The Federal Reserve is bankrupt for all intents and purposes. The same goes for the Bank of England!
This article will focus largely on the Fed, because the Fed is the “financial land-mine”.
How long can someone who has stepped on a landmine, remain standing – hours, days? Eventually, when he is exhausted and his legs give way, the mine will just explode!
The shadow banking system has not only stepped on the land-mine, it is carrying such a heavy load (trillions of toxic wastes) that sooner or later it will tilt, give way and trigger off the land-mine![1]
In a recent article, I referred to the remarks of British Prime Minister Gordon Brown and President Obama calling for the shadow banking system to be outlawed.
Even if the call was genuine, it is too late. The land-mine has been triggered and the explosion cannot be averted under any circumstances.
The only issue is the extent of the damage to the global economy and how long it will take for the world to recover from this fiasco – a financial madness that has no precedent. The great depression is “Mary Poppins” in comparison!
The idea of a central bank going bankrupt is not that outlandish. I am by no means the first author who has given this stark warning. What underlies this crisis (which I initially examined in an article in December 2006) is the potential collapse of the global banking system, specifically the Shadow Money-Lenders.
Nouriel Roubini, the New York University professor said [2]:
“The process of socialising the private losses from this crisis has moved many of the liabilities of the private sector onto the books of the sovereign. At some point a sovereign bank may crack, in which case, the ability of the government to credibly commit to act as a backstop for the financial system – including deposit guarantees – could come unglued.”
Read more > http://www.globalresearch.ca/the-federal-reserve-is-bankrupt/12648
Congress and the White House are engaging in another familiar ritual: The brawl over the federal borrowing limit, known as the debt ceiling. Here’s a look at some of the most frequently asked questions, and answers.
What is the debt ceiling?
The debt ceiling limits the amount of debt that the U.S. Treasury can issue.
Before World War I, Congress approved borrowing for specific purposes, but over the next two decades, it granted more flexibility to the Treasury to issue bonds without individual, definite authorizations. By 1939, Congress effectively established an aggregate debt limit that delegated to Treasury the ability to borrow up to a certain ceiling.
Why is the debt limit in the news again?
Last year, Congress voted to suspend the debt limit through March 15, after which the prior limit of $17.2 trillion would be reset to include any new borrowing. On March 16, the limit was reset at $18.1 trillion. Since then, the Treasury has been using extraordinary measures, such as the suspension of certain pension investments, to conserve cash.
On Thursday, Treasury Secretary Jacob Lew told Congress that it would exhaust those emergency measures by Nov. 3. After that, it will fund the government only with daily cash flow if the debt limit isn’t increased. Analysts at the Bipartisan Policy Center, a Washington think-tank, estimate that the Treasury would run out of cash between Nov. 10 and Nov 19.
In Why Do Foreigners Invest in the United States? (NBER Working Paper No. 13908), Kristin Forbes notes that foreigners have earned substantially lower returns on their U.S. investments over the past five years than U.S. investors have earned abroad, even after removing the effects of exchange rate movements and government investments. This return differential exists even within individual asset classes (equities, foreign direct investment, and to a lesser extent, bonds) and after making rough adjustments for risk.
Still, foreign investors might choose to continue investing in the United States and financing the large U.S. current account deficit for several reasons. Indeed, they may choose to purchase U.S. portfolio investments in order to benefit from the highly developed, liquid, and efficient U.S. financial markets, and from the strong corporate governance and institutions in the United States -- although both of these perceived strengths of the United States have shown some vulnerabilities during the recent financial market turmoil. Foreigners also may invest in the United States in order to diversify risk, especially if returns in U.S. financial markets have little correlation with returns in their own country's domestic financial markets. Or, investors outside the United States may put their money here because of their strong linkages with the United States, through trade flows or such measures of "closeness" as distance, inexpensive communications, or sharing a common language.
Forbes asks which of these factors are actually significant in determining foreign investment in the United States. She finds that a country's financial development is consistently an important factor that affects its investment in both U.S. equity and debt markets. Specifically, countries with less developed financial markets invest a larger share of their portfolios in the United States and the magnitude of this effect decreases with income per capita. Her estimates suggest that if China's bond market were as well developed as the cross-country average - about the level of development in South Korea ---then China's predicted holdings of U.S. bonds would be about $200 billion below their current level.
Countries with fewer controls on capital flows and larger trade flows with the United States also invest more in U.S. equity and debt markets. And, return differentials are important in predicting U.S. equity (but not bond) investments, because foreigners invest more in U.S. equities if they have had relatively lower returns in their own equity markets. Finally, despite strong theoretical support, it appears that diversification motives have little impact on patterns of foreign investment in the United States.
Forbes notes that these results -- and especially the primary role of a country's financial market development in determining its investment in the United States -- have three important implications. First, the results support the theoretical literature on global imbalances that emphasizes the role of U.S. financial markets. Although the exact mechanism varies across models, one key theme in recent research is that lower levels of financial market development in other countries will continue to support capital flows into the United States, thereby supporting the U.S. current account deficit and large global imbalances without major changes in asset prices. A second, related, implication is that as countries around the world continue to develop and strengthen their own financial markets, this will gradually reduce this important driver of capital flows into United States. These adjustments would likely occur slowly, though, because the development of financial markets, especially in low-income countries, is a long process. Finally, and potentially more worrisome, because the liquid and efficient financial markets of the United States are a major impetus behind U.S. capital inflows, anything that undermines the perceived advantages of U.S. equity and bond markets could present a serious risk to the sustainability of U.S. capital inflows. The U.S. sub-prime crisis and continued turmoil in U.S. financial markets already may have undermined this perceived "gold standard" of financial markets, and the risk of a sudden increase in poorly thought-out regulation may aggravate these concerns. If countries with less developed financial markets begin to question the relative advantages of U.S. financial markets, this could lead to a more rapid adjustment in U.S. capital inflows, global imbalances, and asset prices.
-- Les Picker
The Digest is not copyrighted and may be reproduced freely with appropriate attribution of source.
The U.S. Has REPEATEDLY Defaulted
Some people argue that countries can’t default. But that’s false.
It is widely stated that the U.S. government has never defaulted. However, that is also a myth.
Catherine Rampbell reports in the New York Times:
The United States has actually defaulted on its debt obligations before.The first time was in 1790, the only episode Professor Reinhart unearthed in which the United States defaulted on its external debt obligations. It also defaulted on its domestic debt obligations then, too.Then in 1933, in the midst of the Great Depression, the United States had another domestic debt defaultrelated to the repayment of gold-based obligations.
(Update.)
Donald Marron points out at Forbes:
The United States defaulted on some Treasury bills in 1979 (ht: Jason Zweig). And it paid a steep price for stiffing bondholders.Terry Zivney and Richard Marcus describe the default in The Financial Review…:Investors in T-bills maturing April 26, 1979 were told that the U.S. Treasury could not make its payments on maturing securities to individual investors. The Treasury was also late in redeeming T-bills which become due on May 3 and May 10, 1979. The Treasury blamed this delay on an unprecedented volume of participation by small investors, on failure of Congress to act in a timely fashion on the debt ceiling legislation in April, and on an unanticipated failure of word processing equipment used to prepare check schedules.The United States thus defaulted because Treasury’s back office was on the fritz in the wake of a debt limit showdown.This default was temporary. Treasury did pay these T-bills after a short delay. But it balked at paying additional interest to cover the period of delay. According to Zivney and Marcus, it required both legal arm twisting and new legislation before Treasury made all investors whole for that additional interest.
Many consider Nixon’s decision to refusal to redeem dollars for gold to constitute a partial default. For example, University of Massachusetts at Amherst economics professor Gerald Epstein notes:
More at > http://www.ritholtz.com/blog/2013/10/the-myth-that-u-s-has-never-defaulted-on-its-debt/Forty years ago this month, on August 15, 1971, President Nixon “closed the gold window”, refusing to let foreign central banks redeem their dollars for gold, facilitating the devaluation of the U.S dollar which had been fixed relative to gold for almost thirty years. While not strictly a default on a US debt obligation, by closing the gold window the US government abrogated a financial commitment it had made to the rest of the world at the Bretton Woods Conference in 1944 that set up the post-war monetary system. At Bretton Woods, the United States had promised to redeem any and all U.S. dollars held by foreigners – later limited to just foreign central banks — for $35 dollars an ounce. This promise explains why the Bretton Woods monetary system was called a “gold exchange standard” and why many believed the US dollar to be “as good as gold”. When Nixon refused to let foreign central banks turn in their dollars for gold, and encouraged the devaluation of the dollar which reduced the value of foreign central bank holdings of dollars, the Nixon administration effectively “defaulted” on the United States’ long-standing obligations ending once and for all the Bretton Woods System.
