The Federal Reserve Saves The Stock Market?

The Federal Reserve has saved the stock market!  Well, at least for a day.  That was one heck of a “dead cat bounce” that we saw on Tuesday.  Normally, after the kind of dramatic decline that we saw on Monday there is some sort of a rebound, but on Tuesday the market did not begin to soar until the Federal Reserve pledged to leave interest rates near zero until mid-2013.  Once the Fed made their announcement, the market went haywire.  At one point the Dow was down more than 200 points, but by the end of the day it was up 430 points.  It was a desperate move for the Federal Reserve to pledge not to raise interest rates for the next two years, and it has stabilized financial markets for the moment.  But what is the Fed going to do to save the stock market when it starts crashing next week or next month?  The underlying financial fundamentals continue to get worse and worse.  Europe is a mess, Japan is a mess and the United States is a mess.  The Federal Reserve can try to keep all of the balls in the air for as long as possible, but at some point the juggling act is going to end and the house of cards is going to come crashing down.

This move may calm nerves for a day or two, but there is still a tremendous amount of fear out there at the moment.  Many investors are pouring money into “safe havens” right now.  Huge amounts of cash are being poured into U.S. Treasuries and the price of gold is absolutely soaring.  The price of gold is up about $220 in just the last 30 days alone.

So how high could the price of gold go in the coming months?  Well, analysts at JP Morgan are forecasting that the price of gold could hit $2,500 by the end of this year.

Yes, that is how wild things are becoming.  The Federal Reserve is painting itself into a corner.  Never before has the Fed pledged to leave interest rates near zero for the next two years.  The following is an excerpt from the statement that the Fed released earlier today….

To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent.  The Committee currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.  The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings.  The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

Needless to say, the rest of the world is not pleased by this nonsense from the Fed.  Yes, the Fed has stabilized financial markets for the moment, but a lot of ill will is being created with the rest of the globe.  The following is what Bruce Krasting had to say about how the rest of the world is going to react to this latest Fed move….

Brazil, Argentina, Korea, Indonesia are going to scream bloody murder over perpetual ZIRP. Russia is likely to get downright ugly with their rhetoric. I wouldn’t be surprised if they took this opportunity to vote with their feet and just abandon the dollar as a reserve holding. China will also make noise. They will make more calls for a new international currency to replace the dollar. The Central bankers in Japan and Switzerland are puking in the trashcan over this. Bernanke is exporting US deflation to them. Shame on the Fed for pursuing Beggar my neighbor policies. They deserve all the global criticism they are about to get.

The Federal Reserve is using up all of the ammunition it has available and the game has barely even begun.

Things are going to get a lot worse.  The U.S national debt continues to pile up at lightning speed.  The debt ceiling deal essentially does nothing to fix our debt problems.  Thousands of businesses and millions of jobs continue to leave the United States.  As a nation, we are constantly becoming poorer and we are constantly getting into more debt.

Meanwhile, Europe is on the verge of a financial meltdown and Japan has a “zombie economy” at this point.

Many fear that we could be on the verge of another major global recession.  The following is how a recent Der Spiegel article described the current global financial situation….

Many economists have been pointing out that last week’s panic resembled the fear that swept financial markets after the collapse of US investment bank Lehman Brothers in September 2008.

Then as now, banks stopped lending each money. Then as now, banks’ cash deposits at the central bank doubled within days. The European Central Bank reacted by assuring banks of unlimited liquidity in the coming months. It was an emergency measure that led to short-term relief but sparked anxious questions among bankers and stock market players. How long can the central bank keep up its market-soothing liquidity operations before it finally loses its credibility, the most important asset of a central bank? Is the financial crisis about to escalate?

In the old days, the U.S. and Europe could just borrow gigantic stacks of cash in order to solve any problems.  But now things are dramatically changing.

China’s official news agency recently stated that the U.S. needs to understand that things are different now….

“The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone”

Not that the U.S. government and the Federal Reserve are going to suddenly give up their old habits.  The U.S. government is addicted to debt and the Fed is addicted to printing money.  When push comes to shove, they are going to resort to their favorite tricks.

But at some point the rest of the world is not going to play along anymore.  When that moment arrives, it is going to be very interesting to see what happens.

Meanwhile, the U.S. economy continues to slowly unravel, and people in this country are getting very angry.  Millions of Americans families are barely scraping by right now.  Most Americans just want someone to “fix” things, but unfortunately there are no easy “fixes” to our financial problems.

As our economic problems grow even worse, frustration inside the United States is going to continue to escalate.  A brand new Rasmussen survey found that only 17 percent of Americans now believe that the U.S. government has the consent of the governed.

That was a brand new all-time low.

Faith in the major institutions of our society is already dangerously low and the economy is not even that bad yet.

As horrible as things are now, the truth is that this is rip-roaring prosperity compared to what is coming.

In the months and years ahead, America is going to be greatly tested.  As the recent London riots have shown, things can spiral out of control very quickly.

When the economy completely collapses will America be able to handle it?

A 634 Point Stock Market Crash And 8 More Reasons Why You Should Be Deeply Concerned That The U.S. Government Has Lost Its AAA Credit Rating

Are you ready for part two of the global financial collapse?  Many now fear that we may be on the verge of a repeat of 2008 after the events of the last several days.  On Friday, Standard & Poor’s stripped the U.S. government of its AAA credit rating for the first time in history.  World financial markets had been anticipating a potential downgrade, but that still didn’t stop panic from ensuing as this week began.  On Monday, the Dow Jones Industrial Average dropped 634.76 points, which represented a 5.5 percent plunge.  It was the largest one day point decline and the largest one day percentage decline since December 1, 2008.  Overall, stocks have fallen by about 15 percent over the past two weeks.  When Standard & Poor’s downgraded long-term U.S. government debt from AAA to AA+, it was just one more indication that faith in the U.S. financial system is faltering.  Previously, U.S. government debt had a AAA rating from S&P continuously since 1941, but now that streak is over.   Nobody is quite sure what comes next.  We truly are in unprecedented territory.  But one thing is for sure – there is a lot of fear in the air right now.

So exactly what caused S&P to downgrade U.S. government debt?

Well, it was the debt ceiling deal that broke the camel’s back.

According to S&P, the debt ceiling deal “falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.”

As I have written about previously, the debt ceiling deal was a complete and total joke, and S&P realized this.

Forget all of the huge figures that the mainstream media has been throwing at you concerning this debt ceiling deal.  The only numbers that matter are for what happens before the next election.

The only way that the current debt ceiling deal will last beyond the 2012 election is if Obama is still president, the Democrats still control the Senate and the Republicans still control the House.  If any of those things change, this deal ceiling deal is dead as soon as the election is over.

Even if all of those things remain the same, there is still a very good chance that we would see dramatic changes to the deal after the next election.

So in evaluating this “deal”, the important thing is to look at what is going to happen prior to the 2012 election.

When we examine this “deal” that way, what does it look like?

Well, Barack Obama and the Democrats get the debt ceiling raised by over 2 trillion dollars and will not have to worry about it again until after the 2012 election.

The Republicans get 25 billion dollars in “savings” from spending increases that will be cancelled.

The “Super Congress” that is supposed to be coming up with the second phase of the plan may propose some additional “spending cuts” that would go into effect before the 2012 election, but that seems unlikely.

So in the final analysis, the Democrats won the debt ceiling battle by a landslide.

25 billion dollars is not even 1 percent of the federal budget.  The U.S. national debt continues to spiral wildly out of control, and our politicians could not even cut the budget by one percent.

Somehow our politicians believed that the rest of the world would be convinced that they were serious about cutting the budget, but it turns out that global financial markets are tired of getting fooled.

It has gotten to the point where now even the big credit rating agencies are being forced to do something.  Not that they really have much credibility left.  Everyone still remembers all of those AAA-rated mortgage-backed securities that imploded during the last financial crisis.  The reality is that the big credit rating agencies are a bad joke at this point.

Several smaller credit rating agencies have already significantly slashed the credit rating of the U.S. government.  But a lot of pressure had been put on the “big three” to keep them in line.

But now things have gotten so ridiculous that S&P felt forced to make a move.

Sadly, our politicians are still trying to maintain the charade that everything is okay.  Barack Obama says that financial markets “still believe our credit is AAA and the world’s investors agree”.

Once again, Barack Obama is dead wrong.

The truth is that the credit rating for the U.S. government should have been slashed significantly a long time ago.  This move by S&P was way, way overdue.

Moody’s might be the next one to issue a downgrade.  At the moment, Moody’s says that it will not be downgrading U.S. debt for now, but Moody’s also says that it has serious doubts about the enforceability of the “budget cuts” in the debt ceiling deal.

This crisis is just beginning.  It is going to play out over time, and it is going to be very messy.

The following are 8 more reasons why you should be deeply concerned that the U.S. government has lost its AAA credit rating….

#1 The U.S. dollar and U.S. government debt are at the very heart of the global financial system.  This credit rating downgrade just doesn’t affect the United States – it literally shakes the financial foundations of the entire world.

#2 As the stock market crashes, investors are flocking to U.S. Treasuries right now.  However, once the current panic is over the U.S. could be faced with increased borrowing costs.  The credit rating downgrade is a signal to investors that they should be receiving a higher rate of return for investing in U.S. government debt.  If interest rates on U.S. government debt do end up going up, that is going to make it more expensive for the U.S. government to borrow money.  The higher interest on the national debt goes, the more difficult it is going to become to balance the budget.

#3 We could literally see hundreds of other credit rating downgrades now that long-term U.S. government debt has been downgraded.  For example, S&P has already slashed the credit ratings of Fannie Mae and Freddie Mac from AAA to AA+.  S&P has also already begun to downgrade the credit ratings of states and municipalities.  Nobody is quite sure when we are going to see the dominoes stop falling, and this is not going to be a good thing for the U.S. economy.

#4 10-year U.S. Treasuries are the basis for a whole lot of other interest rates throughout our economy.  If we see the rate for 10-year U.S. Treasuries go up significantly, it will suddenly become a lot more expensive to get a car loan or a home loan.

#5 The current financial panic caused by this downgrade is hitting financial stocks really hard.  The big banks led the decline back in 2008, and it looks like it might be happening again.  Just check out what CNN says happened to financial stocks on Monday….

Financial stocks were among the hardest hit, with Bank of America (BAC, Fortune 500) plunging 20%, and Citigroup (C, Fortune 500) and Morgan Stanley (MS, Fortune 500) dropped roughly 15%.

#6 China is freaking out. China’s official news agency says that China “has every right now to demand the United States to address its structural debt problems and ensure the safety of China’s dollar assets”.  If China starts dumping U.S. government debt that would make things a lot worse.

#7 There are already calls for the Federal Reserve to step in and do something.  If the U.S. economy drops into another recession, will we see more quantitative easing?  It seems like we have reached a point where the Fed is constantly in “emergency mode”.

#8 The U.S. national debt continues to get worse by the day.  Just check out what economics professor Laurence J. Kotlikoff recently told NPR….

“If you add up all the promises that have been made for spending obligations, including defense expenditures, and you subtract all the taxes that we expect to collect, the difference is $211 trillion. That’s the fiscal gap”

Dick Cheney once said that “deficits don’t matter”, but the truth is that all of the debt we have been piling up for decades is now catching up with us.

The United States is in such a huge amount of financial trouble that it is hard to put into words.  The days of easy borrowing for the U.S government are starting to come to an end.  We have been living in the greatest debt bubble in the history of the world, and it has fueled a tremendous amount of “prosperity”, but now the party is ending.

A whole lot of financial pain is on the horizon.  Please prepare for the hard times that are coming.

18 Signs That Global Financial Markets Smell Blood In The Water

Can you smell it?  There is blood in the water.  Global financial markets are in turmoil.  Banking stocks are getting slaughtered right now.  European bond yields are absolutely soaring.  Major corporations are announcing huge layoffs.  The entire global financial system appears to be racing toward another major crisis.  So could we potentially see a repeat of 2008?  Sadly, when the next big financial crisis happens it might be worse than 2008.  Back in the middle of 2008, the U.S. national debt was less than 10 trillion dollars.  Today it is over 14 trillion dollars. Back in 2008, none of the countries in the EU were on the verge of financial collapse.  Today, several of them are.  This time if the global financial system starts falling apart the big governments around the world are not going to be able to do nearly as much to support it.  That is why what is happening right now is so alarming.  As signs of weakness spread, the short sellers and the speculators are starting to circle.  They can smell the money.

Back in 2008, bank stocks led the decline.  Today, that appears to be happening again.  The “too big to fail” banks are getting absolutely pummeled right now.  Most people don’t have much sympathy for the banksters, but if we do see a repeat of 2008 they are going to be cutting off credit and begging for massive bailouts once again, and that would not be good news for the economy.

In Europe, the EU sovereign debt crisis just seems to get worse by the day.  Bond yields for the PIIGS are going haywire.  The higher the yields go, the worse the crisis is going to get.

Meanwhile, as I have written about previously, a bad mood has descended on world financial markets. Pessimism is everywhere and fear is spreading.  The short sellers and the speculators are eager to jump on any sign of weakness.  Investors all over the globe are extremely nervous right now.

So what happens next?

Well, nobody knows for sure.

But things certainly do not look good.

The following are 18 signs that global financial markets smell blood in the water….

#1 Banks stocks are absolutely getting hammered right now.  Bank of America hit a 52 week low on Monday.  Bank of America shares declined 4 percent to $9.61.

#2 So far this year, Bank of America stock is down about 27 percent.

#3 Bloomberg is reporting that Bank of America may be forced to increase its capital cushion by 50 billion dollars.

#4 Shares of Goldman Sachs and Morgan Stanley are near two year lows.

#5 Shares in Citigroup fell 2.5 percent on Monday.

#6 Moody’s recently warned that it may be forced to downgrade the debt ratings of Bank of America, Citigroup and Wells Fargo.

#7 Barclays Capital, Goldman Sachs, Bank of America, JPMorgan Chase and Morgan Stanley are all either considering staff cuts or are already laying workers off.

#8 The deputy European director of the International Monetary Fund says that the Greek debt crisis is “on a knife’s edge“.

#9 Moody’s has slashed Ireland’s bond rating all the way to junk status.

#10 The yield on 2 year Portuguese bonds is now over 20 percent, the yield on 2 year Irish bonds is now over 23 percent and the yield on 2 year Greek bonds is now over 35 percent.

#11 Shares of Italy’s largest bank dropped by a whopping 6.4% on Monday.

#12 On Monday, the yield on 10 year Italian bonds was the highest it has been since the euro was adopted.

#13 On Monday, the yield on 10 year Spanish bonds was also the highest it has been since the euro was adopted.

#14 Shares of Germany’s largest bank fell by a staggering 7% on Monday and are down a total of 22% so far this month.

#15 Citigroup’s chief economist, William Buiter, says that without direct intervention by the ECB there is going to be a wave of sovereign defaults across Europe….

“Nothing stands in the way of multiple sovereign defaults except the ECB: they are the only game in town, there is nothing else”

#16 Cisco has announced plans to axe 16 percent of its workers.

#17 Borders Group has announced that it will be liquidating all remaining assets.  That means that 399 stores will be closed and 10,700 workers will lose their jobs.

#18 During times of great crisis, many investors seek safe havens for their money.  On Monday, the price of gold shot past $1600 an ounce.

These are not normal financial times.  The worldwide debt bubble is starting to burst and nobody is quite sure what is going to happen next.  Certainly we are going to continue to see financial authorities all over the world do their best to keep the system going.  But as we saw in 2008, things can spiral out of control very quickly.

Just remember, back at the beginning of 2008 very few people would have ever imagined that the biggest financial institutions in America would be begging for hundreds of billions of dollars in bailouts by the end of that year.

When confidence disappears, the game can change very quickly.  To the vast majority of economists it would have been unimaginable that the yield on 2 year Greek bonds would be over 35 percent in mid-2011.

But here we are.

The entire global financial system is a house of cards built on a foundation of sand.  It is more vulnerable today than it has been at any other time since World War II.  When a couple of major dominoes fall, it is likely to set off a massive chain reaction.

The global financial system of today was not designed with safety and security in mind.  It was designed for greedy people to be able to make as much money as possible as quickly as possible.  The banksters don’t care about the greater good of mankind.  What they care about is making huge piles of cash.

There is way too much risk, way too much debt and way too much leverage in the global financial marketplace.  You would have thought that 2008 should have been a major wake up call for financial authorities around the world, but very few significant changes have been made since that time.

The financial news is just going to keep getting worse.  This financial system is simply unsustainable.  It is fundamentally unsound.  The reality is that financial bubbles cannot keep expanding forever.  Eventually they must burst.

Over the next few weeks, keep a close eye on banking stocks and keep a close eye on European bond yields.

Hopefully things will stabilize.

Hopefully the next wave of the financial collapse is not about to hit us.

Hopefully the entire global financial system is not on the verge of a major implosion.

But you might want to get prepared just in case.

Too Big To Fail?: 10 Banks Own 77 Percent Of All U.S. Banking Assets

Back during the financial crisis of 2008, the American people were told that the largest banks in the United States were “too big to fail” and that was why it was necessary for the federal government to step in and bail them out.  The idea was that if several of our biggest banks collapsed at the same time the financial system would not be strong enough to keep things going and economic activity all across America would simply come to a standstill.  Congress was told that if the “too big to fail” banks did not receive bailouts that there would be chaos in the streets and this country would plunge into another Great Depression.  Since that time, however, essentially no efforts have been made to decentralize the U.S. banking system.  Instead, the “too big to fail” banks just keep getting larger and larger and larger.  Back in 2002, the top 10 banks controlled 55 percent of all U.S. banking assets.  Today, the top 10 banks control 77 percent of all U.S. banking assets.  Unfortunately, these giant banks are also colossal mountains of risk, debt and leverage.  They are incredibly unstable and they could start coming apart again at any time.  None of the major problems that caused the crash of 2008 have been fixed.  In fact, the U.S. banking system is more centralized and more vulnerable today than it ever has been before.

It really is difficult for ordinary Americans to get a handle on just how large these financial institutions are.  For example, the “big six” U.S. banks (Goldman Sachs, Morgan Stanley, JPMorgan Chase, Citigroup, Bank of America, and Wells Fargo) now possess assets equivalent to approximately 60 percent of America’s gross national product.

These huge banks are giant financial vacuum cleaners.  Over the past couple of decades we have witnessed a financial consolidation in this country that is absolutely unprecedented.

This trend accelerated during the recent financial crisis.  While the big boys were receiving massive bailouts, the hundreds of small banks that were failing were either allowed to collapse or they were told that they should find a big bank that was willing to buy them.

As a group, Citigroup, JPMorgan Chase, Bank of America and Wells Fargo held approximately 22 percent of all banking deposits in FDIC-insured institutions back in 2000.

By the middle of 2009 that figure was up to 39 percent.

That is not just a trend – that is a landslide.

Sadly, smaller banks continue to fail in large numbers and the big banks just keep growing and getting more power.

Today, there are more than 1,000 U.S. banks that are on the “unofficial list” of problem banking institutions.

In the absence of fundamental changes, the consolidation of the banking industry is going to continue.

Meanwhile, the “too big to fail” banks are flush with cash and they are getting serious about expanding.  The Federal Reserve has been extremely good to the big boys and they are eager to grow.

For example, Citigroup is becoming extremely aggressive about expanding….

Citigroup has been hiring dozens of investment bankers, dialing up advertising and drawing up plans to add several hundred branches worldwide, including more than 200 in major cities across the United States.

Hopefully the big banks will start lending again.  The whole idea behind the bailouts and all of the “quantitative easing” that the Federal Reserve did was to get money into the hands of the big banks so that they would lend it out to ordinary Americans and get the economy rolling again.

Well, a funny thing happened.  The big banks just sat on a lot of that money.

In particular, what they did was they deposited much of it at the Fed and drew interest on it.

Since 2008, excess reserves parked at the Fed have grown by nearly 1.7 trillion dollars.  Just check out the chart posted below….

The American people were promised that TARP and all of the other bailouts would enable the big banks to lend out lots of money which would help get the economy going for ordinary Americans again.

Well, it turns out that in 2009 (the first full year after Congress passed the bailout legislation) U.S. banks posted their sharpest decline in lending since 1942.

Lending has never fully recovered since the crash of 2008.  The big financial institutions like Goldman Sachs, Morgan Stanley and JPMorgan Chase have been able to get all the cash that they need, but they have not passed that generosity along to ordinary Americans.

In fact, the biggest U.S. banks have actually reduced small business lending by about 50 percent since the crash of 2008.

That doesn’t sound like what we were promised.

These “too big to fail” banks have been able to borrow gigantic amounts of money from the Fed for next to nothing and yet they still refuse to let credit flow to local communities.  Instead, the big banks have found other purposes for all of the super cheap money that they have been getting from the Fed as Ellen Brown recently explained….

It can be very profitable indeed for the big Wall Street banks, but the purpose of the near-zero interest rates was supposed to be to get banks to lend again. Instead, they are, indeed, paying “outrageous bonuses to their top executives;” using the money to engage in the same sort of unregulated speculation that nearly brought down the economy in 2008; buying up smaller banks; or investing this virtually interest-free money in risk-free government bonds, on which taxpayers are paying 2.5 percent interest (more for longer-term securities).

What makes things even worse is that these big banks often pay next to nothing in taxes.

For example, between 2008 and 2010, Wells Fargo made a total profit of 49.37 billion dollars.

Over that same time period, their tax bill was negative 681 million dollars.

Do you understand what that means?  Over that 3 year time period, Wells Fargo actually got 681 million dollars back from the U.S. government.

Isn’t that just peachy?

Meanwhile, the big financial giants have not learned their lessons and they continue to do business pretty much as they did it prior to 2008.

The big banks continue to roll up massive amounts of risk, debt and leverage.

Today, Wall Street has become one giant financial casino.  More money is made on Wall Street by making side bets (commonly referred to as “derivatives“) than on the investments themselves.

If the bets pay off for the big financial institutions, mind blowing profits can be made.  But if the bets go against the big financial institutions (as we saw in 2008), firms can collapse almost overnight.

In fact, it was derivatives that almost brought down AIG.  The biggest insurance company in the world almost folded in 2008 because of a whole bunch of really bad bets.

The danger from derivatives is so great that Warren Buffet once called them “financial weapons of mass destruction”.  It has been estimated that the notional value of the worldwide derivatives market is somewhere in the neighborhood of a quadrillion dollars.

The largest banks have tens of trillions of dollars of exposure to derivatives.  When the next great financial collapse happens, derivatives will almost certainly be at the center of it once again.  These side bets do not create anything real for the economy – they just make and lose huge amounts of money.  We never know when the next great derivatives crisis will strike.  Derivatives are essentially like a “sword of Damocles” that perpetually hangs over the U.S. financial system.

When I start talking about derivatives I get a lot of people in the financial community mad at me.  On Wall Street today you can bet on just about anything you can imagine.  Almost everyone in the financial world has gotten so used to making wild bets that they couldn’t even imagine a world without them.  If anyone even tried to put significant limits on futures, options and swaps it would cause Wall Street to throw a hissy fit.

But someday the dominoes are going to start to fall and the house of cards is going to come crashing down.  It is an open secret that our financial system is fundamentally unsound.  Even a lot of people working on Wall Street will admit that.  It is just that people are so busy making such big piles of money that nobody wants the party to stop.

It is only a matter of time until some of these big banks get into a huge amount of trouble again.  When that happens, we might really find out whether they are “too big to fail” or whether we could get along just fine without them.

If The U.S. Government Loses Its AAA Rating It Could Potentially Unleash Financial Hell Across The United States

For decades, the U.S. government has had a AAA rating.  On the scales used by the big three credit rating agencies, that is the highest credit rating that a government can get.  Moody’s scale actually uses lettering that is a little different from the other two big agencies (“Aaa” instead of  “AAA”), but you get the point. Right now, the U.S. government is closer than ever to losing its AAA rating.  The threat of a rating downgrade is going to continue to grow regardless of how the political theater that we are watching unfold in Washington D.C. plays out.   The truth is that the federal government has accumulated a debt that is so vast that it will never be paid back.  In fact, we are rapidly approaching the point when this debt will no longer be serviceable.  If the credit rating of the U.S. government is not slashed right now, it will be soon enough.  In fact, the truth is that the U.S. government is such a financial mess that it should have been done long ago.  But whenever the United States does lose its AAA rating, we could potentially see financial hell unleashed because it will also mean that there will almost certainly be a wave of credit rating downgrades from coast to coast.

As I have written about previously, government debt becomes more painful the higher that interest rates go.  When the big credit agencies downgrade the credit rating of a government, that is a signal to investors that they should ask for higher interest rates on debt issued by that government.

This does not always play out in practice (just look at Japan), but nations such as Greece, Portugal and Ireland sure are going through financial hell right now as they deal with reduced credit ratings and soaring interest rates.

Right now, the U.S. government is able to borrow gigantic quantities of money at ridiculously low interest rates. This is the primary reason why the debt disaster predicted by so many in the past has not arrived yet.

If the credit rating of the U.S. government is downgraded, it could finally get investors all over the world to realize that the game is over and that they should be demanding much higher returns on debt issued by the U.S. government.  The truth, as U.S. Representative Ron Paul put it recently, is that the U.S. government is already “insolvent” and at some point we are all going to have to face reality….

“Ultimately, the fundamentals show this country is bankrupt.”

So whether or not it happens right now, the truth is that at some point the credit rating of the U.S. government is going to go down and interest rates are going to go up.

Unfortunately, it appears that this might happen sooner rather than later.

Earlier this week, Moody’s Investors Service publicly announced that it would be reviewing our Aaa bond rating for a possible downgrade.

On Thursday, S&P actually went so far as to announce that there is a “50 percent chance” that it will downgrade the credit rating of the U.S. government within the next three months.

S&P has been warning of trouble for some time now.  Back on April 18th, Standard & Poor’s altered its outlook on U.S. government debt from “stable” to “negative” and warned that a downgrade was likely at some point soon if nothing changed.

If the credit rating of the U.S. government gets slashed and if that results in higher interest costs on the national debt, that is going to make it much harder to balance the budget.

The U.S. government will take in somewhere around 2.2 or 2.3 trillion dollars this year.  It will spend somewhere in the neighborhood of 3.5 or 3.6 trillion dollars this year.

Included in that spending is about 400 billion dollars that goes for interest on the national debt.

As I explained in a previous article, if our interest costs double or triple it is going to make it basically impossible to balance the budget under our current system.

If interest rates on U.S. government debt were to rise to moderate levels, we could soon be easily paying a trillion dollars a year just in interest on the national debt.

If interest rates on U.S. government debt were to rise to the levels that Greece, Portugal and Ireland are now facing, it would be beyond catastrophic.

But a reduced credit rating and higher interest rates would not just hurt the finances of the U.S. government.

Any financial institution that is linked to the U.S. government in any way would also probably be downgraded.

This fact was noted in the announcement put out by Moody’s this week….

In conjunction with this action, Moody’s has placed on review for possible downgrade the Aaa ratings of financial institutions directly linked to the government: Fannie Mae, Freddie Mac, the Federal Home Loan Banks, and the Federal Farm Credit Banks.

We have also placed on review for possible downgrade securities either guaranteed by, backed by collateral securities issued by, or otherwise directly linked to the government or the affected financial institutions.

Just think of the financial carnage that would cause.

Also, check out what one Bloomberg article had to say about the potential cascading effects of a credit rating downgrade for the U.S. government….

At least 7,000 top-rated municipal credits would have their ratings cut if the U.S. government loses its Aaa grade, Moody’s Investors Service said.

An “automatic” downgrade affecting $130 billion in municipal debt directly linked to the U.S. would occur if the federal level is reduced, Moody’s said yesterday in a report. Additionally, top-rated securities with no direct links to the national government will be reviewed for similar action.

But the nightmare would not end there.  The truth is that the credit ratings of large numbers of state and local governments from coast to coast would likely be reviewed and downgraded as well.  Right now, many state and local governments are scratching and clawing in a desperate attempt to survive financially, and a significant rise in interest costs would be enough to wipe many of them out.

The ripple effects of a U.S. government credit downgrade would be endless.

A lot of people argue that if the federal government ran a balanced budget from now on none of this would matter.

Unfortunately, that is not true.

At this point, a very high percentage of U.S. government debt is short-term debt.  That means that gigantic amounts of debt must be “rolled over” each year in addition to any new debt that we take on.  So even if interest rates rise significantly on just the existing debt that we have it is going to be a total nightmare.

And make no mistake, whether it happens now or later a collapse of U.S. government finances is coming.

David Murrin, the chief investment officer at Emergent Asset Management, recently told CNBC the following….

“It’s inevitable that the U.S. will default—it’s essentially an empire which is overextended and in decline—and that its financial system will go with it”

Right now it is being projected that the U.S. national debt will hit 344% of GDP by the year 2050 if we continue on our current course.  We are on a runaway train that is heading straight for a brick wall.

Europe is also a complete financial wreck.  The sovereign debt crisis over in the EU continues to grow worse by the day and there is no end in sight.

If the U.S. collapses, Europe is not strong enough to save it.  If Europe collapses, the U.S. is not strong enough to save it.

We really are entering an unprecedented time in world history.   We are on the verge of the first truly global financial disaster.

It is going to be interesting to see which major currency crashes and burns first.  Some think that it will be the euro.  Others think that it will be the dollar.

In any event, the reality is that the current global financial system is not sustainable.  The folks that are in charge can try to keep things together for as long as possible, but at some point the dominoes are going to start to fall and the house of cards is going to crash.

We have entered a time when there is going to be financial crisis after financial crisis.  Even if the EU and the U.S. government can somehow fix things for the moment, more problems are going to be just around the corner.

The world has become incredibly unstable and the entire globe is going to be shaken.  Most people cannot even conceive of the kind of financial hell that is coming our way as a nation.

Yes, it can be a bit sad to think about what is happening, but it is much better to be armed with the truth than to be totally clueless and totally unprepared.

A Bad Mood Has Descended On World Financial Markets

Have you noticed that a really bad mood seems to have descended on world financial markets?  Fear and pessimism are everywhere.  The global economy never truly recovered from the financial crisis of 2008, and right now everyone is keeping their eyes open for the next “Lehman Brothers moment” that will send world financial markets into another tailspin.  Investors have been very nervous for quite some time now, but this week things seem to be going to a whole new level.  Fears about the spread of the debt crisis in Europe and about the failure of debt ceiling talks in the United States have really hammered global financial markets.  On Monday, the Dow Jones Industrial Average dropped 151 points.  Italian stocks fared even worse.  The stock market in Italy fell more than 3 percent on Monday.  The stock markets in Germany and France fell more than 2 percent each.  On top of everything else, the fact that protesters have stormed the U.S. embassy in Syria is causing tensions to rise significantly in the Middle East.  Everywhere you turn there seems to be more bad news and large numbers of investors are getting closer to hitting the panic button.  Hopefully things will cool down soon, because if not we could soon have another full-blown financial crisis on our hands.

Even many of those that have always tried to reassure us suddenly seem to be in a really bad mood.

For example, U.S. Treasury Secretary Timothy Geithner admitted to “Meet the Press” that the U.S. economy is really struggling and that for many Americans “it’s going to feel very hard, harder than anything they’ve experienced in their lifetime now, for a long time to come.”

Does Geithner know something that we don’t?

To say that what Americans are facing will be “harder than anything they’ve experienced in their lifetime now, for a long time to come” is very, very strong language.

It almost sounds like Timothy Geithner could be writing for The Economic Collapse blog.

It certainly is not helping things that the Democrats and the Republicans still have not agreed on a deal to raise the debt ceiling.  It is mid-July and Barack Obama and John Boehner continue to point fingers at each other.

Of course if they do reach a “deal” it will likely be a complete and total joke just like their last “deal” was.

But for now they are playing politics and trying to position themselves well for the 2012 election season.

Meanwhile, world financial markets are starting to get a little nervous about this situation.  The newly elected head of the IMF, Christine Lagarde, has stated that she “can’t imagine for a second” that we are going to see the U.S. default on any debt.  Most investors seem to agree with Lagarde for now, but if we get to August 2nd without a deal being reached things could change very quickly.

But it isn’t just the debt ceiling crisis that is causing apprehension in the United States.  The truth is that there are a host of indications that the U.S. economy is continuing to struggle.

Even big Wall Street banks are laying people off.  A recent Reuters article described the bad mood that has descended on Wall Street right now….

Goldman Sachs Group Inc (GS.N), Morgan Stanley (MS.N) and some other large U.S. investment banks are not just laying off weak performers and back-office employees. They are also cutting the pay of those they are keeping, scrutinizing expense reports and expecting even the most profitable workers to bring in more business for the same amount of compensation.

That is not a good sign for the U.S. economy.

If the corrupt Wall Street banks are even struggling, what does that mean for the rest of us?

But the big trouble recently has been in Europe.  The sovereign debt crisis continues to get worse and worse.

As I wrote about yesterday, the emerging financial crisis in Italy has EU officials in a bit of a tizzy.  If Italy requires a bailout it is going to be an unmitigated disaster.

One of the most respected financial journalists in Europe, Ambrose Evans Pritchard, says that financial tensions in the EU are rising to dangerous levels….

If the ECB’s Jean-Claude Trichet is right in claiming that Europe was on the brink of a 1930s financial cataclysm a year ago – and I think he is – it is hard see how the threat is any less serious right now.

Fall-out from Greece flattened Portugal and Ireland last week. It is engulfing Spain and Italy, countries with €6.3 trillion of public and private debt between them.

Last year it was just small countries like Greece and Ireland that were causing all the trouble.

Now Italy (the fourth largest economy in the EU) and Spain (the fifth largest economy in the EU) are making headlines.

Up to this point, the EU has had all kinds of nightmares just trying to bail countries like Greece out.

What is going to happen if Italy or Spain goes under?

At this point things with Greece have gone so badly that some EU officials are actually suggesting that Greece should just default on some of the debt.

Yes, you read the correctly.

There are news reports coming out of Europe that say that EU leaders are actually considering allowing the Greek government to default on some of their bonds.  According to The Telegraph, “the move would be part of a new bail-out plan for Greece that would put the country’s overall debt levels on a sustainable footing.”

All of this chaos is causing bond yields in Europe to go soaring.

Earlier today, The Calculated Risk blog detailed some of the stunning bond yields that we are now seeing in Europe….

The Greek 2 year yield is up to a record 31.1%.

The Portuguese 2 year yield is up to a record 18.3%.

The Irish 2 year yield is up to a record 18.1%.

And the big jump … the Italian 2 year yield is up to a record 4.1%. Still much lower than Greece, Portugal and Ireland, but rising.

Could you imagine paying 31.1% interest on your credit cards?

Well, imagine what officials in the Greek government must be feeling right about now.

If these bond yields do not go down, we are going to have a full-blown financial crisis on our hands in Europe.  If these bond yields keep rising, we are going to have a complete and total financial nightmare in Europe.

The only way that any of these nations that are drowning in debt can keep going is if they can borrow more money at low interest rates.  There are very few nations on earth that would be able to survive very high interest rates on government debt for an extended period of time.

Pay attention to what is happening in Europe, because it will eventually happen in the United States.  Right now we are only paying a little more than $400 billion in interest on the national debt each year because of the super low interest rates we are able to get.

When that changes, our interest costs are going to absolutely skyrocket.

Not that the United States needs any more economic problems.

Right now Americans are more pessimistic about the economy than they have been in ages.

In a recent article entitled “16 Reasons To Feel Really Depressed About The Direction That The Economy Is Headed” I noted a number of the recent surveys that seem to indicate that the American people are in a real bad mood about the economy right now….

*One of the key measures of consumer confidence in the United States has hit a seven-month low.

*According to Gallup, the percentage of Americans that lack confidence in U.S. banks is now at an all-time high of 36%.

*According to one recent poll, 39 percent of Americans believe that the U.S. economy has now entered a “permanent decline”.

*Another recent survey found that 48 percent of Americans believe that it is likely that another great Depression will begin within the next 12 months.

The American people are in a really bad mood and investors around the world are in a really bad mood.  More bad financial news seems to come out every single day now.  Everyone seems to be waiting for that one “moment” that is going to set off another financial panic.

Hopefully we can get through the rest of this summer without world financial markets falling apart.  But the truth is that the global economy is even more vulnerable today than it was back in 2008.  None of the things that caused the financial crash of 2008 have been fixed.

We will eventually have a repeat of 2008.  In fact, next time things could be even worse.

The entire world financial system is a house of cards sitting on a foundation of sand.  Eventually another storm is going to come and the crash is going to be great.

The Sovereign Debt Crisis Is Never Going To End Until There Is A Major Global Financial Collapse

In the past, there certainly have been governments that have gotten into trouble with debt, but what we are experiencing now is the first truly global sovereign debt crisis.  There has never been a time in recorded history when virtually all of the governments of the world were drowning in debt all at the same time.  This sovereign debt crisis is never going to end until there is a major global financial collapse.  There simply is no way to unwind the colossal web of debt that we have constructed in an orderly fashion.  Right now the EU and the IMF have been making “emergency loans” to nations such as Greece, Ireland and Portugal, but that is only going to buy those countries a few additional months.  Giving more loans to nations that are already drowning in red ink may “kick the can down the road” for a little while but it isn’t going to solve anything.  Meanwhile, dozens more nations all over the globe are rapidly approaching a day of reckoning.

All of the bailouts that you are hearing about right now are simply delaying the pain.  The reality is that when the “emergency loans” for Greece stop, Greece is going to default.  Greece is toast.  The game is over for them.  You can stick a fork in Greece because it is done.

One of the big problems for Greece is that since it is part of the euro it can’t independently print more money.  If Greece cannot raise enough euros internally Greece must turn to outside assistance.

Unfortunately, at this point Greece has accumulated such a mammoth debt that it cannot possibly sustain it.  By the end of the year, it is projected that the national debt of Greece will soar to approximately 166% of GDP.

The financial collapse of Greece is inevitable.  If they keep using the euro they will collapse.  If they quit using the euro they will collapse.  When the rest of Europe decides that it is tired of propping Greece up the game will be over.

At this point very few people are interested in lending Greece more money.

As I wrote about yesterday, many of the nations around the world are only able to keep going because they are able to borrow huge amounts of money at low interest rates.

Well, nobody wants to lend money to Greece at a low rate of interest anymore.

Today, the yield on 2 year Greek bonds is back over 28 percent.

Fortunately for the rest of the world, Greece is just a very, very small part of the global economy, but when interest rates start spiking like that on U.S. debt or Japanese debt the entire world financial system will be thrown into chaos.

So why is there so much of a focus on Greece right now?

Well, there is a real danger that the panic will start to spread.

The other day, Moody’s Investors Service slashed the credit rating on Portuguese government debt by four notches.

Portuguese debt is now considered to be “junk”.

But even more alarming is that Moody’s stated that what is going on in Greece played a role in reducing the credit rating of Portugal.

The following is a portion of what Moody’s had to say when they cut the credit rating of Portugal by four notches….

Although Portugal’s Ba2 rating indicates a much lower risk of
restructuring than Greece’s Caa1 rating, the EU’s evolving approach to providing official support is an important factor for Portugal because it implies a rising risk that private sector participation could become a precondition for additional rounds of official lending to Portugal in the future as well. This development is significant not only because it increases the economic risks facing current investors, but also because it may discourage new private sector lending going forward and reduce the likelihood that Portugal will soon be able to regain market access on sustainable terms.

Do you understand what is being said there?

Basically, Moody’s is saying that the terms of the Greek bailout make Portuguese debt less attractive because Portugal will likely be forced into a similar bailout at some point.

If the EU is not going to fully guarantee the debt of the member nations, then that debt becomes less attractive to investors.

The downgrade of Portugal is having all kinds of consequences.  The cost of insuring Portuguese government debt set a new record high on Wednesday, and yields on Portuguese bonds have gone haywire.

If you want to get an idea of just how badly Portuguese bonds have been crashing, just check out this chart.

But it is not just Portugal that is having problems.

Just recently, Moody’s warned that it may downgrade Italy’s Aa2 debt rating at some point within the next few months.

Spain is also on the verge of major problems and Ireland may need another bailout soon.

Things don’t look good.

Unfortunately, if the dominoes start to fall the entire EU is going to go down.

Big banks all over Europe are highly exposed to sovereign debt and they are leveraged to the hilt.

It is almost as if we are looking at a replay of 2008 in many ways.

When Lehman Brothers finally collapsed, it was leveraged 31 to 1.

Today, major German banks are leveraged 32 to 1, and major German banks are currently holding a tremendous amount of Greek debt.

Anyone with half a brain can see that this is going to end badly.

So how is the European Central Bank responding to this crisis?

They are raising interest rates once again.

That certainly is not going to help the PIIGS much.

But Europe is not the only one facing a horrific debt crunch.

In Japan, the national debt is now up to about 226 percent of GDP.  So far the Japanese government has been able to handle a debt load this massive because the citizens of Japan have been willing to lend the government gigantic mountains of money at interest rates so low that they are hard to believe.

When that paradigm changes, and it will, Japan is going to be in a massive amount of trouble.  In fact, an article in Forbes has warned that even a very modest increase in interest rates would cause interest payments on Japanese government debt to exceed total government revenue by the year 2019.

Of course the biggest pile of debt sitting out there is the national debt of the United States.  The U.S. is so enslaved to debt that there is literally no way out under the current system.  To say that America is in big trouble would be a massive understatement.

In fact, the whole world is headed for trouble.

Right now government debt around the globe continues to soar at an exponential pace.  At some point a wall is going to be hit.

The Wall Street Journal recently quoted Professor Carmen Reinhart as saying the following about what we are facing….

“These processes are not linear,” warns Prof. Reinhart. “You can increase debt for a while and nothing happens. Then you hit the wall, and—bang!—what seem to be minor shocks that the markets would shrug off in other circumstances suddenly become big.”

That is the nature of debt bubbles – they keep expanding and expanding until the day that they inevitably burst.

Governments around the world will issue somewhere in the neighborhood of 5 trillion dollars more debt this year alone.  Debt to GDP ratios all over the globe continue to rise at a frightening pace.

Because the world is so interconnected today, the collapse of even one nation will devastate banks all over the planet.  If even one domino is toppled there is no telling where things may end.

The combination of huge amounts of debt and huge amounts of leverage is incredibly toxic, and that is what we have all over the globe today.  Almost every major nation is drowning in a sea of red ink and almost all of our major financial institutions are leveraged to the hilt.

There is only one way that the sovereign debt crisis can end.

Very, very badly.

I hope you are ready for what is coming.

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