Archive for the ‘Debt’ Category


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Gold Doesn’t Look Overvalued Now.

In Debt,Investment Returns on August 1, 2011 by CQCA

In 1950, the U.S. national debt was $257 billion. The average price of gold that year was $34.72 per ounce. At the end of 2010 (fiscal year), the U.S. national debt was $13.5 trillion, or an increase of 52.70 times from 1950. The average price of gold in 2010 was $1224.53, or an increase of 35.27 times. As the graph shows, the increase in the price of gold has been dwarfed by the increase in the national debt.

The current national debt is estimated at $14.3 trillion. If the price of gold were to return to the same ratio that existed in 1950, the equation would be:

($34.72 per ounce/$0.257 trillion) = ($X per ounce/14.3 trillion)
X = $1,931.89 per ounce.

The closing price today was $1,620 per ounce. Even though the nominal price of gold is at historic highs, in terms of the national debt, the current price is still undervalued by 16% against the 1950s ratio.

Considering both U.S. political parties have indicated that they are unwilling to put an upward limit on the national debt, we should be safe in assuming that there will be no upward limit on the U.S. Dollar price of gold.

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2001-2011 Greek Financial Leverage Ratios.

In Debt on May 31, 2011 by CQCA

The chart above shows the leverage ratio of Greece’s central bank and its aggregate figure for all monetary financial institutions. In January, 2001, both the Bank of Greece and Greek MFIs had a leverage ratio between 10 and 15, meaning for every €1 they held in equity or capital, they had €10 to €15 in assets (or €9 to €14 in liabilities).

Monetary financial institutions increased their leverage exposure steadily until a high point of 17.86 in December, 2008. Since that time, they have de-leveraged considerably. The Bank of Greece, by contrast, has leveraged itself higher since that time. The Bank of Greece, by comparison, leveraged itself a high point of 50.03 in December, 2010.

Much of the Bank of Greece’s growth in assets has come from claims on MFIs, which are most likely of dubious market values. If the Bank of Greece’s €130.4 billion in assets go down by 2.46%, it will completely eliminate its capital reserves of €3.2 billion. This will cause Greece’s “lender of last resort” to become insolvent, if it is not already.

Hopefully Germany will throw more of its citizens’ money at Greek banks.

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Happy Debt Ceiling Day!

In Debt on May 16, 2011 by CQCA

“I am notifying you, as required under 5 U.S.C. § 8438(h)(2), of my determination that, by reason of the statutory debt limit, I will be unable to invest fully the Government Securities Investment Fund (“G Fund”) of the Federal Employees’ Retirement System in interest-bearing securities of the United States, beginning today, May 16, 2011. The statute governing G Fund investments expressly authorizes the Secretary of the Treasury to suspend investment of the G Fund to avoid breaching the statutory debt limit.” —Treasury Secretary Tim Geithner, May 16, 2011 Letter to the 112th Congress.

It took 200+ years, but the U.S. federal government finally reached its debt limit of $14.294 trillion. Wanna know what else is crazy? The Treasury yield actually fell.

The blue line is the Treasury yield on April 15th, 2011, one month before the U.S. hit the debt ceiling. The red line is the Treasury yield on May 16th, 2011, the day the Treasury announced it had reached the debt ceiling. This means bond investors required a lower rate of return on debt issued by the United States government after it had declared de facto bankruptcy, than before. These people clearly deserve to lose all of their money.

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Bin Laden is Dead, but …

In Debt on May 2, 2011 by CQCA

“[We have] experience in using guerrilla warfare and the war of attrition to fight tyrannical superpowers, as we, alongside the mujahidin, bled Russia for 10 years, until it went bankrupt and was forced to withdraw in defeat. … So we are continuing this policy in bleeding America to the point of bankruptcy. Allah willing, and nothing is too great for Allah.” —Osama bin Laden, video released September, 2004. Translation provided by Al Jazeera.

At that time, we were fighting two wars. Now, we are bombing Libya, and it looks like Pakistan is more like another theater of war, than an ally. No end in sight.

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Standard & Poor’s Slow Reaction Time.

In Debt on April 20, 2011 by CQCA

On April 18th, Standard & Poor’s downgraded the outlook on U.S. government debt from “stable” to “negative.” U.S. government debt is still rated AAA, it is only the outlook that has been lowered. Why did they wait this long?

The S&P’s decision makes more sense if it is put it in the context of their previous rating blunders. Lehman Brothers is a good example.

The above chart shows Lehman Brother’s stock throughout the year 2008. The blue line shows when Lehman Brothers was rated “A” by S&P. The red line shows when they were rated “Selective Default.” There was no in-between. S&P’s press release announcing the downgrade refers to the bankruptcy in the past-tense, meaning a company that filed filed for bankruptcy still had an “A” rating for at least an hour.

If Standard and Poor were invited to a birthday party in May, they would show up in July.

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Recent Trends in Interest Rates on Government Debt.

In Debt on April 15, 2011 by CQCA

The chart above compares the interest rates on 10 year government bonds in 2007 and 2011. In 2007, when investors believed all government debt was risk free, these six countries paid about the same rate on government debt. In 2011, investors realized that government debt, like any other kind of debt, has the possibility of default. German debt is still considered less risky, meaning demand has increased so much for German debt that investors are willing to buy it at a lower rate of return. However, the German government also spends more money than it receives in tax revenue, so eventually it will be in the same situation that most of Europe is in.

As discussed in a previous article, Spain is pushing its debt out into the future. If it cannot repay debt that has a 4% interest rate, how does it expect to repay future debt at a higher rate?

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Greece’s Pre-Crisis Debt Redemption Timeline.

In Debt on April 10, 2011 by CQCA

The chart above is taken from the Greek Ministry of Finance’s December, 2009 Public Debt Bulletin.

The budget for 2009 was €79 billion. The chart above shows that about €30 billion was coming due in 2010. If the amount of debt due (€30 billion) is divided by the total budget for the previous year (€79 billion), the redemption ratio is 37.97% of the government budget. This is considerably higher than Spain’s current redemption ratio. However, in 2009, Greece owed 30% of its total debt in the next three years. Spain, today, owes 45% of its total debt in the next three years.

This indicates that the debt-to-GDP ratio is not as important as the redemption ratio between the government’s budget and debt due in the near future.

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The Federal Reserve is More Leveraged than Lehman Brothers was.

In Debt on April 8, 2011 by CQCA

Bank leverage is determined by dividing bank assets by stockholders equity. When a bank, or any company, borrows money to purchase an asset, it makes a bet that that asset will increase. If the asset does increase in value (or produces more income) both the assets and stockholders equity increase. However, if the value of that asset decreases, then any loss in excess of the stockholders equity begins to cut into creditors’ money.

Imagine I have $10 in assets, but only $1 is my own and $9 is borrowed. If that asset increases to $11, I now have $2 of my own and owe $9 to creditors. Because of leverage, I was able to double my money by purchasing something I was not able to purchase without borrowing money.

Now assume the value of that asset goes down to $9. I now have $0 and owe $9 to my creditors. Even though the asset only lost 10%, I lost 100% of my capital. So leverage can also be very dangerous.

The table above shows the degrees of leverage for various institutions. The average FDIC insured bank has a leverage ratio of 8.73%, or a leverage multiplier of 11.5. This means the average FDIC insured bank borrows $11.5 for ever $1 in assets, and would have to lose more than 8.73% of its assets to go bankrupt. Washington Mutual, which failed in 2008, had a leverage multiple of 13.4. Lehman Brothers was at 21.1. Surprisingly, the Federal Reserve has a multiplier of 50.5.

Yesterday the Federal Reserve released the Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks (April 7, 2011). The Federal Reserve’s equivalent of stockholders equity is simply called capital.

In total, the Federal Reserve has $52.5 billion in capital. Its assets include $937.1 billion in mortgage-backed securities, which are “Guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. [The current] face value of the securities, […] is the remaining principal balance of the
underlying mortgages.” If 6% of them default, the Federal Reserve would suffer $56.2 billion in losses, which would place it in negative equity (insolvency). More than likely, the values of these mortgage securities are overstated, meaning the Federal Reserve is already insolvent.

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Japan’s 2011 Debt Maturity Timeline.

In Debt on April 7, 2011 by CQCA

Japan has an extremely near-future tilted debt maturity timeline. Even though Japan is the United States’ third largest creditor, Japan itself has the highest debt-to-GDP ratio in the world. Eventually Japan will have to cut its budget, but currently they seem to be able to push debt further into the future. 2010 maturity timeline (below) shows that Japan was able to push ¥105 trillion into the future. It is doubtful that they will be able to continue this, considering the debt owed in 2011 is over ¥120 trillion.

Source: Japan Ministry of Finance.

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U.S.’s Bond Maturity Timeline is Similar to Spain’s.

In Debt on April 6, 2011 by CQCA

The Spanish government posts the maturity of its Treasury notes on its website. The U.S. Treasury is not as transparent. Quarterly data on refunding was published until February, 2010. The chart above is from the last Quarterly Refunding Charts Report by the Office of Debt Management. They also provide the data they use to compile their reports.

The chart above shows the total debt due each year. The U.S. debt maturity is clustered in the near-future, which increases the likeliness of default. However, the data that was provided (and was turned into the graph above) only added up to $4.87 trillion, which is considerably less than the actual national debt in February, 2010.

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