“I have always depended on the kindness of strangers,” said Blanche DuBois, in the final words of the play A Streetcar Named Desire. Well, don’t we all.

Many citizens probably still cling to the old saw that public debt doesn’t matter because “we owe it to ourselves.” Wrong. Debt always matters. And as for whom we owe it to, it is a lot of kind (or, at least, not yet unkind) strangers.

As recently as 1970, foreign holders of U.S. debt were essentially non-existent. But their slice of our obligation pie has steadily increased, especially over the past two decades, until now foreign governments and international investors hold about 35% of Treasuries, as the following chart reveals.

Chart of U.S. national debt holders, domestic and foreign

Of about $11 trillion in U.S. debt, foreigners have about $3.8 trillion, with China in the lead at nearly $1 trillion and Japan not far behind at around $750 billion.
Most likely, though, this trend has already leveled off. The Chinese, Japanese, Russians, and Indians have openly announced their decision to cut back on further purchases and existing holdings of U.S. government debt. Beyond that, the source of funds previously allocated to their purchases — trade surpluses — has declined sharply with the recession. As a consequence, going forward, foreign buying is more apt to shrink than increase.
While foreigners are continuing to show up for the record-sized Treasury auctions, it’s due to the dollar retaining its status (albeit shakily) as the world’s reserve currency. But they have become quite cautious, generally investing towards the front end of the yield curve, which is a vote of no confidence in the buck’s future. As the chart below illustrates, sales of long-term bonds to foreigners are way down.

Treasury bond sales graph

So what does all this mean?

It means that a big chunk of our prosperity during the past twenty years was due to a trade deficit that put billions of dollars into the hands of foreigners, who then turned around and bought Treasuries with them, helping the U.S. government finance its massive deficit spending. That’s over — and the unwinding process has just begun.

Yet federal deficit spending, far from reflecting this reality, has grown by leaps and bounds. But who will finance it? Let’s extend our first chart out a few years.

Projected U.S. Debt

As you can see, we project that foreign participation has plateaued. U.S. private domestic investors can probably increase their holdings moderately, now that households are consuming less and saving more, and financial institutions have money to invest in Treasury paper. The agencies and trusts (like Social Security) are really not a part of the equation, but rather reflect programs on “auto-pilot” and quickly headed to the point where they will negatively impact, not help, the deficits.
Adding it all together, even under the most conservative of assumptions, there are simply not enough buyers to cover the accelerating federal deficits. That leaves the lender of last resort, the Federal Reserve, as the only remaining candidate to satisfy the government’s grotesque appetite for funding. There is no viable alternative.
The Fed will take up the slack in the only way open to it, by printing money out of thin air and exchanging it for promises from the Treasury. That means an escalation of monetary inflation and, somewhere down the road, serious price inflation as well. We don’t know exactly when that will happen, only that it must.
The editors of The Casey Report have been alerting subscribers to this very possible scenario for quite some time. If foreigners stop buying U.S. government debt, the whole house of cards will come crashing down. But you can do a lot to protect yourself financially – run with the trend instead of swimming against it. Find out more about the accurate predictions of trend hunter Doug Casey and his team, and how to profit from them . . . click here.

Well, to be fair, it is not capitalism that condemns millions to poverty, but instead the poor are doomed by the destruction of the purchasing power of the little bit of money that they get and things cost too much for the poor to afford them, and which is deliberately caused by a government so stupid (audience shouts out “How stupid, Wonderful And Wise Mogambo (WAWM)?”) that it deficit-spends money on the poor to alleviate their poverty by allowing the Federal Reserve to produce large, persistent expansions in the money supply with which to buy up the government debt, an expansion of the money supply which erodes the purchasing power of the money, so that the little bit of money owned by the poor doesn’t buy as much!

If the education system of the USA were not so egregiously bad, he would know that fact, and everybody would know that fact, and so when he went to some producers and said he wanted them to finance a new documentary about how capitalism is evil and (I assume) communism is good, they would have laughed in his face and said, “Hahahaha! Where did you get such a stupid idea? Are you some kind of moron?”

Or, alternatively, he could have saved a lot of time and just come to me and asked me and I could have told him, “Hahahaha! Where did you get such a stupid idea? Are you some kind of moron?”

Unfortunately, he did not learn anything from all of that, and actually has the movie concluding that, unbelievably, “Capitalism is an evil, and you cannot regulate evil. You have to eliminate it and replace it with something that is good for all people, and that something is democracy.” Hahahahahaha!

The use of the extra-long “Hahahahahaha!” is my clever way of indicating that this is where a Junior Mogambo Ranger (JMR) who has achieved even a glimmer of True Mogambo Enlightenment (TME) starts laughing in Sublime Mogambo Scorn (SMS)! Hahahahahaha! Just like that! SMS! Hahahahaha!

I thought I was calmed down and was reaching for a bottle of something alcoholic so as to deaden the pain of my stomach hurting from so much laughing when I started laughing all over again when my eyes again fell across the idea that democracy replaces capitalism! Hahahahahaha! I never heard anything so stupid! Hahahahaha!

The first thing that comes to mind, of course, is “Did democracy finance his stupid documentary, or some capitalist?” Hahahaha!

Beyond that, the mind reels! While we are at it, why not replace the production of expensive gasoline not with democracy, but with a super-majority voting system? And we could heat our houses with gang rule! And we can replace expensive food with some dictatorship! Wow! There’s no end of what you can do if you are willing to be ridiculous! Hahaha!

The dismal fact is, in case you were wondering, that capitalism in free enterprise is the only hope that the poor have, if not by sheer dint of theoretical argument that creating jobs is vastly superior to government handouts, then by the complete lack of any successful enrichment of the poor by any other method, mostly because they involve the government creating more and more money which destroys the purchasing power of the little bit of money that the poor had.

But since we Americans have decided, with a stupidity that absolutely staggers the imagination, to prove, once again, that exact same, sad, sorry lesson repeated and repeated over 4,500 years of history, then investing becomes easy when another lesson from that same 4,500 years of history is to own gold!

In fact, it becomes so easy that you can’t help but giggle, “Whee!”

Source: Fighting Capitalism with Capitalism

The U.S. dollar gained, retracing the week’s losses, as the durables goods report for July eroded risk appetite and prompted investors to seek shelter in the safe-haven greenback.

Orders for long-lasting manufactured goods registered the biggest advance since July 2007, but excluding transportation goods, orders for durables were slightly below expectations.

Slippage among global stocks that climbed to 10-month highs this week boosted money flows into less risky assets, such as European government bonds, which also gained from some modest month-end buying, traders said.

Economic data in Europe showed further signs of recovery, as did a report showing U.S. new home sales jumped in July to their fastest pace in 10 months.

But a key measure of U.S. business demand — nondefense capital goods, excluding aircraft — fell, reminding investors that the U.S. economy still faces huge challenges as it tries to emerge from deep recession.

Investors in equity markets took profits on a recent run-up in prices, and key commodity prices, such as copper, fell as the U.S. data cast doubt over the speed of economic recovery.

For example, the MSCI all-country world index rose for six straight session through Tuesday, gaining 5.3 percent over the stretch. The index was down 0.5 percent on Wednesday, but still up about 4 percent in August.

“The market has come a long way, and the economics are still supportive,” said Georgina Taylor, an equity strategist at Legal & General Investment Management.

“We’re just seeing a little profit taking. Nothing has been derailed. Housing data is improving. The only area of concern is consumer spending.”

In Britain, retreating mining and oil stocks outweighed modest gains from defensive pharmaceuticals, while energy shares were the biggest drag on a leading European index.

The pan-European FTSEurofirst 300 <.FTEU3> index of top shares fell 0.5 percent to close at 973.92. The index is still up more than 50 percent from its lifetime low of March 9.

U.S. stocks seesawed after market sell-offs on Monday and Tuesday led investors to turn skittish.

“Given how extended we are, and relatively overbought, sentiment is going to drive the market’s direction much more than any economic news, at least in the short term,” said Michael James, senior trader at Wedbush Morgan in Los Angeles.

Shortly after 1 p.m., the Dow Jones industrial average <.DJI> was down 4.24 points, or 0.04 percent, at 9,535.05. The Standard & Poor’s 500 Index <.SPX> was down 1.74 points, or 0.17 percent, at 1,026.26. The Nasdaq Composite Index <.IXIC> was down 6.60 points, or 0.33 percent, at 2,017.63.

Oil pared early gains to drop to almost $71 a barrel, extending losses from the previous session, on the rise in U.S. stockpiles of crude.

The U.S. Energy Information Administration (EIA), the statistical arm of the Department of Energy, reported on Wednesday that crude stocks in the world’s largest energy consumer rose by 200,000 barrels last week.

U.S. crude for October was down $1.00 at $71.05 a barrel, after falling $2.32 on Tuesday.

Brent crude fell 61 cents to $71.21 a barrel after losing $2.44 the previous day.

U.S. government debt prices fell. The benchmark 10-year note was down 4/32 in price to yield 3.45 percent.

Gold eased as the dollar recovered losses against the euro.

U.S. gold futures for December delivery in New York were down $1.00 at $945 an ounce.

The ICE Futures’ dollar index <.DXY> rose 0.6 percent to 78.723. The euro fell about 0.4 percent to $1.4235 .

Japan’s Nikkei share average closed up 1.4 percent <.N225> to a fresh 10-month high, while the MSCI index of Asia Pacific stocks traded outside Japan rose 0.3 percent.

Aug 26 (Reuters)

Hedge fund legend Julian Robertson is betting the farm against long-dated US Treasurys. As Notes readers will be aware, we have been banging the drum on the vulnerability of long-dated US debt for over a month now. But Robertson, of Tiger Management fame, has a different way to make this short long-term Treasurys play (hat tip Market Folly).

Robertson is shorting long-dated US debt using something called a steepener swap play. Although the mechanism of this trade may be unfamiliar, at heart it’s a simple bet on inflation.

Robertson reckons inflation could easily hit 7% and that it could even reach 18%. Again, Notes readers will be familiar with this market script. This from eFinancialNews:

Steepeners are a type of interest rate swap, where one party agrees to pay the other a fixed rate in exchange for a floating rate, which is derived from the difference between long and short term rates. Many of these products also use high leverage, where the difference between the two rates is multiplied by up to 50 times to produce a higher return.

Retail investors can make the same play as Robertson without using interest rate swaps. It’s actually very straightforward.

Robertson is betting on the yield curve steepening. This happens when the difference between the yields of short-term and long-term US Treasurys increases. Robertson is essentially short the price of long-term US Treasurys and long the price of short-term US Treasurys.

Anyone with a brokerage account can do this by buying the iShares Barclays 1-3 Year Treas.Bd ETF (NYSE: SHY) and shorting the iShares Barclays 7-10 Year Treas.Bd ETF (NYSE: IEF). This would give you a leveraged return on an inflationary future, which not only Robertson but also many other underground investors we know are betting on.

Robertson reckons China and Japan will stop buying US government debt as the dollar weakens. This would bring down the price of 10-year T-notes and cause the yield to shoot up.

Of course, the reason Robertson is so sure that inflation is on the horizon is the Fed’s quantitative easing ‘solution’ to the economic crisis, aka the printing money route, combined with the enormous pressure on US Treasurys right now.

I’m amazed at the amount of money the government is throwing at this thing. You don’t even react anymore unless somebody’s talking about $1 trillion. I genuinely admire the administration’s courage in doing what it’s doing, but not the wisdom of it. I look at the TALF (Term Asset-Backed Securities Loan Facility) program, for example, and it’s almost a bribe to get people to put on more leverage … I ask anyone to give me an example of an economy beefed up by huge amounts of quantitative easing that did not inflate tremendously when or if the economy improved . I think what we’re doing now will either fail, or it will result in unbelievably high inflation – and tragically, maybe both. That would mean a depression and explosive inflation, which is frightening.

Even the mainstream media has started to pick up on the threat of inflation. How can you hedge against it other than by shorting long-dated government debt? Here’s what the Wall Street Journal recommends:

1. A managed gold fund such as Tocqueville Gold (TGLDX) or US Global Investors World Precious Minerals (UNWPX). This is a lower-risk alternative to buying gold directly, since the metal itself can be volatile.

2. A mutual fund that bets on long-term interest rates rising. The two best known are the ProFunds Rising Rates Opportunity fund (RRPIX) and the Rydex Inverse Government Long Bond Strategy fund (RYJUX).

3. An absolute return fund that can use derivatives and aims to beat inflation. An example: MFS Diversified Target Return (DVRAX), which aims to beat inflation over 5% a year over a market cycle. The problem: there are no guarantees. Many of these funds are new. And the track record is too short to judge.

4. Refinance your house into a new 30-year fixed mortgage immediately. Rates currently average about 5.32%. If inflation surges, rates will too.

5. Sell long-term bonds. A bond guaranteeing 7% a year for 30 years won’t be worth much if inflation hits 10% and CDs start paying 11%. Treasury bonds have sold off sharply. But corporate bonds haven’t. The yield gap between long-term investment grade corporates and 30-year Treasurys, which was nearly 5% in mid-January, has fallen to 3.5%.

6. If you want guarantees, buy inflation-protected Treasury bonds (TIPS). Right now, the 20-year TIPS yield is about 2.4% over inflation.

Your family’s share of the government debt is now over half a million dollars. A record $546,668, to be exact.

That cheery Monday stat comes courtesy of a USA Today study, which claims that each American family’s share rose 12% in 2008. That’s $55,000 in new government debt last year for every U.S. household — thousands more than the median household annual income. Here’s how it breaks down:

Last year’s spike is the biggest since the Medicare prescription drug benefit was added in 2003. According to the rag, the government garnered $6.8 trillion in “new obligations” in 2008, bringing the total U.S. tab to $63.8 trillion. Given our spending record so far in 2009, it’s safe to say your family’s burden is already much, much larger.

And you ain’t seen nothin’ yet… the Social Security program will grow by 1-2 million beneficiaries every year until 2032 as baby boomers retire. Medicare will add just as many each year starting in 2011, when that same demographic starts turning 65.
Unless the U.S. becomes a net saver, “another global financial crisis triggered by a dollar crisis could be inevitable,” forecast former Chinese central banker Yu Yongding over the weekend. (Oy… Beijing is 7,000 miles from Washington, and even they can see this coming.)

Yu’s comments were purposefully timed — U.S. Treasury Secretary Geithner embarked on a sudden PR tour of China this weekend. His mission? Keep the cash flowing from America’s No. 1 creditor.

“No one is going to be more concerned about future deficits than we are,” said Geithner, whose government’s budget deficit will exceed $1.75 trillion this year. “As we recover from this unprecedented crisis, we will cut our fiscal deficit [and] we will eliminate the extraordinary government support that we have put in place to overcome the crisis.”

In the meantime, Geithner assured students at Peking University that China’s investments in U.S. paper are “very safe.”
“I doubt the Chinese believed him,” says the man, the myth, the legend Chuck Butler. “Of course, I’m not a Chinese official, so I don’t really know what they are thinking. But I’ve watched them smile and tell former U.S. Treasury Secretary Paulson that they were going to allow greater currency flexibility, and after he would board his plane, it would business as usual… Same thing for Graham and Schumer, who thought their prestigious status as lawmakers would get them someplace with the Chinese.

”It all comes down to the fact that the U.S. needs China more than the other way around.”
General Motors, once the backbone of U.S. manufacturing, is officially bankrupt. As you’ve no doubt heard, the company declared bankruptcy this morning. But since it’s 2009, lord knows it can’t be a run-of-the-mill insolvency. The Obama administration has its hands deep in this thing… here’s the fine print of the biggest industrial bankruptcy in U.S. history:

• Uncle Sam gets a 60% stake. The government will pump an additional $30 billion into GM (on top of the $20 billion already squandered). In exchange, the government will be the largest shareholder… leverage it will use to usher GM through bankruptcy and convert it to this “leaner, stronger company” we’ve been promised
• Half of the UAW’s $20 billion health care fund will be converted to GM stock, which will give it a 17.5% stake in the company. 12-20 factories will be closed, at the cost of approximately 21,000 union workers. 40% of the 6,000 GM dealers will have to close, too
• The Canadian government gets a 12% stake, given all GM’s design/manufacturing activity up north.
• Bondholders were bought (bullied?) out. They’ll swap their $27.1 billion in unsecured debt for 10% of GM, with warrants to own 15% more. Surely, they learned from Chrysler’s bondholders, who were publicly vilified by President Obama for demanding what was lawfully theirs… so much for that hallmark of American capitalism
• Current shareholders get nada. At least that rule of bankruptcy is still intact. If you were long GM, please consider letting someone else manage your money. Anyone.

“GM Bankruptcy to Bring Taxpayer Ownership,” headlined Bloomberg this morning. Shame on them and the U.S. government for perpetuating this “taxpayer ownership” BS.

We must have been asleep when the “taxpayer” got any say in this one. GM is owned by wealthy politicians in Washington who, under threat of imprisonment, forced their constituents to finance the deal. Insinuating the public has any control is “Orwellian in the extreme” Addison suggested when we discussed the matter late Friday. Amen.

And let’s be really honest… taxes haven’t gone up to cover the GM bailout (or any credit crisis expense), but government borrowing certainly has. If any “taxpayers” truly own GM, their tax returns get mailed to Beijing or Tokyo.
Sign of the times… GM and Citigroup are getting kicked off the Dow. Cisco and Travelers will replace them next Monday. Extra irony (and foreshadowing?) in this exchange, as Citi is the former owner of Travelers, which it spun off in 2002.
The market baked in GM’s insolvency a long time ago. In fact, the Dow’s off to the races this morning, even though one of its 30 components is rapidly approaching zero (the “beauty” of a weighted index). The big indexes rose 2% within the first 30 minutes of trading.
“We have reached a pivot point in financial markets,” forecasts Rob Parenteau, steward of the Richebacher Society.

“As we have documented in recent weeks, the list of U.S. macro series showing stable nominal levels over the past three-four months continues to increase. These include retail sales, new orders for durable goods and imports of materials and finished goods. That is not what usually happens in a debt-deflation dynamic, which cumulatively builds on itself. It appears the debt-deflation risk is being contained by extreme fiscal and monetary measures.

“Stability is better than free fall, but it is not the same as expansion, and we believe equity investors have shoved valuations high enough over the past three months that they now require signs of economic growth, not just stability, to carry equity indexes higher. We think the odds of them getting that could improve after we get past the auto production and dealer downshift later in the summer, but the rise in Treasury yields is becoming alarming.

“So from a strategic point of view, we believe equity investors want and need to see stronger economic and earnings results to drive indexes higher, while bond investors need just the opposite to calm Treasury yields down. In addition, through near-zero interest rate policy (ZIRP) and quantitative easing (QE) approaches, the Fed has been trying to push private investors into riskier asset classes while the Treasury’s debt issuance calendar implies they need private investors to prefer owning Treasury bonds, which are generally not the asset of choice in an economic recovery scenario.

“In other words, we have contradictory cross currents here. If the Fed doesn’t intervene to slow or halt the Treasury yield backup, there is a chance the stabilization in unit home sales will wither away. If the Fed does step up QE operations to halt the Treasury yield rise, professional investors taking the ‘green toilet paper’ view will continue to sell dollars and buy commodities. Down the line, that implies higher energy prices for consumers and higher input prices for manufacturers, neither of which we would consider growth-supportive developments.”

If you seek a better, richer life through macroeconomic awareness, you’ll be right at home in the Richebacher Society. Get in, here.
Like last week, materials and energy companies are leading the way today. The great global rebound argument is still hot, and this data point is keeping the commodity fire ablaze:
China’s manufacturing sector expanded for the third month in a row in May, its government reports today. China’s purchasing managers index registered a score of 53.1 during the month, down just a bit from April but still above the expansion/contraction score of 50.
Oil’s up to a fresh seven-month high of $67 a barrel today, largely due to China’s PMI number.
The dollar is still falling, giving commodities an even bigger boost. The dollar index fell right through support at 80 on Friday and has plunged another point and a half since. It’s at 78.8 as we write, just off its 2009 low.

Thus, the cost of your European vacation has popped 7% since the start of May. The euro is up 9 cents over the last 30 days, to just under $1.42 as we write. The pound has followed suit, up 11 cents over the last month, to $1.62.

And could parity be around the corner for our neighbor to the north? The Canadian dollar is up to 92 cents today, its highest level since October 2008.
Gold continues to flourish, but silver has been the real precious metal story of late. The yellow metal is up about 9% over the last month, to roughly $980 today. Silver, on the other hand, shot up 29% in May, to $15.50 an ounce.

“In general,” says Byron King, “the precious metals are up because the big-spending politicians in Washington have no respect for the U.S. dollar. Break out the black crepe and armbands of mourning for the U.S. dollar.

“Specifically, silver has always been the “poor man’s gold.” Silver tends to lurk in the shadows of the price of gold, sort of a stepchild to the yellow metal.

“But on occasion, silver undergoes a slingshot effect. Between the basic industrial demand for electronics, plus jewelry demand (’cuz gold’s getting pricey!), and now the monetary pull… silver is accelerating in a price rise that is — believe it or not — leaving gold in the dust.

“Silver could break $20 sooner than we’ll see gold at $1,200, and the silver miners (my readers own several) will soar to new heights. Do you have your ticket for this ride? All aboard!!!”

Heh, get your ticket here: Byron’s latest special report on precious metals investing.
Silver may continue to outperform gold. If you’re a believer in historic ratios, silver still has room to rise in order to meet its average gold price ratio over the last decade.

Either that, or gold’s price needs to fall. And in this environment, we’d sooner go long silver than short gold. Do you agree?
“I’m a raving fan, but sometimes you guys get misled a bit,” writes a reader in response to Robert Gordon’s call that the recession has bottomed.

“The so-called ‘ultimate indicator’ of recession ends of the four-week moving average of initial jobless claims is hardly as accurate as suggested. It is true that it does turn down typically, just as a recession ends from the retrospective declaration of that recession, but it is NOT true that every time the four-week moving average of initial jobless claims turns down during a recession, the recession ends.

“In the ’81-’82 recession, the indicator turned down from over 500k four times before a correct signal — in December ’81, February 82, May 82, June 82, and finally at the real ultimate peak in October 82. In the 1990 recession, it turned down in January of ’91, before its ultimate peak in April 1991.

“In the 2000 recession, it turned down in June 2001 from high levels, to give a false signal before peaking in October 2001, although many other recession indicators suggest that the recession went on for far longer than in the graphic you presented.

“Virtually every recession therefore has witnessed false signals of at least one and often many times before the ultimate peak in initial claims and before the later declared end of the recession. Why would this time be any different — particularly in view of the potential for auto mess to lead to accelerated claims?”

The 5: We agree… guess we didn’t lay the skepticism on thick enough when we introduced the idea. Glad to hear you’re a fan.

Source: Your Share of the Debt, GM Dies, Silver Still a Buy, A Pivot Point and More!

We’re not so sure. It seems too early to us.

But we’re not even going to think about it. Today, we’ve got to make tracks. We’re traveling.

In light of our voyage we’re turning today’s essay over to guest host Ian Mathias, of Agora Financial’s 5 Min. Forecast. He’ll take over from here…

Your family’s share of the government debt is now over half a million dollars. A record $546,668, to be exact.

That cheery Monday stat comes courtesy of a USA Today study, which claims that each American family’s share rose 12% in 2008. That’s $55,000 in new government debt last year for every US household – thousands more than the median household annual income. Here’s how it breaks down:

Last year’s spike is the biggest since the Medicare prescription drug benefit was added in 2003. According to the rag, the government garnered $6.8 trillion in “new obligations” in 2008, bringing the total US tab to $63.8 trillion. Given our spending record so far in 2009, it’s safe to say your family’s burden is already much, much larger.

And you ain’t seen nothin’ yet… the Social Security program will grow by 1-2 million beneficiaries every year until 2032 as baby boomers retire. Medicare will add just as many each year starting in 2011, when that same demographic starts turning 65.

Unless the US becomes a net saver, “another global financial crisis triggered by a dollar crisis could be inevitable,” forecast former Chinese central banker Yu Yongding over the weekend. (Oy… Beijing is 7,000 miles from Washington, and even they can see this coming.)

Yu’s comments were purposefully timed – US Treasury Secretary Geithner embarked on a sudden PR tour of China this weekend. His mission? Keep the cash flowing from America’s No. 1 creditor.

“No one is going to be more concerned about future deficits than we are,” said Geithner, whose government’s budget deficit will exceed $1.75 trillion this year. “As we recover from this unprecedented crisis, we will cut our fiscal deficit [and] we will eliminate the extraordinary government support that we have put in place to overcome the crisis.”

In the meantime, Geithner assured students at Peking University that China’s investments in US paper are “very safe.”

“I doubt the Chinese believed him,” says friend and currency expert Chuck Butler. “Of course, I’m not a Chinese official, so I don’t really know what they are thinking. But I’ve watched them smile and tell former US Treasury Secretary Paulson that they were going to allow greater currency flexibility, and after he would board his plane, it would be business as usual… Same thing for Graham and Schumer, who thought their prestigious status as lawmakers would get them someplace with the Chinese.

“It all comes down to the fact that the US needs China more than the other way around.”

General Motors, once the backbone of US manufacturing, is officially bankrupt. As you’ve no doubt heard, the company declared bankruptcy this morning. But since it’s 2009, lord knows it can’t be a run-of-the-mill insolvency. The Obama administration has its hands deep in this thing… here’s the fine print of the biggest industrial bankruptcy in US history:

• Uncle Sam gets a 60% stake. The government will pump an additional $30 billion into GM (on top of the $20 billion already squandered). In exchange, the government will be the largest shareholder… leverage it will use to usher GM through bankruptcy and convert it to this “leaner, stronger company” we’ve been promised
• Half of the UAW’s $20 billion health care fund will be converted to GM stock, which will give it a 17.5% stake in the company. 12-20 factories will be closed, at the cost of approximately 21,000 union workers. 40% of the 6,000 GM dealers will have to close, too
• The Canadian government gets a 12% stake, given all GM’s design/manufacturing activity up north
• Bondholders were bought (bullied?) out. They’ll swap their $27.1 billion in unsecured debt for 10% of GM, with warrants to own 15% more. Surely, they learned from Chrysler’s bondholders, who were publicly vilified by President Obama for demanding what was lawfully theirs… so much for that hallmark of American capitalism
• Current shareholders get nada. At least that rule of bankruptcy is still intact. If you were long GM, please consider letting someone else manage your money. Anyone.

“GM Bankruptcy to Bring Taxpayer Ownership,” headlined Bloomberg this morning. Shame on them and the US government for perpetuating this “taxpayer ownership” BS.

We must have been asleep when the “taxpayer” got any say in this one. GM is owned by wealthy politicians in Washington who, under threat of imprisonment, forced their constituents to finance the deal. Insinuating the public has any control is “Orwellian in the extreme” Addison suggested when we discussed the matter late Friday. Amen.

And let’s be really honest… taxes haven’t gone up to cover the GM bailout (or any credit crisis expense), but government borrowing certainly has. If any “taxpayers” truly own GM, their tax returns get mailed to Beijing and Tokyo.

Sign of the times… GM and Citigroup (NYSE:C) are getting kicked off the Dow. Cisco and Travelers will replace them next Monday. Extra irony (and foreshadowing?) in this exchange, as Citigroup is the former owner of Travelers, which it spun off in 2002.

The market had baked in GM’s insolvency a long time ago. In fact, the Dow’s off to the races this morning, even though one of its 30 components is rapidly approaching zero (the “beauty” of a weighted index). The big indexes rose 2% within the first 30 minutes of trading.

“We have reached a pivot point in financial markets,” forecasts Rob Parenteau, steward of the Richebächer Society.

“As we have documented in recent weeks, the list of US macro series showing stable nominal levels over the past three-four months continues to increase. These include retail sales, new orders for durable goods and imports of materials and finished goods. That is not what usually happens in a debt-deflation dynamic, which cumulatively builds on itself. It appears the debt-deflation risk is being contained by extreme fiscal and monetary measures.

“Stability is better than free fall, but it is not the same as expansion, and we believe equity investors have shoved valuations high enough over the past three months that they now require signs of economic growth, not just stability, to carry equity indexes higher. We think the odds of them getting that could improve after we get past the auto production and dealer downshift later in the summer, but the rise in Treasury yields is becoming alarming.

“So from a strategic point of view, we believe equity investors want and need to see stronger economic and earnings results to drive indexes higher, while bond investors need just the opposite to calm Treasury yields down. In addition, through near-zero interest rate policy (ZIRP) and quantitative easing (QE) approaches, the Fed has been trying to push private investors into riskier asset classes while the Treasury’s debt issuance calendar implies they need private investors to prefer owning Treasury bonds, which are generally not the asset of choice in an economic recovery scenario.

“In other words, we have contradictory cross currents here. If the Fed doesn’t intervene to slow or halt the Treasury yield backup, there is a chance the stabilization in unit home sales will wither away. If the Fed does step up QE operations to halt the Treasury yield rise, professional investors taking the ‘green toilet paper’ view will continue to sell dollars and buy commodities. Down the line, that implies higher energy prices for consumers and higher input prices for manufacturers, neither of which we would consider growth-supportive developments.”

Just like last week, materials and energy companies are leading the way today. The great global rebound argument is still hot, and this data point is keeping the commodity fire ablaze: China’s manufacturing sector expanded for the third month in a row in May, its government reports. China’s purchasing managers index registered a score of 53.1 during the month, down just a bit from April but still above the expansion/contraction score of 50.

Oil’s up to a fresh seven-month high of $67 a barrel today, largely due to China’s PMI number. On the other had, the dollar is still falling, giving commodities an even bigger boost. The dollar index fell right through support at 80 on Friday and has plunged another point and a half since. It’s at 78.8 as we write, just off its 2009 low.

Thus, the cost of your European vacation has popped 7% since the start of May. The euro is up 9 cents over the last 30 days, to just under $1.42 as we write. The pound has followed suit, up 11 cents over the last month, to $1.62.

And could parity be around the corner for our neighbor to the north? The Canadian dollar is up to 92 cents today, its highest level since October 2008.

Gold continues to flourish, but silver has been the real precious metal story of late. The yellow metal is up about 9% over the last month, to roughly $980 today. Silver, on the other hand, shot up 29% in May, to $15.50 an ounce.

“In general,” says energy and oil expert Byron King, “the precious metals are up because the big-spending politicians in Washington have no respect for the US dollar. Break out the black crepe and armbands of mourning for the US dollar.

“Specifically, silver has always been the “poor man’s gold.” Silver tends to lurk in the shadows of the price of gold, sort of a stepchild to the yellow metal.

“But on occasion, silver undergoes a slingshot effect. Between the basic industrial demand for electronics, plus jewelry demand (’cuz gold’s getting pricey!), and now the monetary pull… silver is accelerating in a price rise that is – believe it or not – leaving gold in the dust.

“Silver could break $20 sooner than we’ll see gold at $1,200, and the silver miners (my readers own several) will soar to new heights. Do you have your ticket for this ride? All aboard!!!”

Silver may continue to outperform gold. If you’re a believer in historic ratios, silver still has room to rise in order to meet its average gold price ratio over the last decade.

Either that, or gold’s price needs to fall. And in this environment, we’d sooner go long silver than short gold. Do you agree?

So again, we thank Ian for his contribution today as guest host and his insightful above look at the news.

Our regular commentary, such as it is…tomorrow.

Bill Bonner

Source: Your Share of the US Debt

The downgrade has both financial and political ramifications.  It is sure to increase the country’s cost of borrowing and may even boost the out-of-favor Conservative Party to victory in the next election, which may come as early as next year.

Even though the agency reaffirmed its ‘AAA’ long-term and ‘A-1+’ short-term credit ratings for the United Kingdom, the downgrade may be cause for alarm among its debt holders and citizens.

“We have revised the outlook on the U.K. to negative due to our view that, even assuming additional fiscal tightening, the net general government debt burden could approach 100% of GDP and remain near that level in the medium term,” Standard & Poor’s credit analyst David Beers said in a statement, according to Reuters.

S&P questions the government’s stance regarding “how quickly the erosion in the government’s revenue base may be repaired, the extent to which the growth in government spending can be curtailed, and consequently the pace at which historically high fiscal deficits are likely to narrow,” Beers said in the statement.

Just minutes before S&P announced the ratings cut, the government released figures that revealed the budget deficit hit $13.4 billion (8.5 billion pounds) in April, the most for that month since records began.

Government bond futures, British share prices and the pound fell sharply after the S&P announcement.

Britain’s finance minister Alistair Darling said the economic future is still not clear and S&P could reverse itself if the United Kingdom is able to make significant progress towards reducing its budget deficit to its stated goal of $276 billion (175 billion pounds) this year.

The government has launched a program of quantitative easing to buy a record $340 billion (220 billion pounds) in government bonds, which has ballooned the deficit.  Some analysts have criticized the program and characterized government projections that deficits would shrink in the future and spark economic growth as unrealistic.

But the government is holding to its view.

“There are significant uncertainties in the global economy at the present time and S&P point out that the outlook could be revised back to stable ‘if fiscal outturns are more benign than (they) currently anticipate’,” a Treasury spokesman said, according to Reuters.

“The Budget set out a clear plan to halve the deficit in five years. That judgment was based on a deliberately cautious view of the public finances,” the Treasury added.

S&P said Britain’s high debt ratings were supported by its wealthy, diversified economy, fiscal and monetary policy flexibility, and relatively flexible product and labor markets, Reuters reported.

But in an ominous warning, S&P said that it would consider lowering the U.K.’s top-tier AAA debt rating if the next Government does not take radical measures to reduce the scale of public debt, according to the Daily Telegraph.

“The rating could be lowered if we conclude that, following the election, the next Government’s fiscal consolidation plans are unlikely to put the U.K. debt burden on a secure downward trajectory,” Beers said.

The specter of a divisive election – now likely in 2010 – is raising political uncertainty about how government policy may affect fiscal matters in the future.
Analysts were unsure if fallout from the economic crisis could convince voters to change parties in order to deal with the deteriorating debt situation.  But S&P’s downgrade is sure to bear on the minds of the victorious party.

“Whoever wins the next election, tax hikes and sharp spending cuts will be the order of the day – but today’s announcement by S&P puts that much more pressure on the next government to act quickly,” Colin Ellis of Daiwa Securities Group Inc. told Reuters.

Source: S&P Lowers U.K. Credit Outlook Putting Election in Flux

We know from Jeremy Grantham’s work on the “presidential cycle” that stock values rise on average 22% (based on the S&P 500) in the third year of a presidential terms relative to years one and two. This is not statistical noise. It’s evidence of the power presidents have to puff up stock markets through financial stimulus, political maneuvering and moral hazard.

Nobody who seeks political power is ever happy to give it up. So presidents try to give the economy a helping hand in time for elections. Bush, helped by a pliant Fed chief, did a better job at this than most. To say that the Fed’s monetary policy was loose in the run up to Bush’s reelection campaign is an understatement of epic proportions. George Junior had learned an important lesson from his father’s presidency: recessions don’t get you reelected.

Of course, the ensuing expansion of credit also helped by loose regulation of the shadow-banking sector and derivatives markets, couldn’t last forever. And the hero of the 2004 presidential elections left office during the biggest economic disaster since the 1929 crash.

President Obama knows his presidency will stand or fall on voters’ perceptions of his ability perform major triage on the wounded US economy. It does not, however, matter to Obama’s reelection bid if the economy assumes a sustainable pattern of growth; a good old-fashioned dose of ‘stimulus’ will do. Obama’s playbook is to borrow and spend America out of trouble. It is a short-term remedy at best. At worst, it will ruin the country.

The government will borrow 50 cents of each dollar it spends for the next year. To do this it will run the largest annual fiscal deficit since the US mobilized for World War II. There are only two ways to pay off the debt pile George W Bush and Barack Obama have run up. (President Clinton left office with a budget surplus.) The government will either raise taxes via the IRS or trigger inflation. It will likely resort to a combination of both.

This point is not lost on even Obama supporters. Warren Buffett had this to say recently about spiraling deficits:

A country that continuously expands its debt as a percentage of GDP and raises much of the money abroad to finance that, at some point, it’s going to inflate its way out of the burden of that debt.
Every country that has denominated its debt in its own currency and has found itself with uncomfortable amounts of debt relative to the rest of the world, in the end they inflate.
That becomes a tax on everybody that has fixed dollar investments.

Buffett thinks the ratio of debt to GDP in the US could reach 80% by 2011. Right now, the government has backstopped roughly 70% of the US economy with public funds. This is not a free market by any stretch of the imagination.
It is difficult to understand how the government will extract itself from this situation without triggering another collapse.

As we have said before here at Notes, traders and investors are now betting on Uncle Sam’s support of the market, not the market itself.

What was giving us nightmares was Japan. If fiscal stimulus is so stimulating, then Japan would have experienced on the of the biggest economic booms of all time after its government ramped up the debt-to-GDP ratio there from 50% to almost 170% to ward of the recession that struck the former Asian powerhouse in the 1990s.

Instead, as Van Hoisington and Lucy Hunt put it recently in John’s Mauldin’s Quarterly Review and Outlook, Japans economy “is in shambles.”

After two decades of repeated disappointments, Japan is in the midst of its worst recession since the end of World War II. In the fourth quarter, their GDP declined almost twice as fast as that of the U.S. or the EU. The huge increase in Japanese government debt was created when it provided funds to salvage failing banks, insurance and other companies, plus transitory tax relief and make-work projects.

In 2008, after two decades of massive debt increases, the Nikkei 225 average was 77% lower than in 1989, and the yield on long Japanese Government Bonds was less than 1.5%. As the Government Debt to GDP ratio surged, interest rates and stock prices fell, reflecting the negative consequences of the transfer of financial resources from the private to the public sector. Thus, the fiscal largesse did not restore Japan to prosperity. The deprivation of private sector funds suggested that these policy actions served to impede, rather than facilitate, economic activity.

It seems fiscal stimulus, by sucking investment into government spending, can actually be deflationary rather than inflationary.

Another problem is monetary velocity. Although the Fed can increase monetary base, it cannot force the banks to lend out this money and thus create the credit necessary for inflation to occur. Right now, banks would rather sit on their reserves rather than lend it out and risk default due to deflation. And as long as banks hold onto their toxic assets, they will need all the cash they can get to cover the costs of writedowns and credit losses.

In this way, the banks in their current state are more like vampires than zombies: they are sucking the lifeblood (money) out of the economy and perpetuating the deflationary spiral the feds are stuffing them full of money to avoid.

It continues to amaze us here at Notes that the Obama administration has so far gotten away with protecting banks’ unsecured creditors at the expense of the economy as whole. Of course, this can’t last forever. And once the banks do start lending again… we could be in for a serious inflationary surprise.

In this parallel reality, U.S. Federal Reserve Chairman Ben S. Bernanke has just rung the loudest bell ever heard in the foreign-exchange and government-debt markets. Investors who ignore the clanging do so at their own peril. The bell’s reverberations will be felt by everyday Americans, whose lives are about to change in ways few can imagine.

While nearly every facet of America’s economy has been devastated over the past six months, our national currency has thus far skipped through the carnage with nary a scratch. Ironically, the U.S dollar has been the beneficiary of the very global economic crisis that the United States set in motion. As a result, our economy has thus far been spared the full force of the storm.

Following its policymaking meeting last week, the Fed finally made clear what should have been obvious for some time: The only weapon that the U.S. central bank is willing to use to fight the economic downturn is a continuing torrent of pure, undiluted, inflation. The announcement should be seen as a game changer that redirects the fury of the financial storm directly onto our shores.

In its statement, the Fed announced its intention to purchase an additional $1 trillion worth of U.S. Treasury and agency debt. The purchases, of course, will be made with money created out of thin air through the government’s printing presses. Few can doubt that it will persist with these operations until the economy returns to its former health. Whether this can ever be accomplished with a printing press alone has never been seriously considered. Bernanke himself admits that we are in uncharted waters, with no map or compass, just simply a hope that more dollars are the answer.

Rather than solving our problems, more inflation will only add to the crisis. Falling asset prices, the credit crunch, declining consumer spending, bankruptcies, foreclosures, and layoffs are all part of the necessary rebalancing of our economy. These wrenching movements, however painful, are the market’s attempts to resolve the serious problems at the root of our bubble economy. Attempts to literally paper-over these problems will lead to disaster.

Now that the Fed has recklessly shown its hand, the mad dash to get out of U.S. Treasuries and dollars should not be far off. The more the Fed prints to buy bonds the less the dollar is worth. Holders of our debt (read China and Japan) understand this dynamic. We must expect that they will not only refuse to buy new bonds, but they will look to unload those bonds they already own.

Under normal circumstances, if creditors grew concerned that inflation was eating into their returns, the Fed would raise interest rates to entice them to buy. However, the Fed will avoid this course of action as it fears higher rates are too heavy a burden for our debt-laden economy to bear. To maintain artificially low rates, the Fed will be forced to purchase trillions more debt than it expects to as it becomes the only buyer in a seller’s market.

Just last week, Chinese Premier Wen Jiabao voiced concern about his country’s massive investments in U.S. government debt. In the most unequivocal statement yet by the Chinese leadership on this issue, Wen made it plain that he was concerned with depreciation, not default. With his fears now officially confirmed by the Fed statement, we must wonder when the Chinese will finally change course.

There is a growing consensus that if China no longer wants to buy our bonds, we can simply print the money and buy them ourselves. This naïve view fails to consider the consequences implicit in such a change. When the Treasury sells bonds to China, no new dollars are printed. Instead, China prints yuan, which it then uses to buy Treasuries. This effectively allows America to export its inflation to China. However, now that we will be printing the money ourselves, the full inflationary impact will fall directly on us.

With such a policy in place, America has now become a banana republic. It won’t be too long before our living standards reflect our new status. Got Gold?

[Editor's Note: Peter D. Schiff, Euro Pacific Capital Inc.'s president and chief global strategist, is a well-known author and commentator, and is a periodic contributor to Money Morning. Schiff is the author of two New York Times best sellers: "The Little Book of Bull Moves in Bear Markets,"and " Crash Proof: How to Profit from the Coming Economic Collapse"." For a more-detailed analysis of the nation's financial problems, and the inherent dangers that these problems pose for both the U.S. economy and for dollar-denominated investments, click here to download Euro Pacific's new financial-research report, "The Collapsing Dollar: The Powerful Case for Investing in Foreign Securities."

In the midst of an ongoing financial crisis that's eradicated trillions of dollars in shareholder wealth, the profit search facing U.S. investors is tougher than ever. The uncertainty surrounding the economic-stimulus and banking-bailout plans isn't helping.  But a special new offer from Money Morning is a two-way win for investors: A free report provides insights into the threats those plans pose, while our monthly newsletter, The Money Map Report, consistently spotlights some of the hard-to-find but potentially lucrative profit plays that remain. Investors who subscribe to the Money Map Report can obtain a complimentary copy of Schiff's best seller, "Crash Proof," in which he details the causes of the housing bubble and financial-system collapse, and tells investors how to dodge losses from the problems that are still to come. To read our free report, and to find out more about this special offer, please click here .]

Source: Will the Bailouts Transform Us from Global Superpower to Banana Republic?