MarketNeutral
6th April 2010, 09:42 PM
The United States send weak economic signals insufficient for a meaningful and sustainable economic expansion required to gain back confidence of national and foreign investors, futureofdollar.com finds in the present research. Political decision-making process is paralyzed by numerous disabilities, while external market constraints obstruct economic recovery. Stagflation is an imminent danger.
Summary
GDP numbers have been significantly influenced by government intervention into the economy and are rather poor at a closer look. Employment data shows that the labor market generally continues to stagnate with rising number of long-term unemployed workers. Government financial obligations including the national debt, Social Security, Medicare, and other benefits and mandatory programs continue to pile up moving the U.S. to the first place in the world for the highest debt to GDP ratio. Budget deficit is growing with no visible turning point. Low interest rates create a risk of stagflation. The market of Treasuries is about to collapse as investors, including China, are losing confidence in the financial stability of the United States.
Weak economy is accompanied by numerous political disabilities making the recovery almost impossible. The country was unable to create a powerful deficit reducing commission. It is unable to cut growing nonproductive military (security) expenses. It does not follow its own economic advice given to other countries in similar critical situations in the past. In addition, it doesn’t cooperate with countries, which will determine the future of the United States.
Finally, market constraints make the crisis in the U.S. even deeper. High oil prices add to economic slowdown and lead to an increase in core inflation. China’s peg to the dollar prevents export growth and creation of new jobs.
All these factors evidence against the future of the dollar as a global reserve currency. Moreover, altogether they indicate increased likelihood of hyperinflation in the near future. Futureofdollar.com was not satisfied with the government’s reaction to the problem, finding that the U.S. will be unable, or even reluctant, to resist dollar depreciation.
Part I
Weak Economics Signals
GDP
According to the “third†estimate real Gross Domestic Product (GDP) increased at an annual rate of 5.6 percent in the fourth quarter of 2009 compared to the “second†estimate of 5.9% released in February. (1)
Real GDP decreased 2.4 percent in 2009 in contrast to an increase of 0.4 percent in 2008. This is “the worst single-year performance since 1946,†Bloomberg said. (2)
Efforts to rebuild depleted inventories contributed 3.79 percent to GDP. (3)
Nouriel Roubini, an economics professor at New York University, noted in an interview following the report on GDP: “The headline number will look large and big, but actually when you dissect it, it’s very dismal and poor.†“I think we are in trouble,†he added. (4)
“Those inventory changes alone cannot sustain growth over an extended period of time,†the New York Times noted, because “as long as the labor market remains weak, consumers — whose purchases make up the bulk of economic output each quarter — will be reluctant to spend money.†(5)
Most of the boost in the third quarter of 2009 was provided by the Government’s program known as “cash for clunkers,†which offered buyers payments of as much as $4,500 to trade in older cars and trucks for new ones. The plan boosted sales by about 700,000 vehicles, according to the Transportation Department. (6)
GDP was also influenced by a significant gain in residential spending activity due to home buyer tax credit. The National Association of Realtors said that nearly half of the jump in home sales in 2009 was directly attributable to the tax credit. (7) President Obama extended the $8000 tax credit for first-time home buyers till the end of April 2010 beyond its original deadline in the end of November 2009. (8) It has also been expanded to include more buyers. (9)
Federal Reserve Board economist Jeremy Nalewaik questions the accuracy of GDP (that tracks spending) with respect to the assessment of economy’s performance as opposed to Gross Domestic Income (GDI). While GDP showed a modest rebound in the third quarter of 2009, GDI gave no evidence of a rebound during this period. “These two measures have shown markedly different business cycle fluctuations over the past twenty-five years, with GDI showing a more-pronounced cycle than GDP.†(10)
A genuine economic recovery would be led by real business activity and increased consumer spending. Much of the boost lately was a product of government intervention into the economy. Therefore, there is no ground to say that the United States are heading towards meaningful and sustainable economic expansion.
Unemployment
Government data indicates that the economy gained 162,000 jobs in March after losing 14,000 jobs in February and adding 14,000 jobs in January, and the unemployment rate held at 9.7 percent. (11) The country has not seen such unemployment levels since the 80s. The data below shows that the labor market generally continues to stagnate.
Most hiring in March occurred due to the 2010 Census (+48,000 jobs), temporary help services (+40,000 jobs), and employment in health care (+27,000 jobs). While manufacturing and construction added 17,000 and 15,000 jobs respectively, financial activities shed 21,000 jobs and employment in the information industry decreased by 12,000.
For some reason the government decided to hire twice as many people in 2010 as were needed for the 2000 Census making some analysts worry that it will just mask the weakness of the employment situation. Most of these jobs will last only for several weeks. "The U.S. economy has lost more than 3 million jobs since President Obama signed the trillion-dollar 'stimulus' into law amid promises it would create jobs 'immediately,' " Michael Steel, the spokesman for House Republican Leader John A. Boehner of Ohio, observes. (12) "Everyone understands that temporary census hiring may inflate the statistics released on Friday, but the American people will rightly continue to ask, 'Where are the jobs?' " (13)
The fundamental weakness of the labor market was highlighted by the significant increase in the number of long-term unemployed (those jobless for 27 weeks and over). The number rose by 414,000 over the month to 6.5 million. It is estimated that it is much worse than in any other recession in entire post-War period. (14)
The broad measure of unemployment, including not only unemployed but part-time and discouraged workers, rose to 16.9% in March. According to Gallup, a statistical consultancy, this measure is actually 20.3%, an increase from the previous month’s 19.8%, meaning that about 30 million Americans don’t work or work less than their desired capacity. (15) Automatic Data Processing Inc. conducted its own payroll survey for March that showed a loss of 23,000 jobs in the private sector. (16)
In its March summary of commentary on current economic conditions by Federal Reserve Districts, the Beige Book, the government finds that “labor markets generally remained soft throughout the nation.†(17) Although “[t]he pace of layoffs slowed in most Districts. . . hiring plans still remained generally soft.†(18)
The Senate approved recently the bill extending unemployment benefits. The bill costs approximately $140 billion. (19) If the bill eventually is signed into law, which is highly probable, it will not only increase the deficits but will also worsen the unemployment situation. According to numerous economic studies benefits for unemployed significantly reduce the search effort on their part. (20) When an unemployed person becomes ineligible for benefits the probability that he or she will find a new job rises “markedlyâ€. (21)
Although some specialists are trying to look for positive signs in decreasing numbers of job losses the overall employment situation remains weak. The growing number of temporary workers and those employed by the government does not give an assurance that the labor market conditions have already reached a turning point. When businesses begin to create more full-time jobs this will mark a positive change in the current situation.
Financial obligations of the U.S. government
In the middle of February, Obama signed into law the bill increasing the public debt ceiling from $12.394 trillion to $14.294 trillion. This is a second increase in the upper limit on the national debt in less than two months.
Last time, in December, House Majority Leader Steny Hoyer commented that Congress simply had no other choice: otherwise the United States would have to default on their debt obligations what would be another catastrophe for financial markets. (22)
David Ross from Radiant Asset Management indicates in his research that the total obligations of the U.S. government exceed $90 trillion referring to the estimate of the Financial Management Services of the U.S. Treasury. (23) They include hospital insurance, supplementary medical insurance, and social security. “[T]he collected money (which Treasury has borrowed and Congress spent) falls far short of what is required to fulfill the long-term obligations of those programs, even if it had not already been spent. Almost all of the $90 trillion are promised obligations with no established method of payment.†(24)
Ross points out further: “Including unfunded obligations, the U.S. moves to 1st, well above Taiwan and Zimbabwe, for the highest debt to GDP ratio. . . U.S. total debt plus unfunded obligations total 625% of GDP.†(25)
The Peterson-Pew Commission on Budget Reform stated that “the United States would almost certainly experience a debt driven crisis,†that “could unfold gradually or it could happen suddenly, but with great costs either way.†(26) “The excessive debt would. . . affect citizens in their everyday lives by harming the American standard of living through slower economic growth and dampening wages, and shrinking the government’s ability to reduce taxes, invest, or provide a safety net.†(27)
Many experts believe that at some point such system of borrowing is going to collapse. Peter Schiff, the President of Euro Pacific Capital, argues that the way the U.S. government functions is that “we borrow money and then when the interest payments are due we borrow money to pay the interest. . . It is one gigantic Ponzi scheme.†(28)
Budget deficit
The United States reached a record budget deficit of $1.415 trillion in fiscal year 2009 that ended in September. (29) The deficit will probably again exceed one trillion dollars in the current fiscal year as it is already over $651 billion.
The excess of spending over revenue in the U.S. was $220.9 billion in February 2010, as opposed to a deficit of $193.9 billion in February 2009. (30) This is the largest monthly deficit in the history of the United States. (31) It is also the 17th straight month in which the government posted a deficit. (32)
In the beginning of February 2010 Obama transmitted a $3.8 trillion budget for 2011 to the Congress with a record $1.6 trillion deficit. (33)
IMF’s Managing Director Dominique Strauss-Kahn noted at the 10th Annual Herzliya Conference in Tel Aviv that the global crisis had created a problem of fiscal sustainability for many countries that could take decades to fix because of the huge debts built up during the crisis, especially in developed countries. (34)
Federal Reserve Bank of New York President William Dudley said recently in London that it was wrong to “wait and see how things go†in relation to high U.S. deficits implying that the country still does not have a credible exit plan. (35) Something has to be done already at this point while the situation is under relative control. (36) Doing nothing “is a risky strategy because it fully exposes the economy to the vagaries of market sentiment and because shifts in such sentiment can have important consequences for both the deficit path and the economy.†(37)
Low interest rates
The Federal Reserve is going to maintain the federal funds rate near zero percent “for an extended period†as the pace of economic activity is going to be moderate for a time and inflation will be, allegedly, subdued. (38) The government has been keeping the key rate near historical zero percent since December 2008. Rates at this level allow the government to make lower interest payments on the ballooning debt, flood the banking system with credit and drive interest rates lower.
Although, in practice, loan demand remained weak, and lending standards remained tight across the country as banks are cautious about lending during the crisis. (39) However, low rates provoked “carry tradeâ€, when investors borrow cheap U.S. dollars and buy higher-yielding assets. As the result, international stock and commodity markets grew abnormally within the last twelve months.
These developments produce significant pressure on the dollar. With rising oil prices stagflation becomes the primary risk in a long run. Stagflation is an economic situation in which inflation and economic stagnation occur simultaneously and remain unchecked for a significant period of time. (40)
If this is so, why does not the government raise interest rates? David Ross states that “high interest rates will mean either substantially higher taxes or a budget that is nothing but interest payments.†(41)
Is there a plan? Although the government does not tell exactly what it is going to do, it is possible to draw a conclusion from its actions that there will be no resistance to dollar depreciation on its part since, according to Ross, authorities will be highly motivated to keep interest rates low and “inflate [their] way out of the debt.†(42)
It is also unlikely that the Obama administration will reduce spending and fight the deficits as the only way out of the debt burden. Sir John Templeton, the John Templeton Foundation, said in 2005: “The psychology all over the world is that people will not re-elect leaders who want them to be thrifty. The voters will elect the government that spends more money.†(43) There is ample evidence that the current government of the Unites States seems to be driven by this psychology.
The vague future of the market of U.S. Treasuries
The year of 2009 was the worst year for U.S. Treasuries since at least 1978 “as the U.S. stepped up debt sales to help spur growth in an economy recovering from its deepest recession in six decades.†(44)
For the past twelve months the Fed has been actively supporting the Treasury and mortgage markets with purchases of Treasuries and Mortgage Backed Securities (MBS). The Fed had to buy Treasuries in order to suppress the growth in borrowing costs.
Since March 2009 the Fed purchased $300 billion of Treasury securities, $1.25 trillion of agency MBS and about $175 billion of agency debt securities. (45) The last two programs have ended in the end of March 2010.
Specialists warned that markets should be prepared for a ‘surprise’ when the programs end. “If it appears to be that the demand for Treasuries was fueled by the Federal Reserve, the yields on them can grow sharply. This presents great risks for the economy since the borrowing cost is the basis of the whole financial system. And the cost of credit depends on it.†(46) David Keeble, head of fixed-income strategy at Calyon in London, agrees that “[t]he end of the Fed’s quantitative easing program will hurt the market. We also have to cope with a lot of supply. It doesn’t get smaller.†(47)
When the government leaves the market this would mean that the 5-year, 10-year and 30-year Treasuries will become much less popular, Pimco's President Bill Gross told CNBC in November 2009. (48)
A few days after the Fed concluded purchases of agency MBS and debt securities risk premiums on securities sold by Fannie Mae, Freddie Mac and Ginnie Mae widened and were heading toward their widest levels in five months. Widening premiums can inflate mortgage rates.
Ten-year Treasury yields are heading upwards. After the government reported job growth in March, which seemed to be encouraging for the mainstream media, demand for the safety of government debt has decreased. Moreover, market participants look at the market of government debt very cautiously now because of the end of several key stimulus programs and because of dangerous government debt levels.
For an extended period of time such countries as China and Russia showed concerns about the reliability of the U.S. government debt. According to the U.S. Treasury Department net outflows from all U.S. securities totaled $33.4 billion in January 2010. (49) Central banks worldwide were the biggest sellers. (50) China cut its holdings of U.S. Treasury securities by $5.8 billion in January after trimming them by $34.2 billion in December and by $9.3 billion in November, but still remaining the largest foreign holder of U.S. debt. (51) Russia’s Treasury holdings fell by a net $17.6 billion in January, while in December 2009 Russia cut them by $9.6 billion. (52)
Jim Rogers, an expatriate American investor and financial commentator based in Singapore, “certainly wouldn’t be buying U.S. Treasuries†and “couldn’t imagine lending money to the U.S. government for long periods of time.†(53) Pimco’s President Bill Gross said that investors should seek countries where national debt levels are low and reserves are high, while the company was cutting holdings of U.S. debt as the nation increase borrowing to record levels. (54)
Summary
GDP numbers have been significantly influenced by government intervention into the economy and are rather poor at a closer look. Employment data shows that the labor market generally continues to stagnate with rising number of long-term unemployed workers. Government financial obligations including the national debt, Social Security, Medicare, and other benefits and mandatory programs continue to pile up moving the U.S. to the first place in the world for the highest debt to GDP ratio. Budget deficit is growing with no visible turning point. Low interest rates create a risk of stagflation. The market of Treasuries is about to collapse as investors, including China, are losing confidence in the financial stability of the United States.
Weak economy is accompanied by numerous political disabilities making the recovery almost impossible. The country was unable to create a powerful deficit reducing commission. It is unable to cut growing nonproductive military (security) expenses. It does not follow its own economic advice given to other countries in similar critical situations in the past. In addition, it doesn’t cooperate with countries, which will determine the future of the United States.
Finally, market constraints make the crisis in the U.S. even deeper. High oil prices add to economic slowdown and lead to an increase in core inflation. China’s peg to the dollar prevents export growth and creation of new jobs.
All these factors evidence against the future of the dollar as a global reserve currency. Moreover, altogether they indicate increased likelihood of hyperinflation in the near future. Futureofdollar.com was not satisfied with the government’s reaction to the problem, finding that the U.S. will be unable, or even reluctant, to resist dollar depreciation.
Part I
Weak Economics Signals
GDP
According to the “third†estimate real Gross Domestic Product (GDP) increased at an annual rate of 5.6 percent in the fourth quarter of 2009 compared to the “second†estimate of 5.9% released in February. (1)
Real GDP decreased 2.4 percent in 2009 in contrast to an increase of 0.4 percent in 2008. This is “the worst single-year performance since 1946,†Bloomberg said. (2)
Efforts to rebuild depleted inventories contributed 3.79 percent to GDP. (3)
Nouriel Roubini, an economics professor at New York University, noted in an interview following the report on GDP: “The headline number will look large and big, but actually when you dissect it, it’s very dismal and poor.†“I think we are in trouble,†he added. (4)
“Those inventory changes alone cannot sustain growth over an extended period of time,†the New York Times noted, because “as long as the labor market remains weak, consumers — whose purchases make up the bulk of economic output each quarter — will be reluctant to spend money.†(5)
Most of the boost in the third quarter of 2009 was provided by the Government’s program known as “cash for clunkers,†which offered buyers payments of as much as $4,500 to trade in older cars and trucks for new ones. The plan boosted sales by about 700,000 vehicles, according to the Transportation Department. (6)
GDP was also influenced by a significant gain in residential spending activity due to home buyer tax credit. The National Association of Realtors said that nearly half of the jump in home sales in 2009 was directly attributable to the tax credit. (7) President Obama extended the $8000 tax credit for first-time home buyers till the end of April 2010 beyond its original deadline in the end of November 2009. (8) It has also been expanded to include more buyers. (9)
Federal Reserve Board economist Jeremy Nalewaik questions the accuracy of GDP (that tracks spending) with respect to the assessment of economy’s performance as opposed to Gross Domestic Income (GDI). While GDP showed a modest rebound in the third quarter of 2009, GDI gave no evidence of a rebound during this period. “These two measures have shown markedly different business cycle fluctuations over the past twenty-five years, with GDI showing a more-pronounced cycle than GDP.†(10)
A genuine economic recovery would be led by real business activity and increased consumer spending. Much of the boost lately was a product of government intervention into the economy. Therefore, there is no ground to say that the United States are heading towards meaningful and sustainable economic expansion.
Unemployment
Government data indicates that the economy gained 162,000 jobs in March after losing 14,000 jobs in February and adding 14,000 jobs in January, and the unemployment rate held at 9.7 percent. (11) The country has not seen such unemployment levels since the 80s. The data below shows that the labor market generally continues to stagnate.
Most hiring in March occurred due to the 2010 Census (+48,000 jobs), temporary help services (+40,000 jobs), and employment in health care (+27,000 jobs). While manufacturing and construction added 17,000 and 15,000 jobs respectively, financial activities shed 21,000 jobs and employment in the information industry decreased by 12,000.
For some reason the government decided to hire twice as many people in 2010 as were needed for the 2000 Census making some analysts worry that it will just mask the weakness of the employment situation. Most of these jobs will last only for several weeks. "The U.S. economy has lost more than 3 million jobs since President Obama signed the trillion-dollar 'stimulus' into law amid promises it would create jobs 'immediately,' " Michael Steel, the spokesman for House Republican Leader John A. Boehner of Ohio, observes. (12) "Everyone understands that temporary census hiring may inflate the statistics released on Friday, but the American people will rightly continue to ask, 'Where are the jobs?' " (13)
The fundamental weakness of the labor market was highlighted by the significant increase in the number of long-term unemployed (those jobless for 27 weeks and over). The number rose by 414,000 over the month to 6.5 million. It is estimated that it is much worse than in any other recession in entire post-War period. (14)
The broad measure of unemployment, including not only unemployed but part-time and discouraged workers, rose to 16.9% in March. According to Gallup, a statistical consultancy, this measure is actually 20.3%, an increase from the previous month’s 19.8%, meaning that about 30 million Americans don’t work or work less than their desired capacity. (15) Automatic Data Processing Inc. conducted its own payroll survey for March that showed a loss of 23,000 jobs in the private sector. (16)
In its March summary of commentary on current economic conditions by Federal Reserve Districts, the Beige Book, the government finds that “labor markets generally remained soft throughout the nation.†(17) Although “[t]he pace of layoffs slowed in most Districts. . . hiring plans still remained generally soft.†(18)
The Senate approved recently the bill extending unemployment benefits. The bill costs approximately $140 billion. (19) If the bill eventually is signed into law, which is highly probable, it will not only increase the deficits but will also worsen the unemployment situation. According to numerous economic studies benefits for unemployed significantly reduce the search effort on their part. (20) When an unemployed person becomes ineligible for benefits the probability that he or she will find a new job rises “markedlyâ€. (21)
Although some specialists are trying to look for positive signs in decreasing numbers of job losses the overall employment situation remains weak. The growing number of temporary workers and those employed by the government does not give an assurance that the labor market conditions have already reached a turning point. When businesses begin to create more full-time jobs this will mark a positive change in the current situation.
Financial obligations of the U.S. government
In the middle of February, Obama signed into law the bill increasing the public debt ceiling from $12.394 trillion to $14.294 trillion. This is a second increase in the upper limit on the national debt in less than two months.
Last time, in December, House Majority Leader Steny Hoyer commented that Congress simply had no other choice: otherwise the United States would have to default on their debt obligations what would be another catastrophe for financial markets. (22)
David Ross from Radiant Asset Management indicates in his research that the total obligations of the U.S. government exceed $90 trillion referring to the estimate of the Financial Management Services of the U.S. Treasury. (23) They include hospital insurance, supplementary medical insurance, and social security. “[T]he collected money (which Treasury has borrowed and Congress spent) falls far short of what is required to fulfill the long-term obligations of those programs, even if it had not already been spent. Almost all of the $90 trillion are promised obligations with no established method of payment.†(24)
Ross points out further: “Including unfunded obligations, the U.S. moves to 1st, well above Taiwan and Zimbabwe, for the highest debt to GDP ratio. . . U.S. total debt plus unfunded obligations total 625% of GDP.†(25)
The Peterson-Pew Commission on Budget Reform stated that “the United States would almost certainly experience a debt driven crisis,†that “could unfold gradually or it could happen suddenly, but with great costs either way.†(26) “The excessive debt would. . . affect citizens in their everyday lives by harming the American standard of living through slower economic growth and dampening wages, and shrinking the government’s ability to reduce taxes, invest, or provide a safety net.†(27)
Many experts believe that at some point such system of borrowing is going to collapse. Peter Schiff, the President of Euro Pacific Capital, argues that the way the U.S. government functions is that “we borrow money and then when the interest payments are due we borrow money to pay the interest. . . It is one gigantic Ponzi scheme.†(28)
Budget deficit
The United States reached a record budget deficit of $1.415 trillion in fiscal year 2009 that ended in September. (29) The deficit will probably again exceed one trillion dollars in the current fiscal year as it is already over $651 billion.
The excess of spending over revenue in the U.S. was $220.9 billion in February 2010, as opposed to a deficit of $193.9 billion in February 2009. (30) This is the largest monthly deficit in the history of the United States. (31) It is also the 17th straight month in which the government posted a deficit. (32)
In the beginning of February 2010 Obama transmitted a $3.8 trillion budget for 2011 to the Congress with a record $1.6 trillion deficit. (33)
IMF’s Managing Director Dominique Strauss-Kahn noted at the 10th Annual Herzliya Conference in Tel Aviv that the global crisis had created a problem of fiscal sustainability for many countries that could take decades to fix because of the huge debts built up during the crisis, especially in developed countries. (34)
Federal Reserve Bank of New York President William Dudley said recently in London that it was wrong to “wait and see how things go†in relation to high U.S. deficits implying that the country still does not have a credible exit plan. (35) Something has to be done already at this point while the situation is under relative control. (36) Doing nothing “is a risky strategy because it fully exposes the economy to the vagaries of market sentiment and because shifts in such sentiment can have important consequences for both the deficit path and the economy.†(37)
Low interest rates
The Federal Reserve is going to maintain the federal funds rate near zero percent “for an extended period†as the pace of economic activity is going to be moderate for a time and inflation will be, allegedly, subdued. (38) The government has been keeping the key rate near historical zero percent since December 2008. Rates at this level allow the government to make lower interest payments on the ballooning debt, flood the banking system with credit and drive interest rates lower.
Although, in practice, loan demand remained weak, and lending standards remained tight across the country as banks are cautious about lending during the crisis. (39) However, low rates provoked “carry tradeâ€, when investors borrow cheap U.S. dollars and buy higher-yielding assets. As the result, international stock and commodity markets grew abnormally within the last twelve months.
These developments produce significant pressure on the dollar. With rising oil prices stagflation becomes the primary risk in a long run. Stagflation is an economic situation in which inflation and economic stagnation occur simultaneously and remain unchecked for a significant period of time. (40)
If this is so, why does not the government raise interest rates? David Ross states that “high interest rates will mean either substantially higher taxes or a budget that is nothing but interest payments.†(41)
Is there a plan? Although the government does not tell exactly what it is going to do, it is possible to draw a conclusion from its actions that there will be no resistance to dollar depreciation on its part since, according to Ross, authorities will be highly motivated to keep interest rates low and “inflate [their] way out of the debt.†(42)
It is also unlikely that the Obama administration will reduce spending and fight the deficits as the only way out of the debt burden. Sir John Templeton, the John Templeton Foundation, said in 2005: “The psychology all over the world is that people will not re-elect leaders who want them to be thrifty. The voters will elect the government that spends more money.†(43) There is ample evidence that the current government of the Unites States seems to be driven by this psychology.
The vague future of the market of U.S. Treasuries
The year of 2009 was the worst year for U.S. Treasuries since at least 1978 “as the U.S. stepped up debt sales to help spur growth in an economy recovering from its deepest recession in six decades.†(44)
For the past twelve months the Fed has been actively supporting the Treasury and mortgage markets with purchases of Treasuries and Mortgage Backed Securities (MBS). The Fed had to buy Treasuries in order to suppress the growth in borrowing costs.
Since March 2009 the Fed purchased $300 billion of Treasury securities, $1.25 trillion of agency MBS and about $175 billion of agency debt securities. (45) The last two programs have ended in the end of March 2010.
Specialists warned that markets should be prepared for a ‘surprise’ when the programs end. “If it appears to be that the demand for Treasuries was fueled by the Federal Reserve, the yields on them can grow sharply. This presents great risks for the economy since the borrowing cost is the basis of the whole financial system. And the cost of credit depends on it.†(46) David Keeble, head of fixed-income strategy at Calyon in London, agrees that “[t]he end of the Fed’s quantitative easing program will hurt the market. We also have to cope with a lot of supply. It doesn’t get smaller.†(47)
When the government leaves the market this would mean that the 5-year, 10-year and 30-year Treasuries will become much less popular, Pimco's President Bill Gross told CNBC in November 2009. (48)
A few days after the Fed concluded purchases of agency MBS and debt securities risk premiums on securities sold by Fannie Mae, Freddie Mac and Ginnie Mae widened and were heading toward their widest levels in five months. Widening premiums can inflate mortgage rates.
Ten-year Treasury yields are heading upwards. After the government reported job growth in March, which seemed to be encouraging for the mainstream media, demand for the safety of government debt has decreased. Moreover, market participants look at the market of government debt very cautiously now because of the end of several key stimulus programs and because of dangerous government debt levels.
For an extended period of time such countries as China and Russia showed concerns about the reliability of the U.S. government debt. According to the U.S. Treasury Department net outflows from all U.S. securities totaled $33.4 billion in January 2010. (49) Central banks worldwide were the biggest sellers. (50) China cut its holdings of U.S. Treasury securities by $5.8 billion in January after trimming them by $34.2 billion in December and by $9.3 billion in November, but still remaining the largest foreign holder of U.S. debt. (51) Russia’s Treasury holdings fell by a net $17.6 billion in January, while in December 2009 Russia cut them by $9.6 billion. (52)
Jim Rogers, an expatriate American investor and financial commentator based in Singapore, “certainly wouldn’t be buying U.S. Treasuries†and “couldn’t imagine lending money to the U.S. government for long periods of time.†(53) Pimco’s President Bill Gross said that investors should seek countries where national debt levels are low and reserves are high, while the company was cutting holdings of U.S. debt as the nation increase borrowing to record levels. (54)