Showing posts with label US debts. Show all posts
Showing posts with label US debts. Show all posts
Friday, 12 August 2011
Thursday, 11 August 2011
Here's The Problem With This Market Crash...
Henry Blodget | Aug. 4, 2011, 10:05 PM |
Well, it's deja vu all over again.
Read more: http://www.businessinsider.com/heres-the-problem-with-this-market-crash-2011-8#ixzz1Uh6pP1g9
 See Also: |
For anyone who followed the market crashes of 2000-2002 and 2007-2009--especially the crash of 2007-2009--the 512-point drop in the Dow feels awfully familiar.
And as those market crashes reminded us, the downdrafts can last a lot longer and be a lot more severe than most people initially think.
(They can also reverse themselves quickly and unexpectedly, and maybe that's what will happen this time. We can always pray.)
But there are also several very important differences between this market crash and the ones a few years ago:
- The Fed has fired most of its bullets (interest rates are already at zero)
- Our budget deficit is already out of control, and Congress has had it with "stimulus"
- The public has had it with bailouts
That means the government's ability to do anything about this market crash is severely limited.
Yes, we'll almost certainly have a "QE3." And maybe that will prop things up a bit. But it won't fix the fundamental problems clogging the economy, just as QE1 and QE2 didn't permanently fix anything. (The only thing that will fix our economy is debt-reduction, discipline, and time.)
To get a good sense of how hamstrung the government is, you need only look as far back as last week, when Congress was so paralyzed that it almost put the country into default rather than raise the debt ceiling.
And you also need only note that, when the 2000 crash began, the US federal budget was running a surplus, and when the 2007 crash began, the deficit was only $200 billion. Now, the deficit's about $1.4 trillion:
Image: St. Louis Fed
Meanwhile, to get a good sense of how different the Fed's position is now than it was at the start of the last two market crashes, all you have to do is look at the chart below.
In 2000, when the market tanked, the Fed Funds rate was 6.5%. The Fed immediately began cutting rates and eventually took them all the way down to 1%. (Where it left them for far too long, thus helping to inflate the housing bubble.)
In 2007, when the market began to crack, the Fed Funds rate was 5.25%. The Fed immediately began cutting rates and eventually took them all the way down to 0.25%. Where they have been as long as anyone can remember. And where they still are today, just as the market is beginning to crash again.
In short, it IS different this time. And not in a good way.
Read more: http://www.businessinsider.com/heres-the-problem-with-this-market-crash-2011-8#ixzz1Uh6pP1g9
Thursday, 16 September 2010
Chinese think tank warns US it will emerge as loser in trade war
A State Council think-tank in China has warned Washington that the US will come off worst in a trade war if it imposes sanctions against Beijing over the two nations' currency spat.
The US is considering legislation to punish Beijing for holding down the yuan Photo: AFP
Ding Yifan, a policy guru at the Development Research Centre, said China could respond by selling holdings of US debt, estimated at over $1.5 trillion (£963bn). This would trigger a rise in US interest rates. His comments at a forum in Beijing follow a string of remarks by Chinese officials questioning US credit-worthiness and the reliability of the dollar.
China's authorities seem split over how to respond to moves on Capitol Hill for legislation to punish Beijing for holding down the yuan. The central bank has ruled out use of its "nuclear weapon", insisting that it would not exploit its $2.45 trillion of foreign reserves for political purposes. "The US Treasury market is a very important market for China," it said.
However, the mood is hardening on both sides of the Pacific. The dispute risks escalating if China's trade surplus with the US climbs further and more US jobs are lost. US Treasury Secretary Tim Geithner, who has taken a softly-softly line in the past, said on Friday that China had done "very little" to correct the undervaluation of the yuan since ending the dollar peg in June.
Mr Ding reflects thinking among some in the Poltiburo, who seem convinced that the US is in decline and that China's rise as an exporter of goods and capital give it the upper hand.
"They are utterly wrong," said Gabriel Stein from Lombard Street Research. "The lesson of the 1930s is that surplus countries with structurally weak domestic demand come off worst in a trade war."
He described the implicit threat to sell Treasuries as "empty bluster" because Beijing's purchase of these bonds is a side-effect of its yuan policy. "Bring it on: it will weaken the dollar, which is what the US wants. The interest rate effect can be countered by the Fed."
"Some Chinese officials seem to believe that buying Treasuries underpins US public spending. In fact China's mercantilist policy is forcing the US to run large deficits against its own interest. China should be terrified of a trade war."
http://www.telegraph.co.uk/finance/currency/8002719/Chinese-think-tank-warns-US-it-will-emerge-as-loser-in-trade-war.html
Mr Ding reflects thinking among some in the Poltiburo, who seem convinced that the US is in decline and that China's rise as an exporter of goods and capital give it the upper hand.
"They are utterly wrong," said Gabriel Stein from Lombard Street Research. "The lesson of the 1930s is that surplus countries with structurally weak domestic demand come off worst in a trade war."
He described the implicit threat to sell Treasuries as "empty bluster" because Beijing's purchase of these bonds is a side-effect of its yuan policy. "Bring it on: it will weaken the dollar, which is what the US wants. The interest rate effect can be countered by the Fed."
"Some Chinese officials seem to believe that buying Treasuries underpins US public spending. In fact China's mercantilist policy is forcing the US to run large deficits against its own interest. China should be terrified of a trade war."
http://www.telegraph.co.uk/finance/currency/8002719/Chinese-think-tank-warns-US-it-will-emerge-as-loser-in-trade-war.html
Wednesday, 14 April 2010
The Biggest Holders of US Government Debt
As the US government spends an unprecedented amount of money to fix the nation's economy, there is an equally great need to raise the cash to pay for it. This is accomplished through borrowing, whereby Uncle Sam sells Treasury securities of varying maturity.
For investors, the government bills, notes and bonds are considered a safe financial product because they have a guaranteed rate of return, based on faith in future US tax revenues. The government has been partially funding operations via Treasury securities for decades.
This borrowing adds to the national debt, which has climbed above $11 trillion and is rising every day. Much of that debt is held by private sector, but about 40 percent is held by public entities, including parts of the government. Here's who owns the most.
By Paul Toscano
Updated 17 Feb 2010
http://www.cnbc.com/id/29880401/?slide=1
Thursday, 15 October 2009
Investing In A Weakening Dollar Environment
Investing In A Weakening Dollar Environment
Posted: October 13, 2009 12:17PM by Ryan Barnes
You've likely heard of this scenario mentioned in an ominous financial forecast: The U.S. dollar continues to lose value compared to other major world currencies, and any number of very bad things occur, spelling doom for our fragile economic recovery.
But even though a low dollar world has a few deleterious side effects, it also brings benefits, and the latter can be profited on by investors who think ahead about where to place their assets. Today we'll discuss what makes the USD rise and fall, and where to position your investments to take advantage of a low dollar world.
Background
The U.S. Dollar Index is an exchange-traded instrument that measures the value of the USD against a basket of 6 major world currencies, including the Euro, Yen, British Pound and Canadian Dollar.
In the past six months, the U.S. Dollar Index has fallen by roughly 13%. This is a continuation of a longer term trend that has seen USD Index fall by 46% since 2001.
What Causes a Falling Dollar?
There is no single bullet theory as to why the USD has fallen, but most professionals point to several ongoing events. First, the strength of the USD is largely determined by how willing global investors are to hold investments denominated in dollars versus other currencies. The USD is often noted as the "world's reserve currency," meaning that foreign governments around the world often choose to park a good chunk of their reserves in dollar assets like Treasury Bonds rather than holding them in their home currency.
But if investors become skittish about the strength of the U.S. economy and our ability to pay our future bills (via Treasury interest), they will begin to shift assets away from the dollar. The rising budget deficit of the U.S. is one of many caution flags that is beginning to be noticed by global investors.
Another reason why the dollar has weakened this decade is because interest rates have been historically very low. The 10-year Treasury Bond, a benchmark for global fixed income investors, has seen its lowest yields this decade since the 1960's. These low yields aren't much of an incentive for global investors to buy U.S. bonds.
The Federal Reserve has had good reason to keep interest rates low; it was crucial in freeing up money flows in the face of a global recession. But as the economy stabilizes, look for the Fed to slowly begin to ratcheting up interest rates. As this happens, the U.S. dollar should begin to strengthen.
What Investments to Hold in a Low-Dollar World?
Commodities and other "hard" assets tend to do very well in a low dollar environment. The reason is twofold; hard assets are a safe haven when fiat currencies weaken, and most global commodities are priced in dollars. So foreign investors (whose currency has risen in value vs. the USD), can buy more with the same amount of money. This increases overall demand, leading to rising prices for things like gold, silver and oil. (For further reading, check out How to Invest in Commodities.)
Companies that are based in the U.S. but conduct a lot of business overseas make great investments in a falling dollar world. The reasoning is simple; costs to pay workers and produce goods are paid in dollars (which are weak), but goods are sold in foreign currencies abroad. When those higher-valued foreign currencies are translated back to dollars for the purposes of accounting, the favorable exchange rate adds to profit margins.
Investors can easily find out how much business a U.S. firm does overseas by reading the most recent annual report. Look for firms with greater than 40% of sales abroad, and having the bulk of factories and offices located in the U.S.
USD Outlook
The future strength of the dollar will largely depend on how well the U.S. government can control its budget deficit. The better the U.S. looks as a debt payer, the better the dollar will do. Use this as a guide to determine when it might be time to begin investing in dollar strength versus dollar weakness. (To learn more, check out What Fuels the National Debt?)
And when it comes to the dollar, a little inflation can be a good thing. As our economy strengthens, some inflation should begin creeping back into the system. This will trigger the Fed to start raising interest rates, boosting the dollar along with Treasury yields. When this trend begins to occur, look to shift away from the investments outlined above.
Parting Thoughts
A low dollar world will have some bad side effects, like more expensive overseas travel and higher prices of imports like gas and electronics. But savvy investors can make up the pennies being squeezed elsewhere by profiting from the many companies and assets that are taking a low dollar environment all the way to the bank.
http://financialedge.investopedia.com/financial-edge/1009/Where-To-Invest-In-A-Weakening-Dollar-Environment.aspx
Posted: October 13, 2009 12:17PM by Ryan Barnes
You've likely heard of this scenario mentioned in an ominous financial forecast: The U.S. dollar continues to lose value compared to other major world currencies, and any number of very bad things occur, spelling doom for our fragile economic recovery.
But even though a low dollar world has a few deleterious side effects, it also brings benefits, and the latter can be profited on by investors who think ahead about where to place their assets. Today we'll discuss what makes the USD rise and fall, and where to position your investments to take advantage of a low dollar world.
Background
The U.S. Dollar Index is an exchange-traded instrument that measures the value of the USD against a basket of 6 major world currencies, including the Euro, Yen, British Pound and Canadian Dollar.
In the past six months, the U.S. Dollar Index has fallen by roughly 13%. This is a continuation of a longer term trend that has seen USD Index fall by 46% since 2001.
What Causes a Falling Dollar?
There is no single bullet theory as to why the USD has fallen, but most professionals point to several ongoing events. First, the strength of the USD is largely determined by how willing global investors are to hold investments denominated in dollars versus other currencies. The USD is often noted as the "world's reserve currency," meaning that foreign governments around the world often choose to park a good chunk of their reserves in dollar assets like Treasury Bonds rather than holding them in their home currency.
But if investors become skittish about the strength of the U.S. economy and our ability to pay our future bills (via Treasury interest), they will begin to shift assets away from the dollar. The rising budget deficit of the U.S. is one of many caution flags that is beginning to be noticed by global investors.
Another reason why the dollar has weakened this decade is because interest rates have been historically very low. The 10-year Treasury Bond, a benchmark for global fixed income investors, has seen its lowest yields this decade since the 1960's. These low yields aren't much of an incentive for global investors to buy U.S. bonds.
The Federal Reserve has had good reason to keep interest rates low; it was crucial in freeing up money flows in the face of a global recession. But as the economy stabilizes, look for the Fed to slowly begin to ratcheting up interest rates. As this happens, the U.S. dollar should begin to strengthen.
What Investments to Hold in a Low-Dollar World?
Commodities and other "hard" assets tend to do very well in a low dollar environment. The reason is twofold; hard assets are a safe haven when fiat currencies weaken, and most global commodities are priced in dollars. So foreign investors (whose currency has risen in value vs. the USD), can buy more with the same amount of money. This increases overall demand, leading to rising prices for things like gold, silver and oil. (For further reading, check out How to Invest in Commodities.)
Companies that are based in the U.S. but conduct a lot of business overseas make great investments in a falling dollar world. The reasoning is simple; costs to pay workers and produce goods are paid in dollars (which are weak), but goods are sold in foreign currencies abroad. When those higher-valued foreign currencies are translated back to dollars for the purposes of accounting, the favorable exchange rate adds to profit margins.
Investors can easily find out how much business a U.S. firm does overseas by reading the most recent annual report. Look for firms with greater than 40% of sales abroad, and having the bulk of factories and offices located in the U.S.
USD Outlook
The future strength of the dollar will largely depend on how well the U.S. government can control its budget deficit. The better the U.S. looks as a debt payer, the better the dollar will do. Use this as a guide to determine when it might be time to begin investing in dollar strength versus dollar weakness. (To learn more, check out What Fuels the National Debt?)
And when it comes to the dollar, a little inflation can be a good thing. As our economy strengthens, some inflation should begin creeping back into the system. This will trigger the Fed to start raising interest rates, boosting the dollar along with Treasury yields. When this trend begins to occur, look to shift away from the investments outlined above.
Parting Thoughts
A low dollar world will have some bad side effects, like more expensive overseas travel and higher prices of imports like gas and electronics. But savvy investors can make up the pennies being squeezed elsewhere by profiting from the many companies and assets that are taking a low dollar environment all the way to the bank.
http://financialedge.investopedia.com/financial-edge/1009/Where-To-Invest-In-A-Weakening-Dollar-Environment.aspx
Thursday, 5 March 2009
What Fuels The National Debt?
What Fuels The National Debt?
by Reem Heakal (Contact Author Biography)
First established in 1789 by an act of Congress, the United States Department of the Treasury is responsible for federal finances. This department was created in order to manage the expenditures and revenues of the U.S. government, and hence the means by which the state could raise money in order to function. Here we examine the responsibilities of the Treasury and the reasons and means by which it takes on debt.
Responsibilities of the Treasury
The U.S. Treasury is divided into two divisions: the departmental offices and the operating bureaus. The departments are mainly in charge of policy making and management of the Treasury, while the bureaus' duties are to take care of specific operations. Bureaus such as the Internal Revenue Service (IRS), which is responsible for tax collection, and the Bureau of Engraving and Printing (BEP), in charge of printing and minting all U.S. money, take care of the majority of the total work done by the Treasury. (For related reading, see Buy Treasuries Directly From The Fed.)
The primary tasks of the Treasury include:
The National Debt
A government creates budgets to determine how much it needs to spend to run a nation. Oftentimes, however, a government may run a budget deficit by spending more money than it receives in revenues from taxes (including customs duties and stamps). In order to finance the deficit, governments may seek to raise money by taking on debt, that is, by borrowing it from the public. The U.S. government first found itself in debt in 1790, after taking on the war debts following the Revolutionary War. Since then, the debt has been fueled by more war, economic recession and inflation. As such, the public debt is a result of accumulated budget deficits. (For more insight, read The Treasury And The Federal Reserve.)
The Role of Congress
Up until World War I, the U.S. government needed approval from Congress every time it wanted to borrow money from the public. Congress would determine the number of securities that could be issued, their maturity date and the interest they would pay. With the Second Liberty Bond Act of 1917, however, the U.S. Treasury was given a debt limit, or a ceiling of how much it could borrow from the public without seeking Congress' consent. The Treasury was also given the discretion to decide maturity dates, interest rate levels and the type of instruments that would be offered. The total amount of money that can be borrowed by the government without further authorization by Congress is known as the total public debt subject to limit. Any amount above this level has to receive additional approval from the legislative branch.
Who Owns the Debt?
The debt is sold in the form of securities to both domestic and foreign investors, as well as corporations and other governments. U.S. securities issued include Treasury bills (T-bills), notes and bonds as well as U.S. savings bonds. There are both short-term and long-term investment options, but short-term T-bills are offered regularly, as well as quarterly notes and bonds. When the debt instrument has matured, the Treasury can either pay the cash owed (including interest) or issue new securities.
Debt instruments issued by the U.S. government are considered to be the safest investments in the world because interest payments do not have to undergo yearly authorization by Congress. In fact, the money the Treasury uses to pay the interest is automatically made available by law.
The public debt is calculated on a daily basis. After receiving end-of-day reports from about 50 different sources (such as Federal Reserve Bank branches) regarding the amount of securities sold and redeemed that day, the Treasury calculates the total public debt outstanding, which is released the following morning. It represents the total marketable and non-marketable principal amount of securities outstanding (i.e. not including interest).
War Time
In times of war, a government needs more money to support the effort. To finance its needs, the U.S. government will often issue what are commonly known as war bonds. These bonds appeal to the nation's patriotism to raise money for a war effort. Following September 11, 2001, the U.S.A. Patriot Act was passed by Congress. Among other things, it authorized Federal agencies to initiate ways to combat global terrorism. To raise money for the "war on terrorism", the U.S. Treasury issued war bonds known as patriot bonds. These Series EE savings bonds hold a five-year maturity.
The U.S. Treasury has also become a key institution working with financial institutions to draft new policies aimed at battling counterfeiting and money laundering related to terrorism.
Conclusion
The public debt is a liability to the U.S. government, and the Bureau of Public Debt is responsible for the technical aspects of its financing. However, the only way to reduce debt is for the federal budget's expenditures to cease to exceed its revenues. Budget policy lies with the legislative branch of government, and thus, depending on the circumstances at the time of budget formulation, running a deficit may be the country's only choice.
For more insight, read Giants Of Finance: John Maynard Keynes.
by Reem Heakal, (Contact Author Biography)
http://www.investopedia.com/articles/04/011404.asp?partner=NTU3
by Reem Heakal (Contact Author Biography)
First established in 1789 by an act of Congress, the United States Department of the Treasury is responsible for federal finances. This department was created in order to manage the expenditures and revenues of the U.S. government, and hence the means by which the state could raise money in order to function. Here we examine the responsibilities of the Treasury and the reasons and means by which it takes on debt.
Responsibilities of the Treasury
The U.S. Treasury is divided into two divisions: the departmental offices and the operating bureaus. The departments are mainly in charge of policy making and management of the Treasury, while the bureaus' duties are to take care of specific operations. Bureaus such as the Internal Revenue Service (IRS), which is responsible for tax collection, and the Bureau of Engraving and Printing (BEP), in charge of printing and minting all U.S. money, take care of the majority of the total work done by the Treasury. (For related reading, see Buy Treasuries Directly From The Fed.)
The primary tasks of the Treasury include:
- The collection of taxes and custom duties
- The payment of all bills owed by the federal government
- The printing and minting of U.S. notes and U.S. coinage and stamps
- The supervision of state banks
- The enforcement of government laws including taxation policies
- Advising the government on both national and international economic, financial, monetary, trade and tax legislation
- The investigation and federal prosecution of tax evaders, counterfeiters and/or forgers
- The management of federal accounts and the national public debt
The National Debt
A government creates budgets to determine how much it needs to spend to run a nation. Oftentimes, however, a government may run a budget deficit by spending more money than it receives in revenues from taxes (including customs duties and stamps). In order to finance the deficit, governments may seek to raise money by taking on debt, that is, by borrowing it from the public. The U.S. government first found itself in debt in 1790, after taking on the war debts following the Revolutionary War. Since then, the debt has been fueled by more war, economic recession and inflation. As such, the public debt is a result of accumulated budget deficits. (For more insight, read The Treasury And The Federal Reserve.)
The Role of Congress
Up until World War I, the U.S. government needed approval from Congress every time it wanted to borrow money from the public. Congress would determine the number of securities that could be issued, their maturity date and the interest they would pay. With the Second Liberty Bond Act of 1917, however, the U.S. Treasury was given a debt limit, or a ceiling of how much it could borrow from the public without seeking Congress' consent. The Treasury was also given the discretion to decide maturity dates, interest rate levels and the type of instruments that would be offered. The total amount of money that can be borrowed by the government without further authorization by Congress is known as the total public debt subject to limit. Any amount above this level has to receive additional approval from the legislative branch.
Who Owns the Debt?
The debt is sold in the form of securities to both domestic and foreign investors, as well as corporations and other governments. U.S. securities issued include Treasury bills (T-bills), notes and bonds as well as U.S. savings bonds. There are both short-term and long-term investment options, but short-term T-bills are offered regularly, as well as quarterly notes and bonds. When the debt instrument has matured, the Treasury can either pay the cash owed (including interest) or issue new securities.
Debt instruments issued by the U.S. government are considered to be the safest investments in the world because interest payments do not have to undergo yearly authorization by Congress. In fact, the money the Treasury uses to pay the interest is automatically made available by law.
The public debt is calculated on a daily basis. After receiving end-of-day reports from about 50 different sources (such as Federal Reserve Bank branches) regarding the amount of securities sold and redeemed that day, the Treasury calculates the total public debt outstanding, which is released the following morning. It represents the total marketable and non-marketable principal amount of securities outstanding (i.e. not including interest).
War Time
In times of war, a government needs more money to support the effort. To finance its needs, the U.S. government will often issue what are commonly known as war bonds. These bonds appeal to the nation's patriotism to raise money for a war effort. Following September 11, 2001, the U.S.A. Patriot Act was passed by Congress. Among other things, it authorized Federal agencies to initiate ways to combat global terrorism. To raise money for the "war on terrorism", the U.S. Treasury issued war bonds known as patriot bonds. These Series EE savings bonds hold a five-year maturity.
The U.S. Treasury has also become a key institution working with financial institutions to draft new policies aimed at battling counterfeiting and money laundering related to terrorism.
Conclusion
The public debt is a liability to the U.S. government, and the Bureau of Public Debt is responsible for the technical aspects of its financing. However, the only way to reduce debt is for the federal budget's expenditures to cease to exceed its revenues. Budget policy lies with the legislative branch of government, and thus, depending on the circumstances at the time of budget formulation, running a deficit may be the country's only choice.
For more insight, read Giants Of Finance: John Maynard Keynes.
by Reem Heakal, (Contact Author Biography)
http://www.investopedia.com/articles/04/011404.asp?partner=NTU3
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