at some point. It was inevitable that this has happened. The lines
crossed some time ago. Portugal has too much short-term debt. The cost
of rolling it over (if possible at all) would be too high. Debt service
at free market rates would kill the country. So there is no sense in
keeping up the charade any longer. It was Portugal’s dependence on ST
debt that did them in. This chart shows how the maturity schedule of
existing debt simply overwhelmed their capacity to refinance.
What would you call this? ‘Mismanagement’ comes to mind. The Portuguese Treasury put the country at risk. Rather than point fingers it would be ‘nicer’ to conclude that Portugal had no option but to borrow short-term. It would be fair to blame the economic leaders of the EU.
They knew for years that Portugal’s ST debt was a time bomb. The
lessons of Greece and Ireland and their dependence on money with a short
string are fresh in their minds.
Okay. You got that? ST debt = death.
The greater the reliance on ST financing the greater the systemic risk.
Now look at the US debt profile. Compare it to Portugal. Who looks worse to you?
When looking at a country’s aggregate debt and maturity profile it is
important to look at the borrower's current status. But it is much more
important to look at the relative change of ST debt on a year over year basis. Clearly the US is going in the wrong direction. It's happening at a pretty good clip.
The argument that will be put to me is that the USA is a Reserve
Currency and therefore can never be faced with the Portuguese disease of
“no rollover”. Hogwash. Like I said, “Mismanagement” comes to mind.
You can't compare the structure of Portugese debt to US debt because Portugal can't print Euros.
Even if China (and others) have been actively cycling out of long-dated US paper into short, any refusal to roll on the short end will be quickly picked up by the PDs flushed with fresh reserves from the Fed on a demand basis. You can bet on that, like the night follows day.
Increasingly, it's the Fed on the short end, (where it *should* be), and the Fed won't stop rolling until inflation really starts to bite. Bernanke is still losing sleep over deflationary threats, so don't bet on that roll stopping any time soon.
Let me put on my flak jacket :)
The US has not ceded currency sovereignty, unlike the crazy EU periphery, so in a real sense we cannot default. We just fire up the printing presses. As far as the maturity schedule goes, well, it's not clear to me whether we are better or worse off locking in current rates. Between demographic decline and being ravaged by globalization, maybe we end up with a 10 year near 1% like Japan because the output gap proves stubborn to close.
Having said that ... I think a weaker dollar in the US's best interest, and a sovereign can always debase their own currency successfully, so the US will get what it wants. Therefore I would and do invest in PMs but not because of the above graph. I feel consistent because one way to debase is to offer crappy yields (c.f., today's EUR-USD action), and the above maturity curve suggests crappier yields are coming.
From that graph things look like they will get much better in the future (bars get smaller).
Ireland defaulted several years back.....I wonder how they're doing these days?
Words like default or crisis are no longer relevant, so strike them from your vocabulary. These unpleasant events are now managed, curated, by people that received perfect SAT scores. Any temporary difficulties will be subsumed by the ongoing economic expansion which is fueled by unlimited growth potentials and a general disbelief in gravity.
But has portugal asked for an IMF/EU bailout, I don't think they have just yet. Also as we have said over a year ago, as goes Portugal will go Spain.
QE(n+1) where n is a positive number between 1 and infinity.
the fed is now the buyer of last resort and will be the buyer of last resort house of cards collapses. They must keep short rates at or near zero.
Buy Gold, buy silver. be prepared for some nasty times.
"the lessons of Greece and Ireland are on their mind." The Greek government actually survived. These two have not. Is it smarter not to survive though? They are suppose to fail, oui, oui? Perhaps a "more imperfect Union" for "Oui the Europeans" is the answer?
Bruce,
Take your first paragraph and where you have the word Portugal, insert the word US. The majority of US debt is denominated in less than 3 years and you'll be able to reuse this article in less than 3 years.
Who's going to bail out the US when SHTF?
Nice article.
When Clinton began to shift US debt to ST he was hailed as a budget cutter.
3 Years?...........How about 3 months
We are NOW is an accelerated time continuum
Well, if they roll the debt over from short term at super low rates, to long term at super low rates, then problem solved. So what would crush the long end of the yield curve and send people flooding to Treasuries? A massive crash perhaps?
A massive crash is helpful in so many ways for the "notional market" makers isn't it?
strong systemic motive(s), easy opportunity and oh so rewarding. For the Bernanke, it's personal. The Senators' insulting foray into "econ for dummies" will be avenged.
Hey Bruce, while everyone is on the QE3 bandwagan, wont it be the final nail in the coffin as i tell my freinds. Wont commodities, especilallly oil go thru the roof. Wont DXY break the 08 lows. What exactly will QE3 accomplish. Will we really have another 30% plus rally, what are your thoughts.
thanks Bruce, keep up the good work you do for us rookies.
Reread the article. What QE3 would accomplish would be someone actually being there to buy US debt. The final nail was driven when the bubble began to blow up. It is not some possibility that with no QE3 we might slowly recover... Either way the bubble deflates, QEs just give that huge rollover nicely illustrated above a home to go to without the US borrowing costs that would otherwise be associated. Of course there are "costs" to QE3, but that is the point, shift the costs of the state largess. If you use the dollar, you will pay.
i have fiends, too. i like to think of them as friends--but they are so fiendish, too.
It's a case of damned if you do, damned if you don't at this point. The only question is which type of damnation is worse.
This is false; there is a great deal of money to be made here; you need a futures account; forget about the stocks.
The one that involves giving up your sovereignty to the EU is the worst. Ask the Irish.
FWIW a Portuguese businessman here told me, that his countryfolk "are just waiting to go bankrupt on their national debt ... but they will wait for the EU & ECB to say when and how".
Think the US 'rollover' game does have a few extra options, including:
(1) Buying the US' own debt in large quantities, as has been going on;
(2) Fake buys of the US' own debt via straw purchasers in the Caymans etc.;
(3) Collusion with the other central banks, via swap lines etc., CBs who have shared concerns of 'global systemic risk'.
For Portugal, it's up to Trichet and the ECB, and Merkel and the Germans, as to how long to do 'extend and pretend'. But they can play that for a while too if they choose.
did these "country folk" add the caveat "we're looking forward to it" because "this is what we always do," though?
Are you really sure about your statement:
Quote: "The argument that will be put to me is that the USA is a Reserve Currency and therefore can never be faced with the Portuguese disease of “no rollover”"
Reserve currency form whom?
I hope your econimics are better than your typing, or English.
or yours :-)
is that the Holy Hand Grenade of Antioch?
"Ohhh, it's just a harmless bunny, eh?" - Tim the Enchanter
For those unfamiliar, the 'Holy Hand Grenade of Antioch' is from the film, 'Monty Python and the Holy Grail' (1975).
Here is the short 'Holy Hand Grenade of Antioch' clip from the movie, including the related 'scriptural' reading from the 'Book of Armaments' ... over a million views (!):
http://www.youtube.com/watch?v=xOrgLj9lOwk
you're joking, yes? Only repressed nerds read this blog... we all damn well knew what it was.
I fart in your general direction.
Your mother was a hampster and your father smelt of elderberries!
+3
It's Barry O's antiperspirant.
I figured it was a Christmas tree ornament.
I thought it was a dressed Lemon. Like the EU.
+1 lol
Fantastic article Bruce. The above charts show exactly why the US won't be able to borrow itself out of another recession without resulting to the printing press.
Excellent. you have posted various FX trades here; if you understand this subject; why are you not short the long treasury bond on the CME; you don't have a commodities account? this is a major problem. the big money is made in the futures trading; not stocks.