The US Economy: It’s A Freakin’ House Of Cards

The revelation that Fannie Mae (FNM) may need an additional $100bn to remain solvent is a complete understatement.  When the Treasury Dept. was “crafting” these bailout deals earlier this year, they realized that it would be necessary to throw a life line to ailing Fannie Mae and Freddie Mac (FRE). The Chinese and Japanese hold huge positions in the “government agency” bonds.  The US Government needs to make sure that they don’t default on this debt.  If the Government were to default on the Fannie and Freddie debt, we can literally kiss the economy goodbye.  China and Japan will not buy another US bond.  The result would be a rapid spike in interest rates.

Bloomberg  reported today:

“Treasury may end up putting far more than $100 billion into these entities, especially if the housing market continues to decline,” said Rajiv Setia, a fixed-income analyst at Barclays Capital in New York. “There’s just no way, no way” Fannie and Freddie will emerge from conservatorship within the next two to three years, he said.

Fannie, like McLean, Virginia-based Freddie, needs constant access to the debt markets to fund purchases for its $761 billion portfolio and pay off debt as it matures. The company has more than $138.6 billion in short-term debt maturing over the next two months, according the filing. The cost of using derivatives to manage the interest-rate risks has also increased, Fannie said.
Fannie’s financing agreement with the Treasury also constrains its ability to issue debt, capping the total outstanding amount at 110 percent of the balance as of June 30. Fannie estimates that limit as $892 billion. As of Oct. 31, Fannie had $880 billion in total debt outstanding.

The Government set these arbitrary limits.  It’s like drawing a line in the sand, knowing full well that as soon as the line as crossed, a new line will be drawn - with another threat - “Don’t cross that line…or else”, or else we’ll draw another line in the sand again!

Stupid threats. The Government is in a box and has no way out.  The Fed is expanding the Balance Sheet like never before.  Rates will go higher eventually.

Take a look at the Baa Corp. yields. Rates have spiked dramatically.  It’s also interesting to note the rapid spike in rates from 1929 to 1934.

Take a look at the following chart. Doesn’t it raise your eyeballs! I almost did a doubletake when I looked at the following chart.

Here’s another beauty. Talk about expanding the monetary base!

This one is a little scary too…

A picture is worth a thousand words; these pictures paint the story of a nation that is in trouble.  We are deep in debt and are trying to print money to escape.  As long as other nations are willing to continue to hold our debt, the game will continue.  As soon foreign governments choose to no longer finance us, the game will end.  The economy and all markets will crash - far worse than the crash of 1929.  If China or Japan wish to exert political control over our government, they now hold the lever.  We are not in control of our own destiny.

If we hope to enjoy life as we have known it, then we must play by the rules, as they are laid out by those who hold our government debt.  The only other alternative is to default on the debt and force our nation into the worst depression the nation will have ever known.  Stock markets around the world will crash - untold trillions of dollars will be lost forever.  Essentially the world will start over.  We are now embarking down a dangerous path.  We’ve fired up the printing presses and we’re seeking to avert a global depression.  History has shown that there is no way to escape - hyperinflation and monetary expansion has NEVER been a successful policy.  It only seeks to delay the inevitable.

Posted in Categories: Contributor, Economy, External Research.

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