IT CAN NOT HAPPEN TO ME. GUESS WHAT? IT WILL!!!
CHAPTER 20
GAME CHANGER!
The major media is wring all about QE-3(more later), but the big bugaboo is debt; our debt your debt my debt. The entire world is swimming in debt and everyone is trying to deleverage (reducing debt) and that is deflationary. Deflation is worse than inflation because the economy slows down like a stream freezing over. The public puts off buying unless they really need it, because they know if one waits the price will come down.
In most major elections an unforeseen event happens that changes the entire campaign around.
An example would be the first debate between Kennedy and Nixon. When Richard Nixon heard John Kennedy refuse make-up for the first TV debate he also refused. What Richard Nixon did not realize was that John Kennedy already had a healthy looking tan.
So when the debate started John Kennedy looked healthy and vibrant and Richard Nixon looked pale and haggard.
The Financial Times Wednesday September 12, 2012 USAedition carries the headline: “Moody’s threat to strip US of Top rating.”
There is one school of thought that that no matter what happens, bonds will keep on trading. This is true. The real question is at what price? Lowering a credit rating is serious business. Moody’s is giving the Congress over a year’s warning. The real implication is we cannot spend more than we make till the crack of doom.
This is a serious battle for the whole world. Moody’s rating agency is considered the leading agency on debt credit while Standard & Poor’s is considered tops in equity issues (common stock).
Money can be made and lost by a single change (Moody’s) in a debt rating.
The US Treasury securities are considered the world’s virginal risk free asset. In international trade funds are settled in US Treasury funds. All bond issues are priced off the similar US Treasury bond. The riskier the credit the higher the rate (interest coupon); thus the higher yield the credit risk!
Another factor investors must realize is that bonds do not act like common stocks. When there are more buyers around than sellers; then demand is in control and stocks should rise.
With bonds it is entirely different. If US Treasuries lose their AAA rating and it is downgraded to AA1; then all trades are halted until the computer programmer can change the rating lower and that drops the price.
Poof goes the magic dragon! This like a lotus or Microsoft’s Excel spread sheets. If you have your bank statement on one and you go back and change one entry by a nickel and then press the send key to whole sheet changes and your current balance changes by that one nickel. A rating change can change the price of a bond by several points. This could mean all assets backed by the US Dollar automatically drop in value all over the world instantly. Most sovereign debt will be affected also, unless they have a strong balance sheet. Problem is that most countries have some form of socialism which means higher debt. This debt will drop in value which means more monies to pay it back. This means higher taxes. Higher taxes lead to more bureaucracy which leads to a slower economy and a loss of individual freedom to pursue one’s dreams.
FDR’s grand “New Deal” did not work. He had to raise taxes in 1938 and the economy started sliding down the slippery slope of Government spending.
Hindsight can be beautiful and insightful. When the government spends on roads, buildings, someone has to pay for it. Today we call it Quantitative Easing or QE’s. Quantitative Easing does not work. They are buying up bad debt and bailing out poor financial people who made bad decisions in the first place. WE are heading down the same path thatJapantook.
It is the people that make this country grow. Not the politicians inWashingtonD.C.that should create a positive atmosphere. One has to wonder that if all the government bailouts had been returned to the people – where would we be today? The shock treatment would have jolted us back to good health by this time and the world would be better off. This is my personal opinion dear reader.
Joseph Schumpeter was correct in his creative Destruction Theory. It went something like this. When an industry starts to die out, it is replaced by a newer more creative industry. The Horse and Carriage and the buggy whip industry were replaced by the automobile. Where would we be today if the socialist kept supporting the carriage business because of jobs?
So writing about jobs is not the mantra. It is debt. Moody’s has given the US Government until the end of 2013 to put its’ house in order.
They might be too late. The end will come with a BANG!!! That could be when no one will submit $0.00 for a nations sovereign debt. A leading financial publication has already suggested Google is a better alternative to sovereign debt! They could have started the process of turning off the spigot that gushes out debt. No more smoking mirrors, we must elect real representatives that are not afraid to lead. WE must not be afraid to work out problems as a group, community. We must work together for the common good. If we fail to act now then the Part One of this book will be forced upon us as effect and cause and not cause an effect.
The first step would be for the Federal Reserve to Raise All Margin rates to 100%
Reinstate to Up Tick Rule for Short Sales.
These two steps would cut out 95% of the abuses going on today.
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