the Republicans soon realized they have representatives seeking re-election in high tax states too…and this idea has also quickly fallen by the wayside.

On October 20th, the New York Times reported that “House Republicans are considering a plan to sharply reduce the amount of income American workers can save in 401(k) accounts, reportedly to as low as $2,400 per year (The current figure is $18,000, rising to $18,500 next year, with $6,000 additional in catch-up contributions permitted to those 50 and over.)”   However, President Trump quickly killed this with a tweet too.

Now we hear rumblings of a higher tax bracket; this may get the support of some Democrats, but the truth is there are not enough one-percenters to make the numbers work.

The Senate can pass tax reform with a simple majority but there is a catch. To use what is called the budget reconciliation process it cannot add to the deficit beyond the 10-year budget window. Therefore, a feasible solution may be to include an additional upper-income bracket to throw a bone to the Democrats and bring some on board to get to 60 votes. But the problem is that under either Reconciliation or Regular Order, passing tax cuts would mean that deficits would soar.

Our economy did prosper after the Regan tax cuts. But here is the rub, in the 1980’s the National debt was 45% of GDP; but now it is 106% of GDP.

According to Carmen Reinhart and Ken Rogoff, in their book, “This Time Is Different” – 800 years of financial history proves that high government debt ratios lead to low economic growth. And though some of their data have been questioned regarding the magnitude of their findings, their basic premise that high debt leads to weaker growth has held true under aggressive scrutiny.

Cutting taxes in an environment of massive debt and ballooning deficits, without a commensurate reduction in spending, is not going to grow the economy over 3%–at least it hasn’t worked in the past 800 years.

Declining government revenues and long-term costs associated with an aging population, including higher Social Security and Medicare spending, are expected to continue pushing up deficits over the coming decades. Real tax reform is needed but it should be paid for in order to ensure that we grow the private sector as we shrink the public sector. That means cutting taxes, eliminating loopholes and reducing spending. Sadly, few in Washington espouse such an agenda. Without such cuts, the economic boost from lower taxes would be more than offset by spiking debt service payments on the record amount of outstanding debt.

The S&P500 hit a bottom of 666 in March of 2009, which led to the most humongous intrusion into free markets by the U.S. government in its history. Now we have that same foreboding number 666; this time regarding the amount of red ink during the 2017 fiscal year. A mere coincidence I’m sure. Nevertheless, we must pray this rapidly rising debt figure does not forebode yet another step closer for the demise of the middle class.

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China’s Economic Reforms Get Another Chance

Re-Blogged From https://worldview.stratfor.com

Editor’s Note

The 19th Chinese Communist Party Congress runs Oct. 18-24. The convention marks the start of a transition as delegates name new members to lead China’s most powerful political institutions. But the change in personnel is only part of a larger transformation underway in the Party and in the country — a process that began long before the party congress kicked off and will continue long after it ends. This is the third installment in a four-part series examining how far China has come in its transition, and how far it has yet to go.

For years, China has tried to better balance the wealth in Qingdao and other coastal areas with inland areas that have languished.

(STR/AFP/Getty Images)

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Yawning Debt Trap Proves the Great Recession is Still On

By David Haggith – Re-Blogged From Great Recession Blog

While David Stockman stated early this year with resolute certainty that the debt ceiling debate would blow congress up and send the nation reeling over the financial precipice, I avoided jumping on the debt-ceiling bandwagon. While I was convinced major rifts in the economy would start to show up in the summer, I was not convinced they would have anything to do with the debt ceiling debate. If there is anything you can be certain of this in endless recovery-mode economy, it is that the US will just keep pushing its bags of bonds up a hill until it can finally push no more. So, I figured another punt down the road was more likely.

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