We all know how screwed up things are and how the powers that be are screaming for a reduction in the ‘social spending’ of governments.
Well, it’s going to get worse. And here are two (there are more but these two are very significant).
"Foreign demand for US Treasury bonds and notes fell by a record amount in December as China reduced its holdings."—–so who is going to fund the deficits created by ongoing wars?
"China cut its holdings by $34.2bn – meaning it is now the second-biggest US debt holder after Japan. "—–like the Japanese don’t have enough economic problems(they still haven’t recovered from their years of deflation and zero per cent interest rates)
"Ben Bernanke is making sure the Fed’s exit strategy goes as easily as a camel passing through the eye of a needle. Instead of choosing to just sell assets and unwind the amount of securities it holds, the Fed chairman is seeking to be creative once again–as he was in the buildup of its balance sheet–and increase the amount of interest it pays on excess reserves."
"But in order to prevent intractable inflation, the Fed must at some point shed most of the $1.43 trillion worth of housing debt it will own by the end of March. The Fed’s balance sheet has increased to $2.25 trillion from $925 billion at the start of 2008 and excess reserves in the banking system now total more than $1 trillion.
Commercial bank deposits placed with the Fed that are not required to be held against loans are considered excess reserves. By paying interest on these central bank deposits, the Fed can raise the interest rate on interbank lending (which essentially means an increase in interest rates charged for credit as the ‘overnight rate’ is passed onto consumers in order to maintain profit margins) because loans to other banks are intrinsically more risky than loans given to Mr. Bernanke. But there are major flaws to this strategy. The Fed pays interest on reserves with yet more deposits held at the central bank. Therefore, paying interest on reserves further increases commercial bank deposits held at the Fed, and those new deposits will accrue interest as well…and so on. As a result, by choosing to not sell assets and drain liquidity from banks, the unwinding of their balance sheet will take many years.
Projections from the St. Louis Fed are that it will take 5-7 years for the Mortgage-Backed Securities (MBS) to be paid off and unwound from the Fed’s balance sheet. That means Ben Bernanke is betting banks will not make more profitable loans to consumers and enterprises during those years and will instead opt for the lower return garnered from receiving interest on deposits."
Strap yourselves in because the ride is going to be even more bumpy.