If Russia Sells its U.S. Treasuries Will The Fed Buy Them?

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Podcast Summary

0:00-5:15 Intro

Unemployment and the Weather

5:15-6:18 discussion of the jobless claims, initial jobless claims and non farm payroll reports. The claim that the weather is the cause of poor job reports is ludicrous as we live in the 21st century where we are sheltered from the weather, the weather has not been bad across the entire country and the power has not been down for weeks at a time across large portions of the country. A poor workman blames his tools and a poor economist blames the weather.

The Credibility Taper

6:18 -8:50 The Federal Reserve is tapering quantitative easing (QE) and insisting the economy is recovering so they can taper to gain credibility by showing that QE is not forever. In the past few years the Fed has made rosy second half of the year projections that have not panned out. If the economy is weaker than expected the Fed has an excuse to do more QE. Currently, the Fed is insisting that slow economic growth so far in 2014 due to bad weather but that as the weather clears up, the economy will improve. Fed Chair Janet Yellen recently stated that the Fed will focus on unemployment, even though there is little the Fed can do to improve the unemployment situation.

The Situation in Ukraine

8:50-11:25 Finance advisor to Russia threatens to sell its U.S. dollar reserves if the United States imposes sanctions on Russia. This could create a perfect buying opportunity for the Fed to print money to buy all the U.S. Treasuries that Russia may wish to sell. Further discussion of the credibility taper.

11:25-12:45 Discussion of the lag effect in analyzing economic activity and the housing market.

12:45-14:00 If cold weather really impacted economies, Canada would have the GDP of Tunisia. Cold weather actually adds to the GDP as it increases the production of gas and oil utilities.

14:00-16:30 analysis of the housing market. Low inventory and low demand still leads to higher home prices! Discussion of consumer spending in bad weather.

16:30-21:43 discussion of President Obama’s proposed budget that increases spending even though the total liabilities of the US government are increasing. Discussion of raising the debt ceiling. When does the last straw get placed on the camel’s back? Discussion the Fed’s criticism of Congress not having its fiscal house in order! How the Federal Reserve facilitates Congress’ ability to engage in deficit spending.

21:43-26:11 discussion of the dearth of mortgage applications even though interest rates are at historically low interest rates. The lack of courage of political leaders. Discussion of the impact of higher interest rates on the economy and the government ability to service its debt. The number of home sales and new home sales are 3X lower than 7-8 years ago, yet home prices are rising. Discussion of the law of small numbers. Discussion of why it was important to boost home prices.

Why Inventory is Low and How It Might Have Been Lower

26:11- 28:25 Without rising home prices there would be even fewer homes on the market because more homes would be underwater. If prices had remained at a collapsed level and were foreclosed upon, more homes at lower prices would have come to the market. Instead, QE acted as a bailout for existing home owners.

How Foreign Holders of U.S. Securities Pose a Threat to the U.S. Economy

28:25- 33:00 Foreigners own about half of the U.S. Treasuries issued and outstanding. Who will buy them if they were to sell and who would buy the newly issued treasuries in the amounts and prices that would work for the U.S? Mandatory retirement accounts? Would mandatory retirement accounts funded with U.S. Treasuries cause social unrest? If done after a stock market crash, perhaps not. U.S. bonds are backed by the Fed’s willingness to print dollars.

Why Foreign U.S. Treasury Holders Don’t Dump Their Holdings

33:00-39:10 The main reason that holders of US treasuries who may take issue with QE or the United States’ political actions don’t sell their holdings en masse is because such selling would also hurt the sellers. Foreign holders of U.S Treasuries, however, can slowly sell and stop buying US Treasuries making the problem, not a joint one, but a U.S. one only. In addition, if the Fed has to print the difference, inflation will ensure especially if imports from China are reduced due to their relative costs. Realistic analysis of the state of the economy vs. the incessant “recovery” talk.

39:10-41:03 discussion of the main stream media’s interpretation of the initial jobless claims vs. the alternative media coverage. Discussion of Fed President’s Richard Fisher’s outlook on the economy. Mr. Fisher had been against QE because of its potential deleterious effects on the fiscal solvency of the United States but is now against QE because he claims the economy doesn’t need it any more as it is recovering.

Should You Rent Out Your Home or Sell it?

41:03- analysis of a listener question on whether to rent out one’s home or to sell it.

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Further Reading:

How Russia Could Set Off an Inflationary Spiral in the United States

Russia Adds To Its Gold Reserves

Initial Jobless Claims

The False Housing Recovery of 2013 and How it Unravelled

Fed Presidents Continue to Talk Taper

Royal Canadian Mint

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