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5 Personal Comments on current debt crisis facts not political fantasies
07-24-2011, 02:16 AM
Post: #1
5 Personal Comments on current debt crisis facts not political fantasies
Since I deal in facts not a make believe politically created crisis, lets look at facts

1) Crisis in Treasury Debt Market?

The latest Treasury debt auction - Debt dated 7/21/2011 - 28 day T-bills:
U.S. Debt offered: $28 billion
Bids (competitive and non competitive): $125.8 billion (4.49x more demand for debt than available)
Highest interest rate bid 0.005%
Median interest rate 0% (per Treasury rules 50% or more accepted tenders at or below this rate.)

Yes folks, interest free 0% cost of borrowing by the Treasury with huge demand even at no interest to hold safest debt in the world. In the last few weeks with European debt concerns some short term Treasury rates in the after market actually went negative!

Yet, supposedly we have a "debt crisis."

10-year Treasuries are back just under 3% near all time low rates.
7/13/2011 Latest 10-year action median yield 2.891% $21 billion available with bids for $66.6 billion (3.17x coverage ratio)

Before, during and after "QE2" the coverage ratio across all Treasury terms was about 3 times the amount offered. QE2 seemed to make no difference.

The bond market doesn't take seriously the threat of a rating downgrade or even a short-term default, as the U.S. is seen as by far the safest of any sovereign debt in the world. However, if this view changes it has the potential for a Lehman like global crisis. Remember before TARP and the Fed action that fateful night when even commercial paper was frozen and money market funds were set to plummet in value.

2) Fallout if Debt Ceiling talks fail

First of all the people that say we won't default because we can easy just pay interest totally ignore (or are ignorant) about debt that is due for which new debt has to be issue before the old debt can be paid.

On August 4th there is $87 billion of U.S. debt due. It is not known if from Aug 2-Aug 4th enough revenue will come in to pay this maturing debt. While the repayment will decrease the overall debt by the same amount, Treasury first has to issue new debt in order to pay off the maturing debt.

The Federal Reserve has no authority to step in and buy new debt or pay maturing debt, only existing debt in the public market.

The last ditch savior may be a constitutional crisis trying to invoke the 14th Amendment. But the Supreme Court may immediately intervene as it does not have solid legal footing. Or a legal battle could go on for years - we are simply on totally uncharted grounds.

3) If avoid default but no debt limit increase entire govt may have to shut down.

Even if don't default on debt, all payments at risk including social security checks.

As of Saturday 7/23 it appears (per WSJ) government computers that crank out checks can not selectively stop payment on just certain payments (social security, workers, contractors, medicare, medicaid payment to states etc) but will have to stop ALL payments to everyone, unless computers can be reprogrammed. Military pay is handed by a separate system that could keep paying if the funds are available.

The U.S. has never faced this crisis since Congress has never been so irresponsible to create a self imposed crisis where only some payments can be met. The debt limit has always been increased by both parties as needed to meet obligations.

4) Corporate earnings and executive pay soars with very low tax burden on the most wealthy

Earnings overall are beating expectations again as 2nd quarter reports come in. Most large companies are making at or near record profits. Corporate taxes actually collected (not top rate) are the lowest of 32 OECD member countries (most large developed nations).

As corporate profits reach record levels, executive compensation is higher than pre-recession levels. Million dollar executives continue to enjoy some of the lowest tax burden in the world and historically in the U.S..

5) We Must Reduce Deficit!

"We must reduce the deficit" really means "We must cut jobs." Whether you cut govenment jobs or federal contractors or "widget" makers, it all takes money out of the economy and creates job losses in the private sector not just govenment workers

We should be creating more jobs not reducing them. Many job seekers and especially young people don't have skills for jobs available which is why we have to go overseas for those with math and science skills from a better educational system who are more motivated to have a better education. One of the hardest hit is the constuction industry. The proposed "Infrastructure Bank" would utilize construction workers in a private-govt combined program.

According to the Economic Policy Institute, just a proposed $196 billion haircut from federal non defense discretionary spending over the next two fiscal years projects this could remove 900,000 jobs from the economy next year and 1.3 million jobs in 2013.

Public spending has a role to bridge the gap. Virtually all non partisan economic studies agree the "Stimulus" saved or created 3-3.5 million jobs just as advertised. But the unemployment rate grew since the stimulus was not large enough to create more jobs as at that time no one realized how deep the recession was.

Part of this stimulus spending was also offset by the profits made by TARP in bailing out the banks - who basically are still not lending to small businesses that what to expand and hire more workers.

There is the view that cutting the budget with its related loss of jobs is more important than job creation spending to bridge gap to when private industry hires many more workers.

We have been in a slow recovery since June 2009 with more than 1 million of private sector jobs created. Even with aid to local governments from the stimulus,we have had about 500,000 government job losses. Even without further budget cuts state and local jobs (teachers, police etc.) will decline as the aid from stimulus spending expires.

Depression Comparison
We need to remember what happened in the Depression. Franklin D. Roosevelt tried public works, farm subsidies, and other devices to restart the economy, but never completely gave up trying to balance the budget. Roosevelt never spent enough to bring the economy out of recession until the start of World War II.

Massive war spending (U.S. borrowed the equivalent of $10.5 Trillion to finance) resulted in unemployment ending with over-employment. The U.S. had its greatest economic boom ever — by far. It doubled output in six years which dramatically reduced the debt (as a % of GDP) with excess revenue from high employment and prosperity.

Footnotes - Examples of latest corporate earnings headlines with low tax burden compared to most of the world:
From last week:
Apple Delivers Blowout Results as iPad Sales Nearly Triple.
Intel Crushes Expectations.
BlackRock white-hot as quarterly profits soar.
Harley (Davidson) Net Roars On U.S. Rebound.
Coca-Cola Lifted by Overseas Sales.
American Express 2Q Profit Up 31% On Record Spending by Affluent
Microsoft 4Q Net Jumps 30% On Broad Gains; Results Top Street
General Electric beats earnings estimate, led by strength at GE Capital; backlog at record

From prior week:
Alcoa showed recovery on track globally as earnings about doubled and revenue up 27%, beating estimates.
Google: "Google surge highlights tech rally" Morningstar headline of 7/15/11 as it beat earnings and revenue estimates.Revenue increased 24% y/y and EPS gained 36%.
Yum - The owner of KFC, Pizza Hut and Taco Bell chains raised its full-year earnings forecast, seeing growth of at least 12%. It continues to grow strongly in China and other emerging markets, while U.S. results were "very disappointing." Yum reported same-store sales jumped 18% in China and 2% in its international division excluding China. Operating profit in China increased 31% from a year ago, but dropped 28% in the U.S. (Dave notes China's GDP growth rate slowed in 2Q to "only" 9.5% but is projected to slow to "only" 9%!)
Marriott International - second-quarter earnings climbed 13% on strong growth abroad, while the U.S. market benefits from improved lodging demand and limited supply, which have helped boost occupancies and room rates.
J.P. Morgan Chase - $5.43 billion in quarterly profits beat estimates (but most of profit is from its investment banking division not by making small business loans.)

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