The economic situation continues to erode both here in the U.S. and around the world. Interest rates continue to move up, which is a sign that investors are refusing to buy sovereign debt unless they are compensated with higher rates.
This is putting pressure on world economies and sovereign debt, especially the few countries treading water that have been asked repeatedly to help the drowning nations. Poland’s foreign minister Radoslaw Sikorski called on Germany to save the euro, which he said that only Germany could do.
We also see the interest rates on Belgian sovereign debt shooting up; Portugal and Hungary’s sovereign debt has also been cut to junk. Italian interest rate costs hit euro lifetime peaks at their sovereign debt auction on Tuesday. Reports are also surfacing that France might be put on negative outlook for its sovereign debt very shortly by S&P.
Now there are signs that investors are worried that the European crisis is spreading to Japan’s sovereign debt as well. S&P noted that Japan’s finances are getting worse and worse and has a negative outlook on its sovereign debt with potential for further downgrades.
This is truly a global world, one in which everyone is connected one way or another. Citizens will feel the impact either directly through events like quantitative easing by the Federal Reserve and sovereign debt issues or indirectly through their local economy.
It is becoming obvious that the current financial system fueled by high levels of debt is coming to an end. All of the current levels of stimulus are obviously not helping the economy.
This was on top of further weakness in the real-estate sector. September’s Case-Shiller home price index fell 3.9% year-over-year, compared to expectations of a 3.1% drop. There are still 3.33 million units of previously owned homes on the market. Demand is to reach 301,000 this year. In 2010, less than 323,000 homes were sold, which was the lowest number since 1963.
Janet Yellen, Federal Reserve Vice Chairman, recently commented that the central bank has leeway to spur the U.S. recovery with more asset purchases. She went on to say that the Federal Reserve needs to clarify its plan when it comes to keeping interest rates low. She did not say the words “quantitative easing,” but I think this is likely.
“We at the Federal Reserve are moving vigorously to promote a stronger economic recovery,” Yellen said. Is this a cryptic signal regarding more quantitative easing? What she knows that you don’t is the true extent of how weak the U.S. economy really is. She wouldn’t have made these comments unless real action is coming down the pipeline.
We’re not the only ones coming to this conclusion, as Societe General, a large European bank, issued a report stating that, in its January 2012 FOMC meeting, the Federal Reserve will preannounce that it will issue another round of quantitative easing.
The report states, “A major liquidity crisis should not occur this time, as we think we are on the eve of major quantitative easing in the UK, US and in the Eurozone.”
There was no comment regarding the speculation about quantitative easing from the Federal Reserve.
The bank estimates that another $600 billion will be pumped into the financial markets through quantitative easing by the Federal Reserve; others estimate as high as $1.5 trillion.
As large as these figures seem, remember Federal Reserve Vice Chairman Yellen’s ominous quote, “These are no ordinary times.”