Old Is New

- Keep your face always toward the sunshine - and shadows will fall behind you.

- Walt Whitman 

Buybacks

No! Not stocks. We are talking about "old" government bonds. The quiet news last Friday is typical of the government. A crisis is brewing, but the powers-to-be are seeking, as they always do, to keep it under wrap. The US Treasury Department stated that "Yellen" Yellen is considering buying back old government bonds.

Just recently, figuratively speaking, the Fed said that they will shrink their excessive balance sheet. They sold old government bonds in the marketplace. The problem is no one wants to buy them. Now, they say that they will repurchase them and hold to maturity. By the way, the US government bond market is the world's largest. It stands at $22.6 trillion. That is almost half the world's GDP. Danger on so many levels and all as a result of the Fed's polcies.

End the Fed!

You have read that meme many times in this blog. Here is another reason. You should be aware by now of the financial crisis occurring in the UK. They are having a liquidity crisis. Their central bank has been forced to intervene or England might have a "Lehman" moment? Well, the same type of problem is developing in the US. Let us step back (not a buyback) for a moment.

Europe Vacation?

If you traveled to the UK in June of this year, our dollar lost to the pound. The pound stood at 142. However, behind the scenes, with rising interest rates, the problem could have been seen. In fact, whenever rates change, this concept has to be considered. What is it? Why, you ask?

You can answer the question by understanding the present value of the pound. Last Friday, it closed at 111. It touched 102 in September. The English pay more for everything. Inflation, yes, but the root problem is the value of their currency. Having a choice, wouldn't you rather have your European vacation now? This is the present situation in the UK. It has not yet been resolved. It centers on our example. Would you want to purchase a government bond that pays 1.5% or 3% with the exact same time duration?

In the US, you can get buy a 30-year note that yields 3.99% or a 12-month note that yields 4.46%. Why would anyone buy the "old" 30-year note when the one year pays more? This is the brewing financial crisis in the US. This is the story behind Yellen's statement. 

Cause?

The Federal Reserve is to blame. By keeping interest rates artifically low, (1st cause) and our nation importing everything, (2cd cause) the currency differential kept inflation in check. However, humans being human, want and need a little more for their work. When they receive better eages, their producers pass along the price increase. This is what is happening now. Foreign imports cost more. Our higher interest rates have held these costs increases in check (which is really scary), but at the same time, this Fed manuver is causing havoc in the global community. Every nation is suffering from currency differential. Inflation is a worldwide problem. We are not making friends and the Chinese see that. They are seeking to gain from the Fed's mistakes. Can you say...

Asian Yuan?

The Chinese are copying everything. Their latest is to clone the euro by offering the yuan to all Asia. This danger is still yet, another reason to End the Fed!             Peace.