The Ultimate Bailout: The Fed’s True Plan
from EQUEDIA The start of a new year always promises to be one of many positive resolutions. Those who did well in the markets last year, will make bigger bets this year to top the last; those who did poorly, will make bigger bets to make up for their losses. In other words, our natural instinct always leads us to invest – that is, until the market absolutely collapses. It is then when we decide enough is enough and say to ourselves, “I am never going to trust the system again.” After the dust settles, the market bounces, and we’re once again drawn in – like a moth toward a light. We can talk about all different kinds of financial cycles, but that is the financial cycle in all its simplicity. And that is what fuels central bank policies. What I am about to share with you is of the utmost importance; it will give you a better idea of the strategy being used by the Fed and the U.S. to counteract its loose monetary policies. I believe – unlike what many experts may tell you – that the Fed actually has a plan… We’ll get to this in a bit. Despite poor global economic fundamentals that should have sent the market lower, financial fundamentals – i.e. record share buybacks and liquidity injections – caused the market to move higher. That is why I have strongly stood behind the stock market and its upward direction, every year after the financial crisis of 2008. Now seven years later, can the market maintain this momentum?
The True Focus of 2015
The question I keep getting is: What should we expect for 2015? There are all kinds of global imbalances that could shift the stock market back into negative territory; from Greece woes, to Japan’s deflationary worries; from China’s slowing economy, to Europe’s recession. But these are all, for now, short-term nuisances for the market. The main focus – as it has been for the last seven years – is: How much further will can financial fundamentals boost the stock market? To put in simpler terms, how much newly created global currency will be used to backstop liquidity? First, let’s take a look at the United States. What do you think should be the focus in 2015?
Pile on the Debt
Despite the media and government officials talking about the deficit shrinking, debt continues to pile on.
Total public debt outstanding has now reached over $18 trillion.
And while President Obama has talked about the dramatically shrinking deficit, he has failed to acknowledge that under his policies, this deficit will conveniently skyrocket once he leaves office.
“The Congressional Budget Office said Tuesday that higher tax revenues and restrained spending will produce smaller budget deficits in the next few years, but after 2015 deficits will start rising again. That will happen because federal spending will grow more quickly than the economy will.
Beyond 2017, the budget office is forecasting that economic growth will be less than the average growth over the past several decades, in part due to an aging population and slow-growing labor force.”
Over the next decade, the deficit is expected to reach nearly one trillion dollars due to an aging population, rising healthcare costs (which is expected to rise over 85 percent) and an expansion of federal subsidies for insurance.
Furthermore, via the CBO:
“Federal debt held by the public will reach about $12.8 trillion by the end of this fiscal year, an amount that equals 74 percent of the nation’s total output (gross domestic product, or GDP) this year. If current laws generally remained unchanged-the assumption that underlies CBO’s baseline projections-CBO projects that such debt would climb to $20.6 trillion, or 77 percent of GDP, in 2024.
Interest payments on that debt represent a large and rapidly growing expense of the federal government. CBO’s baseline shows net interest payments more than tripling under current law, climbing from $231 billion in 2014, or 1.3 percent of GDP, to $799 billion in 2024, or 3.0 percent of GDP-the highest ratio since 1996.”
Within the next ten years, interest payments will equal almost all – maybe more – of the total expected $960 billion U.S. deficit.
Furthermore, these interest payments represent only the interest payments on federal debt held by the public, and do NOT include interest on intragovernmental holdings.
If we include interest payments held by intragovernmental holdings, it could easily consume the bulk of the U.S. deficit.
Intragovernmental holdings, in short, means the U.S. government is borrowing from another branch of government, such as Social Security, Civil Service Retirement Fund, and the Military Retirement Fund. Therefore, it’s conveniently not counted in the federal budget.
However, more than $5 trillion of intragovernmental holdings is owed to these retirement-esque departments – departments that American citizens pay into. As people draw on their social security, this money is withdrawn from its reserves.
By 2016, conveniently when a new U.S. president is elected, the troubled finances of Social Security’s disability program are actually projected to run out of reserves.
That means an automatic cut to the benefits that citizens have been paying into – kind of like a default on a loan.