Posted on 03/16/2008 8:58:36 PM PDT by bruinbirdman
As feared, foreign bond holders have begun to exercise a collective vote of no confidence in the devaluation policies of the US government. The Federal Reserve faces a potential veto of its rescue measures.
Asian, Mid East and European investors stood aside at last week's auction of 10-year US Treasury notes. "It was a disaster," said Ray Attrill from 4castweb. "We may be close to the point where the uglier consequences of benign neglect towards the currency are revealed."
The share of foreign buyers ("indirect bidders") plummeted to 5.8pc, from an average 25pc over the last eight weeks. On the Richter Scale of unfolding dramas, this matches the death of Bear Stearns.
Rightly or wrongly, a view has taken hold that Washington is cynically debasing the coinage, hoping to export its day of reckoning through beggar-thy-neighbour policies.
It is not my view. I believe the forces of debt deflation now engulfing America - and soon half the world - are so powerful that nobody will be worrying about inflation a year hence.
Yes, the Fed caused this mess by setting the price of credit too low for too long, feeding the cancer of debt dependency. But we are in the eye of the storm now. This is not a time for priggery.
The Fed's emergency actions are imperative. Last week's collapse of confidence in the creditworthiness of Fannie Mae and Freddie Mac was life-threatening. These agencies underpin 60pc of the $11,000bn market for US home loans.
With the "financial accelerator" kicking into top gear - downwards - we may need everything that Ben Bernanke can offer.
"The situation is getting worse, and the risks are that it could get very bad," said Martin Feldstein, head of the National Bureau of Economic Research. "There's no doubt that this year and next year are going to be very difficult."
Even monetary policy à l'outrance may not be enough to halt the spiral. Former US Treasury secretary Lawrence Summers says the Fed's shower of liquidity cannot cure a bankruptcy crisis caused by a tidal wave of property defaults.
"It is like fighting a virus with antibiotics," he said.
We can no longer exclude a partial nationalisation of the American banking system, modelled on the Nordic rescue in the early 1990s.
But even if you think the Fed has no choice other than to take dramatic action, the critics are also right in warning that this comes at a serious cost and it may backfire.
The imminent risk is that global flight from US Treasury and agency debt drives up long-term rates, the key funding instrument for mortgages and corporations. The effect could outweigh Fed easing.
Overall credit conditions could tighten into a slump (like 1930). It's the stuff of bad dreams.
Is this the moment when America finally discovers the meaning of the Faustian pact it signed so blithely with Asian creditors?
As the Wall Street Journal wrote this weekend, the entire country is facing a "margin call". The US has come to depend on $800bn inflows of cheap foreign capital each year to cover shopping bills. They may have to pay a much stiffer rent.
As of June 2007, foreigners owned $6,007bn of long-term US debt. (Equal to 66pc of the entire US federal debt). The biggest holdings by country are, in billions: Japan (901), China (870), UK (475), Luxembourg (424), Cayman Islands (422), Belgium (369), Ireland (176), Germany (155), Switzerland (140), Bermuda (133), Netherlands (123), Korea (118), Russia (109), Taiwan (107), Canada (106), Brazil (103). Who is jumping ship?
The Chinese have quickened the pace of yuan appreciation to choke off 8.7pc inflation, slowing US bond purchases. Petrodollar funds, working through UK off-shore accounts, are clearly dumping dollars amid rumours that Gulf states - overheating wildly - are about to break their dollar pegs. But mostly likely, the twin crash in the dollar and US agency debt reflects a broad exodus by global wealth managers, afraid that America is spinning out of control. Sauve qui peut.
The bond debacle last week tallies with the crash in the dollar index to an all-time low of 71.58, down 14.6pc in a year. The greenback is nearing parity with the Swiss franc - shocking for those who remember when it was 4.375 francs in 1970. Against the euro it has hit $1.57, from $0.82 in 2000. Against the yen it has smashed through Y100. Spare a thought for Toyota. It loses $350m in revenues for every one yen move. That is an $8.75bn hit since June. Tokyo's Nikkei index is crumbling. Less understood, it is also causing a self-reinforcing spiral of credit shrinkage throughout the global system.
Japanese investors and foreign funds are having to close their yen "carry trade" positions. A chunk of the $1,400bn trade built up over six years has been viciously unwound in weeks. The harder the dollar falls, the further this must go.
It is unsettling to watch the world's reserve currency disintegrate. Commodities from gold to oil and wheat are taking on the role of safe-haven "currencies". The monetary order is becoming unhinged.
I doubt the dollar can fall much further. What is it to fall against? The spreading credit contagion will cause large parts of the globe to downgrade in hot pursuit - starting with Europe.
Few noticed last week that the Italian treasury auction was also a flop. The bids collapsed. For the first time since the launch of EMU, Italy failed to sell a full batch of state bonds.
The euro blasted higher anyway, driven by hot money flows. The funds are beguiled by Germany's "Exportwunder", for now. It cannot last. The demented level of $1.57 will not be tolerated by French, Italian and Spanish politicians. The Latin property bubbles are deflating fast.
The race to the bottom must soon begin. Half the world will be slashing rates this year to stave off credit contraction. The dollar will have a lot of company. Small comfort.
and I remember the inflation rate at 21%.....
you work...you save...you invest a little....and now what do we do.....
bought more tomato sauce and spaghetti today....meant to buy dry milk....
It is not going to be fun to watch CNBC today. The Demoncrats and RINOS are going to get slapped this morning. Big time. Hold on.
Looking at this from a historic viewpoint, I would have to say another world war was in the offing.
We already knew we were at war, but have been denying the reality of it.
Hillary will, of course, blame Bush, Obammy will blame bush, and the timing couldn’t be better. The blame is on Bush but every member of Congress for the past 60 years as well. The bubble is bursting. The overspending of Government is solely to blame.
I am no expert but it seems that Greenjeans is the culprit...not only for keeping interest rates too low and encouraging rampant real estate speculation....he has been shooting his mouth off since leaving his throne and he has undermined Big Ben......
JP Morgan bought Bear Stearns for 3 cents on the dollar. Even at that firesale price, the US Gov guaranteed JP Morgan they would absorb their losses on the deal—think about that one and tell me things aren’t really bad. Where is our already broke Government going to come up with all this $$ when they can’t sell their devalued treasuries? And the Bear Stearns failure is probably the first of many to come. Something is going to give soon. It will not be pretty.
“Didn’t housing prices go up as mortgage rates went down?
Wouldn’t prices drop enough to encourage buying? I knew people who purchased houses during the late 1970s stagflation. I swear I remember the mortgage interest was more than 20 percent at that time. They survived. The rest of us survived.
No one is saying that’s going to be easy.”
You bring up a good point but I’d fill in a couple of missing points. First, homes had not blown up in price so far outside of their long term price envelope, roughly equal to 3x median income. Secondly, qualifying for loans back then was quite conventional, requiring solid down payments. Most homes during that era were sold with seller-financed second mortgages. When rates later came down, there was ample opportunity to refi to lower rates. I think I was paying 13% on a first mort and 11% on a seller second on a home I bought in 1983.
Why the current situation is different is because: Despite their recent decline, homes are still selling for prices outside that 3x median income benchmark, and with rates already so low, there is likely to be no great opportunity to refi. Indeed, mort rates have actually risen in response to the Fed lowering rates just recently.
I just need to hang on a few more years and collect my early Social Security, that's been a great government managed plan I can depend on. /sarc.
depends on how y ou look at it. might be bargain prices to jump in and buy too. Have to research, but might be terrific time to buy up rather than sell.
This is the guy who wrote the best book on the Clinton crime family. He has got just as good a handle on this story as well. Jorge made a COMPLETE fool of himself last week when babbled about America having a strong dollar policy. It was either completely dishonest or what is even worse, it was an admission that his administration has a policy which COULD NOT HAVE FAILED more, because the dollar has never been weaker.
I don’t understand how the price of anything can go down if oil keeps going up up up. Fuel costs affect everything.
As of last Friday, US treasuries looked extremely popular to me, and I bet they’ll be even more popular on Monday.
McCain didn’t even know Congress had banned lightbulbs! He pooh-poohed the idea to an interviewer, and when it was pointed out that it had already been done, he changed the subject. I guess you have to give him points for having that much presence of mind.
Unfortunately, what folks went through in the 30s was a grand repurposing of the federal government towards socialism, entitlements, nanny-statism, and an outright confiscation of Constitutional money, namely gold. I have little faith that things will turn out much better in this, the era of the ME ME ME generation.
Let those sovereign wealth funds flee. Let the Chinese government take their investments with them too.
What happens if we stop buying Chinese and even pay them in full? That's less than one thousand dollars per citizen over there.
It's going to take a lot more than that to stave off revolution with millions more out work and all the corruption and other state-threatening problems in Red China.
The euro blasted higher anyway, driven by hot money flows. The funds are beguiled by Germany's "Exportwunder", for now. It cannot last. The demented level of $1.57 will not be tolerated by French, Italian and Spanish politicians. The Latin property bubbles are deflating fast.
I believe it's true, no group of sovereign countries have ever shared a single currency successfully.
Either they combine into one country or give it up. It's been a picnic now there's trouble abrewing. Will the Euro survive? No. I bet.
(Though some like the Euro's protection against an individual country's currency being devalued.)
The northern countries are not happy with the southern countries performances, I believe. Real trouble abrewing.
Well, I don't know. It might be worth it to see the Arabs eat sand.
“I seem to recall japan tried to get out of their mess by having zero interest...how did that work out ?”
Wll. Bernanke is smarter than the Japs. You see, if you cause the sub prime debacle by printing money, then the cure must be to print money.
if we are all paying MORE of our money on gasoline, that leaves LESS for food,entertainment, clothing, cars, etc......
people can't really cut off the food, but surely the entertainment,retail and auto industries have got to be feeling the pinch from slow sales....so why aren't they discounting greatly?...no one is buying their stuff and they have to unload it....so why haven't THOSE prices at least come down....
in a real good and normal recession, one can usually make up for losses by picking up "deals"...so where are the deals?
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