Archive for the ‘debt crisis’ Category
Thank the Fed for Your New Car, Home, Investments
By George Leong, B.Comm. for Profit Confidential
The Federal Reserve continues to be a friend of Wall Street and those who can take advantage of the low interest rates and ability to carry debt at low carrying costs.
But if you think for one minute that lower and Middle America is better off, then you may want to think again. Yes, it may be true that the cheap financing rates have helped the country to recover from the Great Recession via the purchasing of autos, homes, and other non-essential goods; but for many, the low rates have done very little to help them. Thank the Federal Reserve.
Have you seen what a bank pays in interest? The 10-year bond yield is around two percent, which is dismal unless, of course, you have millions to invest.
For the majority of America, it’s tough to make money, which is why we have seen a rising flow of money into stocks (thank the Federal Reserve) and a key reason for the S&P 500 to be at a record high. (Read “Why the Money-Driven Fed Rally Is Impressive.”)
Thank the Federal Reserve if you are investing and enjoying what a low-interest-rate environment can bring. If you are earning minimum wage, a senior dependent on social security, a student with tens of thousands of dollars of student loans and no job, then you probably don’t have a lot of positive things to say to the chief money printer of the Federal Reserve, Ben Bernanke.
The current situation in America reminds me of an “only the strong survive” mentality. If you are financially set, then, well, everything is OK. If … Read More
Broke States May Have No Choice but to Ask for a Washington Bailout
By Michael Lombardi, MBA for Profit Confidential
The U.S. national debt is a major issue. And as time passes, this issue brings the country’s sovereignty into question. Our national debt—the money owed by the U.S. government and, ultimately, the taxpayers—stands close to $17.0 trillion and growing. (Source: Treasury Direct, last accessed April 19, 2013.)
Sadly, the federal government isn’t reining in spending in any meaningful way. It has posted a budget deficit of over one trillion dollars over the last four years. It won’t surprise me if we see another one-trillion-dollar budget deficit this year.
My concern: the economic problems at the local levels are threatening to increase the national debt even more.
States and cities across the U.S. economy are each posting an increased budget deficit; some are in severe distress, while some have already filed for bankruptcy. Just look at Stockton, California; Jefferson County, Alabama; and, most recently, Detroit, Michigan—the “Motor City” was taken over by the state, because it wasn’t able to control its budget deficit.
A study by Public Financial Management, Inc. (PFM) found that Baltimore, one of the biggest cities by population in the U.S., will amass a budget deficit of $744.8 million over the next 10 years. On top of this, as of 2011, the city has unfunded liability of $3.2 billion—this includes a pension deficit of $1.1 billion and $2.1 billion of costs in health care and other benefits. (Source: Reuters, February 11, 2013.)
Illinois has a multibillion-dollar budget deficit problem. And the state has one of the least-funded pension systems—it sits at 39%; 80% is considered a healthy level. (Source: Yahoo! News, February 13, 2013.)
When states and cities … Read More
All of a Sudden, 2013 Becomes Another Trillion-Dollar Deficit Year
By Michael Lombardi, MBA for Profit Confidential
In its monthly statement of receipts and outlays for the month, the Treasury Department reported that the U.S. government incurred a budget deficit of $107 billion for the month of March 2013. (Source: Department of the Treasury, April 10, 2013.) This monthly budget deficit was a result of the government spending $293 billion while only taking in $186 billion in March.
Since October 1, 2012, the beginning of the government’s fiscal year, the government has spent $600 billion more than it has taken in. Hence, for the first five months of its current fiscal year, the budget deficit is already $600 billion.
We know the U.S. government has run a budget deficit of more than $1.0 trillion for each of the last four years. If the current pace of spending more than what is coming in continues in the current year, then 2013 will be another one-trillion-dollar budget deficit year.
A quote from President Herbert Hoover comes to mind when I see five years of trillion-dollar deficits. He said “Blessed are the young for they shall inherit the national debt.” (Source: Brainy Quote, last accessed April 11, 2013.)
As the U.S. government adds to its budget deficit, it has to borrow more to cover the expenses. This way, our national debt continues to increase daily. We are on pace to surpass $17.0 trillion in national debt this year. A $20.0-trillion national debt is not far away.
For fiscal 2014, President Obama has proposed a budget of $3.778 trillion. In this budget, there are increases in taxes and lower spending on government programs like social security. (Source: Wall Street Journal… Read More
Two New Super Bubbles Created Thanks to Easy Money Policies
By Michael Lombardi, MBA for Profit Confidential
In his recent essay published in the New York Times, David A. Stockman, President Ronald Reagan’s budget director from 1981 to 1985, said that there is a bubble waiting to explode due to the “flood of phony money from the Federal Reserve.” (Source: Stockman, D.A., “State-Wrecked: The Corruption of Capitalism in America,” New York Times, March 30, 2013.)
Stockman further explained that once the bubble actually bursts, the U.S. economy will be left in ruins. To quote, “When it bursts, there will be no new round of bailouts like the ones the banks got in 2008. Instead, America will descend into an era of zero-sum austerity and virulent political conflict, extinguishing even today’s feeble remnants of economic growth.” (Source: Ibid.)
Reading Stockman’s piece, I can’t help but wonder if he is one of the half a million people who read Profit Confidential. As my readers know, I’ve been very skeptical about quantitative easing in the U.S. economy. It may have been needed back in 2009, when the financial system was on the verge of collapse, but I doubt its ongoing $85.0-billion-a-month purpose today.
By keeping interest rates artificially low and issuing multiple rounds of quantitative easing, continuously suppressing bond yields, the Federal Reserve has killed fixed-income returns for investors. Those who took part in the junk bond market in desperate search of higher yields are taking more risk.
In 2008, only $43.0 billion worth of high-yield corporate bonds (often called “junk bonds”) were issued. Fast-forward to 2012, and this number increases to $329.2 billion. (Source: Securities Industry and Financial Markets Association web site, last accessed April 3, … Read More
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