Posted on 05/06/2010 7:19:26 AM PDT by SeekAndFind
The similarities between the subprime mortgage crisis and that of the coming collapse of the U.S. bond market are uncanny. In fact, Mark Twain may have had the U.S. debt market and the previous debt-fueled real estate crisis in mind when he said that "History does not repeat itself--but it does rhyme."
The housing and credit crisis first became evident to most in 2007 with the distress in the subprime mortgage market. The foundation for the housing bubble was low interest rates, which were provided by the Fed, and passed along to consumers via commercial banks and the shadow banking system. Those low "teaser rates" from the Fed compelled consumers to take on too much debt and for banks to become overleveraged. Excessive lending in the real estate sector of the economy caused home prices to skyrocket out of reach of most consumers. Home prices subsequently fell and the assets on banks' balance sheets tumbled in value. The result was the biggest economic contraction since the Great Depression.
Similarly, rock bottom interest rates provided by the Fed and from foreign central banks recycling our trade deficit are misleading the government into believing it can take on a tremendous amount of debt by spending significantly more money than it collects in revenue. Those low rates have also duped the Treasury into believing it can sell a virtual unlimited amount of debt without ever incurring a substantial increase in debt service expense. Of course, this is not unlike homeowners who took on onerous mortgage payments, believing home prices would always increase.
And just like those homeowners who took on adjustable rate loans, our Treasury has set itself up for a bout with intractable mortgage rate resets.
1) Interest rates are currently at historic lows, but instead of choosing to take advantage of those rates by locking them in for decades, the U.S. Treasury has chosen to follow the lead of subprime borrowers.
2) The government should be taking on the equivalent of a thirty year fixed-rate mortgage by issuing only 30 year bonds. However, they have chosen the path of what amounts to a short term adjustable rate mortgage by moving their debt duration to the short end of the yield curve.
3) Today the Treasury has an average maturity on its debt of just about 5 years. Compare that with the U.K. which is about 14 years and even to Greece which is about 8 years in duration. That means the U.S. must roll over its debt much more frequently and is much more susceptible to rising rates. The only logical explanation for this practice is that the U.S. doesn't feel it can issue long term debt and still afford to service its interest rate expenses.
4) the housing market of circa 2006 and the U.S. bond market of today contain all three elements of a classic asset bubble; massive oversupply, an unsustainably high price level and over-ownership of the asset class in question. In the early part of the last decade, home builders began to increase construction volume to twice the intrinsic demand for home ownership. Home price to income ratios eventually reached unsustainable levels. And levels of home ownership reached a record high percentage of the population.
Likewise, the U.S. Treasury is dramatically increasing the supply of debt each year to fund our $1 trillion deficits. The public has plowed their savings into the U.S. debt market as commercial bank holdings of Treasuries have reached an all-time high. And bond prices have soared, pushing the yield on the 10 year note to 3.6%, which is less than half the average yield of 7.3% going back to 1969.
ERGO --- all the elements of a bubble in the bond market are in place, just as they were for the real estate market in the middle of the last decade.
SOLUTION : Aggressively cut spending on the federal level.
THAT AIN'T GONNA HAPPEN IF DEMS ARE IN POWER.
I am amazed they have been able to keep this derilict afloat for this long. It is a boat with 10 holes in the bottom and they only have two corks.
Capital is daily being siphoned from the private market to pay for Government. This is job creating capital. Not only is the treaury market going to crash, but the economy is going nowhere, fast.
“I am amazed they have been able to keep this derilict afloat for this long. It is a boat with 10 holes in the bottom and they only have two corks.”
Exactly. Perfect analogy. Just add that you are stuck on the boat with an idiot crew that thinks that drilling some additional and larger holes in the hull is what will save us.
Government spending at all levels is a bigger bubble than the subprime mortgage collapse. It will burst. It will be ugly.
The entitlement programs and interest on the national debt make up more than half of federal spending. And that will increase as 10,000 people a day retire over the next 20 years. We can not aggressively cut spending without reforming and reducing the entitlement programs.
I do remember a debate on the real estate bubble and loan issues, on this forum, long before 2007. We sold off our investment real estate at the end of 2005 and the market had already softened. A lot of people knew it was a house of cards, but just hoped that they would have a chair when the music stopped.
Is Social Security considered an entitlement program ? After all, WE WHO WORK PAID INTO IT WHETHER WE WANT TO OR NOT.
sounds like the Three Stooges to me.
One of the problems with my 401K is that every choice is either some sort of stocks or bonds or a mix. I’d love a precious metals choice, but there isn’t one.
The even bigger problem with your 401k is that pretty soon the government is going to confiscate it and stick you with a government annuity in its place. Once our government finally realizes its own inevitable Greek-style funding crisis and 100% of Federal revenues are being consumed by debt service and Social Security alone, do you really think they’ll be able to pay your annuity when you want to retire?
I took the hit and completely cashed-out my 401k a couple months ago after getting laid off, rather than rolling it into another easily-confiscated financial instrument.
Our malevolent political class is hell-bent on looting every last penny of real wealth and capital out of our country, and one day middle-class America will wake up in a devastated, burnt-out shell of a country and wonder what the hell happened.
Social Security is considered an unfunded liability of the Federal Government. Its status is the product of a fictitious “Trust Fund”, composed of non-negotiable securities invented only so that the Treasury could borrow current deposits (income) to pay for current spending (outlays) while leaving behind an unenforceable IOU for the fund’s beneficiaries. Bernie Madoff would have been embarrassed to try this.
I don’t have much in my 401 K. I had to cash it all out to live in 2000 due to divorce related events. However, to show that the Lord works in mysterious ways, I had to cash it out one month before the crash. :)
Now I have only four years of buildup. There is just not that much there.
What most people don’t know is that as stiff as the penalty is for early withdrawal, once you reach a certain age the penalty is far worse for not pulling out the minimum. And if you do pull out over the minimum you take a tax bracket hit.
The ONLY thing good about 401K’s is the matching funds. Without that, I would not participate with a single dime.
THAT AIN'T GONNA HAPPEN IF DEMS OR REPS ARE IN POWER!
“Once our government finally realizes its own inevitable Greek-style funding crisis and 100% of Federal revenues are being consumed by debt service”
Debt service will skyrocket once the short-term interest rates the feds are using to carry most of their debt goes up with the inevitable inflation.
Interest alone could be over 1/2 of all federal expenditures in the possible situation.
They will have no choice but to confiscate.
i turn 59 1/2 in 8 months and hope it is not too late by then.
The first image that popped into my mind when I saw the stock market numbers for today was George Soros rubbing his hands together.
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