We’ve now have just a little over 30 days until US breaches its debt ceiling. We would have already done so, except Treasury Secretary Tim Geithner borrowed some $200 billion from emergency funds to buy a few weeks’ time (announcing that he’d be leaving his post before the actual ceiling was breached).
In Europe the political leaders are now not only proclaiming that the “worst” is over but that in fact the crisis as a whole is over. To say this is political grandstanding would be understatement of the year so far: EU unemployment just hit a new record of 11.8%. Also, both Greece and Spain have issued reports revealing that their banks are massively undercapitalized and in fact have negative values.
Having moved to the sidelines due to the uncertainty of the US Presidential election and the Fiscal Cliff negotiations (as well as the holidays), investors are beginning to creep back in the marketplace. And they’re in for a surprise.
While the cost of living has become a problem for some in the US (courtesy of the Fed’s inflationary policies) it’s become a real nightmare for many in the emerging markets where as much as 50% of income is spent by consumers on food.
After all, it’s clear at this point that the entire EU financial system is essentially held together via duct tape by the ECB. And with Spain and Greece’s banking systems once again in dire need of capital I’m very concerned that the next round of the EU Crisis is fast approaching and EU leaders are trying to start the damage control in advance.
In broad strokes, this is the official playbook for political leaders in the Western world. Facilitating this is the ongoing monetary easing by the global Central Banks who have collectively pumped $10 trillion into the system since the Great Crisis began. In simple terms, Central Banks provide the glue to hold the system together while politicians meet and negotiate without ever really solving anything.
Why'd the Fed announce QE 4? Three reasons: the US economy is nose-diving again and the Fed is acting preemptively. The Fed is trying to provide increased liquidity going into the fiscal cliff. The Fed is funding the US’s Government massive deficits.
I’m going to lay out everything you need to know about the fiscal cliff negotiations. After reading this, you can ignore all of the media’s coverage of this topic as well as various politicians’ announcements pertaining to this subject. All you need to know consists of just one sentence. Politicians are in charge of this issue.
Today, Spain barely functions as a country. Basic services have shut down. The entire banking system is on life support. And yet banks and the stock market are ralling.
First and foremost, QE does not create jobs. The UK has announced QE efforts equal to an amount greater than 20% of its GDP and has not seen any meaningful job growth. Similarly, Japan has announced nine rounds of QE for a combined effort equal to 20% of its GDP over the last 20 years and job growth remains dismal there.
As I mentioned before, without a doubt 2013 will be a disastrous year for the global economy and for the financial markets. Things could get ugly before then due to any number of issues that are boiling just beneath the surface… but barring any sudden developments, most of the key players will try to hold things together into year end.
Regardless of the reasons, Ben’s got a major problem on his hands. That problem is the fact that Treasuries are on the verge of breaking their upward sloping trendline. If Treasuries begin to collapse at a time when the Fed is buying up over 70% of debt issuance, then the Great Treasury Bubble is finally about the burst:
US leaders see that this strategy has worked for EU leaders (those who went along with it are still in office, those who didn’t have been kicked out). And so they are now adopting a similar strategy with discussions on the fiscal cliff.
