WSJ: Fed Buying 61 Percent of US Debt

I have been talking about Fed and it’s debt monetization for a long time and here is the horrible truth. The Federal Reserve is printing dollars as fast as they can type on a keyboard and then buying most of the Federal debt being issued. The Fed recently admitted that they have bought European debt as well (what an outrage). Japan and China are now shunning our bond auctions and are net sellers of U.S. debt. Get ready for inflation like you have never seen before in your lifetime. Got Gold?-Lou

 

WSJ: Fed Buying 61 Percent of US Debt

The Federal Reserve is propping up the entire U.S. economy by buying 61 percent of the government debt issued by the Treasury Department, a trend that cannot last, Lawrence Goodman, a former Treasury official and current president of the Center for Financial Stability, writes in a Wall Street Journal opinion article published Wednesday.

“Last year the Fed purchased a stunning 61 percent of the total net Treasury issuance, up from negligible amounts prior to the 2008 financial crisis,” Goodman writes.

Goodman also warns that U.S. economy and markets are “at risk for a sharp correction” if conditions aren’t “normalized.”

“This not only creates the false appearance of limitless demand for U.S. debt but also blunts any sense of urgency to reduce supersized budget deficits.”

The U.S. government is growing increasingly more dependent on borrowing to finance itself, with net issuance of Treasury securities hitting 8.6 percent of gross domestic product (GDP) on average per annum, more than double levels before the crisis.

Fed intervention in the government debt market makes demand for Treasury bonds appear higher than it really is, as foreign creditors and other investors have fled U.S. government debt instruments and are looking elsewhere until the government makes serious attempts to curb spending and narrow its gaping deficits.

Goodman notes that foreign investors like Japan and China that once scooped up U.S. debt are shunning it. In 2009, such foreign purchases of U.S. debt amounted to 6 percent of GDP and has since falled by over eighty percent to a paltry 0.9 percent.

Without foreign buyers and a shrinking base of U.S. corporate and bank buyers, the Treasury has had to resort to the Federal Reserve itself to make the purchases. The Fed purchasing not only makes up the shortfall, but can keep long term interest rates artificially low.

“The Fed is in effect subsidizing U.S. government spending and borrowing via expansion of its balance sheet and massive purchases of Treasury bonds. This keeps Treasury interest rates abnormally low, camouflaging the true size of the budget deficit,” Goodman writes.

“Similarly, the Fed is providing preferential credit to the U.S. government and covering a rapidly widening gap between Treasury’s need to borrow and a more limited willingness among market participants to supply Treasury with credit.”

Political bickering on both sides of the aisle has prevented politicians from cutting spending and undertaking fiscal reform.

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A Picture Is Worth A Thousand Words

What Wealth Really Is

Here is a chapater that was edited out of my book “The Financial Physician: How To Cure Your Money Problems and Boost Your Financial Health”.-Lou

What Wealth Really Is

THE AILMENT

 

When people build wealth, they can become myopic. As they acquire more money, their vision can narrow and they can lose sight of everything else, especially the bigger picture. They can become so involved in getting rich that all they think about is making money and it’s all they want to do.

So they devote their time to building fortunes, which take away from other aspects of their lives. They become obsessive and spend less time at home with their families. When they’re home, they’re disconnected — their minds are somewhere else. Financially, they prosper, but their families suffer. Their children often have problems, become resentful and act out.

Although they work tirelessly and earn lots of money, many never truly enjoy the fruits of their success. Sooner or later, something crashes and they can’t understand why it happened to them.

DIAGNOSIS

It’s easy to get diverted. You can be moving smoothly on course, when something suddenly intervenes and before you know it you’re headed in a new and different direction, not where you intended to go. Money frequently has that affect. When it enters the picture, it can throw everything off track.

Passion can also be a problem. When you want something deeply, you may go after it with all your heart. You focus on your objective, let nothing stand in your way and devote yourself to reaching your goals. Passion is a great motivator and the most successful people tend to be zealous. Their passion is contagious and attracts followers and supporters.

However, passion can also be blinding. When you are immersed in your passions, you may not be able to see clearly. You miss what is obvious to others, even when it is right before your eyes.

Making money can stir our passion. Once you start making it, it can be addictive, you can’t get enough. You can get lost in the process and intoxicated by success. Your new status, lifestyle, and all you can do, buy and be can be mesmerizing. So you can lose track of your original objectives — why you wanted to build wealth. Your need to make money can take over and everything else can get pushed aside.

Wealth is measured by how well you live, not by how much you have. Living like a pauper when you have a seven figure estate is not being wealthy

 

VITAL SIGNS

Why do we try to build financial health? We all have different reasons, but for me it’s to enjoy life, be happy, fulfilled and do the things I like. By making myself financially fit, I’ve been able to take good care of my family, eat well, travel and help others. I’ve also been able to build a retirement fund that will enable us to live comfortably in retirement.

I never consider spending money on a good meal, travel or charity to be a waste. We need to eat well to be fit and happy. Travel broadens our minds, teaches us understanding and realigns our perspective. It also gives us priceless memories. Charity is helping others and sharing my good fortune with those in need. Being charitable is an honor and privilege; it’s one of great gifts that comes with wealth.

I work hard, but I also make it a point to enjoy my life. I don’t want to be the richest corpse in the cemetery. At the end of my life, I don’t want to regret that I didn’t spend more time with my family, help others and do what was most important to me.

I’ve worked with too many wealthy clients who lived frugally all the time. Most of them were miserable. Although they had no reason to worry about money, they constantly did. Worrying about money can really bring you down and ruin your physical health. It can color everything in your life. These clients were obsessed with building their wealth, hoarding it and rarely spending it. They seldom enjoyed it. As soon as they died, their children swooped in, gobbled up their money and spent it wastefully.

Two clear examples of people who don’t really know what wealth is are those who:

  • Work hard, save and invest, but don’t enjoy their lives. Making money is everything to them. They have enough money to live happily, but won’t spend it. Their lives are out of balance.
  • Build nest eggs so they can live comfortably when they retire, but when they do, they don’t spend what they amassed. They continue being thrifty, penny-wise when they can afford to ease up because they’re afraid that they won’t have enough.

TREATMENT

The reward for living a financially healthy and responsible lifestyle when you’re young is being able to enjoy yourself during your final years of life. Make the most of your wealth in the following ways:

1. As you build your financial health, enjoy it. Reward yourself for working hard, sacrificing and living responsibly. Don’t be extravagant and throw your money away, but find a happy balance between building wealth and enjoying some of what your success can buy.

Don’t put off enjoying life until you retire. You may never reach that point. Spend time with your family while they’re still living at home. Your time and experiences together will forge strong bonds and memories that they will pass on to their kids.

2. Invest your time in what is most important to you. Time is frequently more important than money, especially when you can spend it with your family and friends and doing what you love.

3. When you retire, do what you couldn’t do when you were younger, things that you might not have been able to afford or take the time to do. Since you worked so hard to build for your future, remember that your future has finally arrived. So take care of yourself and live a good life.

4. Set examples that you would like your children to follow, show them how it’s done.

A. Give your children and grandchildren the legacy of financial health. Children tend to follow their parents’ example: when parents are financially responsible, their children usually also are. When parents are financially irresponsible, their children usually follow suit.

B. Also show your children how to enjoy balanced lives. Let them see your example of how to build wealth and enjoy their lives while they’re building it.

5. Show your children the nobility work. Working is fulfilling, gratifying and builds the confidence, pride and drive that breeds success. Put your children in situations where they can succeed and enjoy experience and the rewards of their labor. Start with small tasks and build to those that are larger and involve more responsibility. Clearly show them what to do and be sure to compliment and thank them when they do it well.

6. Understand the danger of easy money. When young people come into money that they didn’t work hard to earn, it can have a destructive effect. Many lottery winners, athletes or young inheritors go right through the funds they receive. Within five to ten years, many are broke because the never learned learn money management skills. However, when they earn money by working hard, sacrificing and being financial responsible, it means more to them so they protect and spend it more responsibly.

7. Many people like to see their money being enjoyed. So they give during their lifetimes. Giving to charity or to your responsible children is an excellent idea; it’s wonderful to help. Unfortunately, many people place strings on their gifts, which often creates major problems. They get into a huff if a charity doesn’t apply their donation as they wished and insist that their children do as they say.

If you give money to your children, I think you are entitled to give them some financial wisdom. For example, if you give them money for a down payment on a home, I see no problem with your telling them not to get an adjustable rate mortgage. However, I don’t feel that you should tell them how to spend their money or try to micromanage them.

MY RX

Money is nothing but potential until it’s converted to items such as food, shelter, travel and charity. A $100 bill is just a small piece of paper until we use it to buy what we want or need. Plan ahead. Decide what you want most, what’s of the greatest importance to you, and when you can afford it, think about buying or doing it.

When people retire they often make two common mistakes: (1) believing that their retirement fund should continue to grow and (2) that they can live exclusively on their interest and not dip into their principal. Sorry, neither of these beliefs tend to be true. These misconceptions force people force to cut back on their standard of living, often drastically.

During our lifetime, we save and invest for retirement, but many of us are afraid to use the funds we accumulated. We only want to spend the interest but avoid touching the principal for fear of running out of money. Remember the squirrel. He gathered acorns in the fall and ate them during those barren winter months. Unlike the squirrel, many of us try to preserve or even grow our nest eggs when we retire.

Strike a happy balance. Dip into as much principle as you can without using it up, severely chopping your income or feeling guilty. Retirement funds should be spent during your retirement — so enjoy your golden years.

I constantly tell my radio audience and my clients that (1) you can’t take your money with you when you die and (2) enjoy the money you worked hard to accumulate over the course of your life.

It’s hard to control how your survivors will deal with your money. Regardless of how many restrictions or requirements you create, your survivors will usually do what they want as soon as they get their hands on your money. The best way to control the disposition of your assets is not through controls, but by setting good examples. By having solid values that your survivors will adopt and emulate.

Gun Sales and Gun Stocks Are Soaring

 

Gun Sales and Gun Stoaks are Soaring

Americans have been buying guns at an incredible pace. Just last week Ruger, the fourth largest gun manufacturer announced that they sold one million guns between January 1 and February 29th and were forced to suspend new orders.

Ruger CEO Michael O. Fifer said that despite the company’s continuing efforts to increase production, the incoming order rate exceeds Ruger’s capacity to rapidly fulfill the orders. The temporary suspension is expected to last until the end of May. Read Article here.

The FBI said that there were record gun sales since December. At least Obama is stimulating one segment of the economy. Why are so many people buying guns? Could it be fear of a financial collapse? Could it be fear of civil unrest or Martial Law? Could it be fear of hyper-inflation? I believe it’s all of the above . Surprisingly, women are the fastest growing segment of the gun market.

Look at this chart for Ruger:

The stock has risen from 30 in December to 50 today, a 67% increase in just a few months.

 

Now look at the chart for Smith and Wesson:

The stock has soared from 3 in December to almost 8, a whopping 167% jump.

Americans are arming themselves to the teeth, a disturbing development to say the least.-Lou

 

Listen To This Week’s Radio Shows

Listen to this week’s “The Financial Physician” radio show on XM Talk 168 and wobm am 1160.-Lou

Listen Here

Timothy Geithner: Amount of Debt U.S. To Run Up Will “Make You Uncomfortable”

This exchange between a Congressman and Timothy Geithner will make you “uncomfortable”. The dollar’s future is dire indeed.-Lou

 

My Take On MF Global’s Theft of Customer Funds

Why the IRS Picked You to Audit

Tax preparation season is in full swing so I thought I would bring you the following article on why people get audited.-Lou

 

 

Why the IRS Picked You to Audit

 

“Why me?” is the plaintive cry from most taxpayers facing an examination from the IRS. You can ask the auditor why all day long, but he’ll just shrug and say, “I don’t know. I’m just doing my job.” Once in a while an auditor may give you her best guess as to why you were selected, but don’t count on it.

To be fair, there tends to be a good reason a tax return is flagged for an audit. Sometimes it is a random spin-of-the-wheel choice, but in most cases there’s a catalyst to the red flag. So here’s some insight:

Dif Scores. Electronic filing has made it much easier for the IRS to gather data in order to analyze population groupings, standards and trends. A simple act of feeding in parameters to existing data can provide information regarding queries like: How many home owners exist in a certain nine-digit ZIP code, or what is the average income in Wichita?

The IRS developed a method of computer scoring called the Discriminant Function System (DIF) score which rates the potential for change based on past IRS experience with similar returns. The Unreported Income DIF (UIDIF) score rates tax returns for the potential of unreported income. The highest-scoring returns are reviewed by IRS personnel and from there some are selected for audit with pointers to items on the return that need review.

So: You might be audited if you live in Bel Air, pay DMV tags for a Lamborghini, and pay interest on a million-dollar mortgage yet declare less than $100,000 of income. Although there may be a very good reason for this–maybe you earned millions in 2010 and left the workforce in 2011 to kick back and spend your fortune– the IRS will suspect you aren’t reporting all of your income, and will want to take a peek.

Abusive tax avoidance transactions. Some folks are audited because they participate in abusive tax avoidance transactions. The IRS identifies promoters and participants usually from tipsters or from lists of participants that promoters have been court-ordered to turn over to the IRS. Be very wary when investing into those “too-good-to-be-true” tax shelters. Always run them by your tax pro.

Related examinations. I defended a general contractor in an audit recently. The IRS noticed that he had neglected to send out Forms 1099 to his subcontractors and then identified the subcontractors and checked their tax returns to see if they had declared the income–several had not. The agency pounced on those who had not – easy prey. I’ve had clients tell me that since they didn’t get a 1099, they didn’t think they were required to report the income. Not so. If you have self-employment income of $400 or more, you are required to file a tax return whether you receive a 1099 or not.
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MF’s Corzine Ordered Funds Moved to JP Morgan, Memo Says

So it took six months to determine that MF Global CEO and former Senator and Governor of New Jersey Jon Corzine authorized the theft of customer funds to pay JP Morgan. This is a crime of the highest order and he should go to jail but he won’t. You see if you are a person that reaches the heights of Governor, Senator and friend (and fundraiser) of the President than you are given a pass. The real culprit here is JP Morgan who rumor has it threatened Corzine with an early death if he did not make payment of money owed. MF Global could have declared bankruptcy two days earlier and left JP Morgan as an unsecured creditor but instead stole the money from customers leaving farmers and other commodities investors holding the bag. Welcme to finance in the 21st century.-Lou

 

 

MF’s Corzine Ordered Funds Moved to JP Morgan, Memo Says

 

Bloomberg-  Jon S. Corzine, MF Global Holding Ltd. (MFGLQ)’s chief executive officer, gave “direct instructions” to transfer $200 million from a customer fund account to meet an overdraft in a brokerage account with JPMorgan Chase & Co. (JPM), according to a memo written by congressional investigators.

Edith O’Brien, a treasurer for the firm, said in an e-mail quoted in the memo that the transfer was “Per JC’s direct instructions,” according to a copy of the memo obtained by Bloomberg News. The e-mail, dated Oct. 28, was sent three days before the company collapsed, the memo says. The memo does not indicate whether that phrase was the full text of the e-mail or an excerpt.

O’Brien’s internal e-mail was sent as the New York-based broker found intraday credit lines limited by JPMorgan, the firm’s clearing bank as well as one of its custodian banks for segregated customer funds, according to the memo, which was prepared for a March 28 House Financial Services subcommittee hearing on the firm’s collapse. O’Brien is scheduled to testify at the hearing after being subpoenaed this week.

“Over the course of that week, MF Global (MFGLQ)’s financial position deteriorated, but the firm represented to its regulators and self-regulatory organizations that its customers’ segregated funds were safe,” said the memo, written by Financial Services Committee staff and sent to lawmakers.

Steven Goldberg, a spokesman for Corzine, said in a statement that Corzine “never gave any instruction to misuse customer funds and never intended anyone at MF Global to misuse customer funds.”

JPMorgan Overdraft

Vinay Mahajan, global treasurer of MF Global Holdings, wrote an e-mail on Oct. 28 that said JPMorgan was “holding up vital business in the U.S. as a result” of the overdrawn account, which had to be “fully funded ASAP,” according to the memo.

Barry Zubrow, JPMorgan’s chief risk officer, called Corzine to seek assurances that the funds belonged to MF Global and not customers. JPMorgan drafted a letter to be signed by O’Brien to ensure that MF Global was complying with rules requiring customers’ collateral to be segregated. The letter was not returned to JPMorgan, the memo said.

The money transferred came from a segregated customer account, according to congressional investigators. Segregated accounts can include customer money and excess company funds.

Corzine Testimony

Corzine, 65, in testimony in front of the House panel in December, said he did not order any improper transfer of customer funds. Corzine also testified that he never intended a misuse of customer funds at MF Global, and that he doesn’t know where client funds went.

“I never gave any instruction to misuse customer funds, I never intended anyone at MF Global to misuse customer funds and I don’t believe that anything I said could reasonably have been interpreted as an instruction to misuse customer funds,” Corzine told lawmakers in December.

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“The Financial Physician” Chapter 2: Financial Irresponsibility

The main reason many people fail financially is because they are irresponsible with money. Couple financial irresponsibility with financial illiteracy and you have a recipe for financial failure. The first chapter of The Financial Physician covers financial illiteracy in America, here is excerpt from Chapter 2: Financial Irresponsibility.-Lou

 

 

BEING FINANCIALLY IRRESPONSIBLE

 

THE AILMENT 

 

When we hear the term “financial irresponsibility,” we tend to think it means not paying our bills on time, buying stuff that we can’t afford and really don’t need and taking on too much debt. Yes, financial irresponsibility is that, but it also is much more. Let me give you an example:

 

Alex and Betty each smoke two packs of cigarettes a day. At $7 per pack, they spend $28 on cigarettes each day. Alex also drinks 2 six-packs of beer a day, which adds another $14 a day. So between cigarettes and beer, they spend $42 each day, $294 a week and $15,330 a year. If you compound this over the years, you’re looking at a great deal of money.

 

This example, may seem extreme, but believe me it’s not. Lots of Alex and Betties, people with expensive vices, exist. Their vices wreck their financial health and damage their physical health, which will cost them even more in the long run. The money they spend on their vices could be used to keep them out of debt or to pay off their debts, build their wealth and to enable them lead more comfortable lives. Instead, it’s being wasted, going up in smoke.

 

DIAGNOSIS

Financially irresponsible people spend more than they earn. They buy homes, cars, furnishings, and clothing that are more than they need and can afford. As they make more money, most increase their lifestyles, but not their savings or their wealth. When they get raises, they travel more, buy bigger homes, nicer cars and spend more freely. They build their debt and destroy their finances.

Not understanding the basics of financial management is financially irresponsible. Responsible individuals learn about economics and money management. They find out what’s involved and keep up to date with what is happening in the world. They learn who they can turn to for help and continually watch and manage their money.

Financial irresponsibility comes from making poor choices, being shortsighted, focusing on today and not the future. Too many of us live for today and don’t deal with tomorrow until we’re forced to — and frequently, that’s too late. Financially irresponsible people feel entitled to have it all and have it all now. They’re unwilling to wait or sacrifice in order to build for the future.

When we spend money foolishly, for the wrong reasons and ignore boundaries, limitations and common sense we are not being financially responsible. Prime examples are when we buy impulsively, try to keep up with the Jones, overuse plastic and continue to take on debt without thinking twice.

One of the greatest acts of financial irresponsibility is not getting a higher education. The more education you acquire, the more you will learn about finances and how to boost your financial health. Unfortunately, we make important life decisions when we are young, immature and may not have enough knowledge to make the best decisions.

According to CNN Money & Main Street, education has a strong correlation to unemployment. Of people over age 25 who are unemployed:

  • 15.47 Have no high school diploma
  • 10% Are high school graduates
  • 7.72% Have some college or an associate’s degree
  • 4.76% Hold a bachelor’s degree or higher.

 

Many young people drop out of school. Others complete high school, but don’t go further. When they decide to discontinue their education and go out in the world, many of them don’t understand the full implications involved — even think they think they do.

Not getting a higher education is a financially irresponsible decision. It immediately puts most young people behind the eight ball and they can’t really compete. From the moment they stop going to school, everything becomes harder: finding jobs in which they can advance, earning enough and working in careers that they love.

On the other hand, college grads get better jobs, earn better incomes and tend to do more interesting and meaningful work. Their educations set the stage for the rest of their lives. Most people who do not attend college never catch up.

VITAL SIGNS

 

Personal responsibility and financial responsibility go hand in hand; they’re inseparable. You must be personally responsible to be financially responsible. People who are not personally responsible, are almost always financially irresponsible. Financial responsibility equates to maturity, growing up and behaving like a mature, responsible adult.

Most Americans, regardless of their age, tend to act financially immature. So we must grow up financially and be more responsible. We must exert self-control, self-discipline and live within our means. Better yet, we must live below our means in order to accumulate enough money to have comfortable futures.

We Americans have the highest lifestyles in the world, but we save at rates that are among the lowest in the world. In Asia, savings average well over 10% per family, while savings in the US has been mired in the low single digits.

Many families allow their finances to control them instead of them controlling their finances. They watch others and try to imitate what their friends and neighbors do, what they see on TV, in the media and the movies. They overextend themselves by trying to live extravagant, fairy-tale lives that they can’t afford.

TREATMENT

To become more financially responsible, follow these steps:

  1. Learn the basics of financial management. Discover about the dos and don’ts and seek out people who enhance your education. Identify top experts who can advise and guide you.
  2. Take a systematic approach with your finances. Make financial plan, a budget, so you know what you can spend. Set parameters for your spending, be disciplined and stick with them. Keep good records and routinely check your budget to make sure you’re on track and to test your resolve.
  3. When you write your budget, cut out all money for needless expense such as vices. Giving up smoking, drinking, gambling, drugs and other vices can be exceptionally hard, but it’s the first big hurdle you must clear to regain your financial and physical health. It’s the acid test that you have to pass if you want to build wealth, enjoy good health and have comfortable future.
  4. Before you spend money on anything, apply the Need Test. Ask yourself if you need it, not just want it. If you don’t truly need it, don’t buy it. Form the habit of cutting back, eliminate all your excesses and buy only what you really need.
  5. Change your partners in crime, those playmates who encourage your irresponsibility and wanton ways. They’re bad influences, aiders and abettors, not true friends. If they were true friends, they wouldn’t encourage you to take the road to self-destruction.
  6. Grow up. Realize that it’s time to turn the corner and become an adult rather than a child. Acknowledge that being an irresponsible kid was a blast while it lasted, but now that time has passed. Now, it’s time to change. Take responsibility for yourself, for your behavior and become the best, most responsible person that you can be.

MY RX

 

It is impossible to be financially healthy when you’re financially irresponsible — you must be either one or the other. If you really want to build your net worth and have no money pressures, commit to living responsibly — finically and personally. I know that it can be hard to change, but becoming financially responsible is the only way you can become financially fit.

Personal responsibility goes hand in hand with financial responsibility. When you take control of your physical body, it usually transfers to your financial health as well. The vast majority of people who smoke, drink, gamble or use drugs have continual financial troubles. Control all aspects of your life, take charge, become more responsible and watch your financial situation improve. Clean up your entire act!

It’s especially important for everyone to become financially and personally responsible early in life. Unfortunately, young people are not taught about financial responsibility in school or at home. So they easily fall into bad habits. Hopefully, our schools will begin to address this problem, but until they do, it’s up to you. Act personally and financially responsible. Set a responsible example because it will enhance your loved ones’ lives.