6/29/2011 Portland, Oregon – Pop in your mints…
Much has happened in the financial markets in this past week, and much will happen in the coming weeks. But perhaps what is most notable is what has not happened.
Namely, the US Congress has not raised its self imposed credit card limit. For an entity that is already $14.3 Trillion in debt ($4 Trillion of which reportedly comes due in the next 12 months) with no realistic plan to pay for it, this is suicide. What are they thinking?
The two parties are in agreement one count, they need to save $2 Trillion dollars over 10 years. Why this sum has been identified as the cure for what ails the country’s finances is anybody’s guess. Unfortunately, but not surprisingly, there is no agreement as to how to get there.
Where will they find $2 Trillion? Tax the rich, screams Obama, repeating the eternal populist sentiment. Stop spending, say the Republicans, using the circumstances to make a push for “limited government.”
Editors Note: There is no hope for limited government with the current two party system in place, therefore the Republican’s stance is entirely a façade.
The President has taken the extraordinary step of asking Congress not to recess over the Fourth of July, as is their custom, calling their lack of agreement akin to his daughters not completing their homework. While the President makes a quaint metaphor, we believe that Obama’s daughter’s homework is probably more challenging than Congress’s task of balancing the budget.
Balancing a budget is simple. It just takes courage. It seems that courage is in short supply in Washington DC these days.
Without internal fortitude to press the Americans along, a little external pressure is beginning to be applied. First, the Treasury’s latest 7 year bond auction did not go as well as planned as investors demanded 2.43% to hold US paper for a sabbath cycle. Without the FED at the table, it is hard to imagine how it could have gone well. Bond Market participants are beginning to wring their hands.
Then comes word that the IMF is beginning to apply pressure, eloquently reminding the Americans of what they should do and why they should do it. It is worth noting that the IMF appears to be the last to know about such things so we will excuse their apparent surprise at the lack of inaction (they are most likely not informed MINT readers like yourself):
“…the federal debt ceiling should be raised expeditiously to avoid a severe shock to the economy and world financial markets,”
Yeah, tell us something we don’t know. And then, true to their holier than thou, infallible status, they give the Americans advice on how to do it:
“We see early political agreement on a comprehensive medium-term consolidation plan based on realistic macroeconomic assumptions as a cornerstone of a credible and cyclically appropriate fiscal adjustment strategy,”
Great! Thanks for the incomprehensible and totally impractical advice. This type of drivel simply solidifies our opinion that the IMF is a worthless institution and could be categorically ignored if it were not so insistent upon meddling in financial matters on a global basis.
Meanwhile, we are getting to see first hand what happens to a country that gives up control over its currency and then listens to the IMF for advice and is forced to take a loan from them. Greece, is giving the world a glimpse at how popular austerity is with the masses.
The scene that was carried out in the Middle East in the Spring is set to take place in Europe and England over the summer months.
How long until it crosses the Atlantic?
Another event that may occur as interested parties begin to reduce exposure to US Treasury debt is a liquidity crunch that will start in early July. Apart from the debt ceiling uncertainty, the Dodd-Frank financial reform rules are set to begin to do their damage to the financial system on July 15th.
If they do not forestall these rules as many banks are begging them to do, the US and global economy will take their first tender steps into the great unknown, a world without political or real capital to act a a backstop for failures.
It will be dangerous and exciting. And, just like a fireworks show, will be best enjoyed from a safe distance. Keep your money close at hand, meaning out of banks and preferably in precious metals or anything tangible, and enjoy the show!
Key Indicators for Wednesday, June 29, 2011
Corn Price per Bushel: $6.98 MONETARY POLICY IS NOT WORKING
Gold Price Per Ounce: $1,511 BENEFITING FROM PERMANENT UNCERTAINTY
M2 Monetary Base: $9,086,900,000,000 YIKES!!!
*See the MINT Perceived target Rate Chart. This rate is the FED Target rate with a 39 month lag, representing the time it takes for the FED Target rate changes to affect the real economy. This is a 39 months head start that the FED member banks have on the rest of us on using the new money that is created.