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| Financial crisis: Does the US face a full-scale run on its currency? |
| 2008-09-24 |
| This just arrived in my e-mail from Alex Patelis, global strategist at Merrill Lynch. AS THE US PRINTING PRESS STARTS Taking Stock * Treasury buying mortgage-related assets: $700bn * Potential stimulus package favoured by Democrats: $100bn * Insuring money market funds: $50bn * Treasury fortifying the Fed's balance sheet: $100bn * Expansion of temporary swap lines with central banks: $180bn * Loan to AIG: $85bn * Fed purchase of agency discount notes & ABCP: amount not specified * Fed loans through the Primary Dealer Credit Facility: $20bn through sept 17 * Fed's discount window: $33bn balance * Treasury purchase of GSE MBS this month: $10bn * Potential cost of Fannie/Freddie bailout: $200-$300bn * Financing the current account deficit: priceless Investment Implications SELL THE US DOLLAR "The fiscal cost to the United States is likely to be enormous. Speculation will intensify on a possible US government paper downgrade. US policy-making and credibility has been put into question. The safety of US assets has been put into question. We remain concerned with the repercussions that this crisis will have on the financial flows into the United States against the context of a still large current account deficit." Ouch! Mr Patelis has come within a whisker of warning that the US now faces a full-scale run on its currency and debt markets. There is certainly a risk that this could happen. By my tally, the serial bail-outs add $1.6 trillion to total US debt, or 12pc of GDP, (at least on paper). This is worse than the Swedish banking collapse in the early 1990s. An entire generation of American policy-makers - Clinton, Bush, Rubin, Greenspan, and the Congressional leadership of both parties - has come perilously close to ruining a great nation. The creation of the credit bubble was one of the most disgraceful episodes of economic government in western history. Nothing can justify it. There is no parallel to the Spain of Phillip II, who ruined his empire to pursue the religious cause of Counter-Reformation, or to the bankruptcy of the British Empire combating fascism. It occurred because America abandoned all restraint and gave licence to consumer hedonism. Having said that, I still believe that the US has the cultural vitality to pull itself out of this debacle. While I endorse Mr Patelis's indictment, I do not entirely share his conclusions. The debt added is backed by collateral, mostly housing, and is therefore nothing like normal government debt. Even if it were, the US general government debt (owed to the public, under IMF measures) would rise from 48pc to 60pc of GDP. Yes, I know the US "national debt" is higher, but that is not the relevant benchmark for worldwide comparisons. This extra debt is a tax on the future. It is unconscionable, but it is not a catastrophe. It would still leave US debt at French or German levels, and well below those of Japan and Italy - assuming you believe the official figures. I do not think it will come to this. The RTC made a profit in the early 1990s as the Savings and Loan crisis slowly abated. Paulson's `TARP' may do likewise. The ABX index used to price subprime debt almost certainly overstates the likely default rate. Stephen Jen, currency chief at Morgan Stanley, says bank crises are bloody for currencies, but nationalizations of the banking system (which is what we have here, in disguised form) typically mark the bottom. I do not share the widespread view that the dollar will collapse. This has prompted a volley of hostile comment, as if I was somehow turning traitor to the cause of bears, or had become an optimist overnight. The reason why it will not collapse - at least for now - is that the euro is facing an even deeper and more intractable crisis, Britain is mangled, Sweden frozen, most of Eastern Europe is facing a swing from property boom to bust, Brazil is about to slow dramatically, Japan is in full-recession, and China's banking systems is buckling, as Fitch warned today. What I envisage as this credit crisis goes turns into a full-fledged global economic slump is that half the world resorts to currency devaluation in a beggar-thy-neighbour scramble to stave off recession and cling to market share. This will be very good for gold, though only once the EMU smash-up becomes more evident, perhaps with the onset of street protests in Spain. You won't have to wait very long. To those GATA loyalists asking me why I never report on their claim that the gold price is manipulated by central banks, I can only say that it would be a full-time job to attempt to verify such assertions. I cannot judge whether China, Japan, Russia, emerging Asia, or the Mid-East petro-powers are colluding in such practices, or ascertain why they would do so. And unless they collude, any unilateral efforts by the US to suppress gold would prove futile -- would it not? |
| Posted by:3dc |
| #8 #7 ex-lib: It was started by Frank Roosevelt, and most people have never lived under a stable cash economy, Absolutely CORRECT! And if you look at Gov't spending and give-away programs since FDR, the numbers will bear it out in spades. |
| Posted by: Besoeker 2008-09-24 21:24 |
| #7 ex-lib: It was started by Frank Roosevelt, and most people have never lived under a stable cash economy, so they have no idea that this "experimental" economy has turned out to be fatally flawed. A stable economy cannot have something like a perpetually growing national debt and money leveraged far beyond reality. Eventually, a situation like that will overwhelm everything else. And it has. But it might have kept going for many years, the "boiling the frog" situation, except that the users of multi-layered leveraging, like derivatives, have turned a chronic problem into an acute problem. The US government will futz around until things get very bad, then they will be forced to do what to them is unthinkable: a budget with a surplus. And a BIG surplus. Perhaps 25% of the federal government will have to be shut down permanently. Medicare and Social Security will have to be heavily means tested. Medicaid might have to be returned to the States. To make matters worse, there will be a sharp drop in tax revenue, so everything on the budget will have to fight it out. Vast numbers of programs will have to be suspended, leaving only the vital parts untouched. I am betting that most federal land will have to be returned to the States, and a huge number of funded and unfunded mandates will come to an end. Illegal immigrants may turn into a flood, if Mexico starts another bloody civil war. So the Army and National Guard will have to secure the border. International trade will dry up, so the US will have to rebuild many of its industries. We will have to continue exporting lots of food, because many nations are dependent on us, and food is a truly fungible commodity. The crisis will be international, and hopefully the US will be in a strong enough position so that in a few years, we will be on the road to recovery, and be able to help the rest of the world emerge as well. |
| Posted by: Anonymoose 2008-09-24 20:23 |
| #6 "It occurred because America abandoned all restraint and gave licence to consumer hedonism." Wasn't that because of Clinton legislation? Am I mistaken? So much news out there, I can't make sense of it. thanks |
| Posted by: ex-lib 2008-09-24 18:46 |
| #5 Watch for a big increase in POMOs. That's the sign of currency debasement. |
| Posted by: Bright Pebbles 2008-09-24 17:25 |
| #4 The trouble is that people are losing quality holdings for their money. Even corporations are going heavy into liquidity. I would not be surprised if investors have been fleeing Merrill Lynch, I know at least some are. Eventually, if you can't trust even banks, you have to invest in a safe and keep your money at home. Assuming that you can still convert your money to cash. They may not have enough cash to hand out. And with a credit crunch, you might not be able to spend the money you've got left in the bank. |
| Posted by: Anonymoose 2008-09-24 16:10 |
| #3 People don't queue up in front of the bank anymore. A "run" on the banks comes with the click of a mouse or a few keystrokes from a keyboard. |
| Posted by: JohnQC 2008-09-24 13:58 |
| #2 Inappropriately titled, as the gist is a proposed collapse in international trade, as nations run headlong into currency protectionism. However, a big question remains: will this wipe out the dollar or cause it to skyrocket? Back in the good old days of mercantilism, whoever had the largest military dominated everyone else. And that meant that whoever had the most specie (gold and silver), with which to pay for a military, was dominant. Today, despite all the feel good internationalism, the US military is still what puts us on top, and keeps our economy on top. And the truth of our economy is that we don't have to import much of anything. We do so only because imports are a lot cheaper. But if we were stuck without imports, in 10 years or less we could easily be fully self supporting. But this cannot be said for the rest of the world. Many nations are utterly dependent on the US for all sorts of things. So even if the world economy collapses, they will either buy from us or starve. And this means that everyone will eventually want dollars. For them, it is better that their currency be re-pegged to the dollar then they try to do without. And pegging currency is a great way to open up trade. |
| Posted by: Anonymoose 2008-09-24 13:34 |
| #1 I understand the populist and conservative sentiment of doing nothing which will force the toxic mortgages on to the sales floor. But are we, you, them, us willing to bet our homes, our credit, our savings, our portfolios, our children's and families life style? Do you feel lucky today, punk? Regardless, we are damned either way. The other reason to this immediately is to get the damn issue off the table until after the election. The more it drags out the chances increase that you will get the most inexperienced, unknowing, charlatan ever as the guy who is going to be in charge. Do you really want that? |
| Posted by: Jack is Back! 2008-09-24 13:27 |