Tag Archives: government bonds

Australia On Target To Hit Debt Ceiling By Mid-2012

2 Nov

Click to enlarge | Source: Australian Office of Financial Management (AOFM)

Your humble blogger met Senator Joyce for the first time on 1 July this year.

On introducing myself and mentioning this blog, Barnaby’s very first words to me … were words of humility.

He immediately referred self-deprecatingly to his now-famous warning in late 2009 about the risks of rising US Government debt leading to “possible” default.

You remember. His was the warning that no one wanted to hear; that drew the wrath and mockery of Rudd, Swan, Tanner, Chris Bowen, then Treasury Secretary Ken Henry, and of course, all of our lamestream media economic “experts”. Ignorant, arrogant, foolish ridicule, that prompted the launch of this blog.

Barnaby was quick to volunteer that his warning about US debt was nothing special; rather, in his opinion it was simply obvious that the rising trajectory of US Government debt must eventually run smack into their debt ceiling.

As we all know from the early August kerfuffle over raising the US debt ceiling, a political crisis that threatened to blow up the world economy … Barnaby was right.

Since this blog began in early 2010, we have seen time and time again, that when it comes to matters financial, Barnaby is the only one on the ball.

Doubtless a big contributing factor is that he is an experienced Chartered Accountant, and not a lawyer cum union hack, or a career political hack with an Arts degree.

In May, for example, Barnaby was the first to rail against the Green-Labor minority government quietly sneaking in a budget provision to raise Australia’s debt ceiling by 25%, to a quarter of a Trillion dollars ($250 Billion). Even though no one is supposed to dare question Wayne’s authority:

As Treasurer Wayne Swan was congratulated by colleagues after Tuesday’s budget speech, Assistant Treasurer Bill Shorten introduced draft laws allowing the government to increase the amount it can borrow from $200 billion to $250 billion.

The proposed legislation would also remove a requirement that the Treasurer explain why the extra money is needed.

In recent weeks, Barnaby has upped the ante in continuing to make good on his pledge to never rest in pointing to the dangers of rising government debt.  And fair enough too, when they’re continuing to borrow on the national “credit card” at a staggering rate.

Indeed, Wayne and Co have blown out our total Gross Debt Outstanding by over $7 billion a month in September and October, to a new record $215.6 Billion.

Which begs the question, “When will we run into our new debt ceiling of $250 Billion?”

That is, the new one Wayne set only 5 months ago, in May this year.

The chart above tells the story.

Our debt trajectory suggests that our Green-Labor government will bang into our new debt ceiling around mid-2012.

Unless something goes pear-shaped first, of course.

Like, say, a big fall in our Terms of Trade? Due to a big fall in the price of our biggest export, the iron ore sold to Chinese steel mills, perhaps?

Steel China Iron Ore Fines cfr main China port USD/dry metric tonne (MBFOFO01:IND)

Oops.

Like, say, a 32 month low in the latest measure of Chinese manufacturing? (h/t ZeroHedge)

China Manufacturing PMI prints at 50.4, down from 51.2, when consensus was expecting an increase to 51.8. This is the lowest print in 32 months, and the lowest since February 2009. But wait, before concluding that this is very bad news, uh, ahem… well, sorry, we haven’t taken the CNBC spin school yet. It’s bad news and the hard landing is coming. We leave the spin to the professionals.

Click to enlarge

Oops.

And there’s a lot more “oopses” where they came from. Including internal “oopses” … like Australian house prices and sales both falling … and the Reserve Bank starting to cut interest rates again; which means trouble’s afoot, and they are hoping their action will prompt you to be a complete idiot and start borrowing and spending like a drunken sailor Green-Labor politician.

Dear reader, the signs are all there that a real SHTF moment draws near once again, a la 2008.

Only worse.

Much worse.

Can you say “stimulus”?

Wayne can.

Do you think our government will stop spending more than they bring in from taxing us when they smack into our new debt ceiling?

Not if new Treasury Secretary and former student of US Federal Reserve chairman “Helicopter” Ben Bernanke has anything to do with it.

We already know his views on endless debt.

Here’s what happened back in June, when Barnaby kicked up a stink over our government jacking up Australia’s debt ceiling on the sly:

On Wednesday in Senate Estimates, our [new Treasury Secretary] Martin Parkinson was challenged by Senator Barnaby Joyce over this utterly incompetent and reckless Labor/Green government’s decision, just before the Budget, to sneak in new legislation to raise our debt ceiling too.  By $50 Billion – a 25% increase. To a new all-time record debt level of $250 Billion.

Just like America. The only difference is the scale.

And what did Mini-me Parkinson have to say?

Nationals senator Barnaby Joyce wanted to know what would happen if the government was prevented from lifting its gross debt ceiling by a further $50 billion to $250 billion, as proposed in the budget.

“I couldn’t imagine that parliament would be so foolish,” Parkinson replied.

It would have “serious ramifications” for the operation of government.

So, dear reader, you already know what is going to happen in this country.

Green-Labor are firmly on course to bang up hard against our new debt ceiling, in 2012.

Even without another round or two of “stimulus” borrow-and-spending, to prop up the economy.

The all-knowing genius of Treasury Secretary Mini-me Parkinson will (of course) support the government in raising the debt ceiling even higher.

Our interest-on-debt bill of $1.59 million per hour will rise even higher.

And at some point … sooner rather than later, your humble blogger would suggest … the great external debt-driven forces of the USA, Europe, and/or China, will send the wave that collapses our own financial house of cards.

You can bet your falling house price on it.

“If you do not manage debt, debt manages you”
~ Barnaby Joyce, February 2010

Barnaby is right.

UPDATE: 12:41am

Ummmm, what was that I was saying? … “the signs are all there that a real SHTF moment draws near once again, a la 2008. Only worse. Much worse”

Greek Prime Minister George Papandreou plunged the euro and stock markets back into crisis on Monday [evening, northern hemisphere time] with a shock announcement that he would put a hard-fought rescue deal to a referendum…

All of Europe’s main stock markets registered sharp falls at the new risk of Greek default and contagion, with the German blue-chip DAX 30 stocks index slumping by more than five percent, French shares were down over four percent and London’s stocks fell more than three percent.

Athens witnessed a meltdown as stocks plunged 6.31 percent amid warnings that a rejection of a deal that is deeply unpopular in Greece would force it to leave the 17-nation bloc which uses the euro single currency.

“This is a referendum, in which they’re effectively voting on Greece’s euro membership,” Alexander Stubb, the Europe minister for Greece’s fellow single currency member Finland, told the commercial MTV3 network.

In a sign of the deep unease in European capitals, French President Nicolas Sarkozy and German Chancellor Angela Merkel were to hold talks by phone.

Italian Prime Minister Silvio Berlusconi, another leader under pressure as a result of the eurozone crisis, registered his sense of shock and annoyance.

“There is no doubt the Greek decision to hold a referendum on the European Union’s rescue plan is having a negative effect on the markets,” he said. “This is an unexpected decision that generates uncertainties after the recent European Council and on the eve of the important G20 meeting in Cannes.”

Italian stocks plunged 6.12 percent, led by big falls for banks…

In an online commentary, the Moneycorp currency broker said Papandreou had presented Greeks with “the ultimate Hobson’s Choice”.”

“They could either have their financial eyes ripped out by austerity measures or by the chaos that would follow the total bankruptcy of Greece and the wipe-out of its financial institutions,” it said.

Nicola Rossi, an opposition senator in Italy, warned the mounting cost of borrowing for the government in Rome had the potential to further scupper attempts to safeguard the euro.

Under last week’s deal, the eurozone plans to increase the stockpile of cash in a bailout fund to some one trillion euros but many observers suspect that it will be an insufficient firewall if a country of the size of Italy collapses.

“The Greek government’s decision has unleashed havoc on the markets. It wasn’t very well thought through,” Rossi, an economist, told SkyTG24.

“The problem is that Italy is the weak link in the euro chain so we are under particular scrutiny.”

“We all know that when our borrowing rate is close to seven percent our debt risks becoming unsustainable. The situation is extraordinarily serious.”

And from Bloomberg:

Greece’s referendum poses a threat to financial stability in the euro region and increases the risk of a “disorderly” default, Fitch Ratings said. Papandreou’s grip on power weakened before a confidence vote on Nov. 4 as six senior members of the ruling party called on the prime minister to step down, state- run Athens News Agency reported, without citing anyone.

The risk of a Lehman-style disorderly default now looms a bit larger than before, including some residual risk that Greece may leave the euro zone if it rejects the offer of orderly debt relief in exchange for harsh new spending cuts and reforms,” Holger Schmieding, chief economist at Joh. Berenberg Gossler & Co. in London, wrote in a note…

The cost of insuring against default on sovereign debt surged the most in almost four months with the Markit iTraxx SovX Western Europe Index of credit swaps linked to 15 governments jumping 29 basis points to 333 basis points. Contracts on Italy soared 46 to 498 basis points, France was up 16 at 192 and Germany climbed 10 to 94 basis points.

Guest Post – The Path Of Easiest Profit

20 Oct

Submitted by reader JMD*.

A lot of hullabaloo is made of the ‘flight to safety’ in ‘investor’ circles, a rising price of the US Treasury bond or rising exchange rate of the US dollar is a ‘flight to safety’. Suddenly ‘risk assets’ become a bit too risky & there is a rush to sell for the ‘safest’ securities. Even a rising gold price is considered a ‘flight to safety’ at times but then when the gold price falls it’s suddenly ‘risk off’. This scenario doesn’t make a lot of sense, either gold is safe or it isn’t & why are ‘investors’ worrying about US dollar devaluation one minute & eagerly bidding for it the next?

The whole concept of ‘safety’ is a false premise, maybe dreamed up by some turkey at the Bank of England decades ago, or some such, to obfuscate the real reason.

What drives the ‘money’ markets is not ‘safety’, or ‘risk on’ or ‘risk off’ but ‘profit‘. A good analogy is water flowing down a hill, it follows the path of least resistance. In the case of the ‘money’ markets, it can be described as the ‘money’ follows the path of easiest ‘profit’.

So what is this ‘profit’ & where is it coming from? The ‘profit’ is rising prices on financial ‘securities’ – bonds, notes & bills – particularly, though not exclusively of the government variety. The ‘profit’ is coming from government, through its central banking arm. As GSI’s Keith Weiner describes, US Treasury bonds (also Japanese, British, Australian, in fact government bonds of most ‘developed’ nations) have been in a ‘bull market’ since at least 1982. By ‘bull market’ is meant rising prices. As an ‘investor’ in government bonds you would have been unlucky not to have made a healthy ‘profit’ from your ‘governments’ at any time in the last 30 years, almost a generation.

Central banks are the ‘purveyors of profit’ in the ‘money’ markets, after all, they issue the currency, they are the market makers. There has been no more consistent ‘profit’ made than in government bonds for the last 30 years. How so? Easy, central banks either lend against or buy outright large amounts of government bonds for their own ‘portfolio’, they bid up the price (denominated in their own obligation) of government bonds. As I alluded to in the paragraph above however, central banks are not restricted to government bonds, they can & do manipulate ‘money’ market spreads by bidding for ‘private securities’. They can, if they wish, hand easy ‘profits’ to ‘investors’ in bank bills, corporate debt & even ‘equities’.

I’ll give you what I think are two good examples of the ‘money’ following the path of easiest ‘profit’, though I’m sure many more can be found.

The first is the recent earthquake & tsunami in Japan. Upon the news, the Yen began to soar against many other currencies, silver fell 6-7% in the space of a few hours, gold was well down, as were share- markets & not just in Japan. It is incongruous that a devastating natural disaster, killing tens of thousands of people & destroying property & livelihoods would have ‘investors’ rabidly bidding up the Yen – natural disasters lead to an increase in productivity? I read how it was Japanese institutions ‘repatriating’ their overseas investments for reconstruction & so on but a more logical explanation was a move to ‘front run’ the ‘big easy’, the Bank of Japan.

The Bank of Japan is notorious for its ‘easy money’ policies. I have no doubt that ‘investors’ speculated on the BoJ ‘easing’ in response to the disaster, that is, they would bid up bond prices & not just government bonds. The ‘investors’ would buy low & sell high.

If you go back to 1995 you will see similar moves in the Yen, right about the time of the devastating Kobe earthquake. Speculating on central bank ‘profit’ has been around for a while.

The second is the very recent announcement by the Fed of ‘Operation Twist’. Upon announcement of the Fed buying, so bidding up, longer term government bonds – gold, silver, oil, share-markets & currencies, in fact you name it, lost their bid against the US dollar & government bonds, particularly the 10 & 30 year. The reason is obvious, ‘investors’ speculating on easy ‘profits’ in the government bond market, as Keith Weiner says “engineered by the Fed”, the ‘investors’ would buy low & sell high.

Having said all this, there is one issue I haven’t addressed & that is as Keith Weiner also says, “the money comes from the capital account of the bond issuer. The speculator carries the bond on the asset side of his balance sheet. The issuer carries it on the liabilities side. No matter whether the issuer marks the liability to market, or not, the loss is taken.” The bureaucrats in Treasury & central banks are neither alchemists or gods, they cannot transmute lead into gold or water into wine. Certainly they can steal the “bread from the mouth of labour” but still, the loss must weaken the credit of the government, there is no way around this. Yet ‘investors’ still rush to bid for government bonds when they think, or know, central banks are handing them easy ‘profits’. This just reinforces my point, ‘investors’ care nothing for safety, the concept is bogus. ‘Profit’ is where it’s at.

It is tempting to speculate that the game will continue until no more ‘profit’ can be given, when the yield curve flattens to a point where it just cannot flatten any further. Can the government issue 30yr bonds with a 0% coupon (no ‘profit’ there) & their credit remain ‘money good’? I guess we’ll find out but I suspect the rising gold price since the Bank of Japan’s overnight rate hit 0% for the second time in 2000, is saying that it won’t.

[This article was originally published by the Gold Standard Institute]

Disclaimer: The views expressed in the above article are the author’s own. They should not be interpreted as reflecting any views held by Senator Barnaby Joyce, The Nationals, or by the barnabyisright.com blog author.

* Please see also JMD’s previous Guest Posts –

Infinite Money

The ‘Moneyness’ Of Debt

Why The RBA Sold Our Gold

Our Government Debt Crisis Is Already Here

Our Government *Officially* Does Not Know Who Owns More Than 60% Of Australia’s Debt

16 Jun

Who owns our nearly $200 billion public debt?

It’s a question we’ve asked before.

Back on the 14th of March last year (“Who Owns Our Debt?“), we discovered that “expert” SMH economic commentator Ross Gittins was wrong. He had claimed –

You thought the pollies had done little else but spar about deficits and debt? Sorry, different debt. They’ve been arguing about the public debt – the amount the federal government owes (mainly to Australians).

A search through the RBA’s Statistics tables easily proved Gittins wrong.  We found that at September 2009, an estimated 63.3% of public debt was held by non-residents of Australia.

On April 24th this year (Who Owns 73% Of Our Debt?), we checked again. At December 2010, 72.6% of public debt was estimated to be owed to non-residents of Australia.

The RBA’s data has been updated again. According to them, we owed an estimated 73.13% of our $183.794 billion in public debt (at March 2011) to non-residents.

So, just who are these “non-residents”?

Noone knows.

Not even the Australian Office of Financial Management.  That’s the government department that “manages Australian Government debt, cash and financial assets”.

Apparently, they do not know who owns over 60% of our total public debt.  Even though, according to the AOFM’s website:

The [Guarantee of State and Territory Borrowing Appropriation Act 2009] Act requires the AOFM to establish, and publish on its website each quarter, a register recording the beneficial ownership, by country, of all securities issued by the Commonwealth and any securities guaranteed by the Commonwealth that are issued by Australian States or Territories.

What’s the problem then?

In yet another example of incompetent Labor government bungling (or is it?), the Act mentioned …

contains no provisions to compel the provision of information to the AOFM by the beneficial owners of securities or by persons holding securities on their behalf.  This has limited the information available to the AOFM to form an opinion on the beneficial ownership of the securities.

Still, they don’t mind having a guess (emphasis added):

The figures in the tables represent opinions formed by the AOFM based on limited information.  The AOFM does not believe that they provide any indication of the likely distribution by country of the beneficial ownership of securities held by custodian and nominee companies, or are representative of the distribution of the beneficial ownership of the total securities on issue.

To ascertain the country of beneficial ownership of the securities covered by the legislation, the AOFM has reviewed where possible the ownership records of the registry or depository systems in which they are held.  The AOFM has reviewed the name of the accounts which are registered as holding these securities and from this information and knowledge of the business identified sought to form opinions on the country of domicile of the beneficial owners.  However this information is insufficient to ascertain beneficial ownership where securities are listed as held by custodians or nominees.

So, the Guarantee of State and Territory Borrowing Appropriation Act 2009, and the Public Register set up in accordance with it … is utterly useless.

But let us take a look at the Public Register’s most recently updated “information” anyway (click to enlarge):

Source: AOFM Public Register

Source: AOFM Public Register

As you can see, according to the AOFM’s “opinion”, 2.5% of our public debt is held “overseas not identified by country of beneficial ownership”.

And according to their “opinion”, a whopping 58.8 per cent of our public debt is held by “domestic custodian and nominee companies”.

In other words, by locally-registered ‘shelf’ companies with a PO Box address. Companies that exist in name only, and are officially owned by ‘nominees’ on behalf of unnamed, anonymous beneficiaries.

What a joke.

It’s official.

Labor has hocked our nation up to the eyeballs to … God only knows who.

Mind you, it is rather curious that the almighty RBA has somehow managed to “estimate” that 73% of our debt is held by “non-residents”.

How could they know that?

Especially when the AOFM’s official “opinion” (with a big disclaimer) is that they can only identify the country of beneficial ownership of just 38.7% of our debt.

I say that this Labor government, the AOFM, and especially the “independent” RBA, have an awful lot of explaining to do.

An ancient proverb says, “The borrower is the servant to the lender”.

I for one think that the citizens of Australia have the right to know exactly who our government is rendering us as servants to obey.

Why They Are Planning To Steal Our Super, Explained In 4 Simple Charts

11 Jun

* All charts click to enlarge

1. Commonwealth Government auctions of Treasury Bonds (long term debt) –

Source: Australian Office of Financial Management (AOFM)

2. Commonwealth Government auctions of Treasury Notes (short term debt) –

Source: Australian Office of Financial Management (AOFM)

3. Australian Banks’ $15 Trillion in Consolidated Off-Balance Sheet “Business” (92.3% derivatives) versus $2.66 Trillion in On-Balance Sheet “Assets”

$2.66 Trillion in "Assets" versus $15 Trillion in Off-Balance Sheet "Business" (derivatives)

4. Interest-on-debt, versus government headline budget surplus/deficits –

Sources: RBA Statistics; Commonwealth Final Budget Outcomes; Budget 2011-12

A quick, important note about that last chart.

The last 4 sets of columns (year 2010-11 through 2013-14) are only Labor’s “Estimates” (E) and “Projections” (P).

Since Labor came to power, every year their official budget “estimates” and “projections” have ended up, in the Final Budget Outcome, worse than originally “estimated” and “projected”.

For example, their “estimated” and “projected” Interest-on-debt blew out by $5.69 Billion in just 6 months, between the Mid-Year Economic and Fiscal Outlook (MYEFO) report in November 2010, and the recent May Budget 2011-12.

For more detailed information showing why we’ll never get to see all of our super, please read the following:

“Liberal Party’s Sneaky Plan To Steal Your Super To Pay Labor’s Debt”

“No Super For You!!”

“Budget Blowout: Interest-on-debt $1.59m Per Hour”

“How Gillard’s Use Of The Credit Card Makes Rudd’s GFC Spending Spree Look A Model Of Financial Prudence”

“How Wayne ‘Franked’ Another $20 Billion”

“Our New Treasury Secretary Is America’s Mini-me”

“Fresh Evidence Our Banks In ‘Race To The Bottom’ Means You Can Kiss Your Super Goodbye”

“How Australia Will Look When The SHTF”

“Tick Tick Tick – Aussie Banks’ $15 Trillion Time Bomb”

What’s Another $2 Billion Anyway, I’ll be Retired On A Taxpayer-Funded Pension

28 May

How’s that borrow-our-country-into-endless-servitude-to-foreign-lenders caper going, Wayne?

Four weeks ago – $2.2bn more debt.

Three weeks ago – $2.4bn more debt.

Last week – $2.75bn more debt.

This week – $2.5bn more debt.

Next week – $2bn more debt.

Wayne’s well on track to shatter the glass of Labor’s newly revised $250 Billion debt ceiling by around the 3rd week of August.

That’s just after Aug 2nd, when the US Treasury reckons the US could default on its debts.

Guest Post – The ‘Moneyness’ Of Debt

27 May

Submitted by reader JMD.

I will express a view here that is, as far as I can tell, being laid out by few others. I can’t claim the idea as my own, rather I have put this together based on the thoughts of Doug Noland, my favourite economic analyst by a country mile, who publishes the Credit Bubble Bulletin. I have taken the liberty of lifting quotes directly from his articles, they are in italics throughout my article, though I may have changed his wording just a little to fit in with the flow.

Readers of the Gold Standard Institute know that money is what extinguishes all debt, nevertheless, credit1 can be considered a monetary equivalent or ‘money good’, take for example, Real Bills that mature into gold. Inextinguishable debt, as in irredeemable dollars and dollar denominated debt, are not money since they are, well… inextinguishable debt. Despite this contemporary irredeemability, credit is still considered to be in a dynamic state of ‘moneyness’, driven by the marketplace’s perception of safety and liquidity, and any meaningful definition of contemporary ‘money’ must include government debt instruments.

The situation prevailing today is that key developed economies are locked into a perilous cycle of massive non-productive government debt expansion. Rather than the global money markets being composed of Real Bills, generated through the drawing of short term bills against consumer goods actually required by consumers, we have money markets where for nine quarters now, government finance has completely dominated system credit creation. These ‘marketable’ debt securities now absolutely dominate the world.

Just how massive has this increase in government debt issuance been? I draw your attention to the charts below.

As you can see, government debt issuance has reached levels never heretofore imagined. UST issuance reached almost $1.5 trillion in 2009. While the dollar amount of Australian government debt issuance is small in comparison to the US, the pattern of expansion is the same. I have included Australian government debt issuance back to 1985 to give some perspective of historical issuance. I don’t have figures pre 1996 for UST’s, nor 2010. Nevertheless, you get the picture.

Why the fuss? Because it is the ‘moneyness’ nature of government obligations that they enjoy special treatment in the marketplace. Readers of the Gold Standard Institute also know that when it comes to the ‘moneyness’ of credit it’s not just quantity but quality that counts. I think it safe to presume that government debt has not improved in quality since 2008, yet issuance has exploded with little perception that government debt is being mispriced, over-issued, and misdirected. There is an ever expanding gulf between market perceptions of ‘moneyness’ and the true underlying state of government credit. In simpler terms, government credit is a bubble, a precarious Credit Bubble at the heart of our monetary system. Just as the US financial system doubled total mortgage debt in just over six years during the mortgage/Wall Street finance bubble with little perception of the underlying quality of U.S. mortgage credit, the financial system is now on track to double federal debt in about four years. The situation is no different in Australia and I doubt it would be different in most other ‘developed’ countries.

There is only one true arbiter of the value of government debt, its only extinguisher… gold. Irredeemable dollars, being the obligation of the central bank – not money, cannot extinguish government debt. Is gold reflecting the expanding gulf between perceptions of moneyness and the true quality of government credit? Should holders be loaning their money – gold – for irredeemable government obligations, as if ‘buying’ mortgage credit at the height of the Wall Street bubble? Should the dollar price of gold be falling?

I think not. And we all know what happens to bubbles.

Note: 1. Remember, one person’s debt is another’s credit. I use the terms interchangeably.

Source - Australian Office of Financial Management (AOFM)

Source - Prudent Bear (prudentbear.com)

Disclaimer: The views expressed in the above article are the author’s own. They should not be interpreted as reflecting any views held by Senator Barnaby Joyce, The Nationals, or by the barnabyisright.com blog author.

* Stay tuned for JMD’s follow up post, on the Reserve Bank of Australia’s sale of 2/3rd’s of Australia’s gold during the Asian Financial Crisis of the late nineties.

Labor’s Building the Australia Devolution

21 May

Labor’s  “Building the Australia Devolution” continues.

Three weeks ago – $2.2bn more debt.

Two weeks ago – $2.4bn more debt.

Last week – $2.75bn more debt.

Next week – $2.5bn more debt.

Labor seem determined to shatter the glass of their newly revised $250 Billion debt ceiling.  At this pace, possibly by around the 3rd week of August.

That’s just after Aug 2nd, when the US Treasury reckons the US could default on its debts.

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