American Debt Crisis In The Greek theatre (Guest Post)

chart

By Ilene

Excerpt from this week’s Stock World Weekly: Greek theatre

In spite of all the turmoil in the Eurozone, no matter how bad the situation in Greece seemed to be, or how badly the Euro was battered, none of this was enough to catapult the Dollar above its current upper resistance level of 76. Unless or until patterns change (when the Dollar pops, stocks drop), if the Dollar cannot move above this level, we don’t expect to see stocks to fall significantly.

The stock market is largely at the mercy of the money flows between the Fed, the Treasury, Primary Dealers, foreign central banks, the banking system, and the markets.

Looking ahead, Lee Adler of the Wall Street Examiner writes,
“…My best guess continues to be that the market will churn sideways without materially breaking support for the next week or two as the 13 week cycle enters a weak up phase supported by POMO [permanent open market operations] and light Treasury supply until the end of the month.

At the same time, the dollar’s 18 month cycle has turned up. That’s perverse given the problems with the debt ceiling and the Federal debt …….Right now the dollar is just a little less sick than its competitors and it could stay that way for a few weeks or a few months, but eventually this too shall pass and it will head lower.

Month to date data from the daily Treasury statement now confirms the evidence of an economic stall. This could lead to a vicious cycle where tax receipts fall faster than outlays, causing the Treasury’s borrowing needs to balloon.” Tensions are pulling in all directions, just like in any good, classical Greek drama. Tyler Durden of Zero Hedge reported “Just in time for the end of QE2….we get confirmation that yet another major foreign central bank has decided to …actively sell US Treasuries.” Arkady Dvorkovich, chief economic aide to the Russian President said, “The share of our portfolio in U.S. instruments has gone down and probably will go down further.”

Furthermore, according to Zero Hedge, U.S. households sold Treasuries to the Fed at an annualized rate of $1.1Tn and China is contemplating dumping two-thirds of its $3Tn in USD reserves. With the scheduled end of QE2, the Federal Reserve will no longer be actively buying Treasuries in an emergency measure to pump liquidity into the financial system.

The critical question remains, “who is going to buy U.S. Treasuries?” With private households and foreign investors being potential candidates, we would hope to see signs that they are getting ready to step up to the plate and buy large quantities of Treasuries. Instead, we see the opposite happening.

Meanwhile, on the political front, Republicans have been pushing for spending cuts and austerity measures.  However, labour’s share of US national income is lower than at any point in the last 60 years. There are now 44 million people in the US participating in the Supplemental Nutrition Assistance Program (SNAP) aka “food stamp” program, up from 27 million in October 2007.

chart

That’s an increase of nearly 63% in less than four years. Factor in high unemployment rates and inflation in food, energy and medical services, and we can only wonder what good can come from slashing spending even further.

If the objective is to grow the economy so that tax receipts increase, thereby making it possible to repay debt, then the wisdom of slashing programs that put money directly into the economy (low-income people spend what they get in aid) seems misguided at best.

As Michael Hudson observed,
“The economy is still suffering from the Obama administration’s failure to alleviate the debt overhead. He should be making banks write down junk mortgages to reflect actual market values and the capacity to pay.  [Instead], foreclosures are still throwing homes onto the market, pushing real estate further into negative equity territory while wealth concentrates at the top of the economic pyramid.” EconMatters, June 22, 2011 | Facebook Page [Twitter [Post Alert [Kindle

Read more posts on EconMatters »

NOW WATCH: Money & Markets videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.