Benson's Economic &
Market Trends
Will Central Banks Ever
Say No To America?
Richard Benson
January 27, 2005
Americans suffering from an immediate gratification fix should
really monitor their decisions when they are restless. When feeling
restless, they may decide to sell their house and buy a bigger,
more expensive one. Then, they could easily take some cash out
- or simply a draw-down on their home equity loan - and go shopping
until they drop! Foreign goods fly off the shelves at patriotic
stores like Wal-Mart, sending more dollars to China for goods
we have imported. These dollars get stuffed into government securities
- in the United States and elsewhere - where they wait
to get spent.
How much of this is actually
going on?
But wait, there's more! The
United States government is running federal deficits of over
$400 billion a year, and we're not alone. As reported by the
Financial Times, JP Morgan Chase estimates that global
government bond supply will be $2,320 billion, up two-thirds
from 2001!
This insatiable need to borrow
by governments and American households totally overwhelms the
world's savings. So, where is all the money we are borrowing
coming from? Thank the accommodative central banks. (See table
below):
It works something like this:
Central banks create new money by buying something. The central
banks almost always buy their own government debt, or debt of
another country, theoretically printing money out of thin air
(for a central bank to have a 'reserve' it must buy the debt
of some other country). Foreign central banks own $280 billion
worth of securities issued by United States' government agencies
- go Fannie Mae! The Federal Reserve, as an example, holds
United States' government and agency debt in custody for foreign
central banks.
We are looking at a mutual
back scratching of world central banks printing up new money,
the likes of which the world has never seen before! Will it ever
end?
As long as commercial banks
continue to offer home equity lines of credit, issue credit cards
to anyone regardless of age or credit worthiness, and finance
companies that are cash-flow-negative with more high-yield debt,
this party will continue. Borrowing by the government and consumers
creates new money and spending which "makes the world go
'round." Over the last decade, every world central bank
has remained accommodative to America's willingness to borrow
and spend without limit. Indeed, while the war in Iraq has already
cost $300 billion, its all been paid for by foreign central banks
printing up fresh cash and handing the new money to the United
States Treasury in return for those quaint treasury bills and
bonds. Meanwhile, over-spending in the United States has created
a $650 billion trade deficit that threatens the very existence
of the dollar as the world reserve currency.
The Federal Reserve realizes
that if they raise interest rates to stabilize the dollar - by
making its yield more attractive on dollar investments, as well
as lowering the trade deficit - serious pain will be inflicted.
Rising interest rates will crunch real estate sales as fewer
consumers will be able to afford to pay current outrageous prices
for housing, and service mortgages with higher monthly payments.
Moreover, the burden of servicing consumer and home equity loans
- whose costs are tied to rising short-term interest rates -
will squeeze the American household even further. More money
for debt service means less to spend on domestic and foreign
goods.
If and when the Federal Reserve
starts the "big squeeze" to save the dollar, the trade
deficit will come down. However, if the dollar rallies, American
companies will become less competitive just when the consumer
is feeling strapped financially and spending less. In addition,
our trading partners will not be happy that the free ride on
America is over. When 40 percent of S&P corporate profits
are related to financing, higher interest rates do not bode well
for corporate profits. Moreover, rising interest rates would
inevitably impact the price of stocks, bonds and housing.
Perhaps investors should start
paying closer attention to the statements and actions of the
Federal Reserve governors. The question is, will central banks
stay super easy or will they start acting like adults at the
end of a wild party?
January 26, 2005
Richard Benson
archives
President
Specialty
Finance Group, LLC
Member NASD/SIPC
2505 S. Ocean Boulevard
- Suite 212
Palm Beach, Florida 33480
1 800-860-2907
eMail: rbenson@sfgroup.org
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321gold Inc
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