Tag Archive | "deficit"

China Currency Policy Shift Will Expose Artificial US Economy

Official data from the People’s Bank of China shows the reduction of reserves to $3.18 trillion for the final quarter of 2011. This is a 0.6% negative growth rate for the last quarter of the year and the weakest quarterly data since Spring of 2009.

It should come as no surprise that manufacturing output is coming under pressure as the artificial consumer demand driven by market manipulation, excessive credit, and foreclosure moratoriums is coming to an end. WTF Finance explained the reasons for the artificial stock market rebound and the return to excessive consumerism in our article “Why Investing In US Stocks or Treasuries Is A Bad Idea”.

Reuters reports on the potential consequences to the Chinese Economy and anticipated monetary policy changes:

“The decline in foreign exchange reserves in Q4 is consistent with the sharp reversal in capital flows out of emerging markets in general and the region in particular,” said Andy Ji, an economist at Commonwealth Bank of Australia in Singapore.
“The People’s Bank of China is likely to engage in more cuts in the reserve requirement ratio (RRR) and aggressive liquidity injection through open market operations if the trend deteriorates further,” he said.

“Bank of America-Merrill Lynch Economist Ting Lu expects a trend of sinking surpluses to retard capital flow into China, necessitating a policy response to keep economic conditions as stable as possible ahead of a change in the country’s top political leadership anticipated in late 2012.
“The drop in foreign currency inflow will have significant implications for China’s monetary policy, but limited impact on liquidity conditions if policymakers are flexible in using monetary tools,” Lu said, adding that he expects more reserve requirement cuts.”

The reality is that the Chinese are operating with budget surpluses and over a trillion dollars of China’s currency reserves are invested in US Treasuries. Absent of those Chinese investments, the United States will have a difficult time deficit spending at its usual rate without experiencing significant consequences for its irresponsible behavior.

Chinese President Hu Jintao on several occasions expressed concern over the irresponsible financial policies of the United States and its addiction to deficit spending. The entire Obama Administration travelled to China over the years to blatantly lie that the US would get its financial house in order while at home big government policies continued as usual. Vice President Joe Biden, Treasury Secretary Geithner, Secretary of State Clinton, and President Obama all attempted to convince the Chinese that the United States has its financial affairs in order while supporting costly big government policies, continuous deficit spending, and increases in the debt ceiling.

With the Chinese manufacturing sector slowly losing momentum, China will start having to rely on its own consumers to replace foreign demand for its products. Reduction in reserve holdings and increased consumerism by the Chinese people will reduce the outflow of capital. As the Chinese Economy slowly becomes more self-reliable, the Chinese people will experience an increase in their standard of living while the United States will have to adjust and no longer rely on China’s savings and its productivity.

With China no longer buying US Treasuries, there will be a collapse in the real demand for US Debt. The Federal Reserve can create artificial demand and participate in the Treasury Auctions as it already has done with its $600 Billion Bond Purchase Program, but the World Economy is under no obligation to prop up the irresponsible United States and its artificial economy. China diversifying away from US Treasuries with monetary policies that increase lending and consumption within its own demographic will result in a strong, self-sustainable Chinese Economy and new economic world power while the consumer based US Economy that lacks production and is built on artificial credit will finally be exposed and collapse.

The ultimate collapse of the US Economy is by no means the fault of China. The coming economic demise of the United States can be directly attributed to its fiscal, economic, and monetary policies. By abusing its monetary system with inflationary policies, the US ignorantly enjoyed a lifestyle it cannot afford. As the era of the US Dollar as World Reserve Currency nears its end, the true US Economy will be exposed as artificial and unsustainable.

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Alan Greenspan: Monetary Policy, Deficit Spending, And Future Inflation

Former Federal Chairman Alan Greenspan was hosted on CNBC answering questions about monetary policy and his views on the current state of the U.S Economy. WTF Finance is a harsh critique of Alan Greenspan as the policies of the Federal Reserve were interfering with the natural demand and supply variables of the markets. Greenspan “solved” economic recessions by infusing trillions of newly created liquidity into the markets while keeping interest rates at artificial lows, fueling the speculation in the stock and real estate markets.

“The Fed does do look at future inflation…. It can look at future inflation just as well as he can, not any better, not any worse”

Greenspan acknowledged the budget problems and rightfully questioned equity prices while also voicing concern about the deficit spending and the loose monetary policy. Interesting given that this is descriptive of the policies of the Federal Reserve while Greenspan himself was head of the quasi-private Federal Reserve Bank.

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The Legal Ponzi Scheme: Social Security

“Investments” that pay profits not from capital gains but from new investor money are often referred to as Ponzi schemes. They are named after Charles Ponzi who ran an investment scheme in which he promised to provide investors with a 50% return on postage return coupons within a short period of time. While the investment might have been viable instead of using capital gains he paid off old investors with new investor funds. Ponzi’s “investment” scheme worked very well until one day no more new investors provided him with funds and consequently he could no longer provide returns to the older investors and the pyramid scheme fell apart.

Charles Ponzi went to jail for defrauding his investors and it is still against the law to run Ponzi schemes. The Federal Trade Commission states the following on its web site:

“Both Ponzi schemes and pyramids are quite seductive because they may be able to deliver a high rate of return to a few early investors for a short period of time. Yet, both pyramid and Ponzi schemes are illegal because they inevitably must fall apart. No program can recruit new members forever. Every pyramid or Ponzi scheme collapses because it cannot expand beyond the size of the earth’s population. When the scheme collapses, most investors find themselves at the bottom, unable to recoup their losses.

A Ponzi scheme is closely related to a pyramid because it revolves around continuous recruiting, but in a Ponzi scheme the promoter generally has no product to sell and pays no commission to investors who recruit new “members.” Instead, the promoter collects payments from a stream of people, promising them all the same high rate of return on a short-term investment. In the typical Ponzi scheme, there is no real investment opportunity, and the promoter just uses the money from new recruits to pay obligations owed to longer-standing members of the program. In English, there is an expression that nicely summarizes this scheme: It’s called “stealing from Peter to pay Paul.”

Although you or I would be arrested for running such a scheme, the U.S. Government has been getting away with it for nearly a century. As part of the New Deal, President Franklin D. Roosevelt signed the Social Security Act into law. The U.S. Social Security Program is the largest Government program in the world and accounts for approximately one third of total U.S. Government spending. The problem with the current Social Security System is that it pays out more than it takes in and as such it is no different than Ponzi’s scheme that used new participants to pay out old claims. The problem in both cases is that the payouts exceed incoming cash flow at an ever increasing rate as the number of contributors decrease relative to those expecting a return.

The flaws in the Social Security System were apparent with the first beneficiary. Ida Fuller of Vermont was the first recipient of a Social Security check. Just as the initial investors in Charles Ponzi’s scheme were thrilled to have made more than they contributed so was Ida Fuller. Having paid only $24.75 into the Social Security Fund over three years she received her first check on January 31, 1940 in the amount of $22.54. Her first check almost equaled the total amount she contributed and she lived to be a 100 years having collected a total of $22,888.Ida Fuller - First Social Security check

As if it weren’t enough that the Social Security System in itself is flawed, the many Presidents throughout history have borrowed against the Social Security Fund to increase their ability to spend above the Nation’s means while leaving the SS Fund a giant IOU.

2010 was the first year the fund paid out more than it received, putting additional pressure on future budgets and more uncertainty on whether those currently paying in will ever see their money back.

Today Treasury Secretary Geithner spoke about the problems the Social Security System is facing. He rightfully acknowledged that the budget problems the United States is facing cannot be merely attributed to the results of the financial crisis. Geithner further stated that restoring fiscal responsibility will require

“real sacrifices that affects all Americans… However, we will reject plans that slash benefits; that fail to protect current retirees, people with disabilities and the most vulnerable; or that subject Americans’ retirement savings to the whims of the stock market.”

That’s exactly the reason the United States is posting records deficits. Nobody is willing to reduce any government programs, nobody is willing to make the cuts necessary to balance the budget and most politicians in both parties are increasing the size, role, and spending of Government to “solve” economic problems. Today’s economic uncertainties have been perpetuated by both parties and their interventionist policies that grew the size, role, and spending of Government in an attempt to delay economic corrections. By avoiding economic corrections for many decades the United States has allowed its problems to grow bigger in size and the only solution presented by every Administration has been to further debase the monetary system and to continue on with the same policies that got us here in the first place.

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