Wednesday, January 20, 2010

The Perception Of Safety

My focus on this site, which has most likely become obvious at this point, is to show that the problems in the housing and financial sector during the fall of 2008 were picked up and put on the backs of governments around the world.  Essentially, governments have nationalized the problems.

My focus since the fall of 2008 when this occurred has been to repeatedly state that this was not a cure to the problem, but would only ultimately lead to the next crisis. 

For over a year now that problem has grown, getting worse every month as governments go deeper into debt to try and mask financial losses, artificially supporting their economies with temporary demand, and printing currency to cover what they cannot borrow.

Now we are starting to finally begin to feel the system shake once again, just as we did during the summer of 2008 when people began to worry about the debt at Fannie Mae, the credit at AIG, and the reserves at Lehman brothers.  Just as they were during that summer, the big boy hedge funds are placing their bets to profit from the next catastrophe.

At this moment all eyes are watching the tiny nation of Greece.  The cost to insure Greece debt is hitting new record highs every trading day.  (This insurance is known as a Credit Default Swap and is the same used to insure the debt at places like AIG and Lehman, which also were hitting records every day during the summer of 2008)

The European Central Bank has recently met with attorneys to discuss plans should Greece default on their debt.  While Greece can be removed from the Eurozone (and thus the Euro currency), many experts feel that their default would be a first domino, triggering defaults in the "PIGS" countries; Portugal, Ireland, Greece, and Spain.  All these nations are currently facing funding issues.

The same is happening outside of the Eurozone in Japan and the United Kingdom.  The debt levels in these countries have approached unsustainable levels when compared to their GDP (the size of their economies).  They would be the next domino in the chain to fall.

Back home here in the USA, however, we have an even larger problem.  Our entire economy from top to bottom has been put on government life support.  Our government currently owes $13 trillion and they are proposing to raise the debt ceiling another $1.9 trillion just for this calendar year.

The American public as a whole last year were net sellers in the stock market.  They then took their money and dove into the bond market, contributing over $350 billion in the fourth quarter alone.  The public today feels that bonds are as good as cash only they provide a higher return.

This is false.

If investors begin selling government bonds then interest rates will rise and the value of the bonds will drop.  Investors today are sitting in the "safety" of government bonds looking around to try and figure out where the next bubble is going to burst, just as they did a few years ago when they bought into the safety of real estate after the stock market bubble.

Unfortunately, they do not realize they are already sitting in the bubble and as they look around for their next move it is going to explode along with their retirement.