Government Piling on Debt

[marmar]

from Minyanville:



The Bigger Picture
Mr Practical Jul 30, 2008 9:00 am

Government making mistake of piling up debt, squeezing middle class.



A trader friend opined to me yesterday that he “hears” that there are lots of “shorts” in the credit markets and it could get “squeezed”.

Minyans need to look past this type of talk. As the deflationary process unfolds, we're going to be exposed to all kinds of such talk, innuendo, and mis-information. First of all the credit markets are not really structured like that. There are very few ways to “short” it. There are a few indexes, which may be crowded because of the lack of them, that people can short to hedge their exposure or bet on declines in price, but the relative notional shorts compared to the longs is insignificant.

But this is not really the point. The big picture is this. For the last twenty years the Federal Reserve has used the banking system to expand the credit base of the economy. They kept interest rates low to encourage borrowing. Beginning in 2001 and 2002 the Federal Reserve went into overdrive, driving real interest rates negative and thus encouraging massive speculation in credit. The result is a money supply six times normal relative to GDP but more importantly one bloated with debt with virtually no relative savings to support it.

The system is now broken as evidenced by the TAF facility: the very definition of this is “the financial system has no more capital left and the TAF is the only way the Federal Reserve can get capital back in the system. So the Federal Reserve has taken bad debts in exchange for capital onto their balance sheet. This makes them very nervous. It's not a far fetched thought to believe that the new SEC rules were specifically implemented to drive financial stocks up in order to allow them to raise capital through stock offerings. The capital would make it more probable that these banks are eventually able to take the bad debt back from the Fed. This serves as a warning to those who are tempted to fall for this and buy financial stocks on these secondary stock offerings. .....(more)

The complete piece is at: http://www.minyanville.com/articles/short-squeeze-deflation-Credit-Fed-government/index/a/18277

[enid602]

1. deflation?

Interesting that the author speaks of deflation rather than inflation; it's hard to take a deflation threat seriously in the face of so many price hikes lately. I guess he feels that deflation will be caused by the credit crunch, which will, of course kill demand for so many things sold in our economy. Is it possible to have deflation and inflation at the same time? If so, our government can continue its claim that it has prices (overall) under control, as increased prices for food and gas would offset decreased prices for houses, etc.

[dixiegrrrrl]

2. No fear- Congress is "helping" us....with this.....

from AP story on Bush signing Housing bill.this was buried at last paragraph:

Democratic leaders, recognizing that the measure could be one of the last items to become law during what's left of their abbreviated election-year schedule, tacked on an $800 billion increase, to $10.6 trillion, in the statutory limit on the national debt.


So "our" party just raised the debt ceiling, again, trying to delay the inevitable crash.
They had to, since there is no money for all the bailing out
of the mortgage markets, banks, etc.