Ironically the US Treasuries always gain strength in an uncertain economic environment, despite Credit downgrading of the US Treasury bonds. Why? The US Treasuries, despite some serious Debt implications, are still viewed by the Markets as much safer and risk free instruments. In my opinion, the European debt issue is far from over – there are some countries which have over-leveraged Debt to GDP ratios; Portugal, Spain, Ireland, Italy to name few.
What we need to discern is a subtle difference between the US and the European debt issues iva. These issues may sound similar, but they are quite different both in terms of economic scope and political underpinnings. The US debt, undoubtedly, is a long term challenge as demonstrated by a marked increase in the spread between the yields of Ten year Notes and the corresponding Inflation Protected Treasury securities. The economics is quite simple: more deficit means greater debt; more debt implies higher rates and inflationary pressures; and if they are out of balance this would result in currency crisis, massive devaluations and disturbance of global financial balance.
The European debt is a more complicated issue, at least from the standpoint of the geo-economic structure. The US debt issue, notwithstanding the massive size of debt touching $13 trillion plus, is manageable in so far the government apparatus and the Fed are well positioned to attend to any unexpected movement of debt limits. This may not be the case for the European Union – which is facing a dilemma of aligning political and economic interests. For instance, if Greece were to default and its debt restructured, it would relinquish membership of the European Union. Why? Because its currency will have to undergo massive devaluations to re-align the backlog of its horrendous debt and put the house in order again. This is not possible while its strings are attached to the European Central Bank. Ironically this guaranteed cushion by the European Central Bank might promote moral hazard for countries to take on debt and buy time. Such an eventuality might trigger a more serious crisis at a later stage; the solution lies in both short term injection of capital and long term scrutiny to ward-off risks to overleveraged economies.
The Fed has deployed unprecedented quantitative easing in history, by utilizing $2.86 trillion Balance Sheet, in order to keep the short term interest rates to near zero level. Remember the Fed has already injected a mammoth dose of $2.3 trillion into the Financial System since the collapse of Lehman Holdings in September 2008. The probability of the Fed continuing this stance of keeping rates on lower end would most likely continue; the key drivers are the slumping Mortgage Insurance and ailing housing markets. Any increase in rates would put unbearable pressure on $914.4 billion of Mortgage-backed debt of the Fed. Concomitantly, the Obama administration is struggling to close massive federal budget deficit of $2 to $4 trillion.
In this environment, Treasuries are most likely to rebound in the short term; while yields on Treasury Inflation Protected (TIPS) would escalate in the long term. In my viewpoint, an unstoppable escalation of this “spread” between the two (which would run somewhat parallel to an inverted yield curve) would signal potential threat to the Global economy. Here is the “economics story” behind this key trend witnessed recently:
As we all know too well, consumers within the United States of America have developed a serious addiction to credit card debts, and things have only gotten worse in recent years. Credit card debt has become a national crisis – an accompaniment and spur to the foreclosure boom and bank failures – yet most of our citizens have no real idea on how to change things around. As the economy continues to fall apart, we have no choice but to try and tackle the problem head on with all due diligence in efforts to repair credit card debts before they fully strangle whatever opportunities may come our way. There are professional options available, of course, but all of these come with their own sets of troubles. Most of the debt elimination theoretical solutions hawked through media advertisements could actually be considered destructive to household economies. With a national recession looming over the horizon, it is the responsibility of every citizen to deal with their own personal debt loads no matter how tempting the alternatives can sound. Remember, most consumers only learn about the benefits of debt relief programs from commercials and other advertisements that have little reason to elaborate all of the many disadvantages they may contain. Reducing or eliminating credit card debts should be taken seriously, but consumers should try to avoid the help of external professionals for as long as they can.
As attractive as handing over their problems to supposed authorities may seem in the abstract, one could argue that this is precisely the sort of thinking that led us to this lending crisis in the first place. We blindly believed that the banking community knew what they were doing, and that certainly didn’t turn out that well. This is not to say that all such counselors are not to be trusted, but, as with any ambitious and experienced group of professionals, they do tend to at times to overly profess the wonders of their particular specialty (that is, after all, how they make their living) and often to the borrowers’ detriment. After you have taken the time to fully analyze your own finances and personally tried every sort of credit card debt relief technique, you may indeed realize that one of the economic services may be necessary to pull yourself out of the mires of debt burden. However, you should only succumb to such a plan once you have made certain that you have done everything you can on your own initiative.
You are probably familiar with the Chapter 7 bankruptcy protection, we assume, but what you might not understand is how dramatically 2005 legislation has altered the US bankruptcy code. It’s much more difficult to declare bankruptcy these days, and most people who still maintain the income or savings to afford bankruptcy attorneys (ever more expensive as more and more borrowers find need of their services) would not even be admitted into the program. Yes, qualifications for the Chapter 7 debt elimination bankruptcy program newly depends upon not merely the debts that individuals or families have amassed but also their gross earnings relative to the average of their state of residence. Furthermore, after the congressional alterations of the code, even those supposedly lucky borrowers that have been allowed to enter the bankruptcy program must now face potential seizure of their property based upon each item’s replacement (as opposed to, in previous years, resale) value. In simple terms, this means that every applicant for Chapter 7 bankruptcy will have to gird themselves against the very real possibility that a lifetime’s possessions will be taken away by the courts for auction to repay the accumulated creditors.