The lack of dynamism of foreign investors also raises strong doubts about the upcoming management of US debt
The recovery is not reflected in the increase in debt, which indicates how much the US economy is still under a federal financial infusion. The continued deterioration of the federal finances shows that we are still far from a recovery scenario. This deterioration of the Treasury accounts must be crossed with that of the balance sheet of the Federal Reserve which intervenes in a massive way to buy the rotten MBS of Freddie Mac and Fannie Mae and, probably also, support the revival of the real estate market by acquiring MBS newly issued by these two companies. Massive public debt still seems to be the main driver of the modest US growth T-3 2009. Should we talk in this context about recovery and really positive growth? It will be necessary to wait for the concomitance of the slowdown of the growth of the public debt and a restart of the American economy to be able to speak about the endogenous recovery of the American economy. US GDP data for the 4th quarter of 2009 will, therefore, have to be scrutinized. The data of the 3 Trimestre did not go in the sense.
The consolidation of the payday loan also involves many questions, the most important we seem to be this: will it still be possible in 2010 to lock the US debt in the straitjacket of modest interest rates as has been the case since the beginning of the crisis? This question is complex.
We made the assumption in two other posts (ref below) that the Federal Reserve had intervened punctually to avoid a rise in interest rates Treasury bills, either itself or through the Dealers and Brokers. Our hypothesis remains that the Federal Reserve has occasionally biased the issuing conditions of new treasury bills by influencing certain issues.
If such an action has taken place, it seems difficult to renew it in 2010 without taking the risk of permanently discrediting the US fiscal policy and public debt in treasury bills. The treasury bill bubble would surely burst if the FED allowed itself to rig the emissions again, the questions that are multiplying on its balance sheet reduce these margins today. But we are only making a hypothesis.
The monetization of the GSE debt (and incidentally the Treasury) by mechanisms of monetary creation of reserve institutions of the FED (for short banks) can only lead to a long-term disruption of the credit. For the moment, this disruption is not on the agenda, monetary creation encouraged by the FED does not penalize the distribution of credit to the economy: in view of the rise of payment incidents on all credits, banks remain very cautious. The FED, therefore, has a window of opportunity to divert money creation to its advantage.
But it will be necessary at some point or another to stop letting the balance sheet of the FED deteriorate; in fact, this could result in either a scarcity of credit – the Fed taking over too much of the money creation – or an economic recovery in inflation incompatible with the growth of the debt and the weight of its service. This problem is not unrelated to the question of the future of US fiscal and financial policy: without the help of foreign capital, the Treasury will have to resort more and more to US capital to support the growth of the federal debt. And it will be necessary to pay them all the more as the credit needs of the economy and the financial market will be felt. It will, therefore, be necessary to arbitrate at one time or another between the growth of the financial debt and the financing needs of the economy. The rise in Fed interest rates, the abandonment of support for the economy or a restrictive tax policy will have to be the subject of difficult arbitration in the not too distant future, none of these choices will confirm a possible recovery and a possible recovery makes them imperative.
Certainly, one could imagine a monetization of the debt of the Treasury by the FED on the model of the monetization of the debt of the GSE
The Americanization of the federal debt is pushing in this direction. But, it is taking a ticket for an inflation incompatible with the productive structure of the USA. By depreciating old foreign investments in $ by an internal inflationary mechanism, the US would discourage new financial investments. But American growth inevitably creates a trade deficit that can only be covered by the entry of money capital invested in FDI or in the financial market. And it’s the $ value that depends on this coverage. Is it necessary to say it a financialized economy on par with dislikes inflation? The flight into inflation would, therefore, be a desperate remedy for the US, it would affect the distribution of interest to persons ($ 2000 billion in gross source BEA), an essential component of their income, the credit edifice. final economic reproduction of an economy suffering from insurmountable external imbalances.
The question of the growth of the financial debt and the debt of the Federal Reserve has hitherto been the solution; it is becoming the problem of problems. We can only repeat what we have often written on this blog. There is a race against time between endogenous recovery and indebtedness. If the financial, monetary, and fiscal problems arise faster than a healthy recovery, then the US should experience a second crisis – and it will take years to overcome.
The deterioration of the accounts of the FED and the Treasury is very ominous. The flight into debt leads to a risk of increased fragilization of the US whose consequences are so far incalculable for them and for the world. The scenario of an entry into a Japanese-style crisis phase in 2010 is therefore still plausible, it will be determined by the quality of the recovery that remains to be confirmed. More than 2009, the year 2010 will be the decisive year.