Wednesday, 2 November 2011

FED's Chairman Bernanke sees trouble ahead

It's time to sober up and say a little prayer for the wellbeing of the United States of America. The recent Federal Open Market Committee decided today to keep the benchmark interest rate at the 0% - 0.25% interval, effectively prolonging the Zero Interest Rate Policy, through at least mid- 2013. FED's policy makers agreed that the economy picked up some steam while "signficant downsize risk" still remains. The US Federal Reserve will still conduct the so called "Operation Twist" which aims to swap short term Treasuries with longer term maturities in order to flatten the yield curve and lower the costs of capital investments. 
The inflation rate, measured by the CPI rose to 2.9% in September, the highest since 2008, while the core-CPI (excluding housing and energy costs) rose to 1.6%.

Meanwhile the economic picture in America has not improved a lot and huge monetary stimmulus employed by the Federal Reserve has yielded very little in terms of real growth. The only thing that seems to be rising in the USA is the National Debt.

US debt

After decades of running budget deficits, the US public debt spiraled out of control in 2008 because of all the stimulus effort and it is now at the staggering level of  $14.6 trillion . 

It doesn't seem to worry the US government that 47% of the national debt is in the hands of foreigners, mostly Chinese, Japanese, British and Arabs. When they wake up and see that their investments are rapidly losing value, the perceived flight to "the quality of the US dollar" will stop. 

Of course they cannot start selling the bonds they hold, but the central banks can decide to stop investing in these. The Chinese Central Bank has already expressed a lot of interest in buying European Debt and financing a myriad of resource extraction projects throughout Africa and East Asia. 

The total credit market debt now is at an all high level of 3.5 times GDP and amounts a breath-taking $52.2 trillion. Put into simpler terms, this means that the United States as a hole consumes more than 2.5 times its means. Its like family borrowing from a credit card 3.5 times its salary. At one point there will have to be some form of deleveraging and its going to be more and more painful as time goes on. 

What are you going to do with all debt when interest rates will appreciate as part of the normal credit cycle ?

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