February 17, 2013

Does Debt Matter?

Readers suggested a topic on debt. “The basic concept held by a large faction in government is that debt simply does not matter. People accept the currency as having value. If the Fed could finance all of the government debt and there is no sign of the markets becoming roiled, it’s all good. There’s no consequence.”

“We hear however, from nearly all quarters, that the ‘path we are on is unsustainable.’ This relative to the previous concept that ‘debt doesn’t matter’ sounds like lip service to assuage the masses. So - for an entity that can print money, does debt matter? The government and Fed are not like a company, a family or a state. The Fed/Gov can print money which makes it a unique economic entity.”

A reply, “The national debt may not matter. Personal debt seems to matter a lot unless you are in a favored class whose personal debt gets moved to the national debt.”

The Daily Ticker. “Just hours after the Commerce Department reported the first decline in quarterly GDP in 3-1/2 years, the Federal Reserve announced it was maintaining its policy of near-zero interest rates and $85 billion worth of long-term Treasury and mortgage-backed purchases per month. The Fed said recent economic information suggests that ‘growth in economic activity paused in recent months’ due to ‘weather-related disruptions and other transitory factors’ but household and business spending had grown and housing continued to improve. ‘Employment also expanded but ‘unemployment remains elevated,’ the Fed said.”

“Michael Pento, president of Pento Portfolio Strategies, tells The Daily Ticker that the Fed’s easing policy ‘is wrong.’ He says, ‘It would be much better to rip the Band-Aid off…allow a cathartic depression to engulf the United States for about a year…and we will emerge on the other side of that clean, with a strong currency and a sound balance sheet.’ But instead, Pento expects the Fed ‘will continue to monetize debt and may even increase it.’”

“The danger in this policy, says Pento, is that it is enabling ‘the federal government to run trillion-dollar-plus deficits — about 7 percent of GDP per annum…robbing the middle class of their purchasing power…creating bubble after bubble.’ He says the bubble will eventually burst because the Fed will stop buying securities or the market will push up interest rates or inflation will increase.”

“In the meantime, he advises investors not to fight the Fed.”

The Epoch Times. “To understand why the two drivers of growth are not working anymore, one needs to go back to the original economic road chosen to find that the problem lies in unfair income distribution. This unfair income distribution originates from manipulating real interest rates. ”

“High growth in exports was achieved by mercantilist trade policies and the undervaluation of the Chinese Renmimbi (RMB). High investment on the other hand was a direct result of extremely low real interest rates. Between 2003 and 2011, the average real interest rate on loans was about zero. This means whoever got loans from banks got money for free.”

“As a consequence, governments, large corporations, and state-owned enterprises accumulated lots of wealth in the process. Returns on capital investment were high in the past decades. In particular, as housing prices have increased over ten percent for several years, land developers and real estate companies made a huge fortune.”

“Many of the richest Chinese are associated with real estate. Local governments also increased their revenues by selling land. Revenues from land sales have increased to account for 30-50 percent of local fiscal revenues. Local governments rejoice seeing housing prices go up because it enables them to sell land at a higher price.”

“In the past decade China’s housing prices have more than doubled, widening the income gap. The rich increased their wealth through soaring housing prices, because many of them can afford to own several pieces of real estate. According to the Survey Report on China’s Family Financial Situation, the top ten percentile income group owns 85 percent of China’s household assets. The poor, on the other hand, have to put up all their savings to buy their first house and are heavily burdened by the mortgages. They become what they call ‘house slaves,’ having to spend most of their income on mortgages.”

“As house prices keep rising, people in need of housing use up all of their lifetime savings to purchase a home. Many end up with large mortgages so that most of their monthly income has to be used to pay mortgages, leaving little left for consumption of real goods. Therefore, as long as the housing bubble grows, consumption by the mass—’house slaves’ and ‘house slaves to be’—which need real disposable income growth, will only decline.”

The Oye! Times. “At present, in Toronto everywhere you go in the city, you will find a construction site, building a condo. If you drive into the city on the expressway, you will notice a wall of condos going up. It is that obvious. It is not just one, or two, going up, it is more then the entire amount of condos in the state of New York. They are expected to remain empty and house no one. Canada’s population is 35 million strong, strongly concentrated in Toronto, Montreal, Calgary, and Vancouver. We do not have a land shortage. Everything is too spread out for that. The condos that are going up are investment property. The Canada mortgage and housing corporation (CMHC) was created as a guide book for the real estate market. In reality, it represents the real estate investors, not renters, home owner, or potential first time home buyers.”

“Developers finance political campaigns. The media only reflect the opinions that come from real estate agents and the companies that they work for. They all say the real estate market is hot in Canada, not in a bubble which it has been since the 1980’s. If you did not get the memo, the real estate market in Canada is over inflated. I, like many others who live here, fully expect to see a Japanization of the Canadian housing market. What is that? Japanization was a real estate crash that happened in the 90’s in Japan, which led to home values in Japan to return to 1983 price levels. Ouch!”

“The rich in Canada need to learn such a lesson. They have no sense of social responsibility, only greed, arrogance, and stupidity. They are not even the right calibre of individual to exercise such power that would decide the fate of nations, let alone the lives of their own citizens. They just look at the balance book. If it is not in their backyard, why should they care? That is their mentality.”

Bits Bucket for February 17, 2013

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