U.S. Economic/Financial News
U.S. Debt Depends Upon 'Kindness of Strangers'
A new study by Democrats on the Joint Economic Committee (JEC) and the House Committee on Financial Services asserts that, "The Bush Administration has allowed the United States to become increasingly dependent on foreign purchases of U.S. Treasury securities to finance the federal budget deficit, and future U.S. national income will be depressed by payments to foreign holders of U.S. debt.
"If the United States does not begin to take steps to reduce its unsustainable dependence on foreign borrowing in an orderly way, there could be a run on the dollar and that could precipitate an international financial crisis and a sharp increase in interest rates," the report warned.
The report, "Relying on the Kindness of Strangers: Foreign Purchases of U.S. Treasury Debt," was released by Sen. Jack Reed (D-RI), Ranking Democrat on the JEC, Rep. Carolyn Maloney (D-NY), Senior House Democrat on the JEC, and Rep. Barney Frank (D-Mass), Ranking Democrat on the House Financial Services Committee.
Other key findings from the study:
* "At the end of fiscal year 2005, 42.1 percent of the public debt of the United States was held by foreigners, including foreign governments. That foreign ownership share rose by 11.8 percentage points just since 2001 and will be higher still when the data for 2006 are released.
* "Foreign ownership of Treasury securities more than doubled from $1.0 trillion in January 2001 to $2.2 trillion in August 2006. ChinaUs holdings rose 450 percent, from $61.5 billion to $339 billion. The OPEC nations have doubled their holdings to over $100 billion in the past two years.
* "The fiscal discipline of the 1990s put a halt to rising federal debt and rising foreign-ownership, but both have grown since 2001, with foreign holdings growing faster than the overall public debt.
* "Since 2001, foreign purchases of U.S. Treasury debt have almost certainly contributed to keeping interest rates lower than they otherwise would have been in the face of large federal budget deficits, but the United States must reduce its heavy dependence on foreign borrowing in order to avoid a run on the dollar and a steep rise in interest rates.
* "Even without a run on the dollar, the need to pay interest of $100 billion or more per year on foreign holdings of Treasury securities will reduce U.S. national income."
"Our reliance on China and other nations to finance our debt is the result of a deliberate policy by the Bush administration, one that reversed course from the Clinton administration and has favored deficit financing of tax cuts and federal spending over a prudent fiscal policy. It will take years of sound fiscal policy to reduce our reliance on foreign lenders and return the federal debt to a prudent level," the report concludes.
Plunge Protection Team: Market Surge Is 'Suckers' Rally'
Ambrose Evans-Pritchard, writing in the London Daily Telegraph Oct. 30, reported on the reactivation of the Plunge Protection Team (PPT), which was first leaked to the Wall Street Journal a week earlier and picked up in some U.S. press. Evans-Pritchard writes that the actions of U.S. financial authorities, including the reactivation of the secret PPT (aka the President's Working Group on Capital Markets), indicates that "U.S. authorities believe the roaring bull market this autumn is just a suckers' rally before the inevitable storm hits."
The Telegraph quotes former Clinton White House communications director George Stephanopoulos, now an ABC News anchor, describing how the PPT worked under Clinton: "They have an informal agreement among major banks to come in and start to buy stock if there appears to be a problem. In 1998, there was the Long Term Capital crisis, a global currency crisis. At the guidance of the Fed, all of the banks got together and propped up the currency markets. And they have plans in place to consider that if the stock markets start to fall."
In this context, Evans-Pritchard cites the SEC move to slash margin requirements for institutions and hedge funds on stocks, options, and futures to as low as 15%, down from a range of 25% to 50%. He writes, "Conspiracy buffs are already accusing SEC chief Chris Cox of juicing the markets to help stop the implosion of the Bush Presidency." He then asks whether "Paulson and Mr. Cox know something that we do not: whether other hedge funds are in the same sinking boat as Amaranth Advisers and Vega Asset Management, keel-hauled by bets on natural gas and bonds?"
Third-Quarter Foreclosures Jump 43% Over 2005
RealtyTrac reported at the end of October that more than 318,000 properties entered some stage of foreclosure nationwide during July-September, up 17% from the second quarter, and a 43% yearly increase from 2005. It was described as the impact of interest rate increases in the "first wave of adjustable rate mortgages," combined with jobs losses and falling home prices.
In California, foreclosures soared 171% from last year; they also more than doubled in Michigan, surging 109%; in Florida, they rose 26%, making it the state with the most foreclosure filings.
Housing Bubble Meltdown Drags Down Construction
Construction spending fell in September as home building dropped for the sixth month in a row, according to the National Association of Realtors Nov. 1. Spending on private residential construction was down 1.1% in September, the sixth consecutive decline of 1% or more, the Commerce Department reported; overall spending on all construction projects declined 0.3%.
Helping to drive the fall in construction spending, pending sales of existing homes in September fell 1.1% from August, and were down 13.6% from September 2005, according to an index calculated by the National Association of Realtors.
Bellwether Loudoun County (Va.) Real Estate Continues To Unravel
September cancellations for new-home contracts skyrocketed to 15%, over last year's September rate of 2.4%, reported the Loudoun Times Mirror on Nov. 1. The county, in Northern Virginia, reportedly has the highest per-capita median income in the nation. Fueling the cancellations is the fact that people are unable to sell their current homes and so do not have the required cash to complete the purchase of a new home. In many cases, they must forfeit their deposits, some as high as five figures, as they back out of the contracts. In the larger Washington-area market, new-home contract cancellation rates have tripled to 17%.
Derivatives Allow Profits Despite Mortgage Defaults
The Wall Street Journal Oct. 30 ran an extensive description of how "investors" are now purchasing derivatives, betting that the rate of loan defaults will rise. It used to be that you made money when people paid off their loans. Now, with expectations that the rate of defaults will rise, derivatives are sold that "pay off" when a critical number of subprime borrowers default. As one mortgage bond manager in Los Angeles is quoted: "You can profit from any scenario." Currently about $1 trillion in subprime U.S. mortgages are held by financial institutions, domestic and foreign.
Vultures Eye Ford and GM
Ford and GM are beginning to get their act together with drastic cost-cutting measures, according to the Financial Times Oct. 30, but the London paper warns that they'll be taken over or thrown into bankruptcy if they don't continue along "the recovery road."
Ford and GM's rejection of a tie-up with Renault's Carlos Ghosn, and their deciding to go it alone, carries big risks, says the FT: "Failure to produce meaningful improvements in the near future could leave the companies with no option other than a slide into financial distress or a cut-price sale to private equity funds."
"Ford and GM were sinking ships and they have been stabilized, but that is not enough," says a senior Wall Street banker. "Markets, creditors and shareholders will want to see some positive changes in the operations, or they will quickly become candidates for bankruptcy or a takeover."
More Bad News for Big Three Automakers
A second auto dealership chain is cutting orders to Detroit's Big Three automakers by 30-40%, the Detroit News reported Nov. 1. Joining Auto Nation, Group 1 Automotive said the reduction in orders for 2007 model-year vehicles, is in order to reduce bloated inventory from 100 days' worth to a targetted 75 days' supply. This move will force still more production cuts by General Motors, Ford, and Chrysler.