September 2008 the US came to a fork in the road. The Public Policy
decision to not seize the banks, to not place them in bankruptcy court
with the government acting as the Debtor-in-Possession (DIP), to not split
them up by selling off the assets to successful and solvent entities, set
the world on the path to global currency wars.
By lowering interest rates and effectively guaranteeing a weak dollar, the
US ignited an almost riskless global US$ Carry Trade and triggered an
uncontrolled Currency War with the mercantilist, export driven Asian
economies. We are now debasing the US dollar with reckless spending and
money printing with the policies of Quantitative Easing (QE) I and the
expectations of QE II. Both are nothing more than effectively defaulting
on our obligations to sound money policy and a “strong US$”. Meanwhile
with a straight face we deny that this is our intention.
Though prior to the 2008 financial crisis our largest banks had become
casino like speculators with public money lacking in fiduciary
responsibility, our elected officials bailed them out. Our leadership
placed America and the world unknowingly (knowingly?) on a preordained
destructive path because it was politically expedient and the easiest way
out of a difficult predicament. By kicking the can down the road our
political leadership, like the banks, avoided their fiduciary
responsibility. Similar to a parent wanting to be liked and a friend to
their children they avoided the difficult discipline that is required at
certain critical moments in life. The discipline to make America swallow a
needed pill. The discipline to ask Americans to accept a period of intense
adjustment. A period that by now would be starting to show signs of
success versus the abyss we now find ourselves staring into. A future
that is now massively worse and with potentially fatal pain still to come.
critical issues in America stem from minimally a blatantly ineffective
public policy, but overridingly a failed and destructive Economic
Policy. These policy errors are directly responsible for the opening
salvos of the Currency War clouds now looming overhead.
Don’t be fooled for a minute. The issue of Yuan devaluation is a political
distraction from the real issue – a failure
of US policy leadership. In my
opinion the US Fiscal and Monetary policies are misguided. They are wrong!
I wrote a 66 page thesis paper entitled “Extend
& Pretend” in the fall of 2009 detailing why the proposed Keynesian
policy direction was flawed and why it would fail. I additionally authored
full series of articles from January through August in a broadly
published series entitled “Extend & Pretend” detailing the predicted
failures as they unfolded. Don’t let anyone tell you that what has
happened was not fully predictable!
Now after the charade of Extend & Pretend has run out of momentum and more
money printing is again required through Quantitative Easing (we predicted
QE II was inevitable in
March), the responsible US politicos have cleverly ignited the markets
with QE II money printing euphoria in the run-up to the mid-term
elections. Craftily they are taking political camouflage behind an
“undervalued Yuan” as the culprit for US problems. Remember, patriotism is
the last bastion of scoundres
Below is a chart showing CDS prices for the 5 riskiest states
in 2010. At the start of the year, California was by far
the most expensive to insure, but Illinois' problems caused it to
take the lead midway through the year. The two states have
been fighting it out for the default risk lead over the past four
months now. All states were basically trending lower from
their mid-year default risk highs up until the last couple of
weeks when sovereign debt worries in Europe drove up state CDS
prices as well. The recent jumps have so far been nothing
like we saw earlier in the year, however.
The Treasury now pays a blended cost of about 2.45 percent a
year for some $9.14 trillion in publicly held US debt, the lowest
rate in more than half a century. But inflation and devaluation
will inevitably lead investors to demand a higher return.
The burden is manageable if the rate drifts back up to, say, 5
percent (double the current cost and close to the historic
average). But a crisis in confidence would cause an immediate
spike up in bond yields and interest rates.
We're edging closer to the two conditions that could
precipitate that crisis. One trigger would be the Fed balance
sheet having grown too large for orderly liquidation except at
fire-sale prices; the other would be disorderly ("failed") US
Treasury auctions, wherein bidders step away because they see the
risks as outweighing the return.
Such a crisis would mean the cost of servicing federal debt
would skyrocket -- triggering a downward-spiraling liquidity
crisis ending with the US government unable to finance its
And while Germany and the
European Union were able to rescue Greece and Ireland (so
far), there's no one to bail out the United States.
What to do? In January, the new Congress must focus on even
more than the tough nut of real deficit, debt and spending
reductions. We need more Fed transparency -- such as a public
audit of its balance sheet, with stress tests to see the impact of
sharply higher interest rates.
The news may be ugly -- but hard facts are what's needed to win
public support for the sacrifices necessary to prevent the country
from reaching a tipping point where mounting debt triggers an
Ben Bernanke will be on 60 Minutes this Sunday night.
The interview has been pre-recorded, and according to
CNBC, Bernanke told CBS that QE2 isn't necessarily limited
to just $600 billion.
The news is being cited for what pushed markets higher
later in the day.
We'll have to wait until the whole transcripts are out
to see what Bernanke actually said, of course, and it is
very possible that he just said something pretty vague
about the Fed always having all options open, depending on
how things develop.
That being said, it was always pretty much known that
this was possible.
The weird thing is: why this kind of messaging? And why
drop this even as the fundamentals -- today's NFP report
notwithstanding -- seem to be improving.
Looking at the country-level shift in fiscal policy in
the OECD, every major OECD country is expected to tighten
fiscal policy in the coming year. The greatest
number of countries simultaneously tightening fiscal
policy over the past 30 years has been 10. Most of
the historical examples of tightening were less than 1% of
GDP. In other words, the extent of fiscal tightening
planned for next year - both in terms of the number of
countries planning to tighten and in terms of the severity
of the tightening - is unprecedented.
"Germany cannot keep paying for bail-outs without going
bankrupt itself. This is frightening people. You cannot find a
bank safe deposit box in Germany because every single one has
already been taken and stuffed with gold and silver. It is like an
underground Switzerland within our borders. People have terrible
memories of 1948 and 1923 when they lost their savings."
Gordon T Long is not a registered advisor and
does not give investment advice. His comments are an expression of opinion
only and should not be construed in any manner whatsoever as
recommendations to buy or sell a stock, option, future, bond, commodity or
any other financial instrument at any time. While he believes his
statements to be true, they always depend on the reliability of his own
credible sources. Of course, he recommends that you consult with a
qualified investment advisor, one licensed by appropriate regulatory
agencies in your legal jurisdiction, before making any investment
decisions, and barring that, we encourage you confirm the facts on your
own before making important investment commitments.ont>
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Gordon T Long
is not a registered advisor and does not give investment advice. His comments
are an expression of opinion only and should not be construed in any manner
whatsoever as recommendations to buy or sell a stock, option, future, bond,
commodity or any other financial instrument at any time. While he believes his
statements to be true, they always depend on the reliability of his own
credible sources. Of course, we recommend that you consult with a qualified
investment advisor, one licensed by appropriate regulatory agencies in your
legal jurisdiction, before making any investment decisions, and barring that,
we encourage you confirm the facts on your own before making important