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PCTEL, Inc. Message Board

  • commandor58 commandor58 Apr 5, 2013 4:08 PM Flag

    One of the Big Questioons

    As governments run budget deficits, they are accumulating debt. For many of the largest countries, that debt is being bought up its central bank. The buying is so large, as a % of issuance, that bond prices are at all-time highs while interest rates are at all time lows. Because interest rates are at all-time lows, private sector borrowers, individuals and businesses, are induced to borrow to consume and invest. The biggest consumption areas wold be vehicles and housing. One could argue that without the extremely low interest rates, the consumption of both would be less. Also, businesses are "investing" less that what would have been expected. The big question regarding all of the borrowing, is "how will this debt be serviced?"

    The hope is that GDP growth will be high enough to pay interest and work down the principle. Clearly most governments around the world are paying their interest costs, but the principle and future liabilities continue to expand much faster than GDP growth. Also, without robust GDP growth, individual and businesses ability to service the debt becomes problematic if GDP growth slows or goes negative. In the US, with increasing regulations, the business environment is quasi hostile.
    Bottom line, it is my thinking that, now and in coming years, servicing debt will get harder and harder. So, as a policy response, QE will continue to keep interest rates artificially low and induce inflation to pay debt back with deflated currency. That will work until the bond market says, "no mas"-either inflation overwhelms QE and/or debt gets so high, as a % of the ability to pay, the fear of being not being repaid overwhelms QE. Because interest rates will have been held artificially too low for years and credit risks distorted, when the bond market says, "no mas", the move will likely be 200+ BPS in a short period of time. When that happens, stocks, commodities get cut to 1/3 their peaks and the world goes into depression.

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    • "Central banks are buying up newly issued govt. bonds"..."that will work until the bond market says no mas". If the govt is buying their own bonds hence QE, they essentially are the bond market.

      • 1 Reply to bodybag2006
      • One of the other "big" questions is, how well are the labor markets doing? A couple of points:

        1)Under a different heading, I wrote about how Obamacare is artificially creating two jobs out of nothing because employers are cutting back on full-time employees (greater than 30 hours/week) to have a net two part time employees (that dds one job-the 2nd part-time employee) and the original full-time employee (now part-time) gets another part-time job to keep his(her) income near steady. So, where there was one full-time job, there now exists 3 part-time jobs. All done because companies want to show the fewest full-time employees by the 6/30 reference date fo Obamacare.

        Friday morning, finally, comments were made reflecting what I wrote about and other actions companies are taking, like keeping their employee count below 50, to stay out of the cross hairs of Obamacare.

        Also, you heard on Friday that the participation rate is going down because of demographics. Well, when you look at the details of the data, that is just a crock of dung. Two facts and one anecdotal observation. Fact 1, the participation rate of workers age 55-64 has been holding steady for years at 65%. Fact 2, the participation rate for 25-29 year old is at an all time low. Anecdotally, seniors, over 55 have been retuning to the workforce in drove because they can't earn any interest on their savings and must replace that income-just look at the employee mix at fast food restaurants. Around my area, they are 1/3-1/2 the fast food employees vs less that 10% ten years ago.

        Bottom line, the Obama-econ policies are making it too easy for people not to work and making difficult for business to want to invest and expand.

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