A budget deficit is when you are spending more than you are taking in as income. When a government incurs several years of budget deficits, it then builds a national debt, which is the accumulation of the deficits. Government debt is the total amount owed by the central government, also called national debt. To cover shortfall between spending and income, a government will issue government bonds and bills. These are promises by the government that the money it borrows will be returned, with an interest payment as the cost of borrowing. Since all government debt is paid by income generated by the citizens of the country, this debt is really the burden of the taxpayers. In addition to outstanding securities issued by a government, it can be said that unfunded future liabilities are also considered government debt, such as future pension plans and health costs.
The rate on a 30-year fixed mortgage has been creeping up higher and just broke the four-percent threshold. This is a telltale sign that higher financing rates are on the horizon.
While there’s still hope that the Federal Reserve will hold off on reducing its bond buying at next week’s Federal Open Market Committee (FOMC) meeting, the reality is that the money party is coming to an end.
The failure of the Bank of Japan to deliver additional stimulus sent traders to the exits and resulted in the Nikkei 225 dropping down to below the key 13,000 level. What happened in Japan may be an ocean away, but the knee-jerk reaction was clearly indicative of nervousness among traders.
The reality is that interest rates are heading higher. It’s just a matter of time, so you better be prepared for the move, because it will affect investors’ portfolios, home sales, consumer spending, and the carrying cost of the massive debt levels consumers have accumulated during this period of cheap money.
Even worse, governments from municipal to state to federal will be facing a cash crunch when yields and interest rates ratchet higher. In many states, we are already seeing debt issues that are threatening to explode when interest rates rise.
Case in point: California and its municipalities have amassed a debt load of about $848 billion, which could eventually be eclipsed by $1.1 trillion, according to The California Public Policy Center. (Source: “Report: California’s Actual Debt At Least $848B; Could Pass $1.1T,” CBS web site, May 1, 2013, accessed June 13, 2013.) This is scary news; furthermore, there are 1.64 million … Read More
Federal Reserve Chairman Ben Bernanke may be getting ready to sail off into the sunset as his reign as the top banker in the world is likely coming to an end.
The speculation is that it is doubtful Bernanke will decide to extend his stay as head of the Federal Reserve for a third term at the time his current term finishes at the end of the year.
While Bernanke has helped to save the economy from a deeper recession, he has also created a climate of easy money and massive debt loads that pose their own risks.
What we know is that the economy has recovered under Bernanke’s easy monetary policy.
He has helped to save the big banks, and he will be rewarded by Wall Street, which I will discuss later.
The availability of record-low interest rates by the Federal Reserve has helped to drive up the demand for mortgages and loans. The result has been a marked recovery in the housing market and consumer spending.
Of course, the problem is that the personal debt loads have surged. Recall what happened when the 30-year mortgage rates edged higher in recent weeks on speculation that the Federal Reserve would cut its bond buying at its June meeting: the stock market took a beating as capital shifted into gold and cash.
Loans to companies have been surging. There were $1.53 trillion in commercial and industrial loans in the first quarter by U.S. banks, up 12% year-over-year. (Source: McLaughlin, T., “Surge in U.S. commercial lending raises bubble worries,” Reuters, June 10, 2013.) The amount of lending is a concern given the … Read More
The stock market is setting record after record and there appears to be nothing in its way. Yet as many of you know from reading these pages, while I continue to enjoy the rally, I am also preaching caution.
The Organization for Economic Cooperation and Development (OECD) came out with its semi-annual Economic Outlook report, and it has painted a mixed landscape for the global economy. The findings are really not a surprise, but they do seem to be things the stock market has ignored. I mean, why is the Nikkei up 70% over the past six months?
Sometime down the road, there needs to be some reasoning when looking at the current momentum in the stock market. I still think the stock market is moving too high too fast.
The OECD suggests the recession that has gripped Europe is a threat to the global economy. (Source: “Global economy advancing but pace of recovery varies, says OECD Economic Outlook,” Organization of Economic Cooperation and Development web site, May 29, 2013.)
The eurozone economy is estimated to contract 0.6% this year, followed by a 1.1% rebound in 2014, according to the OECD. My feeling is that the estimate for 2014 might be overly optimistic, as the region has a lot of work ahead of it and could be headed for another disappointment.
Gross domestic product (GDP) growth in the U.S. is estimated to rise 1.9% this year and 2.8% in 2014, according to the OECD. That’s fine, but it’s nowhere near the levels we need to drive significant jobs growth.
Crossing the Pacific, Japan’s economy is estimated to rise 1.6% this … Read More
Japan is currently on cloud nine, with exports bursting out of the gate and Japanese stocks flying high. The benchmark Nikkei 225 index in Japan is up a whopping 48% this year.
Fueling the massive climb in the stock market has been the steady decline in the value of the Japanese yen triggered by the significant money printing by Prime Minister Shinzo Abe’s strategy to inject $2.4 trillion into the Japanese economy over the next decade.
It’s the same everywhere you go around the world. Money printing triggered by record-low interest rates and major monetary and fiscal stimulus is driving the economy and spending.
Yet what about the impact on the inflation rate of the importing country?
The devaluation of the yen against the greenback and other major global currencies makes Japanese goods much cheaper for foreigners, but it also creates a higher inflation rate for Japan.
In the chart below, the gap (as indicated by the blue oval) that has developed between the yen (as shown by the red candlesticks) and the U.S. dollar (as reflected by the green line) is clearly shown. In my view, while Japan is currently seeing growth, the country’s strategy is risky.
Chart courtesy of www.StockCharts.com
The widening gap between the two currencies will present problems in the future for the Japanese consumer due to the rising inflation rate.
Let me explain: the weak yen translates into higher prices paid for imports as more yen are required to pay for the same goods now than in the past.
For now, import prices are starting to edge higher—slowly but surely.
Over time, if the yen … Read More
Economist Nouriel Roubini, also known as Dr. Doom, is finally on board with the stock market upswing; in fact, he believes the stock market can go even higher over the next two years.
Now, if you are familiar with the often bearish opinions of Roubini, you’ll know that his hawkish view of the stock market is somewhat bizarre, but you’ll also understand why he thinks this way.
The thinking behind Roubini’s view is similar to my own view on the stock market. Roubini believes that the concerted move by the world’s central banks to provide easy access to money via aggressive monetary policy is helping to drive the current buying in the stock market.
“In the short-term, it’s great for assets,” said Roubini about investors riding the bubble higher. (Source: Farrell, M., “Dr. Doom: Buy stocks while you still can,” CNNMoney.com, April 30, 2013.)
As many of you know, I have long been a critic of the Federal Reserve’s money-printing operations, along with the easy money flow from the world’s other banks.
Roubini predicts that the stock market will move higher over the next two years—as long as the Federal Reserve continues its aggressive stimulus strategy.
Of course, Roubini is aptly named Dr. Doom for a reason: he believes a period of reckoning is coming. And I’m on the same page.
As interest rates edge higher, investors will exit the stock market, and there will be a subsequent backlash.
I refer to this cause and effect as the impending economic Armageddon—it’s coming.
Interest rates will inevitably move higher. The low or near-zero interest rates are currently enticing investors to look … Read More