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Great Depression Online Archive Issue:

Credit Market Russian Roulette

Great Depression Online
Long Beach, CA
June 22, 2010

Inside This Issue You Will Discover…

*** Greenspeak
*** Unexpected Suddenness
*** Credit Market Russian Roulette
*** And More

Greenspeak

For nearly two decades as Federal Reserve Chairman, Alan Greenspan made a fine art of confusing Congress.  His deliberately ambiguous responses were left for politicians and economic analysts alike to parse and dissect the meaning of.  Greenspeak, it was called. 

Reading his Congressional testimonies offers an intriguing experience.  It’s hard to understand how even mere idiots fell for such blathering gobbledygook; gibberish so vast and immense it was without a doubt unadulterated hogwash.  For years Greenspan mumbled statement after statement of nonsense…sentences as awful as the worst bosh of Hubert Humphrey.

Like this utterance before the U.S. House of Representatives in 1997…

“The concept of price increase is conceptually identical, but the inverse of the depreciation of the value of the currency.

~~~~~~How To Prepare?~~~~~~

The shocking 1990 collapse of the Japanese Market.  The extraordinary U.S. economic boom of the ‘90s and early 2000s.  The devastating global recession that began in 2008.  These impacted everyone’s lives, investments, and fortunes.  The signs of their arrival were visible years and years in advance.  And yet…Almost No One Predicted Them.

The mainstream media didn’t.  The top economists didn’t.  The great financial advisers didn’t.  But One Man Did.

What’s coming Next?  When will it happen?  What should you do to Prepare for it?

Click Here for the Answers 

~~~~~~~~~~~~~~~~~~~~~~~~~

“That does not mean that we think that money is irrelevant; it means that we think that our measures of money have been inadequate and as a consequence of that we, as I have mentioned previously, have downgraded the use of the monetary aggregates for monetary policy purposes until we are able to find a more stable proxy for what we believe is the underlying money in the economy.” 

What’s important is not so much the incomprehensibility of the utterances, but that they were taken seriously, by evidently intelligent people, for so many years. 

Unexpected Suddenness

These days Greenspan has fewer masters to answer to.  Not surprisingly, he’s become much more coherent.  In fact, last Friday the Wall Street Journal published a piece by Greenspan that was remarkably lucid…and, in our opinion, spot on. 

“Don’t be fooled by today’s low interest rates.  The government could very quickly discover the limits of its borrowing capacity,” begins Greenspan.

“Beneath the calm, there are market signals that do not bode well for the future.  For generations there had been a large buffer between the borrowing capacity of the U.S. government and the level of its debt to the public.  But in the aftermath of the Lehman Brothers collapse, that gap began to narrow rapidly.  Federal debt to the public rose to 59% of GDP by mid-June 2010 from 38% in September 2008.  How much borrowing leeway at current interest rates remains for U.S. Treasury financing is highly uncertain.

“I grant that low long-term interest rates could continue for months, or even well into next year.  But just as easily, long-term rate increases can emerge with unexpected suddenness. Between early October 1979 and late February 1980, for example, the yield on the 10-year note rose almost four percentage points.”

Credit Market Russian Roulette

Greenspan’s concern is one he, and millions of foreclosed homeowners, should know all to well: that borrowing short-term to meet long-term obligations is a dangerous undertaking.  Take adjustable rate mortgages, for example. 

Teaser rates are set at the short end of the yield curve, where the interest rate’s lower but the maturity period is shorter – about 3 to 5 years.  After that the rates adjust based on prevailing market interest rates.  The key point is mortgage payments are extremely sensitive to interest rate changes.  If interest rates stay low…no problem.  But if they increase, even just a couple percentage points, debt payments can balloon enormously.

Regrettably, much of the U.S. public debt has been financed using short-term debt.  But, alas, the obligations the debts are to cover extend years and years out into the future.  Over the next three years the U.S. government must borrow $7 trillion to cover the cost of projected deficits and to refinance existing debt that is maturing.

Rolling debt with short-term maturities over and over into the future to meet long-term obligations is like a high stakes game of Russian roulette…you may get away with it for a while, but eventually you blow your head off.  As Greenspan noted last Friday, between early October 1979 and late February 1980, 10-year treasury yields rose almost four percent.  Currently, 10-year treasuries yield 3.24 percent.  A four percent increase means borrowing costs would go up 123 percent – more than double.

Will such a rapid increase in borrowing cost happen again?  By definition, if it happened before, it’s possible, it could happen again.  Moreover, here at the GDO we believe it’s not a question of if it will happen, but of when.  Perhaps this week will provide a clue as to if now’s the time…

This week the U.S. Treasury will attempt to auction off $108 billion in new debt.  Keep an eye on treasury yields.  They could remain about the same.  Or, if creditors have seen enough, they could increase faster than public employee payrolls in the DC metro area.

Sincerely,

M.N. Gordon
Great Depression Online

P.S.  “We’ve seen the greatest credit bubble and greatest real estate bubble in modern history, which means we have inflated asset values and, more importantly, way too much debt in our system,” warned financial author and publisher Harry Dent recently to Moneynews.com.

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