Tag Archives: us debt default

Don’t Bet The House On China

4 May

An excellent and timely article by Karen Maley in today’s Business Spectator (reproduced here in full):

Kevin Rudd’s resource super profits tax has one massive risk – that commodity prices collapse before he gets to collect one cent of it.

Yesterday, the influential forecaster, Marc Faber joined those warning of problems ahead in China. “The market is telling you that something is not quite right”, he said in an interview on Bloomberg television. “The Chinese economy is going to slow down regardless. It is more likely that we will even have a crash sometime in the next nine to 12 months.”

On Sunday – as Kevin Rudd and Wayne Swan were announcing their new resources tax – China’s central bank made another attempt to dampen property market speculation. It lifted its reserve requirement ratio by a further half a percentage point, so that most Chinese banks will now have to hold 17 per cent of their deposits on reserve.

But this latest increase in the reserve ratio will likely prove as ineffective as the two previous rises in January and February this year. Many believe the Chinese property bubble will continue to expand for as long as the Chinese government maintains interest rates below the rate of inflation.

And that’s the core of the problem. The Chinese government is reluctant to increase interest rates because it risks exposing the huge fault lines that exist in the economy.

Over the past decade, China has built factories and expanded its manufacturing capacity in the expectation that the United States and Europe would continue to demonstrate a robust appetite for Chinese-produced goods. But western demand for Chinese products slowed in the wake of the financial crisis, leaving the Chinese economy with substantial overcapacity in manufacturing.

The problem was exacerbated during the financial crisis. With Chinese exports plunging, the Chinese government launched a massive economic stimulus program, equivalent to around 14 per cent of the country’s GDP. It also ordered Chinese banks to lend, and instructed Chinese state-owned companies to borrow.

The program had the desired result. The Chinese economy grew at an 11.9 per cent annual clip in the first three months of the year, the fastest pace since 2007. And we benefited too, because this strong Chinese growth pushed up the prices of our commodity exports, such as iron ore and coal.

But there are huge concerns over how the Chinese stimulus money was spent. Provincial governments, under instructions from Beijing to reach specified growth targets, undertook massive construction projects that have resulted in a glut of commercial office space, and huge shopping malls that are near-vacant. And much of the increase in bank lending was funnelled into property market speculation, pushing up housing prices to astronomic levels.

The Chinese government has tinkered with various measures to contain its property bubble – increasing the reserve requirement, lifting the minimum deposit that home buyers must have before they’re allowed to borrow, and urging banks to monitor their risks.

But it is loathe to raise interest rates for fear that it will cause mass defaults among manufacturers and property developers, leading to huge problem loans in the banking system.

Eventually, however, an end-point will be reached. Either the Chinese government will raise interest rates, or the property market bubble will collapse under its own weight. At that point, commodity prices will plummet, slashing the profits of the big mining companies.

And if this happens before 1 July 2012 when the new tax regime for the miners comes into effect, Rudd is unlikely to ever see a cent of his new resource super profits tax.

Betting the house on China is exactly what the numbskulls in the Rudd Labor government, the Treasury, and the RBA are doing.

Please take some time to review some of the many earlier articles in this blog, showing how the likes of Treasury secretary Ken Henry and RBA Governor Glenn Stevens have declared that the GFC is ‘over’, and forecast that (thanks to China) we are all set for a ‘period of unprecedented prosperity’ lasting until 2050.

What is vital to bear in mind always, is that these are the very same incompetents who all completely and utterly failed to foresee the onrushing Global Financial Crisis in 2008… even though its first wave had already broken in the USA and on global share markets during 2007!

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Roubini: Rising Sovereign Debt Leads to Defaults

30 Apr

Nouriel Roubini, one of just a dozen economists who publicly forecast the GFC, and who recently declared that ‘risky rich’ countries are in greatest danger of default, comments again on the rapidly spreading sovereign debt crisis (from Bloomberg):

Nouriel Roubini, the New York University professor who forecast the U.S. recession more than a year before it began, said sovereign debt from the U.S. to Japan and Greece will lead to higher inflation or government defaults.

“The bond vigilantes are walking out on Greece, Spain, Portugal, the U.K. and Iceland,” Roubini, 52, said yesterday during a panel discussion on financial markets at the Milken Institute Global Conference in Beverly Hills, California. “Unfortunately in the U.S., the bond-market vigilantes are not walking out.”

“The thing I worry about is the buildup of sovereign debt,” said Roubini, a former adviser to the U.S. Treasury and IMF consultant, who in August 2006 predicted a “painful” U.S. recession that came to fruition in December 2007. If the problem isn’t addressed, he said, nations will either fail to meet obligations or see faster inflation as officials “monetize” their debts, or print money to tackle the shortfalls.

Roubini, who teaches at NYU’s Stern School of Business, told attendees at the Beverly Hilton hotel that “Greece is just the tip of the iceberg, or the canary in the coal mine for a much broader range of fiscal problems.”

“Eventually, the fiscal problems of the U.S. will also come to the fore,” Roubini said during the panel discussion. “The risk of something serious happening in the U.S. in the next two or three years is going to be significant” because there’s “no willingness in Washington to do anything” unless forced by the bond markets.

Barnaby Joyce began trying to draw attention to the dangers of growing sovereign debt – warning of a coming day of reckoning in the USA and Europe and here in Australia – as far back as October 2009. As I have shown in countless posts on this blog, many leading economists, financiers, and informed commentators in other countries have been raising almost exactly the same concerns as Barnaby.

Few in Australia chose to listen.

Instead, Barnaby was ridiculed by the government and the media for every minor gaffe or slip of the tongue, his every statement misquoted or twisted out of context. With the ultimate result that he lost his position as opposition Finance spokesman thanks to the relentless attacks on his economic credibility. Despite his being better qualified to comment on finance than the entire Rudd Government economic team.

Only weeks later, those who do choose to look and listen can see ever more clearly… Barnaby Is Right.

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Default Possible On ‘Stunningly Small’ Debts

1 Apr

Recently Professor Ken Rogoff, former chief economist for the IMF, warned that ballooning debts could cause “a bunch of sovereign defaults”.

He has also warned that China is in a bubble that will burst within 10 years, sparking a regional crisis.

In 2008 he correctly forewarned of the possibility of large bank failures in the USA.

Now his latest research offers very important insights for all Australians who believe the Rudd Labor “spin”, that our national debts are very low, and no cause for concern.

From the New York Times:

Professor Rogoff, who has spent most of his career studying global debt crises, has combed through several centuries’ worth of records with a fellow economist, Carmen M. Reinhart of the University of Maryland, looking for signs that a country was about to default.

One finding was that countries “can default on stunningly small amounts of debt,” he said, perhaps just one-fourth of what stopped Greece in its tracks. “The fact that the states’ debts aren’t as big as Greece’s doesn’t mean it can’t happen.”

Also, officials and their lenders often refused to admit they had a debt problem until too late.

“When an accident is waiting to happen, it eventually does,” the two economists wrote in their book, titled “This Time Is Different” — the words often on the lips of policy makers just before a debt bomb exploded.

Barnaby Joyce has been ridiculed up hill and down dale since late 2009, for daring to raise questions about the unbelievably huge US debt (see chart here), and Australia’s own ever-growing national debts.

Professor Rogoff’s research shows that even a debt that is only one-fourth of Greece’s can be enough to cause a sovereign default.

In December, Greece’s debt was $482bn.

Australia’s public debt is $131.682bn.  And growing at around $2bn per fortnight.

Barnaby is right.

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Treasuries Sell-Off Raises US Debt Fears

31 Mar

From the UK’s Telegraph:

Investors are braced for a further sell-off in US Treasuries after dramatic moves last week raised fears that the surfeit of US government debt is starting to saturate bond markets.

The yield on 10-year Treasuries – the benchmark price of global capital – surged 30 basis points in just two days last week to over 3.9pc, the highest level since the Lehman crisis. Alan Greenspan, ex-head of the US Federal Reserve, said the abrupt move may be “the canary in the coal mine”, a warning to Washington that it can no longer borrow with impunity. He said there is a “huge overhang of federal debt, which we have never seen before”.

David Rosenberg at Gluskin Sheff said Treasury yields have ratcheted up 90 basis points since December in a “destabilising fashion”…

Mr Rosenberg said the yield spike recalls the move in the spring of 2007 just as the credit system started to unravel.

Looming over everything is the worry that markets will not be able to absorb the glut of US debt as the Fed winds down its policy of bond purchases, starting with an exit from mortgage-backed securities. It currently holds a quarter of the $5 trillion of the MBS market.

The rise in US bond yields has set off mayhem in the 10-year US swaps markets. Spreads turned negative last week, touching the lowest level in 20 years.

Barnaby Joyce has been warning of the dangers of sovereign debt levels – and in particular the massive US debts – since October 2009. He has been ceaselessly ridiculed by the Labor government, and the mainstream media, for daring to say so.

Please take the time to browse the dozens of articles on this blog, from all around the world, citing leading economists, financiers, traders, and commentators – some of whom predicted the first round of the GFC. Not one of our economic “authorities” did.

Barnaby Joyce is far from the only one who is questioning our economic future, due to massive (and rising) sovereign debt levels, especially in the USA, UK, and Europe.

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Only US Collapse Can Save The Euro

30 Mar

From Zerohedge:

For once, some actually good insight from a CNBC guest. Philip Manduca, Head of Investment of the ECU Group, discusses Greece and the very severe implications of what the final outcome will look like. “Trichet (Ed: President of the European Central Bank) said the Greeks are crooks, and they’ve been lying about the numbers. There is a deeply embedded corruption within the Eurozone. Combined with the endemic European socialism and there is just no way you are going to get spending cuts and tax raises and maintain a GDP that makes any sense of the percentage aspect of debt to GDP. So the whole show is wrong. This is an intractable situation, this is going to continue on and on. The only hope for the Eurozone, and the Euro as a currency, is that someone takes the spotlight soon, and that may be the United States.”

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We’re About To Discover That Sovereign Nations Can Go Bust Just Like Companies

30 Mar

From BusinessInsider:

Bill Gross (Ed: Head of PIMCO, the world’s largest bond trading firm) knocks the halo off of sovereign bonds in his latest March outlook.

He highlights how sovereign debt has been struck with more bad news than corporate debt lately.

While sovereign credit used to be generally considered more secure than that of private companies, suddenly the default of nations such as Greece, the U.K., or even Japan seems on the table, while that of many strong corporates remains remote.

What’s happening, according to Mr. Gross, is that government bonds are starting to look just like corporate bonds, rather than existing on some privileged less-risky peer as in the past. Because it’s anything goes and anyone can default in the new ‘unibond’ market.

Bill Gross commented that:

Government bailouts and guarantees such as those evidenced and envisioned in Dubai and Greece, as well as those for the last 18 months with banks and large industrial corporations across the globe, suggest a more homogeneous “unicredit” type of bond market. If core sovereigns such as the U.S., Germany, U.K., and Japan “absorb” more and more credit risk, then the credit spreads and yields of these sovereigns should look more and more like the markets that they guarantee. The Kings, in other words, in the process of increasingly shedding their clothes, begin to look more and more like their subjects. Kings and serfs begin to share the same castle.

Barnaby Joyce began raising questions about the possibility of ‘default’ by nations such as the USA last year. He was roundly ridiculed by all and sundry for doing so.

Unfortunately, no one raised the point that there is more than one way that a sovereign ‘default’ can occur. Historically, the most common form of ‘default’ is simply where the sovereign nation inflates away its debts. How? By destroying the value of its own currency:

Thus there are no longer any holy bond cows left in this world.

Heck, even U.S. bonds are subject to ‘stealth-default’ risk, which is simply the eating away of bond value over time via inflation and dollar depreciation.

Barnaby is right.

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Waking Up To Sovereign Debt

25 Mar

From Business Spectator:

The current Greek debt crisis is likely to be only the first of a series of disruptions this year, as global financial markets inevitably shift their attention to the sovereign debt problems of advanced economies.

These problems were magnified by the global financial crisis. Faced with a collapse in consumer spending, and the risk of widespread bank failures, governments opened their cheque books while central banks printed trillions of dollars.

This had the effect of stabilising the financial system, but we now have to deal with consequences of these actions, and particularly with the deterioration in the balance sheets of most advanced economies.

The sovereign debt problem is not confined to the so-called PIIGS of Europe (Portugal, Ireland, Italy, Greece and Spain). Markets are also unnerved by the massive build-up of government debt in the United Kingdom and Japan. And that’s without mentioning the huge budgetary problems facing debt-laden US states, such as California.

There are various doomsday scenarios as to how this situation will ultimately play out.

The first is that countries will start off by heading in the direction that Greece is currently taking. That is, governments will attempt to repair their balance sheets by slashing their spending, and pushing up tax rates.

But the worry is that such budgetary measures will prove counter-productive. The countries that follow this path will end up with their economies plunging into recession, and with an outbreak of social unrest. And as their economies shrink, their tax revenues will dry up, which means that they won’t be able to pay the interest bills on their massive debt.

Eventually the situation will become untenable, and central banks will be forced to respond to the situation by printing more and more money in order to create enough inflation to erode the value of the debt.

Under this scenario, massive central bank money printing means ending up with hyperinflation, along the lines of the Weimar Republic, or, more recently, Zimbabwe. In which case the price of gold explodes, with some predicting it could reach $5,000 an ounce. Prices for other commodities also soar, and stock prices are also likely to remain high, as it is assumed that central banks will always keep interest rates below the rate of inflation.

The alternative fear is that the world ends up looking a lot more like Japan than Zimbabwe, and the main struggle is against deflation.

Under this scenario, the determination of consumers to reduce their debt levels overwhelms government efforts to stimulate the economy. What’s more, the deleveraging process causes demand to collapse, and this puts pressure on labour costs. Households respond to this further deterioration in their earnings by tightening their belts even further, resulting in an ongoing deflationary cycle.

One of the main arguments of this camp is that even though central banks continue to print huge amounts of money, it won’t lead to inflation because the banks are not lending the money. Instead, total credit in the economy will contract as consumers, and businesses, try to repay their existing debts, rather than taking out new loans.

According to this view, the price of gold and other commodities will collapse. The drop in demand will also put pressure on the profit margins of businesses, and this will push global sharemarkets lower, even though interest rates will be kept close to zero.

Of course, it’s likely that neither of these two extreme views will play out in their entirety. But we are likely to see markets oscillate between these two opposing fears as worries about sovereign debt continue to climb this year.

Got to love that blind optimism in the final paragraph.

It’s interesting to observe how the power of denial encourages an otherwise rational and sensible commentator to set aside all the evidence of where things are clearly headed, simply because the end of this road looks calamitous –

"She'll Be Right, Mate"

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IMF Warns Wealthiest Nations About Debt

22 Mar

From the New York Times:

In a speech at the China Development Forum in Beijing, the I.M.F. official, John Lipsky, who is the deputy managing director, offered a grim prognosis for the world’s wealthiest nations, which are at a level of indebtedness not seen since the aftermath of World War II.

For the United States, “a higher public savings rate will be required to ensure long-term fiscal sustainability,” Mr. Lipsky said.

Mr. Lipsky said the average ratio of debt to gross domestic product in advanced economies was expected this year to reach the level that prevailed in 1950. Even assuming that fiscal stimulus programs are withdrawn in the next few years, that ratio is projected to rise to 110 percent by the end of 2014, from 75 percent at the end of 2007.

Indeed, the ratio is expected to be close to or to exceed 100 percent for five of the Group of 7 countries — excluding Canada and Germany — by 2014.

Mr. Lipsky warned governments not to try to inflate their way out of their debts.

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Junk Bond ‘Apocalypse’ in 2012

18 Mar

From the New York Times:

When the Mayans envisioned the world coming to an end in 2012 — at least in the Hollywood telling — they didn’t count junk bonds among the perils that would lead to worldwide disaster.

Maybe they should have, because 2012 also is the beginning of a three-year period in which more than $700 billion in risky, high-yield corporate debt begins to come due, an extraordinary surge that some analysts fear could overload the debt markets.

With huge bills about to hit corporations and the federal government around the same time, the worry is that some companies will have trouble getting new loans, spurring defaults and a wave of bankruptcies.

The United States government alone will need to borrow nearly $2 trillion in 2012, to bridge the projected budget deficit for that year and to refinance existing debt.

The apocalyptic talk is not limited to perpetual bears and the rest of the doom-and-gloom crowd.

Even Moody’s, which is known for its sober public statements, is sounding the alarm.

“An avalanche is brewing in 2012 and beyond if companies don’t get out in front of this,” said Kevin Cassidy, a senior credit officer at Moody’s.

Private equity firms and many nonfinancial companies were able to borrow on easy terms until the credit crisis hit in 2007, but not until 2012 does the long-delayed reckoning begin for a series of leveraged buyouts and other deals that preceded the crisis.

The attacks on Barnaby Joyce’s economic credibility began in late 2009, when he publicly questioned whether the US could default on its debts.

Take a look at this chart.

It’s from the US Federal Reserve, using data sourced from The White House Office of Management and Budget. It shows the US Budget surplus / deficit for the last 108 years. But only up to September last year.

It’s far worse today.

Barnaby is right.

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US, UK To Lose AAA Credit Ratings

16 Mar

From Bloomberg:

The U.S. and the U.K. have moved “substantially” closer to losing their AAA credit ratings as the cost of servicing their debt rose, according to Moody’s Investors Service.

“Those economies have been caught in a crisis while they are highly leveraged,” (Moody’s managing director sovereign risk in London, Pierre) Cailleteau said, referring to the level of private and public debt as a percentage of gross domestic product.

Visit the website of Australian Professor Steve Keen, to learn why unprecedented private debt is huge threat to the Australian economy. Even greater than the Rudd government’s ever-growing public debt.

* On April 15th through 23rd, I will be joining Professor Keen in his 230km “Keenwalk” from Parliament House to Mount Kosciuszko, in protest against Australia’s property mania that has been driven directly by insane – and in my personal opinion, immoral – Federal Government and RBA policies, that have enticed hundreds of thousands of financially vulnerable Australians to take on large mortgage debts.

Please consider joining us, for the whole trek or even just for an afternoon section of the walk.

If you’d care to assist a genuinely worthy cause, then please consider sponsoring Professor Keen, or indeed myself. Funds raised will support the wonderful charity Swags For Homeless.

Thanks!

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