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Beware - "Quantitative Easing" is HallucinogenicGary Dorsch American bankers are so fearful of a replay of the 1930's Great Depression, they've finally reached the point of "No-return," - lending $30-billion to Uncle Sam at a rock-bottom interest rate of zero-percent. Demand was so great at the last auction, the Treasury could have sold four-times as many T-bills. If short-term T-bill rates go negative, frightened bankers would effectively be paying the US Treasury for the privilege of lending money to it! But remember, "The Fed can guarantee cash benefits as far out, and at whatever size you like, but we cannot guarantee their purchasing power," former Fed chief, "Easy" Al Greenspan told Congress on Feb 15, 2005. The last time short-term T-bill rates went negative was during the Great Depression, when frightened bankers were effectively paying the US Treasury for the privilege of lending money to it! As for short-sellers of US Treasury bond futures, betting on a major top in a delusional market, John Maynard Keynes would say, "Markets can stay irrational longer than you can stay solvent." There is a massive paranoia in the marketplace, a "safety-at-any-cost mentality," that has knocked the 30-year Treasury yield to 2.63%, the lowest in history, and 10-year yields have plunged to 2.15%, the lowest since 1962. The same sophisticated bankers that bought toxic sub-prime mortgages, and "off-balance sheet" items, such as collateralized debt obligations, structured investment vehicles, and credit default swaps, are now locking in Treasury yields at historic lows.
Most remarkably, bond prices are soaring, and interest rates are plunging, even as the US Treasury expects to auction a record $2-trillion or more of new debt in fiscal 2009. Previously, the largest annual budget deficit in US-history was $450-billion set last year. The wildly bullish behavior of the Treasury market goes a long way to bolstering the argument, that it's the demand side of the equation which is most influential in determining interest rates, rather than the supply side. The US Treasury plans to sell $2-trillion or more of freshly printed IOU's at ultra-low interest rates, while the Fed plans to churn-out unlimited amounts of US-dollars from its electronic printing press to buy the debt. It's an age-old process known as "monetization," and the late Milton Friedman warned, "Money is too important to be left to central bankers. You essentially have a group of unelected people who have enormous power to affect the economy. I've always been in favor of replacing the Fed with a laptop computer, to calculate the monetary base and expand it annually, through war, peace, feast and famine by a predictable 2%," he said. But American households are reeling from the worst credit crunch since the 1930's, and every day continues to deliver more dismal news. The number of US workers filing new claims for unemployment benefits jumped to 573,000 last week, the highest since November 1982. US payrolls have shrunk by 1.9-million so far this year, and other government measures of the labor market that provide a more realistic estimate show unemployment to be well over 10 percent. More than 1-million US-homes have been lost to foreclosure since the housing crisis broke in August of 2007, and Realty Trac predicts that another 1-million homeowners could be forced out of their homes next year. Sales at US retailers fell for a fifth straight month in November, the longest decline in 16-years, and new building permits, declined 15.6% last month to a 616,000 pace, the lowest on record.  Taken together with a record back-to back decline in consumer prices, these reports suggest an economy lurching into the deepest and longest recession since the Great Depression of the 1930's. And in China, the other key locomotive of the global economy, there is also grim picture of a collapse in manufacturing, and tens of millions of job losses next year. On Dec 15th, the IMF slashed its forecast for Chinese growth to 5% for 2009, or less than half of its growth rate this year. China's major export markets in Europe, Japan, and the US, are effectively in recession. Emerging economies can not sustain China's export growth as they have also been hit hard by the global credit crunch. Indeed, Chinese exports were 2.2% lower in November than a year earlier, and industrial output plunged 8.2%, after expanding at a steady annualized rate of roughly 18% over the past three years. Chinese steel production fell to 35.2-millions tons in November, or 25% below its all-time high set in June. Some 70-million tons of iron ore are still stockpiled in 22-Chinese ports, due to the collapse of the global commodities trade, translating into a complete meltdown in the Baltic Cape-Size Index. As well as being hit by plunging sales, Chinese steel mills have faced a 40% fall in global steel prices since July. It's from the ashes of the global stock markets, which have lost $32-trillion of wealth over the past 14-months, that the IMF called on G-20 central banks to slash their interest rates towards zero-percent, and begin printing trillions in paper currency, in order to rescue the world economy from another 1930's style Great Depression.  Traders are now playing a game of chicken with the Fed, purchasing ten and thirty year bonds at lower yields, aiming to eventually dump the IOU's onto the Fed's balance sheet at even higher prices. Yields on the US Treasury's 10-year note have plummeted by 180-basis points, since the Fed signaled it was ready to dig deeper into its tool-box, after cutting the fed funds rate as far as possible, and injecting the most hallucinogenic drug ever - "Quantitative Easing" (QE). To read the rest of this article, click on the hyperlink below: http://www.sirchartsalot.com/article.php?id=100 Gary Dorsch 321gold Ltd |
However, most Americans
are playing it a bit safer. Money market funds invested in T-bills
have surged 150% over the past year, to $726 billion. Overall,
US-money market fund assets have climbed for an 11th straight
week to a record $3.72-trillion, and nearly half of US money
market mutual funds posted no returns as T-bills dipped to zero-percent.
The nightmare scenario has arrived after the US stock market
lost roughly $8-trillion of its value during a brutal 14-month
bear market, and Zillow.com estimates that US-home values also
lost $2-trillion this year.