Worse than Greece - US 2012 GAAP Budget Deficit was an astounding 6.9 Trillion ! Don't recall hearing or reading that anywhere - that's because the MSM have failed to report that news...... Detroit continues further in its death spiral.....

http://market-ticker.org/akcs-www?post=218027

Why The Insanity Must Be Stopped NOW

 

Ah, someone appears to have done the arithmetic....

Federal Reserve Chairman Ben S. Bernanke’s efforts to rescue the economy could result in more than a half trillion dollars of paper losses on the central bank’s books if interest rates rise abruptly from recent levels.
That sum is the difference between the value of securities in the Fed’s portfolio on Dec. 31 and what they may fetch in three years, according to data compiled by MSCI Inc. of New York for Bloomberg News. MSCI applied scenarios devised by the Fed itself for stress-testing the nation’s 19 largest banks.
MSCI sees the market value of Fed holdings shrinking by $547 billion over three years under an adverse scenario that includes an economic contraction and rising inflation. MSCI puts the Fed’s mark-to-market loss at less than half that, or $216 billion, if the economy performs in line with consensus forecasts of gradually rising growth, inflation and interest rates.

The article goes on to state that these are "potential" losses and MTM, making the point that The Fed has no obligation to sell (and in fact Bernanke said today they won't, more or less.)
That would be true if he had the luxury of sitting on the portfolio. 
What if he has to sell?
Here's the problem -- look at the Fed balance sheet.
Note a few things.  First, The Fed has zero in bills.  Bills are short-term instruments that are mostly-insensitive to interest rates.  In the extreme case you can wait the 4 (or 13, or 26, etc) weeks for them to roll off, so there is no, or nearly-no, interest-rate risk in holding them.

However, The Fed doesn't have any more of them.  They're all gone, having been "twisted" away.
Everything else is interest-rate sensitive, which is where that above analysis comes from.  The longer the duration the greater the mark-to-market move of a bond you're holding when interest rates change.
Now here's the kicker: At present The Fed is preventing the "printed" currency they're using to execute QE from entering the economy, causing immediate and serious inflationary pressures, from leaving The Fed.  They are doing this by paying interest on these "excess reserves."
But as the name implies, the reserves are excess of requirements -- that is, the banks cannot be required to leave them on deposit at The Fed.  They do so because the interest rate The Fed pays them (out of its operating income) is greater than the risk-adjusted return they believe they could earn in the economy as a whole.  Remember, back in the early days of the crisis Bernanke argued for having this power to pay interest on excess reserves for this exact reason.
Nobody ever asked him the following question: What happens when you have a scadload of excess reserves on deposit, no short-term bills on your balance sheet at all, you've bought a crap-ton of long-term paper at historically low rates and rates go up?
Suddenly from the banks' point of view it becomes more lucrative to withdraw those reserves and put them into the economy.  But if that happens inflation spikes dramatically and interest rates go up further in response!
To prevent this The Fed would have to pay a higher rate on those excess reserves so as to maintain the preference to leave them on deposit.
From where does it get the money to do so when it is trying to unwind the portfolio -- that is, sell in the market and withdraw excess liquidity?
This is a positive feedback situation.  If The Fed sells securities to get the funds to pay the reserves with it crystallizes a mark-to-market loss into a real, honest-to-god cash operating loss and those sales will at the same time depress prices, causing rates to go higher and the mark-to-market loss on the remaining securities to increase!
If The Fed doesn't sell the securities then it has no funds with which to pay the excess reserve interest and the banks will withdraw those funds, causing inflation which will also drive rates higher and increase the mark-to-market loss.
The only way The Fed gets away with this is if we are Japan -- stuck in an economic environment in which there is no meaningful growth and no meaningful inflation, and therefore no reason for the banks to want to withdraw those funds nor do rates rise.
Now remember folks, one of Bernanke's key claims early on is that he "knew" how to avoid the Japanese problem coming here to America when the crisis hit, and that he would avoid it.
Good luck Bernanke -- you're in a trap of your own design, you fool -- exactly as I and a few others warned of years ago.

and.....









http://www.silverdoctors.com/eric-sprott-real-2012-us-defecit-6-9-trillion-not-reported-anywhere-by-the-public-press/

ERIC SPROTT: REAL 2012 US DEFICIT $6.9 TRILLION- NOT REPORTED ANYWHERE BY THE PUBLIC PRESS!

FEBRUARY 23, 2013 BY THE DOC 5 COMMENTS

In the midst of the latest epic cartel paper gold and silver raid this week, legendary precious metals expert Eric Sprott sat down with The Doc for an exclusive, MUST LISTEN interview. 
In one of his best and most shocking interviews ever, Eric discusses the latest gold and silver raid, his take on the platinum & palladium markets, the Bundesbank’s recent gold repatriation request and the correlation with massive physical gold buying in Asia, and his view on how the endgame of the Western financial/ debt crisis will play out.

Sprott stated that the Treasury Department’s 2012 GAAP budget deficit report was an astonishing $6.9 Trillion, and this has not been reported in 1 single major news outlet!  He also stated that the US government may be exporting German gold from the NY Fed to China, and that despite their recent apparent success, he expects that one day soon the cartel will be brought to their knees simply by traders standing for delivery of physical metal.

*****

The Doc also asked Eric about the Treasury Department releasing the results of their 3 year audit of the Treasury’s 34,021 gold bars held at the NY Fed- particularly with the timing of the release only a month after the Bundesbank requested the repatriation of Germany’s gold, and whether the official denial by the Treasury department of any purity issues with it’s gold stored at the NY Fed in fact confirms our worst  fears:

Well Doc, I read the so-called audit report.  It really said they audited the schedule of holdings- which I don’t even know what that means, the schedule of holdings.  What the NY Fed holds is a very small fraction of the total gold theoretically that’s owned by the US government, and in fact the gold held at the Fed might be German gold!  The Germans might be surprised to find out there’s only 350 tons in the NY Fed and it’s all supposed to be theirs!

It was a sham, and it was another example of those who are attempting to mislead us as to what is going on, and there have been so many examples of things that are just not right and are totally misreported.

Let me give you the biggest example of that.  On Jan 17th, the Dept of Treasury released their GAAP budget deficit , and it was $6.9 TRILLION.  That’s the change in present value of true obligations in ONE YEAR plus the cash deficit- total deficit $6.9 TRILLION!  This is in a $16 trillion economy where politicians fight over $100 billion in spending cuts when the deficit is $6.9 T!  What I find most interesting about that number?  You will not see it reported ANYWHERE in the public press!

You would think that would be something that would be deserving of some comment, but if you Google GAAP budget deficit 2012 you will not find it in any public news release, even though it was released by the Department of the Treasury.  We’re just ignoring the biggest elephant in the room here, and that’s the way they want to work it- more disinformation.

*****

http://www.zerohedge.com/news/2013-02-23/when-fed-has-print-money-just-print-money

When The Fed Has To Print Money Just To Print Money

Submitted by Tyler Durden on 02/23/2013 20:57 -0500

• Baseline Scenario
 
• Deutsche Bank
 
• Excess Reserves
• Lehman
 
• Market Crash
 
• Monetary Policy
 
• Morgan Stanley
 
• net interest margin
 
• NIM
 
• Smart Money

While the topic of net Fed capital flows, and implicit balance sheet risk has recently gotten substantial prominence some three yearsafter Zero Hedge first started discussing it, one open question is what happens when we cross the "D-Rate" boundary, or as we defined it, the point at which the Fed's NetInterest Margin becomes negative i.e., when the outflows due to interest payable to reserve banks (from IOER) surpasses the cash inflows from the Fed's low-yielding asset portfolio, and when the remittances to the Treasury cease (or technically become negative). To get the full answer of what happens then, we once again refer readers to the paper released yesterday by Morgan Stanley's Greenlaw and Deutsche Bank's Hooper, which discusses not only the parabolic chart that US debt yield will certainly follow over the next several decades, but the trickier concept known as the Fed's technical insolvency, or that moment when the Fed's tiny capital buffer goes negative. In short what would happen is that the Fed will be then forced to print money just so it can continue to print money.

From Crunch Time: Fiscal Crises and the Role of Monetary Policy, first the big picture:

Departures from the baseline, such as large-scale purchases continuing past 2013, or a more rapid rise of interest rates (a distinct possibility given the analysis presented in Section 3) would saddle the Fed with losses beginning as early as 2016, and losses that in some cases could substantially exceed the Fed’s capital. Such a scenario would at very least present public relations challenges for the Fed and could very well impact the conduct of monetary policy.

And more to the point, what happens when the Fed's Net Interest Margin goes negative. For the sake of simplicity, in the section below "creating new reserves" means quite simply "printing money" (purists will argue it is low-powered, base money, but realists will respond that since all money is fungible and a dollar is a dollar when buying a share of AMZN, as we have shown previously, it doesn't matter one bit how money printing is defined).

What would a negative remittance from the Treasury to the Fed look like? That is, if the Fed’s net income fell below zero, how would it fund its interest payments on reserves, and its operating expenses? Would it have to draw down its capital or take out a loan from the Treasury, asking the Treasury to issue new debt to do so? No, under the Fed’s new accounting practices adopted in January 2011, when net income available for remittance to Treasury falls below zero, this does not eat into the Fed’s contributions to capital or threaten the Fed’s operating expenses. Rather, the Fed wouldcreate new reserves against an item called the Fed’s “deferred asset” account on the asset side of its balance sheet. For example, to pay interest on reserves, it would simply credit the payee bank’s account at the Fed with the interest being paid, thus creating new reserves. The deferred asset account being run up in the process would serve as a claim on future earnings or remittances to the Treasury. The idea is that when the Fed subsequently returns to earning a profit, rather than return that profit to the Treasury, it would use the funds to run down the deferred asset, and the extra reserves having been created in the process would be run down as well.

Ok: so the Fed can't technically go broke - after all it can print money all it wants right, or as the paper says "create new reserves" (just so it can go back to its baseline operation since 2008 which is... creating new reserves)? Well, not really.

The Fed's (low-powered) money is good and accepted by banks only as long as these banks deem it appropriate and profitable to onboard the Fed's liability on their balance sheet. And to do that, the Fed will have to offer ever higher and higher rates on excess reserves. To wit:

In the present environment, when the demand for excess reserves is infinitely elastic, the creation of new reserves would not be a problem. But in the baseline exit scenario we are discussing, short-term assets have a positive yield and the demand for reserves would not be infinitely elastic. To persuade banks to hold a higher volume of excess reserves in such an environment, the Fed would need to increase the interest rate paid on excess reserves, otherwise the new reserve creation could, on the margin, become inflationary. It should be noted that this reserve creation is a second-order effect of the selling of assets by the Fed with the aim of running down excess reserves (and raising longer-term rates) in our baseline scenario. The capital losses incurred in this case would push up the deferred asset account enough to offset only a relatively small part of the intended reduction in reserves. However, even if the Fed were able to create additional reserves with no effects on the interest rate on those reserves, a cessation of  positive interest payments from the Fed to the Treasury for a significant period could bring Fed policy decisions under greater public scrutiny, potentially leading to controversy that could even threaten central bank independence.

In other words, as the MS and DB strategists put it so tongue-in-cheekly, once it becomes public knowledge that the Fed itself is broke in all but one technicality, and the resolution to said technicality is to go fully Weimar retard, the only hope the Fed will have to keep demand for dollars is if it gets caught in a closed loop of hiking rates ever higher just so banks keep onboarding reserves allowing the Fed to preserve the myth it is solvent, in the process pushing its NIM even lower, and needing to create even more "new reserves", rinsing and repeating.

Or, said otherwise, print more money just to be allowed to print more money.

In simple terms: a positive feedback loop which starts once rates begin ratcheting ever higher, and which ends, well, once the dollar loses it reserve status, and the initial goal of the Fed - to inflate away some $40 trillion in global excess debt is attained.

Ok, but this who knows when this happens right?

Well, yes and no. 

As we showed last week, the rate at which NIM goes negative and the above feedback loops begins would be at approximately 4.5% on December 31, 2013. The "breakeven" rate unleashing the inflationary cycle would then decline by about 1% each year assuming the Fed's balance sheet continues rising at a pace of $1 trillion per year.

So the good news for all those who have been wondering just how much longer the Fed can continue doing more of the same while providing a free lunch for all is that we now know there is a temporal bound: the longer the Fed does nothing to change the status quo, the lower its "rate buffer."

Of course, there is a resolution: the Fed simply begins to sell its assets, and in doing so, destroys the reserves created when said assets were onboarded on the Fed's balance sheet. But there lies the rub: because the second the Fed enters open deleveraging mode, everyone will sell everything they can to lock in the profits generated from the past 4+ years of Fed balance sheet expansion. Furthermore, at that moment, the market will begin pricing in the unwind of some or all of the $15 trillion in central bank liquidity which is the only reason the S&P is where it is today. The result would be a market crash so epic it would make the market response to Lehman and AIG's failure seem like a walk in the park by comparison.

Which is where you come in dear retail investor, and the whole myth of the "Great Rotation." Because unless there is someone who will start providing a bid into which the banks can offload their securities in exchange for cold hard cash, as was explained earlier, the entire stock market ramp of the past 4 years will have been for nothing. It is also why day in and day out the media bombards everyone, as it has in the beginning of every year for the past three, that the time to enter the market is now, and there has never been a better time (ignoring that the market is now more expensive on a forward multiple basis than it was at the last market peak in 2007). Of course, one of the amusing tangents here that the media and the Fed hope and pray everyone forgets is that the Fed is monetizing debt not equities: and that to do what the Fed does one should be buying the 30 year, not some Div/0 P/E stock.

Either way, unless the greater fool comes in and is once again willing to become the bag holder of last and only resort for the smart money, then all those firms, such as the abovementioned Morgan Stanley and Deutsche Bank, whose chief strategists penned the paper referenced above, will start getting nervous, and asking themselves: how much time is there before everyone else appreciates the risk of the D-Rate and sells first.

Because while as a ponzi scheme works on the way up as long as there is at least one more marginal buyer, the inverse is far more troubling, and it is here that the old bastardized Prisoner's Dilemma comes into place: "he who sells first, sells best."

And the biggest irony is that soon it will be the very act of the Fed continuing to expand its balance sheet at the current breakneck pace of $85 billion per month (or more), that is what will make banks ever more and more nervous.

Could it be that we are finally approaching the end of the lunch, and suddenly the realization that it was never free hits everyone at the same time?

http://globaleconomicanalysis.blogspot.com/2013/02/half-of-detroit-properties-have-not.html

Saturday, February 23, 2013 10:04 AM

Half of Detroit Properties Have Not Paid Taxes; Update on Detroit Bankruptcy

The hollowing out of Detroit is nearly complete. All that's left is a bankrupt shell of a city with no services and scattered citizens that do not pay taxes.

The Detroit News reports Half of Detroit Property Owners Don't Pay Taxes 

 Nearly half of the owners of Detroit's 305,000 properties failed to pay their tax bills last year, exacerbating a punishing cycle of declining revenues and diminished services for a city in a financial crisis, according to a Detroit News analysis of government records.

The News reviewed more than 200,000 pages of tax documents and found that 47 percent of the city's taxable parcels are delinquent on their 2011 bills. Some $246.5 million in taxes and fees went uncollected, about half of which was due Detroit and the rest to other entities, including Wayne County, Detroit Public Schools and the library.

Delinquency is so pervasive that 77 blocks had only one owner who paid taxes last year, The News found. Many of those who don't pay question why they should in a city that struggles to light its streets or keep police on them.

"Why pay taxes?" asked Fred Phillips, who owes more than $2,600 on his home on an east-side block where five owners paid 2011 taxes. "Why should I send them taxes when they aren't supplying services? It is sickening. … Every time I see the tax bill come, I think about the times we called and nobody came."

Update on Detroit Bankruptcy

Detroit is financially and morally bankrupt yet the governor refuses to make that declaration. A Review team says Detroit faces financial crisis, has no plan to fix it so why won't the governor act?

 For the second time in a year, a state review team has found Detroit is in a financial emergency that requires Gov. Rick Snyder to intervene in City Hall.

But this time, if Snyder agrees that a financial emergency exists, the governor's choices are more limited. He could appoint an emergency manager to keep Michigan's largest city from plunging into bankruptcy, experts say, or he could continue state financial supervision through a new consent agreement, which seems a faint possibility.

State Treasurer Andy Dillon ruled out a bankruptcy filing at this time.

The six-member review team unanimously concluded in a report released Tuesday that the city failed to restructure its debt-laden bureaucracy under the financial consent agreement signed in April and that Detroit's financial crisis requires Snyder's intervention "because no satisfactory plan exists to resolve a serious financial problem."

Chapter 9 bankruptcy is "always a possibility but I don't think the city should go through (Chapter) 9 to cure its ailments," he added.

The review team said the city's charter adds "numerous restrictions" and hurdles for closing departments, canceling contracts and the type of wholesale restructuring financial experts say is necessary to make city government live within its means.

Restrictions? Who Cares?

In bankruptcy, restrictions go out the window. So do union contracts and pensions. Since all of that needs to go out the window, what's holding the governor back?

Mike "Mish" Shedlock