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After Greenspan’s Housing bubble , now it may be Bernanke’s Treasury bubble ?

Few days ago IMF report said that U.S. need to tackle urgently the deficit in government finances. Now it is made-in USA, Standard & Poor, warned that credit rating of Government Debt could be cut by it. As such it down grades it’s out look from Stable to Negative, increasing the chance that rating could be cut within the next 2 years.

S&P’s concern was that two main political parties will not be able to agree on plans to reduce the increasing U.S. deficit. S&P also revised it’s outlook for 5 big insurance companies of U.S. to negative from stable.
As we can  see some countries with their debt figures Not only the problematic countries of Euro Area but U.S. JapanU.K. are also in or may be in future will be in trouble.

Matter of  Deficit Financing

In 2009, when there was a economic downtrend, U.S. created  lot of unproductive spending. Which have created imbalances in their budget. I think their ultimate plan was to increase public spending ( may be it is unproductive ! ) and then sort it out by creating inflation. But there are some problems –

1) If ultimate aim is to make economy stronger then there must be creation of jobs. To create jobs especially in small businesses there needs good environment. Now lower interest rate and growing inflation can create opportunities for moneys to go either in speculation activities or in short-term Treasury market. But to create jobs they need to  invest in constructive work. In case of U.S. low interest rate helps companies to invest in foreign countries because U.S. labor is expensive.  So there is not much improvements in employment figures and ultimately in GDP growth rate.
2) Who are the owners of this Treasuries, mostly Foreign countries.
Foreign Governments holding in U.S. public debt has risen from 25% in 2007 to nearly 50% in 2011.
 Foreigners nearly hold $4.45 trillion worth of U.S. Govt. debt.  Now they are not here to see that there wealth is in  risk.                                                       This situation may create panic among others countries, now Japan who has quite a worse debt position, expressed confidence in U.S. Government debt. Look like it is the payback time for Japanese government as recently  G-7 countries help them after natural disaster by supporting Japanese YEN.
U.S. spending cuts and tax increase are hard to come. So how thinks are going to do well ?                                                   
What a downgrade means that it will increase the interest rate in Treasuries, as such U.S. Government has to pay more to borrow . Now this could be harmful for U.S. economic recovery.
What I feel that Four main consequences of this deficit financing  

1)     Sub-Prime market and related Housing boom which ultimately ends with pain and still they are feeling the pain.
2)     U.S. Treasury which will suffer in coming days!
3)     Last one will be the Dow Jones and other inflated U.S. stock indexes.
4)     Though  US$ is accepted by most of the countries, but we cannot forget that it is backed by debt  ?   So, we can also consider this.

But Obama warned  that world could plunge into a new recession if the ceiling on money the U.S. can borrow is not raised in the next few weeks, before reaching to the current debt limit of $14.3 tn.

There are German backed  E.U. to save the problematic Euro Area countries but if big fishes like US, Japan get caught then who is going to save them?  Also include the name of UK, as many are saying that next is UK.

Monday, all the markets were down due to this  standard & Poor’s warning. Yesterday Asian markets were showing the same reactions. Gold which already is in higher position, also rises. Because people are running to take shelter under these high value precious metals like Gold and Silver,  just to preserve their  capital.
There was a talking going on around the street that during Greenspan’s time, massive Housing Bubble and related mortgage problem have created. Now it is the time for U.S. to see the Treasury Bubble during the era of Mr. Bernanke, the bond seller?

NOTE:  Please see the disclaimer of this blog.


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