Posted by Eric Solis on December 26, 2009 under U.S. Treasury Markets | 
The US Treasury market will be the mother of all bubbles!!! We have seen the tsunami of liquidity that has flooded the world financial markets over the last couple of decades hop scotch from the stock market to the real estate market/derivative market and then to the commodity/gold market(s). But none of these bubbles are even a drop in the bucket compared to the bubble created by the Federal Reserve and Treasury over the past three years. Without going into a long diatribe with regard to the what, where, when, why and how; suffice it to say that anybody caught on the intermediate/long end of the market will be holding the equivalent to what the market calls “zero coupon bonds’ (bonds bought and extreme discounts which mature at par in the future).
If you are a greedy speculator who could give a rip about our country and want to reap profits beyond your wildest dreams, then short as many treasury bonds as you can on margin, with the opportunity to buy them back at penny’s on the dollar within the next 24 to 36 months. Make sure you can carry the trade and pay the margin expense. But rest assured, this will be a blood bath unlike anything the markets have ever seen. And people who thought they owned the safest investment in the world will learn the hard way that irresponsible fiscal and monetary policy of a government, regardless of its size can have a devastating and lethal impact on its lenders.
In the end, maybe they deserve it. How does one come to believe that a country with 12 trillion in debt should pay 0% interest on its debt??? As an old friend of mine once said…thinking so does not make it so!
Posted by Eric Solis on December 15, 2009 under Public Policy |
Debt Elimination Credit Vouchers (“DECV) Under DECV the government would issue vouchers to every man woman and child for purposes of eliminating debt. These credit vouchers would be in the form of a government loan and would be used as cash for the exclusive purpose of paying off debt. DECV vouchers are an actual dollar amount equal to the average amount of consumer debt owed per US household. Under this plan the DECV voucher can only be used to pay off consumer debt, college loans or a mortgage etc. If one does not have consumer debt, then the DECV can be used to fund an IRA, HSA or other long term savings need. DECV is structured as a government loan paid back over 10, 20, 30 or 40 years.DECV infuses cash into banks through the repayment of all consumer debt. But it will go through the hands of the tax payers who under any rescue plan will be footing the bill. DECV kills two birds with one stone as DECV vouchers will use tax payer money for their direct benefit by way of substantially reducing or eliminating Americans consumer debt. Banks will become a scaled down version of their former self, because the usury rates charged on consumer loans by banks will be paid off and no longer produce outsized revenue to the banking industry. The problem with infusing banks on the back end is that it keeps this massive consumer debt overhang in tact, which is at the core of the financial crisis.
By refinancing consumer debt, which can be as high as 36%, with long term government debt of 2%, we would free up as much as $150 billion net (est.) per year for every trillion of DECV issued. Under DECV the vacuum of wealth created by consumer debt would be eliminated and the aggregate interest charge to our country would be reduced in proportion to the net spread between consumer debt and government debt. Under the current plan all this money goes into the banking industry’s coffers.
This plan will relieve (not eliminate) pressure on the housing market and unclog the credit markets and derivatives tied to it (i.e. CDS, CDO, CMO etc.) because consumers will be more credit worthy at large. More consumers will be able to make their house payment since they will not be burden with consumer debt. Banks will get the much needed cash infusion and people who carried no debt will have a lump sum to sock away for retirement rewarding good financial management. DECV democratizes the bailout to inure to the benefit of all Americans as apposed to consolidating the benefit to a few.The Treasury and the Government will know exactly how much DECV will cost upfront in contrast to the open ended liability of the planned RTC2. According to the Federal Reserve Statistics Release on Consumer Credit dated July, 2008 revolving consumer debt is 3.5 trillion dollars. The demand for government securities is at an all time high while the securities backed by consumer debt are toxic.
DECV takes the toxic assets off the balance sheet of the banks, as prescribed by Treasury, the Fed and the Administration, but it does so through the hands of those footing the bill…the American tax payer.
