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Real Crash 2014
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Posted by Peter Schiff on 03/21/2014 at 12:54 PM
The red flags contained in the national and global headlines that have come out thus far in 2014 should have spooked investors and economic forecasters. Instead the markets have barely noticed. It seems that the majority opinion on Wall Street and Washington is that we have entered an era of good fortune made possible by the benevolent hand of the Federal Reserve. Ben Bernanke and now Janet Yellen have apparently removed all the economic rough edges that would normally draw blood. As a result of this monetary "baby-proofing," a strong economy is no longer considered necessary for rising stock and real estate prices.

But unfortunately, everything has a price, even free money. Our current quest to push up asset prices at all costs will come back to bite all Americans squarely in the pocket book. Death and taxes have long been linked by a popular maxim. However, there also exists a similar link between debt and taxes. The debt we are now incurring in order to buttress current stock and real estate will inevitably lead to higher taxes down the road. However, don't expect the taxes to arrive in their traditional garb. Instead, the stealth tax of inflation will be used to drain Americans of their hard earned purchasing power.

I explore this connection in great length in my latest report Taxed By Debt, available for free download at www.taxedbydebt.com. But diagnosing a problem is just half the battle. I also present investing strategies that I believe can help Americans avoid the traps that are now being laid so carefully.

The last few years have proven that there is no line Washington will not cross in order to keep bubbles from popping. Just 10 years ago many of the analysts now crowing about the perfect conditions would have been appalled by policies that have been implemented to create them. The Fed has held interest rates at zero for five consecutive years, it has purchased trillions of dollars of Treasury and mortgage-backed securities, and the Federal government has stimulated the economy through four consecutive trillion-dollar annual deficits. While these moves may once have been looked on as something shocking...now anything goes.

But the new monetary morality has nothing to do with virtue, and everything to do with necessity. It is no accident that the concept of "inflation" has experienced a dramatic makeover during the past few years. Traditionally, mainstream discussion treated inflation as a pestilence best vanquished by a strong economy and prudent bankers. Now it is widely seen as a pre-condition to economic health. Economists are making this bizarre argument not because it makes any sense, but because they have no other choice.

America is trying to borrow its way out of recession. We are creating debt now in order to push up prices and create the illusion of prosperity. To do this you must convince people that inflation is a good thing...even while they instinctively prefer low prices to high. But rising asset prices do little to help the underlying economy. That is why we have been stuck in what some economists are calling a "jobless recovery." The real reason it's jobless is because it's not a real recovery!  So while the current booms in stocks and condominiums have been gifts to financial speculators and the corporate elite, average Americans can only watch from the sidewalks as the parade passes them by. That's why sales of Mercedes and Maseratis are setting record highs while Fords and Chevrolets sit on showroom floors. Rising prices to do not create jobs, increase savings or expand production. Instead all we get is debt, which at some point in the future must be repaid.

As detailed in my special report, when President Obama took office at the end of 2008, the national debt was about $10 trillion. Just five years later it has surpassed a staggering $17.5 trillion. This raw increase is roughly equivalent to all the Federal debt accumulated from the birth of our republic to 2004! The defenders of this debt explosion tell us that the growth eventually sparked by this stimulus will allow the U.S. to repay comfortably. Talk about waiting for Godot. To actually repay, we will have few options. We can cut government spending, raise taxes, borrow, or print. But as we have seen so often in recent years, neither political party has the will to either increase taxes or decrease spending.

So if cutting and taxing are off the table, we can expect borrowing and printing. That is exactly what has been happening. In recent years, the Fed has bought approximately 60% of the debt issued by the Treasury. This has kept the bond market strong and interest rates extremely low. But a country can't buy its own debt with impunity indefinitely. In fact the Fed, by winding down its QE program by the end of 2014, has threatened to bring the party to an end.

Although bond yields remain close to record low territory, thanks to continued QE buying, we have seen vividly in recent years how the markets react negatively to any hint of higher rates. That's why any indication that the Fed will lift rates from zero can be enough to plunge the markets into the red. The biggest market reaction to Yellen's press conference this week came when the Chairwoman seemed to fix early 2015 as the time in which rates could be lifted from zero. That possibility slapped the markets like a frigid polar wind.

Janet Yellen may talk about tightening someday, but she will continue to move the goalposts to avoid actually having to do so. (Or as she did this week, remove the goalposts altogether). As global investors finally realize that the Fed has no credible exit strategy from its zero interest policy, they will fashion their own exit strategy from U.S. obligations. Should this happen, interest rates will spike, the dollar will plunge, and inflation's impact on consumer prices will be far more pronounced than it istoday. This is when the inflation tax will take a much larger bite out of our savings and paychecks.  The debt that sustains us now will one day be our undoing.

But there are steps investors can take to help mitigate the damage, particularly by moving assets to those areas of the world that are not making the same mistakes that we are. In my new report, I describe many of these markets. Just because the majority of investors seem to be swallowing the snake oil being peddled doesn't mean it's wise to join the party. I urge you to download my report and decide for yourself.

Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show. 

Catch Peter's latest thoughts on the U.S. and International markets in the Euro Pacific CapitalWinter 2014 Global Investor Newsletter!


Tags:  debteconomytaxes
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They Bravely Chickened Out
Posted by Peter Schiff on 12/19/2013 at 12:28 PM

Earlier this week Congress tried to show that it is capable of tackling our chronic and dangerous debt problems. Despite the great fanfare I believe they have accomplished almost nothing. Supporters say that the budget truce created by Republican Representative Paul Ryan and Democratic Senator Patty Murray will provide the economy with badly needed certainty. But I think the only surety this feeble and fictitious deal offers is that Washington will never make any real moves to change the trajectory of our finances, and that future solutions will be forced on us by calamity rather than agreement.

There can be little doubt that the deal resulted from a decision by Republicans, who may be still traumatized by the public relations drubbing they took with the government shutdown, to make the 2014 and 2016 elections a simple referendum on Obamacare. Given the ongoing failures of the President's signature health care plan, and the likelihood that new problems and outrages will come to light in the near future, the Republicans have decided to clear the field of any obstacles that could distract voters from their anger with Obama and his defenders in Congress. The GOP smells a political winner and all other issues can wait. It is no accident the Republican press conference on the budget deal was dominated by prepared remarks focusing on the ills of Obamacare.  

Although he had crafted his reputation as a hard nosed deficit hawk, Paul Ryan claimed that the agreement advances core Republican principles of deficit reduction and tax containment. While technically true, the claim is substantively hollow. In my opinion the more honest Republicans are arguing that the Party is simply making a tactical retreat in order to make a major charge in the years ahead. They argue that Republicans will need majorities in both houses in 2014, and the White House in 2016, in order to pass meaningful reforms in taxing and spending. This has convinced them to prioritize short term politics over long term goals. I believe that this strategy is wishful thinking at best. It magnifies both the GOP's electoral prospects (especially after alienating the energetic wing of their party) and their willingness to make politically difficult decisions if they were to gain majority power (recent Bush Administration history should provide ample evidence of the party's true colors). Their strategy suggests that Republicans (just like the Democrats) have just two priorities: hold onto their own jobs, and to make their own party a majority so as to increase their currency among lobbyists and donors. This is politics at its most meaningless. I believe public approval ratings for Congress have fallen to single digit levels not because of the heightened partisanship, but because of blatant cowardice and dishonesty. Their dereliction of responsibility will not translate to respect or popularity. Real fiscal conservatives should continue to focus on the dangers that we continue to face and look to constructive solutions. Honesty, consistency and courage are the only real options.  

In the meantime we are given yet another opportunity to bask in Washington's naked cynicism. Congress proposes cuts in the future while eliminating cuts in the present that it promised to make in the past! The Congressional Budget Office (which many believe is too optimistic) projects that over the next 10 years the Federal government will create $6.38 trillion in new publicly held debt (intra-governmental debt is excluded from the projections). This week's deal is projected to trim just $22 billion over that time frame, or just 3 tenths of 1 percent of this growth. This rounding error is not even as good as that. The $22 billion in savings comes from replacing $63 billion in automatic "sequestration" cuts that were slated to occur over the next two years, with $85 billion in cuts spread over 10 years. As we have seen on countless occasions, long term policies rarely occur as planned, since future legislators consistently prioritize their own political needs over the promises made by predecessors.                                

The lack of new taxes, which is the deal's other apparent virtue, is merely a semantic achievement. The bill includes billions of dollars in new Federal airline passenger "user fees" (the exact difference between a "fee" and a "tax" may be just as hard to define as the difference between Obamacare "taxes" and a "penalties" that required a Supreme Court case to decide). But just like a tax, these fees will take more money directly from consumer's wallets. The bigger issue is the trillions that the government will likely take indirectly through debt and inflation.

The good news for Washington watchers is that this deal could finally bring to an end the redundant "can-kicking" exercises that have frustrated the Beltway over the last few years. Going forward all the major players have agreed to pretend that the can just doesn't exist. In making this leap they are similar to Wall Street investors who ignore the economy's obvious dependence on the Federal Reserve's Quantitative Easing program as well as the dangers that will result from any draw down of the Fed's $4 trillion balance sheet.

The recent slew of employment and GDP reports have convinced the vast majority of market watchers that the Fed will begin tapering its $85 billion per month bond purchases either later this month or possibly by March of 2014. Many also expect that the program will be fully wound down by the end of next year. However, that has not caused any widespread concerns that the current record prices of U.S. markets are in danger. Additionally, given the Fed's current centrality in the market for both Treasury and Mortgage bonds, I believe the market has failed to adequately allow for severe spikes in interest rates if the Fed were to reduce its purchasing activities. With little fanfare yields on the 10 year and 30 year Treasury bonds are already approaching multi-year highs. Few are sparing thoughts for yield spikes that could result if the Fed were to slow, or stop, its buying binge.

So America blissfully sails on, ignoring the obvious fiscal, monetary, and financial shoals that lay ahead in plain sight. I believe that will continue this dangerous course until powers outside the United States finally force the issue by refusing to expand their holding of U.S. debt. That will finally bring on the debt and currency crisis that we have created by our current cowardice.   

Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show. 

Subscribe to Euro Pacific's Weekly Digest: Receive all commentaries by Peter Schiff, John Browne, and other Euro Pacific commentators delivered to your inbox every Monday

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Detroit Broke City
Posted by Peter Schiff on 08/02/2013 at 11:31 AM

It should come as no surprise that the lessons that should be learned from the bankruptcy of Detroit, a city that once stood as the shining example of America's industrial might, are being ignored by the American political establishment and its allies in the docile press corps. While the death spiral of the Motor City may be extreme in relation to conditions throughout the country, it is a difference of degree rather than design. In truth, Detroit is our canary in the coal mine. It is succumbing to the same combination of productive decay, government mismanagement, and unmanageable debt that is crushing the rest of us. But as the most sub-prime of all major American cities, the symptoms that are infecting all of us have first become fatal in Detroit.

Proving that politicians want nothing more than to tell soothing lies to voters, Detroit mayoral candidate Tom Barrow has forcefully asserted that the city's fiscal crisis is a fiction. In a recent TV interview he described a long term conspiracy by republican and private sector forces to steal assets from Detroit residents, bust the unions, and disenfranchise voters. Not to be outdone in absurdity, MSNBC host Ari Melber concluded that Detroit's problems result from the libertarian movement to deny residents needed government services. He ignores the fact that Detroit's government did not whither by choice, but by necessity. Thanks to years of excessive government the city lacks the resources to fund the basic services that even most libertarians support. Others claim that Detroit is just as deserving of federal bailouts as the Big Three or the communities wiped out by natural disasters such as Hurricane Sandy. But there is nothing "natural" about the fiscal disaster in Detroit, and the mistake of bailing out the auto companies should not be compounded on a municipal level.  

The real story of Detroit is that its problems are entirely man-made, and can be summed up in seven words. Private enterprise built it, government destroyed it. That is the screaming headline that is unfortunately absent from the media coverage.

In the first half of the 20th Century, Detroit offered good manufacturing jobs to nearly 200,000 workers. The booming labor market caused the City's population to swell to 1.8 million by mid Century. But the jobs did not come from government programs or public "investments" in education and training. They were in fact created by the vibrancy of American capitalism, the vision of forward thinking industrialists, the strong work ethic of the labor force, and the relative non-interference from government or organized labor. ("The Big Three" auto companies did not begin to bargain collectively with the United Auto Workers until 1941).

Anyone who has ever had the pleasure of encountering a classic American car like a 1934 Oldsmobile 8 Convertible Coupe or a 1941 Chrysler Town & Country should get a sense of why Detroit prospered as it did. Not only were these cars stunning pieces of engineering and craftsmanship, but they were surprisingly affordable for many middle class Americans. The wealth generated by the makers of these cars, and the myriad of lesser manufacturers that serviced them, flowed to all classes of people in Detroit, allowing the city to build great buildings and civic spaces, establish world class arts institutions, and contributed greatly to the country's cultural achievements. 

But as the city reached its zenith, organized labor and government at the state, federal and local levels combined to kill the goose that laid the golden eggs. Although Detroit continued to produce and prosper into the 1950s, the Vietnam era marked a turning point for the auto industry and the city it represented. While the bureaucratic structure and myopic hubris of the largely unchallenged American auto industry certainly contributed to its decline in the post war years, the real blame falls squarely on labor unions and government. Facing the unshakable power of a monopolized labor force backed by the full might of a democratically controlled political machine, the auto companies had to agree to wage hikes, restrictive work rules, and long-term pension commitments that they simply could not survive.

Politically, the voting block dynamics of a heavily unionized municipality created a perfect storm for Detroit. Mayors and councilman were elected based on the ability to continue to promise more to the unions, who of course showered their preferred candidates with campaign funds. And while the auto companies were free to back candidates of their own, there is no substitute for actual voters. As a result, Detroit has been saddled with generations of corrupt and incompetent governments funded by corrupt, incompetent unions. Both camps have essentially no understanding of how their city was built and how the promises they were making to future generations could never be kept once the industries succumbed under the heavy hand of taxation, regulation, and labor coercion.

Today the population of Detroit has declined more than 60% from its peak and the number of manufacturing jobs has fallen by 90% to fewer than 20,000. Meanwhile the city's municipal debt is now more than $18 billion, which translates into $25,000 per citizen in a city where fewer than half the adult population is employedand nearly half are functionally illiterate. It has promised more than $3 billion to 20,000 city pensioners ($150,000 each) that it simply doesn't have. Detroit's Emergency Manager Kevyn Orr recently showed how the City spends 38 cents of every new tax dollar on these "legacy costs," a figure he expects will grow to 65 cents. This means that there is no money left to run the city. But rather than acknowledging these problems, Detroit politicians, like the aforementioned mayoral candidate, like to pretend that they don't exist. 

Things are no different in Washington. On a national level we have also promised far more than we can deliver. In addition to our acknowledged current national debt of almost $17 trillion ($53,400 per citizen), there is another $87 trillion in unfunded obligations that the Federal government has promised to pay Social Security and Medicare recipients over the next 75 years. (These figures are over and above the projected revenues those programs are scheduled to bring in.) This difference comes to another $290,000 per citizen. Anyone remotely aware of the financial well-being of the average American will know these figures are well beyond our means. But this hasn't motivated us to reform entitlements in a way that will render them affordable.

Very few politicians are prepared to level with the American people about our fiscal dead end. Similarly, they will not fully acknowledge the extent that government micromanagement of industry through the tax code and overly restrictive labor and health care policies has severely undermined the ability of U.S. industry to compete internationally. As a result, we have seen a steady disappearance of our manufacturing jobs nationally, just like Detroit has. The big difference of course is that Washington has a printing press. In the end, however, that will make little difference.

The good news is that the same forces that built Detroit could help turn it around, if only they were allowed to function. First off, Detroit needs to default on its debt. This means the bond holders and the citizenry will suffer. But after this painful process is complete, Detroit will have a few things going for it. It will boast abundantly cheap real estate and plenty of desperate workers. If government were to relax employment regulations, cut business and sales taxes, crack down on union intimidation tactics, and eliminate the minimum wage, the employers would sense the opportunity and return. Although industry could not offer the kinds of high paying jobs that it had in the past, Detroit would at least be hiring again. Although the city will be set back generations, at least it would be moving. But the left would erupt in fury. We are programmed to perceive such developments as greedy exploitation rather than the natural manner in which capitalism cures excess and starts again at square one. Liberals would rather the unemployed stay that way rather than suffer the degradations of capitalism. So instead of such honest cures, look for Detroit to borrow its way out of the crisis while pretending to fix its chronic problems. If we laugh at their foolishness, we should all look in the mirror.

Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show. 

Subscribe to Euro Pacific's Weekly Digest: Receive all commentaries by Peter Schiff, John Browne, and other Euro Pacific commentators delivered to your inbox every Monday! 

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Tags:  bankruptcydebtDetroit
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The Fed Plays All Its Cards
Posted by Peter Schiff on 10/02/2012 at 6:34 PM

There never really could be much doubt that the current experiment in competitive global currency debasement would end in anything less than a total war. There was always a chance that one or more of the principal players would snap out of it, change course and save their citizenry from a never ending cycle of devaluation. But developments since September 13, when the U.S. Federal Reserve finally laid all its cards on the table and went "all in" on permanent quantitative easing, indicate that the brainwashing is widely established and will be difficult to break. The vast majority of the world's leading central bankers seem content to walk in lock step down the path of money creation as a means to economic salvation. Never mind that the path will prevent real growth and may ultimately lead off a cliff. The herd is moving. And if it can't be turned, the only thing that one can do is attempt to get out of its way. 

The details of the Fed's new plan (which I christened Operation Screw in last week's commentary) are not nearly as important as the philosophy it reveals. The Federal Reserve has already unleashed two huge waves of quantitative easing (purchases of either government securities or mortgage-backed securities) in order to stimulate consumer spending and ignite business activity. But the economy has not responded as hoped. GDP growth has languished below trend, the unemployment rate has stayed north of 8%, and the labor participation rate has fallen to all-time lows. In the meantime, America's fiscal position has grown significantly worse with government debt climbing to unimaginable territory. Despite the lack of results, the conclusion at the Federal Reserve is that the programs were too small and too incremental to be effective. They have determined that something larger, and potentially permanent, would be more likely to do the trick.    

However, in making its new plan public, the Fed made a startling admission. At his press conference, Ben Bernanke backed away from previous assertions that printed money would be effective in directly pushing up business activity. Instead he explained how the new stimulus would be focused directly at the housing market through purchases of mortgage backed securities. He made clear that this strategy is intended to spark a surge in home prices that will in turn pull up the broader economy.  Such a belief requires a dangerous amnesia to the events of the last decade. Despite the calamity that followed the bursting of our last housing bubble, economists feel this to be a wise strategy, proving that a poor memory is a prerequisite for the profession.    

But now that the Fed is thus committed, the focus has shifted to foreign capitals. Not surprisingly, the dollar came under immediate pressure as soon as the plan was announced. In the 24 hours following the announcement, the Greenback was down 2.2% against the euro, 1.6% against the Australian Dollar, and 1.1% against the Canadian Dollar. A week after the Fed's move, the Mexican Peso had appreciated 2.7% against the US dollar. Many currency watchers noted that more dollar declines would be likely if foreign central banks failed to match the Fed in their commitments to print money. On cue, the foreign bankers responded.    

It is seen as gospel in our current "through the looking glass" economic world that a weak currency is something to be desired and a strong currency is something to be disdained. Weak currencies are supposed to offer advantages to exporters and are seen as an easy way to boost GDP. In reality, weak currencies simply create the illusion of growth while eroding real purchasing power. Strong currencies confer greater wealth and potency to an economy. But in today's world,no central banker is prepared to stand idly by while their currency appreciates. As a result, foreign central banks are rolling out their own heavy artillery to combat the Fed.    

Perhaps anticipating the Fed's actions, on September 6th the European Central Bank announced its own plan of unlimited buying of debt of troubled EU nations (however, the plan did come with important concessions to the German point of view - see John Browne's commentary). On September 17th, the Brazilian central bank auctioned $2.17 billion of reverse swap contracts to help push down the Brazilian Real. The next day, Peru and Turkey cut rates more than expected. On September 19th, the Bank of Japan increased its asset purchase program from 70 trillion yen to 80 trillion and extended the program by six months. It's clear we are seeing a central banking domino effect that is not likely to end in the foreseeable future.    

Although the Fed is directing its fire towards the housing market, the needle they are actually hoping to move is not home prices, but the unemployment rate.  Until that rate falls to the desired levels (some at the Fed have suggested 5.5%), then we can be fairly certain that these injections will continue. This will place permanent pressure on banks around the world to follow suit.    

All of this simultaneous money creation will likely be a boon for nominal stock and real estate prices. But in real terms such gains will likely not keep pace with dollar depreciation. Inflation pushes up prices for just about everything, so stocks and real estate are not likely to prove to be exceptions.   Even bond prices can rise in the short term, but their real values are the most vulnerable to decline.   In fact, even nominal bond prices will ultimately fall, as inflation eventually sends interest rates climbing. But prices for hard assets, precious metals, commodities, and even those few remaining relatively hard currencies should be on the leading edge of the upward trend in prices. 

While I believe the Fed's plan will be a disaster for the economy, the silver lining is that it provides investors with a road map. As the policy of the Fed is to debase the currency, those holding dollar based assets may seek alternatives in hard assets and in the currencies of the few remaining countries whose bankers have not drunken so freely from the Keynesian Kool-Aid. We believe that such opportunities do exist. Some broad ideas are outlined in the latest edition of my Global Investor Newsletter, which became available for download this week. I encourage those looking for ways to distance their wealth from the policies of Ben Bernanke to start their search today.

Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show. 

Subscribe to Euro Pacific's Weekly Digest: Receive all commentaries by Peter Schiff, John Browne, and other Euro Pacific commentators delivered to your inbox every Monday! 

And be sure to order a copy of Peter Schiff's recently released NY Times Best Seller, The Real Crash: America's Coming Bankruptcy - How to Save Yourself and Your Country

Tags:  Ben Bernankedebtfedfederal reservequantitative easingstimulus
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Operation Screw
Posted by Peter Schiff on 09/14/2012 at 9:42 AM

With yesterday's Fed decision and press conference, Chairman Ben Bernanke finally and decisively laid his cards on the table. And confirming what I have been saying for many years, all he was holding was more of the same snake oil and bluster. Going further than he has ever gone before, he made it clear that he will be permanently binding the American economy to a losing strategy. As a result, September 13, 2012 may one day be regarded as the day America finally threw in the economic towel.

Here is the outline of the Fed's plan: buy hundreds of billions of home mortgages annually in order to push down mortgage rates and push up home prices, thereby encouraging people to build and buy homes and spend the extracted equity on consumer goods. Furthermore, the Fed hopes that ultra-cheap money will push up stock prices so that Wall Street and stock investors feel wealthier and begin to spend more freely. He won't admit this directly, but rather than building an economy on increased productivity, production, and wealth accumulation, he is trying to build one on confidence, increased leverage, and rising asset prices. In other words, the Fed prefers the illusion of growth to the restructuring needed to allow for real growth.

The problem that went unnoticed by the reporters at the Fed's press conference (and those who have written about it subsequently) is that we already tried this strategy and it ended in disaster. Loose monetary policy created the housing and stock bubbles of the last decade, the bursting of which almost blew up the economy. Apparently for Bernanke and his cohorts, almost isn't good enough. They are coming back to finish the job. But this time, they are packing weaponry of a much higher caliber. Not only are they pushing mortgage rates down to historical lows but now they are buying all the loans!

Last year, the Fed launched the so-called "Operation Twist," which was designed to lower long-term interest rates and flatten the yield curve. Without creating any real benefits for the economy, the move exposed US taxpayers and holders of dollar-based assets to the dangers of shortening the maturity on $16 trillion of outstanding government debt. Such a repositioning exposes the Treasury to much faster and more painful consequences if interest rates rise. Still, the set of policies announced yesterday will do so much more damage than "Operation Twist," they should be dubbed "Operation Screw." Because make no mistake, anyone holding US dollars, Treasury bonds, or living on a fixed income will have their purchasing power stolen by these actions.

Prior injections of quantitative easing have done little to revive our economy or set us on a path for real recovery. We are now in more debt, have more people out of work, and have deeper fiscal problems than we had before the Fed began down this path. All the supporters can say is things would have been worse absent the stimulus. While counterfactual arguments are hard to prove, I do not doubt that things would have been worse in the short-term if we had simply allowed the imbalances of the old economy to work themselves out. But in exchange for that pain, I believe that we would be on the road to a real recovery. Instead, we have artificially sustained a borrow-and-spend model that puts us farther away from solid ground.

Because the initials of quantitative easing - QE - have brought to mind the famous Queen Elizabeth cruise ships, many have likened these Fed moves as giant vessels that are loaded up and sent out to sea. But based on their newly announced plans, the analogy no longer applies. As the new commitments are open-ended, quantitative easing will now be delivered via a non-stop conveyor belt that dumps cheap money on the economy. The only variable is how fast the belt moves.

Fortunately, the crude limitations of the Fed's only policy tool have become more apparent to the markets. If you must stick with the nautical metaphors, QE3 has sunk before it has even left port. The move was explicitly designed to push down long-term interest rates, but interest rates spiked significantly in the immediate aftermath of the announcement. Traders realize that an open-ended commitment to buying bonds means that inflation and dollar weakness will likely destroy any nominal gains in the bonds themselves. To underscore this point, the Fed announcement also caused a sharp selloff in Treasuries and the dollar and a strong rally in commodities, especially precious metals.

Given that 30-year fixed mortgages are already at historic lows, there can be little confidence that the new plan will succeed in pushing them much lower, especially given the upward spike that occurred in the immediate aftermath of the announcement. Instead, Bernanke is likely trying to provide the confidence home owners need to exchange fixed-rate mortgages for lower adjustable rate loans - which would free up more cash for current consumer spending. He is looking for homeowners to do their own twist. If he succeeds, more homeowners will be vulnerable to increasing rates, which will further limit the Fed's future ability to increase rates to fight rising prices.

The goal of the plan is to create consumer purchasing power by raising home and stock prices. No one seems to be considering the likelihood that unending QE will fail to lift bond, stock, or home prices, but will instead bleed straight through to higher prices for food, energy, and other consumer staples. If that occurs, consumers will have less purchasing power as a result of Bernanke's efforts, not more.

The Fed decision comes at the same time as the situation in Europe is finally moving out of urgent crisis mode. While I do not think the ECB's decision to underwrite more sovereign debt from troubled EU members will work out well in the long term, at least those moves have come with some German strings attached [For more on this, see John Browne's article from earlier this week]. As a result, I feel that the attention of currency traders may now shift to the poor fundamentals of the US dollar, rather than the potential for a breakup of the euro.

In the meantime, the implications for American investors should be clear. The Fed will try to conjure a recovery on the backs of currency debasement. It will not stop or alter from this course. If the economy fails to respond to the drugs, Bernanke will simply up the dosage. In fact, he is so convinced we will remain dependent on quantitative easing that he explicitly said he won't turn off the spigots even if things noticeably improve. In other words, the dollar is screwed.

 



Tags:  Ben Bernankedebtfedfederal reservequantitative easingstimulus
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The Fed's Campaign
Posted by Peter Schiff on 09/07/2012 at 3:39 PM

This past Friday, as Fed Chairman Ben Bernanke delivered his annual address from Jackson Hole - the State of the Dollar, if you will - I couldn't help but hear it as an incumbent's campaign speech. While Wall Street was hoping for some concrete announcement, what we got was a mushy appraisal of the Fed's handling of the financial crisis so far and a suggestion that more 'help' is on the way. 

It is important to remember that it's not just President Obama's job on the line in this election; in two years time, the next President will have the opportunity to either reappoint Bernanke or choose someone else. So we must understand what platform Bernanke is running on, as his office has an even greater effect on global markets than the President's.

Bernanke has been the perfect tag-team partner for George W. Bush and then Barack Obama as they have pursued an economic policy of deficits, bailouts, and stimulus. Without the Fed providing artificial support to housing and US debt, Washington would have already been shut out of foreign credit markets. In other words, they would have faced a debt ceiling that no amount of bipartisan support could raise. Fortunately for the politicians, Helicopter Ben was there to monetize the debts.

As far back as his time as an academic, Bernanke made clear that when the going got tough, he wouldn't hesitate to fire up the printing presses. He specialized in studying the Great Depression and, contrary to greater minds like Murray Rothbard, determined that the problem was too little money printing. He went on to propose several ways the central bank could create inflation even when interest rates had been dropped to zero through large-scale asset purchases (LSAPs). Sure enough, the credit crunch of 2008 gave the Fed Chairman an opportunity to test his theory.

All told, the Fed spent $2.35 trillion on LSAPs, including $1.25 trillion in mortgage-backed securities, $900 billion in Treasury debt, and $200 billion of other debt from federal agencies. That means the Fed printed the equivalent of 15% of US GDP in a couple of years. That's a lot of new dollars for the real economy to absorb, and a tremendous subsidy to the phony economy.

This has bought time for President Obama to enact an $800 billion stimulus program, an auto industry bailout, socialized medicine, and other economically damaging measures. In short, because of the Fed's interventions, Obama got the time and money needed to push the US further down the road to a centrally planned economy. It is also now much more unlikely that Washington will be able to manage a controlled descent to lower standards of living. Instead, we're going to head right off a fiscal cliff.

The Fed Chairman even admitted to this reality in his statement. Here are two choice quotes:

"As I noted, the Federal Reserve is limited by law mainly to the purchase of Treasury and agency securities. ... Conceivably, if the Federal Reserve became too dominant a buyer in certain segments of these markets, trading among private agents could dry up, degrading liquidity and price discovery." [emphasis added]

"...expansions of the balance sheet could reduce public confidence in the Fed's ability to exit smoothly from its accommodative policies at the appropriate time. ... such a reduction in confidence might increase the risk of a costly unanchoring of inflation expectations, leading in turn to financial and economic instability." [emphasis added]

So we all agree that the prospect of inflationary depression was made worse by the Fed's actions - but at least Ben Bernanke has pleased his boss. As a guaranteed monetary dove, Ben Bernanke appears to be a shoo-in if Obama is re-elected.

Meanwhile, Mitt Romney has pledged to fire Bernanke if elected. While I am not confident that Mr. Romney has the economic understanding to appoint a competent replacement - let alone pursue a policy of restoring the gold standard or legalizing competing currencies - he may well be seen as a threat not only to the Fed Chairman's self-interest, but also to his inflationary agenda.

Given this background, let's look at Bernanke's quotes that have been the focus of media speculation for the past week: the US economy is "far from satisfactory," unemployment is a "grave concern," and the Fed "will provide additional policy accommodation as needed." These comments seem designed to reassure markets (and Washington) that there will be no major shift toward austerity in the near future. The party can go on. But they also hint that Bernanke might be planning to double down again. I have long written that another round of quantitative easing is all but inevitable. It now seems to be imminent.

In reality, when the money drops may have more to do with politics than economics. The Fed may not want to appear to be directly interfering in the election by stimulating the economy this fall, but there are strong incentives for Bernanke to try to perk up the phony recovery before November and deliver the election to Obama. However, if Romney wins, Bernanke can at least fall back on his appeal as a team player as he lobbies for another term.

For gold and silver buyers, either scenario is likely to continue to stoke our market in the short- and medium-term. As the past week's rally indicates, there is no longer a fear that the Fed has had enough of money-printing - in fact, it looks prepared for much more.

 

Peter Schiff is CEO and Chief Global Strategist of Euro Pacific Precious Metals.        

If you would like more information about Euro Pacific Precious Metals, click here. For the fastest service, call 1-888-GOLD-160  



Tags:  Ben Bernankedebtfedfederal reservegoldgold standardquantitative easingstimulus
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Republicans Hope, but Don't Change
Posted by Peter Schiff on 08/20/2012 at 8:14 AM

For much of the past few generations, the debate over balancing the federal budget has been a central feature of every presidential campaign. But over time, the goalposts have moved. As the amount of red ink has grown steadily larger, the suggested time frames to restore balance have gotten increasingly longer, while the suggested cuts in government spending have gotten increasingly shallower. In recent years, talk of balancing the budget gave way to vague promises such as "cutting the deficit in half in five years." In the current campaign, however, it appears as if the goalposts have been moved so far that they are no longer in the field of play. I would argue that they are completely out of the stadium.

It says a great deal about where we are that the symbolic budget plan proposed last year by Congressman Paul Ryan, the newly minted vice presidential nominee, has created such outrage among democrats and caution among republicans. The Obama campaign warns that the Ryan budget is a recipe for national disaster that will pad the coffers of the wealthy while damning the majority of Americans to perpetual poverty. The plan is apparently so radical that even the Romney campaign, while embracing the messenger, is distancing itself from the message (it appears that Romney wants to bathe himself in the aura of fresh thinking without actually offering any fresh thoughts). In interview after interview, both Romney and Ryan refuse to discuss the details of Ryan's budget while slamming Obama for his callous "cuts" in Medicare spending. 

(It is extremely disheartening that the top point of contention in the campaign this week is each candidate's assertion that their presidency could be the most trusted not to cut Medicare. Mindful of vulnerabilities among swing state retirees, Republicans have also taken Social Security cuts off the table as well. What hope do we have of reigning in government spending when even supposedly conservative Republicans refuse to consider cuts in the largest and fastest growing federal programs?) 

So what was the Ryan Budget's radical departure from the status quo that has caused such uproar? If enacted today, the Ryan budget would so drastically upend the fiscal picture that the U.S. federal budget would come into balance in just... wait for it.... 27 years! This is because the Ryan budget doesn't actually cut anything. At no point in Ryan's decades long budget timeline does he ever suggest that the government spend less than it had the year before. He doesn't touch a penny in current Social Security or Medicare outlays, nor in the bloated defense budget. His apocalypse inducing departure comes from trying to limit the rate of increase in federal spending to "just" 3.1% annually. This is below the 4.3% rate of increase that is currently baked into the budget, and farther below what we would likely see if Obama's priorities were adopted.

Because there are no actual cuts in his budget, Ryan hopes that fiscal balance can be restored by 2040 only because he assumes that we achieve returns to the annual economic growth that are equal to levels averaged for much of the last century. In other words, he sees slow growth of the last four years as the aberration, not the new normal. As with all other government projections, this is on the extreme optimistic end of the spectrum. In truth, there is nothing on the horizon that should make anyone think these growth figures will be achieved. America's crushing debt, burdensome regulations, political paralysis, and nagging demographic problems bode poorly for the return to trend line growth anytime soon. More likely, based on the speed towhich republicans will shrink from popular backlash, is that the "cuts" that Ryan proposes will be abandoned as soon as they prove to be politically unpopular. 

In fact, among his other overly-optimistic assumptions are that the unemployment rate falls to 4% by 2015 and an unprecedented 2.8% by 2021, another real estate boom begins almost immediately, and there is an average inflation and ten-year treasury rate for the next ten years of 2.04 and 4.15 respectively. These are assumptions that would make even the most rabid economic cheerleaders sit on their pompoms. Despite these pollyannish economic growth and record low unemployment projections, Ryan still assumes interest rates will remain near historic lows and that none of the cheap money showered onto the economy will ever find its way into the CPI. In other words, it's the economic equivalent of winning the lottery twice in a row while failing to account for the higher taxes that accompany such good fortune. 

Like all other government forecasters, Ryan never considers how rising interest costs on the many trillions of dollars of outstanding government debt holdthe potential to completely upend budget projections. For more on this, see my recent commentary "The Real Fiscal Cliff."  

More likely, the continued accumulation of unsustainable levels of debt under the Ryan plan will eventually cause our creditors to lose confidence in our ability to repay. It will cause interest to spike, the economy to tank, unemployment to soar, spending to rise, revenues to decline, and the budget deficit to spiral out of control. Rising interest rates hold the potential to spark a sovereign debt and currency crisis that willrender the entire plan irrelevant anyway. 

While I appreciate that Ryan has the courage to take a position at the vanguard of his party in the campaign for fiscal responsibility, the modesty of his plan is just the latest reminder of how utterly divorced from reality Washington politicians remain. Like all of his brethren, Ryan is pinning his budget battling plans on the pain free "grow your way out of it plan." But as long the government consumes so much of the nation's productivity, the conditions to create that growth will never occur. Hope is not a strategy.


Tags:  budgetdebtdeficiteconomyMedicareMitt RomneyObamacarePaul Ryan
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Pentonomics - Gold is the True Reserve Currency
Posted by Michael Pento on 08/04/2011 at 9:51 AM

The reliance upon the U.S. dollar as the world's reserve currency and "safe haven" asset has created a perverse, but deeply entrenched, mindset among global investors. In fact, many believe the major financial players have no alternatives to owning U.S. debt and dollars. They argue that the market for U.S. dollars and Treasuries is the only financial pool large enough to handle the massive liquidity that sloshes around the globe on a daily basis. This idea makes a mass exodus from U.S. debt holdings seem impossible. This provides a nice explanation why the U.S. Treasury bonds can rally even while the government openly flirts with default and ratings agencies issue downgrades. But just because an illogical event occurs habitually does not mean it is logical or tenable.  

 

The sophomoric reasoning behind the dollar "exceptionalism" argument is like assuming a stock can never fall unless a significant portion of shareholders decide to sell. In reality, a buyers strike is all that is needed to puncture a market. If the U.S. experienced just one disastrous Treasury auction, prices could nose-dive and yields could skyrocket across the board on all U.S. debt.

 

But the problem doesn't just lie with the United States. Investors around the world are finally beginning to understand that central bank's thirst for creating inflation, in order to keep their banks and governments solvent, will never be quenched.

 

This week, the Swiss government took action to weaken the surging franc by lowering interest rates and printing currency. The franc was pushed down briefly, but then snapped back. It's hard to keep a good currency down. Similarly, the Bank of Japan announced that it won't stand for Yen appreciation much longer and would likely soon intervene to buy dollars and weaken the Yen.

 

Meanwhile, problems at the overly indebted countries just get worse. Italian and Spanish debt yields are now following the upward spiral of Greek bonds (and hitting multi year highs). Italian ten-year notes have surged from just above 3% in late 2010 to well over 6% today. For a country whose debt to GDP ratio is currently over 120%, a doubling of interest rate expenses spells disaster.

 

Enter Jean Claude Trichet who will certainly use his printing press to buy much of the weakening Italian debt that is now festering on the balance sheets of the biggest European banks. But the size of the bailouts needed to deal with Italian and Spanish debts will be several orders of magnitude greater than those needed for Ireland or Greece. Anticipating a massive increase in the Euro money supply, investors are flocking to gold to protect themselves from currency debasement.

 

Adding fuel to the gold fire is the recent debt deal reached in Washington. The disgusting agreement virtually assures that over the next decade the U.S. will add an additional $8 trillion in public debt, an increase of nearly 80% in ten years! The back-end-loaded deal will cause the amount of deficit reduction to be just $21 billion in 2012 and $42 billion in 2013.

 

But even this modest debt reduction depends on rosy assumptions from Washington that are always wrong. For example, the Obama administration predicts GDP growth will average well over 3% for the coming decade. But the annualized GDP growth in the first half of 2011 was just 0.9%. That means the actual deficit and debt figures will be far greater than the projections. Given the immediate increase in borrowing needs, and the obvious slowing of the tepid "recovery," there can be little doubt that the next round of quantitative easing will be launched sooner rather than later.

 

The incompetency of U.S. credit rating agencies has long been suspected. But their actions in the wake of the debt ceiling agreement now confirm them as liars. After threatening to downgrade U.S. credit if Washington failed to cut $4 trillion in spending, neither Moody's, Fitch nor S&P had the courage to carry through, despite the fact that the total cuts would amount to only half their requirements. But a credit rating downgrade on Treasuries did come-from China. The Dagong Global Credit Rating agency cut the credit rating on U.S. sovereign debt to A from A+, 5 notches below AAA. And since the Chinese are the biggest foreign buyer of Treasuries, their opinion counts. 

 

This week, more evidence of U.S. stagflation emerged. The ISM manufacturing and non-manufacturing reports showed a slowdown in new orders and employment and the ADP report showed that the U.S. lost 7,000 goods-producing jobs in July. Other data releases showed that layoffs surged 60% last month to a 16-month high. Meanwhile, YOY consumer prices are up 3.6% and M2 money supply is up 7.5% YOY and rising at a 14.6% annual rate in the last quarter. As the problem with stagflation becomes worse, international investors will avoid the U.S. dollar and U.S. debt at an ever increasing rate.

 

With soaring debt-to-GDP ratios in Japan, Western Europe and America, the desirability of owning precious metals will grow as investors realize the fiat currency system's days are numbered. Those holding U.S. dollars and U.S. debt will feel the biggest brunt of the change. But it is always darkest before the dawn. As a result of the carnage the re-establishment of gold as the world's reserve currency is, hopefully, only a few years away.



Tags:  currencydebtdollareconomygoldgold standardreserves
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Pentonomics - The Chinese Have Stopped Laughing
Posted by Michael Pento on 07/29/2011 at 10:21 AM

The economy continues to prove that it didn’t need a stalemate between democrats and republicans over whether or not we should expand our credit limit in order to poop the bed. Gross Domestic Product climbed a paltry 1.3% in the second quarter of this year following a severely downgraded Q1 print of just 0.4%. Growth in the first quarter was revised down from a 1.9% prior estimate. Also today, the Institute for Supply Management-Chicago Inc. said its business barometer fell to 58.8 in July, from 61.1 in the prior month. And the Thomson Reuters/University of Michigan final index of consumer sentiment fell to 63.7 this month, which was the weakest since March 2009, from 71.5 in June.

Where are all those shills who assured us last year that 2011 would display a “V” shaped recovery in jobs and the economy? I know, I heard some of them today saying that the second half of this year is going to be great!  Their reasoning was the same as it always is. Earnings are going to be wonderful because half of S&P 500 companies' earnings are in foreign currencies. Then, thanks to our crumbling currency, those foreign earnings translate into a ton of U.S. dollars—those dollars don’t buy you very much, but who cares as long as we are able to say we beat Wall St. expectations.

The poor, lonely Tea Party is vilified as being inhuman and behaving as insane children for not allowing the country to bankrupt itself as quickly as possible—even by members of their own party (read here what John McCain had to say for yourself). I guess the philosophy of McCain and his friends is that we should raise the debt ceiling to infinity and beyond and just pay our creditors back with more printed money. After all, the National Debt has grown from $400 billion in 1971 to $14.4 trillion today, so what’s a few more trillion between now and 2013? The dollar has lost 98% of its purchasing power in the last 40 years, so why not keep on defaulting on our debt through inflation and destroy the last few vestiges of the middle class. Sounds like a plan to me. It’s just business as usual. They urge us to keep up the spirit of cooperation and goodwill that has served to render this country insolvent.

The only problem is that the Chinese have stopped laughing at Geithner’s so called “strong dollar policy” and are now allowing the Renminbi to rise against the greenback (up nearly 6% in the last year). If we continue down this road much longer the only buyer of U.S. debt will be the Fed. That’s the real down grade to come. Not from the credit rating agencies, but from our foreign creditors. Once we have a failed Treasury auction, it will engender a vicious cycle. Debt service expense will soar, which causes out of control deficits. The Fed will be forced to purchase more of the debt and inflation rates become intractable, thus destroying GDP growth. Runaway debt, interest rates and inflation is what  the Tea Party is trying so hard to avoid and it is a cause worth fighting for!



Tags:  Chinacreditdebtdebt ceilingeconomyGDPGeithner
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Pentonomics - Debt Ceiling Myths
Posted by Michael Pento on 07/22/2011 at 1:07 PM

The debt ceiling debate that has dominated the headlines over the past month has been thoroughly infused with a string of unfortunate misconceptions and a number of blatant deceptions. As a result, the entire process has been mostly hot air. While a recitation of all the errors would be better attempted by a novelist rather than a weekly columnist, I'll offer my short list.  

 

After having failed utterly to warn investors of the dangers associated with the toxic debt of entities like Enron, Fannie Mae, Freddie Mac, and AIG, as well as the perils of investing in mortgage-backed securities and sovereign debt of various bankrupt countries, the credit ratings agencies (CRAs) have now apparently decided to be more vigilant. Hence, many have offered conspicuous warnings that they may lower U.S. debt ratings if Washington fails to make progress on its fiscal imbalances. But then, just in case anyone was getting the impression that these rating agencies actually cared about fiscal prudence, Moody's suggested this week that its concerns would be lessened if Washington were to make a deal on the debt. The agency has even suggested that America's credit could be further improved if Washington would simply eliminate the statutory debt limit altogether. In other words, Moody's believes that our nation's problems are more a function of squabbling politicians rather than a chronic, unresolved problem of borrowing more than we can ever hope to repay.

 

With or without a deal, the CRAs should have already lowered their debt ratings on the $14.3 trillion of U.S. debt. In fact the rating should be lowered again if the debt ceiling IS raised. And it should be lowered still further if we eliminated the debt ceiling altogether. To lower the rating because the limit is NOT raised is like cutting the FICO score of a homeless person because he is denied a home equity loan.

 

Republicans are making a different misconception about the debt ceiling debate in their belief that they can dramatically cut government spending without pushing down GDP growth in the short term. In a recent poll from Pew Research Center for the People and the Press showed 53% of G.O.P. and 65% of Tea Party members said there would be no economic crisis resulting from not raising the debt ceiling.

 

They argue that leaving money in the private sector is better for an economy than sending the money to Washington to be spent by government. That much is undoubtedly true. But a very large portion of current government spending does not come from taxing or borrowing, but from printed money courtesy of the Fed. If the Fed stops printing, inflation and consumption are sure to fall. While this is certainly necessary in the long run, it will be nevertheless devastating for the economic data in the near term.

 

Over the last decade and a half our economy has floated up on a succession of asset bubbles, all made possible by the Fed. Our central bank lowers borrowing costs far below market levels. Commercial banks then expand the money supply by making goofy loans to the government or to the private sector. As a consequence, debt levels and asset values soar and soon become unsustainable. Ultimately, the Fed and commercial banks cut off the monetary spigot, either by their own volition or because the demand for money plummets. The economy is forced to deleverage and consumers are forced to sell assets and pay down debt. Recession ensues. That's exactly what could happen if $1.5 trillion worth of austerity suddenly crashes into the economy come August 2nd. Although they don't seem to realize it, this will create huge political problems for Republicans.

 

And then there is the deception coming from Democrats who argue that we need to raise taxes in order to balance our budget. This is simply not possible. The American economy currently produces nearly $15 trillion in GDP per annum but has $115 trillion in unfunded liabilities.With a hole like that, no amount of taxes could balance the budget. Raising revenue from the 14% of GDP, as it is today, to the 20% it was in 2000 would barely make a dent toward funding our Social Security and Medicare liabilities. Therefore, we need to cut entitlement spending dramatically. But the Democrats refuse to face the obvious facts. 

 

With the Tea Party gaining traction in Congress, and causing nightmares for incumbents, Republicans have little incentive to raise the debt ceiling (although they raised it 7 times under George W. Bush). Democrats aren't going to reduce entitlements without raising taxes on "the rich" and Republicans aren't going to raise taxes when the unemployment rate is 9.2%. There's your stalemate and anyone expecting a significant deal to cut more than $4 trillion in spending by the August 2nd deadline will be severely disappointed. Although there has been some movement by the so-called "Gang of Six" centrist senators in recent days, a substantive deal may be more unlikely than most people think. And even if a much smaller deal can be reached in time, the credit rating agencies may follow through on their promise to downgrade our sovereign debt. The fallout could be devastating to money market and pension funds that must hold AAA paper. But an even worse outcome will occur when the real debt downgrade comes from our foreign creditors, when they no longer believe the U.S. has the ability to pay our bills.

 

In my opinion, the best news for the long term future of this nation is the Republican "Cut, Cap and Balance" plan that just passed the House. It now heads to a much harder hurdle in the Democrat controlled Senate, and if it passes that, to a certain veto from President Obama. At least something so promising got to the table at all. However, I think the country needs some more tastes of brutal reality before such bitter medicine has a chance of going down.



Tags:  CRAcreditdebtdebt ceilingeconomyGDP
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