Currently, the Fed has created the largest equity bubble of all time; the $9 trillion housing bubble, slapped together over the last 3 years by lowering rates to an unbelievable 1.5% (at one point) and facilitated through shabby lending practices. As rates continue to rise to satisfy America’s need for $2 billion cash inflows from foreign lenders every day, the carnage from the housing-bomb is bound to be extensive and agonizing.

ESTIMATES of the growing pile of non-performing loans (NPLs) in China appear to have caught many by surprise, especially because Beijing's efforts to clean up its rickety state-owned banks were thought to have greatly reduced NPLs and the risk of a full-blown financial crisis.
According to Ernst & Young, the accounting firm, bad loans in the Chinese financial system have reached a staggering $US911 billion ($1.18 trillion), including $US225 billion in potential future NPLs in the four largest state-owned banks.

This equals 40 per cent of gross domestic product and China has already spent the equivalent of 25-30 per cent of GDP in previous bank bail-outs.

The housing bubble has been made possible by low interest rates and shakey financing schemes. Higher rates would sink a lot of folks, flooding the market with distressed sales, popping the housing bubble and much of our economic strength at the same time.

Anyone who doesn't see the coming real estate "correction" is hopelessly blind IMHO. We're reliving the late 70's/early 80's. Housing values around SF, the hottest of hot markets, are moving down for the first time in over 20 years. Got gold?

Karl,
How has the current trend in interest rates affected the housing bubble? And what "shakey financial schemes" are you talking about?

http://www.nfsn.com/...rts/ratecharts17.gif

blah blah blah

Personally, I don't think the sky is falling yet but I think chips are coming off the ceiling and it's time to put on a helmet. I do think the sky might fall but I'm usually wrong. Sell Sky

Peace

Karl

Since becoming president, George Bush has presided over one of the steepest peacetime rises ever in the federal debt. The gross federal debt now exceeds $8.3 trillion. There are three reasons for the post-2000 increase: reduced revenue during the 2001 recession, generous tax cuts for higher income groups and increased expenditures not only on warfare abroad but also on welfare at home. And if projections from the Congressional Budget Office turn out to be correct, we are just a decade away from a $12.8 trillion debt — more than double what it was when Bush took office.

The trouble is that the officially stated borrowings of the federal government are only one part of the U.S. debt problem. Ordinary American households have also gone on prodigious borrowing sprees.

In the past five years alone, the value of U.S. home-mortgage debt has increased by nearly $3 trillion. Not all of that borrowing went to pay for real estate, the traditional function of mortgages. In 2004, net mortgage borrowing not used for the purchase of new homes amounted to nearly $600 billion. The International Monetary Fund estimates that this kind of equity extraction has risen from less than 2 percent of household disposable income in the year 2000 to more than 9 percent in the third quarter of last year.

Not only do Americans borrow as never before; they also save remarkably little. The impressive resilience of American consumer spending in the past 15 years has been based partly on a collapse in the personal savings rate from around 7.5 percent of income to below zero. The aggregate national savings rate, which includes the public sector and corporations, averaged 13 percent in the 1960's. Last year it was just 0.8 percent.

Already, Social Security, Medicare and Medicaid consume nearly half of federal tax revenues. And that proportion is bound to rise, not only because the number of retirees is going up but also because benefits programs are out of control. Over the past four years, Medicare benefits per recipient grew 16 times as fast as the real wages of the workers paying for them through taxation.

In short, the federal government seems to have much larger unfinanced liabilities than official data imply. If you compare the present value of all projected future government expenditures, including debt-service payments, with the present value of all projected future government receipts, the gap is about $66 trillion, according to calculations by the economists Jagadeesh Gokhale and Kent Smetters. That's almost eight times the size of the official gross federal debt.

In almost every year since 1992, the gap between the amount of goods and services the United States exports and the amount it imports has grown wider. This year the current account deficit, which is largely a trade deficit, could rise as high as 7 percent of G.D.P., nearly double its peak in the mid-1980's. What results is a remarkable accumulation of foreign debt. Estimates of the net international investment position of the United States — the difference between the overseas assets owned by Americans and the American assets owned by foreigners — have declined from a modest positive balance of around 5 percent of G.D.P. in the mid-80's to a huge net debt of minus 20 percent today.

What this means is that foreigners are accumulating large claims on the future output of the United States. However the borrowed money is used, whether productively or not, a proportion of the future returns on U.S. investments will end up flowing abroad as dividends or interest payments.

Foreign ownership of the U.S. federal debt passed the halfway mark in June 2004. About a third of corporate bonds are now in foreign hands, as is more than 13 percent of the U.S. stock market. One analyst has half-seriously calculated that at the current rate of foreign accumulation, the last U.S. Treasury held by an American will be purchased by the People's Bank of China on Feb. 9, 2012.

It's a pretty safe bet that if a dollar decline shows signs of boosting inflation, the Federal Reserve will raise interest rates. Even a federal-funds rate above 5 percent might seem too low. Bear in mind that the federal-funds rate (the overnight rate at which the Fed lends to the banking system) has been going up for two years, from its nadir of below 1 percent in June 2004. Now ask yourself, Who has been most affected by this monetary tightening?

Two important categories of debtor spring to mind. First, there are the households with adjustable-rate mortgages. More Americans have variable-rate mortgages than ever before, even if most existing mortgage rates remain fixed. Since March 2004, there has been a 59 percent increase in one-year adjustable-rate mortgages. But that just means that they have become more expensive for new borrowers. The key question is, When do existing A.R.M.'s reset? The answer: Soon.

According to calculations published by Barron's in February, over the next two years the monthly payments on about $600 billion of mortgages taken out by borrowers in the so-called subprime market (those with checkered or nonexistent credit histories) will increase by as much as 50 percent. This is because many A.R.M.'s have two-year teaser periods to entice borrowers. After that, the meaning of "adjustable" suddenly becomes (in this case, painfully) apparent.

Yet the surprising thing is that the second category of debtor vulnerable to higher short-term rates can scarcely plead ignorance or naïveté. For it is none other than the federal government itself.

The protracted decline of long-term interest rates since the 80's has been a boon for an indebted government. Since 1990, the cost of servicing the federal debt has actually declined from 3.2 percent of G.D.P. in 1990 to 1.5 percent in 2005, even as the absolute size of the debt has soared. But that decline has been achieved partly thanks to the term structure of the debt — that is, to the relatively short duration of the bonds issued by the Treasury, which has allowed the government to take maximum advantage of falling rates. At the end of fiscal year 2005, for example, fully a third of the federal debt had a maturity of less than one year, and the average maturity of the entire debt was just 57 months (down from 74 months at the end of 2000).

This was wonderful so long as interest rates were falling. But now that they have started going up, it creates a potential fiscal nightmare: big slices of the federal debt that have to be refinanced at higher market rates. And that creates a new source of budgetary red ink: rising interest payments. It turns out that George Bush has the biggest A.R.M. in the world.