Bond Market Blowout

Bernanke's Pickle

June 4, 2009

Bond Market Blowout

By MIKE WHITNEY

Last week's ructions in the bond market leave little doubt that the financial crisis has entered a new and more lethal phase. Of particular concern is the spike in long-term Treasuries which are used to set interest rates on mortgages and other loans. On Thursday, the average rate for a 30-year fixed loan jumped from 5.03 per cent to 5.44 per cent in just two days. The sudden move put the mortgage market in a panic and stopped the refinancing of billions of dollars in loans. The yields on Treasuries are going up because investors see hopeful signs of recovery in the economy and are moving into riskier investments. More money is moving into equities which is why the stock markets have been surging lately. (The Federal Reserve's multi-trillion dollar monetary stimulus has played a large part, as well.) The bottom line is that investors are looking for better returns than the paltry yields on government debt. That will make it harder for the Fed to sell up to $3 trillion in Treasuries in the next year to finance Obama's proposed economic recovery plan. For now, foreign central banks are still buying enough short-term Treasuries to balance the current account deficit, but that could change in a flash, especially given Fed chief Bernanke's propensity to print more money at the drop of a hat. That's making foreign holders of dollar-based assets more jittery than ever.

Bernanke is in a bit of a pickle. He needs to sell boatloads of US debt, but if he raises interest rates he'll kill the recovery and send the stock market reeling. What to do? Eventually the Fed chief will arrive at the conclusion that there's only two ways out of a credit bust of this magnitude; either raise rates and crush the economy or print more money and face a funding crisis. Either way, there's a world of hurt ahead.

The factors which strengthened the dollar earlier in the crisis have now run their course. Treasuries no longer attract "flight-to-safety" investors, because most people don't think that another Lehman Bros-type meltdown is likely. Investors are shifting to emerging markets, corporate bonds and securities. Commodities are on the upswing because speculators think that Fed's quantitative easing will end in hyperinflation. More important, cross-border flows have either stopped entirely or been significantly reduced due to the need for fiscal stimulus at home to counter falling demand and rising unemployment. In 2006, 65 per cent of global surplus capital flowed to US markets. No more. Now the US will have to fight tooth-and-nail for a smaller and smaller share of the same pool. It will be uphill all the way.

http://www.counterpunch.org/whitney06042009.html

Financial big wigs in Asia this past week,t hey LAUGHED at him when he said that we were in recovery?

For now, foreign central banks are still buying enough short-term Treasuries to balance the current account deficit, but that could change in a flash, especially given Fed chief Bernanke's propensity to print more money at the drop of a hat. That's making foreign holders of dollar-based assets more jittery than ever.

Perhaps Obama should have investigated Geithner/Bernanke before giving them such tough positions.

I find it ironic that President Obama was all about reaching out across the aisle immediately after his inauguration, yet he somehow didn't manage to talk to any in the Congress or the Senate who understood the correct steps to take in our economic messes, and might have helped him pick truly reform-minded people as his appointees.

to keep the status quo, for the elites. Maybe they really do believe that the trillions of our taxmoney that is thrown into the economy, will keep it from imploding. Except the bubble is too big, and it will eventually burst throwing us into a depression.

Personally I think our taxmoney could better be spent by stockpiling food for the homeless when millions lose their jobs after the auto factories and dealers are closed.

He picked exactly who he was told to pick. Wall Street and The Banksters underwrote his campaign. He owes them big time.

Obama is not what he appears....but you are starting to see his true colors. He even said that taxing health benefits of working people is on the table. He said the exact opposite during the campaign.

He is not to be trusted. It's so sad that after those horrid 8 years of W, we are going to get no relief...just a big fat Depression.

Pitchforks.

But I am trying to be extremely diplomatic on DU. (At least -every so often.)

"Seemslikeadream" "Fiveagan" "Leftchick" are all gone now.

And also I have been told that honey attracts more flies than vinegar.

When you say gone...do you mean they have been banned from DU? Or what?

And why 12/08/08 to open your eyes?

Geithner and Summers are such a part of the Wealthy Elite's system. With the TARP $$$, every person in the U.S. could have had nearly $2,700. Or paid off all of the mortgages in the country. It was a HUGE HEIST. We're headed for 3rd World Status.

One moment you might be here, the next gone without warning.

As for the date 12/08/08, I saw Obama on Sixty Minutes in late Nov and he was saying "Hank is working so hard" (In reference to Paulson) - sort of a "Good job there, Brownie" moment from our President elect.

All I could think was "Oh S____!"

But I did wait a bit to see who he was considering for the top economic appointee/adviser spots and by Dec 8, 2008, what I was hearing confirmed that O's economic plans would be a disaster.

I agree with you about the HEIST and the third world status. We have been robbed, and sadly most of the people who voted on Nov 4th '08 have been in such a swoon that they do not even realize it.

I can't believe it. Is there anywhere to go to read what happened??

So are all their posts then deleted as well???

I'm speechless.

Well...I like your word, 'swoon,' cuz that is what it is. A friend of mine threw a huge fit and called me all kinds of names just because I asked about how Obama doesn't seem to appear as he portrayed himself in the campaign. She is in total Denial...and I believe sick that this isn't working out the way it should. She said she'd never speak to me again. Whew!

Take care....let me know anything about the banishment.

Screw people who depend on social programs, including Social Security and Medicare.

"because investors see hopeful signs of recovery in the economy" is the operative clause.

International saving funds were so terrified that they were giving the US Treasury free money.

Now that it's clear that the Obama administration has prevented a Great Depression II, and that the financial system isn't going to collapse, money is draining out of virtually interest free treasuries into the real economy.

Bernanke's statement the other day said that his challenge now was to cope with the end of the flight to ultimate security in treasuries. While it makes financing the deficit more expensive, it's actually good news.

Not that most DUers of the "let it fail" variety would consider the likelihood of a late 2009 recovery "good news."

It great to see green shoots, unfortunatly, they are sprouting up in vacant parking lots where folk's parked thier cars to go shopping or to work.

As jobs are a lagging indicator, we have some way to go before this is over with.

Bernanke has major problems comming his way. He gave the Congress the question every body wants an answer to. How are you planning to pay for all this?

Any suggestions?

to go after discretionary military spending and to raise taxes on the wealthy.

Those are basically the only ways to pay for it in the long term.

Obama and Gates are already talking about canceling major weapons systems, and Obama's pick for procurement at DOD is an expert on cost reduction.

Even if you could cut Defense procurement, given Congress' not in my district mentality, what can you save given the current commitments by the Administration? $300 billion?

That would cover most of what the administration expects to loose given it's commitments to TARP and all it's siblings. True, they were boxed into it before they even won the election. Yes, the banks are paying interest on the loans. As for now, the toxic assets are still on the banks' books.

There are tax increases coming. The employer provided health care tax for one. That money is already spoken for. And even going back to Clinton's tax percentages, that's still not enough to cover the proposed deficits.

Cap and trade? How do you fit that in? When do you fit that in? Is this another now or never deal?

What happens when California goes bust? Loose the left coast? Impose IMF austerity rules on Sacramento?

May be you could cut a trillion dollars. Shrink the air force and go with UAV's instead of fighters and bombers. You then loose conventional capacity and can't defend your own airspace. Not gonna happen. Cut the navy? While China is expanding their's. Not gonna happen. The Army then? Pull out of Korea or Europe? And put them where? CONUS. Continental US. You'd have to build new bases and pay god knows what to clean up the old ones.

When is the last time any base was closed in this country? Should we cut cyber warfare capability?

You will get some cuts from defense. Cut to much and the economy slows down. Do you have any idea how much peanut butter the Pentagon buys each year? Paper clips? Laptops? Toilet paper? Gas?

This is a clean sheet of paper opportunity. It would be great if the leadership used it's majority to bring some real change for a change. So far it's business as usual.

There was a huge round of closing and consolidations around ...05, I think.
I remember all the talk in Ca. about what to do with Treasure Island in SF ( closed Navy base )
a few other places there.
My impression is that there were a lot of Navy bases closing, I remember talk of closing Oak Harbor
on Whidbey Island.
I know there was an Air Force Base in Fla. Elgin, that notified us of changed flight patterns due to their consolidation with a closing base in here in Al ( we Live close to the Fla. border, as the jet flies).

I don't recall any past 2005. Fort Dix in New Jersey was some where around there too. What ever happened to the Base Closing Commission? Did they do their time or just go unfunded and disappeared into the night?

Point is there aren't a whole lot of options given current economic conditions and overseas deployments in hot zones. To draw down the Iraq segment will help. I think they will just shift to the Af-Pak war, so there's not that much there.

Congress won't do anything unless they are forced to. Forward basing has been part of doing business from WW2 and that's not going away. The EU would stroke out in a heart beat. Japan is already planning to adjust their constitution to expand their defense forces.

I just don't see salvation coming from cuts in the defense budget.

I agree.
Ironically, Rumsfeld did ths huge PR thing early in the Shrub years about how we could afford to fight wars with less manpower, less expense, leaning heavily on "smart" technology.
Then all those trillions "disappeared" from the Pentagon ( never to be heard about again ) and all those contractors got paid triple what any militray operatin would cost.
The budget is now something like 53% for war, last time I looked, and we have expanded into a third country.
Totally fuckig insane.