Tuesday, June 02, 2009

A sustainable economy can't be based on debt.

Reuters News Service
Rising U.S. bond yields may spark Credit Crisis II
Fri May 29, 2009 2:43pm EDT
By John Parry - Analysis

NEW YORK (Reuters) - The global financial crisis may morph into a second, equally virulent phase where borrowing costs rise again, hobbling an embryonic economic recovery, debilitating cash-strapped banks, and punishing investors all over again.

Early warnings signs of this scenario include surging government bond yields, a slumping U.S. dollar, and the fading of the bear market rally in U.S. stocks...

Once Credit Crisis Version 2.0 ramps up, foreign investors may punish the U.S. government for borrowing trillions of dollars too much by refusing to buy its debt until bond prices plunge to much cheaper levels.

The telling harbinger is benchmark Treasury note yields' surge to six-month highs around 3.75 percent this week, as investors began to balk at the record U.S. government borrowing requirement this year.

The U.S. Treasury plans to sell about $2 trillion in new debt this year to fund a $1.8 trillion fiscal deficit.

Heavy selling of U.S. dollar-denominated assets could trigger a full-blown currency crisis and usher in surging inflation, forcing mortgage rates and corporate bond yields up, undermining any rebound in economic activity...

But by issuing so much debt, the United States risks repulsing a critical buyer: foreign central banks, who own more than a quarter of marketable U.S. Treasuries. China recently overtook Japan as the biggest such buyer...

..."What happened at the end of this month is the beginning of the end of that goodwill period," Weiss said. "There could be a major near-term selloff in the dollar."

Like you or me or California, the Federal government cannot continue to spend beyond its means forever. Any smart person would have stopped digging by now, but Obama's team can't seem to put the shovel down.

So China, or some one of our other major investors, may just decide to knock it out of his hand.

The spending is going to stop, one way or another. The "full faith and credit" of the US government is its ability to tax and the land-property-building assets that it owns and controls. People cannot pay near enough in taxes to run a balanced budget - or it would have been done by now. Nor does the govt own enough hard assets to satisfy all the debt holders. In other words, the US is actuarily broke, whether we admit it or not.

A balanced budget is one that covers immediately necessary expenses, makes payment toward old debt, and incurs no new debt. Obama's budget, obviously, is nowhere near balanced, and isn't going to be until some outside power makes it so. It would be much less painful for the average American citizen if Obama was simply honest about the country's finances and cut spending until the budget is balanced, rather than letting the dollar collapse and put the entire nation into turmoil.

But no, that would be too responsible, make too much sense.

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