It was a terrible week in Euro land. Greek bond spreads broke 10%. A
restructuring can’t be too far away. They are performing a bank stress
test that appears to be a joke. The results will exclude sovereign risk.
Exactly where the risk lies. With this as a backdrop the Euro should
have been slammed. It would have been in the market we had just a month
ago. But not this week. Some charts of the larger reserve currencies
versus the dollar.
The dollar has backed up in a significant way since the first week in
June. Some would say that the Buck is just suffering some indigestion
after a big move up in a short period of time. A very good case can be
made for the Euro to be 10-15% lower than it is today purely on
fundamentals. But that is not what the tape is telling us.
Currencies have two roles. They are a medium of exchange for settlement
of cross boarder trade and finance. All the reserve currencies do a good
job in that function. The other role of a currency is as a store of
wealth. It is not clear to me if any of the major currencies are doing
well in that capacity.
In the long run things like trade imbalances and current account
deficits are determinants in setting exchange rates. In the course of
any given month those influences have almost nothing to do with how
rates are set. In the short term it is all about sentiment.
I see the US losing the sentiment battle. With all the problems in the
UK and the EU at least the governments are attempting to address the
fundamental problem of fiscal imbalances. Even Germany is taking up the
issue. This is probably going to prove to be the kiss of death for
Greece. But a failure of Greece is not by itself the kiss of death for
the Euro.
This weekend’s G20 meeting may give us some clues on the sentiment
issue. We are going to see some battle lines drawn. Both Obama and
Geithner will be pushing for a growth package. It is likely that some of
the other countries are going to give the US a thumbs down on that.
America is going to be the only major country left that is continuing
down the path of fiscal insanity.
The final communiqué will have some nice talk about global coordination
and a big “thank you” to China for stepping up to the plate and
adjusting its FX policy. Behind the scenes it will be less friendly. A
number of countries will attempt to chastise the US for its profligate
ways. No one at the meeting will really be satisfied that China adjusted
its FX rate against the dollar by a measly ½% as a ticket to the show.
Should the US be held up as “the way not to do it” or if we getting some
snotty comments from a finance minister or two then we will see this in
the FX markets on Sunday night. The one thing that no one is thinking
about in the summer of 2010 is a dollar problem. That is probably the
best reason why one might pop up.
WRESTLEMANIA G8:
http://williambanzai7.blogspot.com/2010/06/g8-wrestlemania.html
Could this current dollar devaluation and treasury strength be due to the FED currency swaps simply making its way into the system? So my thought would be the FED makes currency swaps in order to devalue the dollar and in return get other CBs to purchase treasuries. Does this seem plausible?
Good observation. Thanks for sharing Bruce.
Gold is rising in all currencies because...........well because.........what else is there? And.........gold ain't even that great.
The US dollar was great because of the US Military. Now that McChristal has been defeated by duplicitous Rolling Stone Magazine (and the Taliban-Afghans), the US dollar is no more.
Gold ain't great but it's all that's left. Kiss your investment income stream goodbye.
Git back to working for a living.
Hey Clint
I'm heading to Walmart right now. After all, China needs someone to market their crap. And that big cheer in the morning, why it brings a tear to yer eye.
Clinteastwood
Or he was out of his freaking mind due to the " Spartan lifestyle he maintained.
From Counterpunch
"How could McChrystal have been so stupid? Megalomania. A senior US military commander has the powers and appurtenances of a Roman proconsul, of a Julius Caesar in Gaul. McChrystal had been successful in massaging the press with confidential briefings and seemingly total access. Talking to Rolling Stone, he probably thought this magazine deserved a more unbuttoned approach than the New York Times.
Less careful than the adroit Petraeus, he over-reached himself, possibly because he insists on sleeping only four hours a night, running seven miles at dawn and eating one meal every 24 hours. (Petraeus has the same sort of Spartan life style. Rather than pour out indiscretions to a reporter Petraeus passed out briefly in a Senate hearing two weeks ago, stating later that he'd been dehydrated.)".
If the dollar was so weak as to be defeated by one bearded scribbler, then it was about to die anyway.
That kind of article would've been ignored just a year ago. Those of us who've followed the war for a long time know that those kinds of articles reveal almost nothing and have historically had little influence.
The Obamanauts went ballistic about it because Barry has lost his halo. That created the controversy. The article itself taught nothing new. It's supposed to be a shock that members of the military call French people faggots? Wha?
Those of us who've followed the war for a long time know that those kinds of articles reveal almost nothing and have historically had little influence.
I love the pronouncements of the ignorant. You might want to look up one General Macarthur, and a certain congressmen, Joseph Martin Jr. before you pontificate again.
With all due respect, when has ANY fiat currency done even halfway well as a store of wealth? Actually, that is of course a rhetorical question, as NONE of them, ever, have done so, and most attempts by their hapless users to "store wealth" in them have led to significant if not total losses of that wealth through inflation, revaluation and currency collapse. Hence the state's desire to impose fiat currency, and state monetary monopoly enforced through the coercion of legal tender laws, on the unfortunate peasants by ruling elites.
Fiat currencies are just another tool of financial manipulation and confiscation by the financial and political powers-that-be, and are as much a crime against humanity as slavery and (state-organized) warfare.
Not correct that all fiat currencies lose value. The Yen was faxed at 360 to the dollar after WWII. Today it is 90.
That comes to a gain of 6% per annum, for 65 years. It makes me wonder who won that war......
You beat me to it, Bruce. The yen and Japan's perennial trade surplus fly in the face of the "currency manipulator" crowd now on China's case, as well as the anti-fiat crowd. My first visit to Japan I exchanged at 360. I'm happy to get 90 now. Damn paper has held value pretty well. And Toyota still kicks GM's butt.
Perhaps if I intended to live 900 years like Methuselah I would concern myself more with the "inevitable collapse of all fiat currency", but I just need it to continue to exist another decade or two or three. A partial hedge in the interim (some gold) should suffice.
I must admit, I still do not understand how anyone can make such a statement.
Or do you define the yen losing more than two-thirds of its purchasing power as "having held value well"?
Again, comparing changing exchange rates against the dollar is specious when there is no such thing as "the dollar" ---- the dollars in question are separated by decades, and leagues apart in value when taking the intervening inflation into account.
My "damn paper" was the yen and what it buys me in the world ex-Japan.
But the yen has still never risen in value, as Bruce admits, but only fallen more slowly in value than the dollar. So what is the point of claiming it to have risen?
(Chindit, I am honestly not trying to be antagonistic toward you or Bruce, as I find both you and he to be two of the most valuable posters here --- I simply do not see the point you are trying to make.)
I'm with you, buddy. No disrespect to Bruce or Chin, but really: all you guys are saying is one boat is sinking more slowly than the other.
In 1980 it would have cost me san ju man (300,000) to buy an ounce of gold. Today I can buy an ounce of gold for ju-ichi man (110,000). Holding the yen, even in paper form, was far better than holding gold. I only need to worry about the value of fiat currency while I'm alive. Maybe long term all paper is dead, but so am I. Timing is everything.
I have to agree with Akak here. Your guy's arguments are terrible. Why do people always use the very peak of 1980 to try and make these kinds of arguments when there is a 100 year trend for gold.
Secondly here is a quote from Marc Faber.
"People who tell me about the big deflation in Japan, why don't they spend a day in Tokyo? It's still the most expensive city in the world."
I lived in Japan for ten years. Expensive was 1989. While Tokyo still ranks Number One in the world, I pay the same price for a beer there I paid in 1989. My apartment there cost a million yen a month in 1989. The same place is slightly less today (in yen terms).
I see you conveniently chose to reference the price of gold at it's brief early-1980 peak, which is frankly rather disingenuous and anecdotal, yes?
How about we talk about the price of gold OUTSIDE of that onetime peak --- then how does your argument hold up? More importantly, why reference gold, and instead talk about the overall cost of living, which is much more pertinent? Again, are you trying to say that the nominal cost of living, in yen or any other fiat currency, has FALLEN over the decades, anywhere?
Yes, one only needs to worry about the value of fiat currency while one is alive. But inflation, devaluation and currency crises can do a great deal of damage to an individual's savings even under that timeframe, and typically do so.
I must admit, I find this whole discussion rather surreal, and your apparent position ignoring ongoing universal currency devaluation rather disappointing in light of your many valuable past insightful contributions here.
akak,
While I agree that long term all fiat will die a painful death, and that belief in gold as a store of value is older than the belief in anybody's god, my point is that it is all about timing. Yes, I chose a peak...to make that point about timing. All I need to do is find a combination of things that will hold the value I need them to hold over the period of time I'm still above ground.
Sometimes I have to laugh about the new disciples. A decade or so ago I used to go into a bank in Hong Kong, where they still had a gold window. I'd buy what I could comfortably carry, then put it in a SD box. Eventually I had four boxes. I paid 50 cents above spot per ounce back then, and I think you know the approximate price of gold at that time. I never had to wait in line at the bank, and even the teller used to look at me as some sort of lunatic. After all, it would take five one ounce coins just to buy the then-standard desktop computer. Who would want some "useless" metal?
Those boxes are mostly empty now. Most were cleaned out recently as all of a sudden everybody loves the stuff. It seems a little crowded of a trade now, and the trader in me is looking for other opportunities. And yes, over the period I held it, it did rather well. I just bought a new laptop, i7 processor with 4 GB RAM and 500GB hard drive, all for two thirds of a single coin.
I like to use 1980, because that was the last time I remember lots of talk of the end of fiat money. I once sat in a room in Jeddah drinking tea with a man named Mohammed Aboud al Amoudi and watching him take Paulson-size positions in gold futures, via a very bad phone line to NY and Europe. He ended up taking a substantial hit when Henry Jarecki arranged to have COMEX rules changed, though if you Google Mohammed you can see he ended up better than Henry Jarecki.
I won't make the tired argument about not being able to "eat it", because that is a silly argument. What I will say is that I really don't know how I would realize value if the SHTF. That is my concern. Maybe I'm wrong, but a thousand acres of land---which is now quite cheap---seems to give me slightly better odds of survival in a worst case scenario.
I'll tell you something. I have had the occasion to bribe my way out of trouble, or secure passage across unfriendly borders, or aid other people to cross borders. What I learned is that a coin or two, or a few pieces of paper, or a 40 kg bag of rice, gets one a lot of friends. Lots of coins or lots of paper gets one a bullet. It's an odd calculus. I was not so surprised to read reports by other people in other bad parts of the world who said the same thing.
I suspect that if the SHTF, a coin here or a coin there might get you some necessities. I think under those circumstances, however, the first time you hit a repeat---i.e., do a transaction with the same person---the secret of one's "stash" will be out and draw lots of unwanted attention. Call it "gold fever" if you will.
I do not mean to disparage anyone with regard to gold. I've kept some myself, just in case. I'm also just trying to increase my odds of coming out the other side no matter what turn the world takes, which I believe could be anything from a prolonged no growth recession (best case) to a Mad Max world. I am not optimistic, by any stretch, that we will be lucky enough to "just" experience a long recession. Anyway, I'll have to pay for my choices. Good luck to us all.
There's a reason there's a patch on your eye
Gentlemen- back to your corners.
All points well taken.
A GAIN, you say?!
Bruce, I am dumbfounded that you would even attempt to make such a disingenuous argument.
You are trying to assign absolute value to the US Dollar Index, which has no absolute or fixed value whatsoever --- you are comparing apples to inflating oranges. The yen at 360 to the 1950 dollar was still more valuable, and had greater purchasing power, than the yen at 90 to the 2010 dollar does today, as the 1950 dollar was worth at least ten times more in purchasing power than today's dollar. It is ludicrous to try to state that the cost of living and consumer prices in Japan have FALLEN since 1950, as they demonstrably have not.
Really, Bruce, I am astonished at your assertion that the yen has RISEN in value since WWII. Is that what you are REALLY trying to claim?
Yeah, that's my claim. The yen has risen in relative value versus the US dollar since 1945 by 6% per annum on average. It was 360 to the dollar, today it is 90.
Same with the Swiss Franc. It took 4.373 CHF to buy one dollar in 1950. Today it cost only 1.09 francs to buy a dollar. This is to say that the dollar has lost 75% of its value or the Swiss Franc has appreciated 400%.
I am not saying that any of these currencies retain their value to inflation. The purchasing value of money goes down overtime because of the underlying growth rates. Some currencies do a better job than others as a store of wealth. The Argentine Peso has done a terrible job. The Mexican Peso has devalued a dozen times. The dollar has done a poor job. The CHF and the Yen have done much better.
Yes?
can we say:
they all drop when measured against "real money", ie gold.
which does not drop to zero, ever.
otherwise its just the ol "mine is sinking faster than yours" game.
Well, granted, relative to the dollar, the Japanese yen and the Swiss france have not lost AS MUCH purchasing power value --- but they have ALL lost value in an absolute, objective sense.
I don't see how comparing the rate of one sinking ship to another, slightly more slowly sinking ship implies that either sinking ship represents a safe refuge. I would say that post-gold standard, NO fiat currency, anywhere in the world, has represented a real "store of value" --- anyone holding any of them for any great length of time has suffered an absolute (and not insignificant, even in the best possible case) loss of value.
(This is why it is inappropriate to refer to "fiat money" ---- if it is fiat, it is NOT "money", but merely currency, as money implies a long-term stable store of value function, as well as being a means of exchange and unit of account.)
PS: I have greatly appreciated all your prior posts and comments otherwise.
the quantitative currency/currency relationship is irrelevant except to FX traders. Its the goods-services/currency trade that matters.
People - other than those who travel/trade overseas or are currency traders/speculators - don't buy other currencies except indirectly when they buy foreign goods. It is the utility of the goods that matter; a cheap hammer is more valuable when a nail needs to be driven than the hammer manufacturing country's currency value might suggest. When you need a hammer, you need a hammer. Nothing else will do!
Purchasing power changes with technology and availability of goods. We in the developed world have traded currency utility for goods utiltiy - and have been pleased with the trade. (Up to now, that is ...)
Our current crisis rests in the loss of goods utility for various reasons. Mostly because the goods are unprofitable to make because of increasing input costs (a 500% increase in energy prices since 1999). This has led to unemployment (loss of customers), increased borrowing (loss of income in any currencies) and interest rate/credit distortions.
You must look at the inputs and not obsess about the borrowing. At worst all borrowers will default. Investors will either be bailed out or walk home with nothing (same dif).
You make a good point; ours is a 'value' crisis. What is 'stuff' worth? What will the same stuff be worth tomorrow? Next year? Chances are most stuff won't be worth much in a few years. Not because of money per se, but because the context that gives 'stuff' value will be distorted along with credit. Hammers are (always) useful (in fact I have six or seven different kinds) but jet- skis are not.
Along with jet- skis there are houses in the far suburbs, SUV's, private aircraft, vacation 'homes', RV's, cruises, gambling casinos, narcotics, electronic gadgets, flat screen televisions, giant office towers, Phoenix (and 'desert cities' in general), soft drinks, CAFO's, high- speed rail ... etc. This stuff is just junk, showoff stuff.
As for gold, it's an investment not money. Money circulates. It's a medium of exchange. What will you trade YOUR gold for? How will you sell your gold? For what, exactly? (Answer, a rusty can of creamed corn ...)
+1
periods of "derisking", remember 2008? Cash gained when priced in most else
Yes, unfortunate for the hapless ones who also manage to lose all even under bimetallic standards.
let's get through hyperdeflation first, shall we?
these systems work, until they don't. identifying the inflection points is key
yes, people do actually willingly sell their souls for material things. get over it. don't fall into the trap.
In 2008, the quality of developed countries' sovereign debt was largely not questioned. In 2010, it's a whole different ball game, and "cash" is looking like a less solid store of wealth when the US is actively pursuing policies that effectively debase the currency's purchasing power. Otherwise, highly deflationary environment.
Name one single historical example of such losses having happened to those holding gold and silver (hint: there were none).
A transitory and fundamentally illusory example. No fiat currency ever really gains in value or purchasing power ---- no sustained fall in consumer prices has ever been seen since the end of the gold standard.
where were you with your gold and silver between 1980-2000
great depression occured when gold standard was present.
Stop being an idealist! Whatever it takes to keep families at home will be done including rewriting economics as they are doing now
atleast some flexibility is there under fiat money
note that smal guys get hurt in any standard
Uhh Akak
There were times when holding gold or silver were a little bit of a problem.
Try Gold versus fiat currency in the early eighties with prime at 17%. I think gold dropped something like 50% ?
If you set the Fed rate at the real inflation rate, then fiat currency will hold its value, everything else being equal. And don't tell me general inflation is negative, out in the real world everything is rising in price, except housing.
Bernanke, sadly, is an intellectual midget, incapable of thinking outside of the box. Sorry, Ben but there really is a cost to printing money.
Kayman - Gold versus fiat currency in the early eighties with prime at 17%.
Impossible this time around unless print money to pay interest. Debt load is already too great and there is no 60% cut in the cost of energy in the cards like there was then due to the North Slope and North Sea oil coming on tot he market.
And I suspect Ben knows what he's doing. It's called a controlled demolition. Like this - http://www.wtc7.net/videos.html
Maybe I don't understand your point, but didn't the nominal gold price decrease more than 50% in the 20 year period between 1980 and 2000? If you look at purchasing power, I would guess that was about a 75% decrease in the value of gold. 20 years is not forever, but it exceeds my investing horizon.
I own gold funds but I am not big advocate of physical gold for two reasons: 1) I don't know where you can safely store enough to matter for my investing purposes 2) I was adult before it was legal to own gold, so it is not inconceiveable to me that gold will again be confiscated (sure, you can bury it in the backyard and keep it but what good does it do you there?)
Not trying to get the gold bugs stirred up and certainly not defending fiat money but we need to understand how our fiat may act because it is the only game in town (unless your investment plan is G-cubed--Guns, Gold and Groceries--which is a survival strategy, not an investment strategy, not saying that might not be the best approach, it just won't work for me)
Invisible Hand
Thank you for some common sense.
Two other quick points.
Gold can be taxed upon exchange to currency.
If the markets are being manipulated why assume Gold is not?
As A survival strategy Gold actually sucks. I've read stories from various political upheavals. Most claimed that Gold or Silver was virtually useless to them, foreign currency or even books had much more value in their daily survival.
Books had more value than gold in a political upheaval. Thanks for the good laugh.
Gwynplaine
"Books had more value than gold in a political upheaval. Thanks for the good laugh."
I posted a couple of articles from survival forums. They were experiences of various people who managed to survive through political upheavals.
Personally I don't care what you think on the subject. They have REAL LIFE TIME spent living the nightmare.
Do you?
Gully, the value of gold and silver lie not as much in their possible utility during the chaos of a transitory emergency or chaotic situation, as it does in their ability to carry stored wealth through that emergency or chaotic situation.
Many anti-gold commentators love to posit the narrow (and still, I would say, specious) argument that gold may not be of use during a crisis ("You can't eat it", blah blah blah), but they conveniently ignore its much greater value as a durable, hideable and reliable means of storing and transferring wealth.
Yes, there may be times when gold is locally and temporarily of minimal value --- gold is of little value on a lifeboat, for example. So what? Bonds and equities are of little value during a colonoscopy. That hardly invalidates the much broader and greater significance.
Excellent point that bears repeating often. Gold is the vehicle for moving wealth from one regime to the next. Physical gold in one's possession cannot be stolen by inflation, dictat, etc.
It seems like a world without exponential growth is inconceivable to you. I suggest you rethink that.
those 20 years are a blink of the eye in the grand scheme. and the price was being and is still being controlled and suppressed. the next 20 years will also be a blink of the eye. i truly believe the difference between then and now is that the demise of fiats will occurr in the next twenty years. and if you dont ensure your wealth is preserved through accumulation of physical items whether its PM's, agricultural related items, guns, sustainable energy practices etc, you are committing financial suicide. i truly believe we are on the brink of serious, serious change. with that being said i dont have all my eggs in "that" basket either.
Maybe there is a reason that gold is rising in all currencies...
From Doug Noland in the Prudent Bear. He echoes your sentiments in a slightly different way:
As an analyst of Bubbles, the economic community’s price sentiment is not high on my list of key Bubble indicators. And it is the nature of Bubbles to flourish specifically because of perceptions of seemingly guaranteed returns. I have theorized that policymaker response to the 2008 bursting of the Wall Street/mortgage finance Bubble unleashed a Bubble in sovereign debt – the “Global Government Finance Bubble.” I see ongoing evidence supporting this thesis.
Yet there remains a contentious debate on whether Treasury bonds are in a Bubble. The bond bulls – most with strong views anticipating a deflationary backdrop – see Treasury prices well-supported by underlying inflation trends. The best I can tell, the bullish camp doesn’t venture far away from prices when it comes to Bubble analysis. They also tend to view Bubble risk in terms of the probability for imminent major price declines.
I am reminded of the discourse back in the Bubble period 2004-2007. Many, including Federal Reserve Chairman Greenspan, argued forcefully that housing wasn’t in a Bubble. The Bubble apologists were fond of the presumption that “there can’t be a national housing Bubble because real estate markets are always local.” Such shallow commentary ignored the national dyanmics of the mortgage Credit marketplace. It also disregarded the speculative dynamics that had come to command both mortgage finance and our real estate markets. And, importantly, the apologists failed to factor in the major structural distortions wrought from trillions of mispriced mortgage Credit.
Bubble analysis must focus first and foremost on the underlying sources, quantity and dynamics of the underlying Credit. Are there unusual supply and/or demand dynamics at work fueling self-reinforcing market distortions? Is over-issuance of Credit fundamental to the market’s perception of minimal asset price risk? Are other dynamics at play providing market participants assurance that risks can be downplayed or even ignored? Bubble analysis should de-emphasize near-term price fluctuations/prospects and instead focus on ongoing structural Credit, market, and economic effects/impairments.
The major rally in Treasurys and the dollar over the past couple of months helped solidify the bullish view that our nation’s fiscal situation was relatively benign and that the U.S. retained its premier safehaven status. An alternative explanation posits that much of the rally has been “technical” - the result of the crowd caught on the wrong side of global leveraged speculations. Moreover, I strongly believe that both Treasurys and the dollar have benefited from the markets’ perception that the U.S. enjoys a competitive advantage in “reflation” – that our policymakers continue to enjoy great flexibility and latitude for both fiscal and monetary stimulus. In stark contrast to Greece, a prevailing bullish view holds that massive ongoing U.S. fiscal and monetary stimulus ensures U.S. assets (debt and equity securities and real estate) retain both an inflationary bias (prices tending to rise) and less downside (Credit dislocation) risk.
Back in November - and in spite of gross borrowing excesses - the markets were fine lending to Greece for two years at about 2%. Two-year Greek yields traded today at 10%, down from as much as 18% last month. Were Greek bonds in a Bubble this past autumn? I would argue an emphatic “yes” and then question why analysts would not contemplate that similar misperceptions and speculative dynamics might be in play in our debt markets.
The markets were convinced that Greek debt was essentially guaranteed by the Eurozone – as well as backstopped more generally by global policy-induced market liquidity excess. As such, underlying fundamentals were not a primary market concern. This fateful market misperception was similar to the mortgage finance Bubble belief that Fannie, Freddie, the Fed and Treasury would ensure uninterrupted liquidity and stability throughout the mortgage, MBS and housing marketplaces.
These are precisely the types of major market distortions that virtually ensure spectacular booms and busts. As long as ample new borrowings – Greek debt or U.S. mortgage Credit – were forthcoming, a semblance of stability and sustainability was maintained. But as soon as market yields rose – and more fundamentally-based risk premiums took hold – the true state of underlying structural debt problems were illuminated and the bubbles burst. For an extended period, the market accommodated Bubble excesses, only to see the Bubble falter almost the moment that this accommodation began to wane.
Are Treasury bonds a Bubble? Well, I certainly believe major market misperceptions are deeply ingrained and significantly distorting prices. I see a marketplace where massive issuance is having minimal impact on prices and risk perceptions. I see over-issuance of Treasury debt significantly impacting the pricing and perception of risk throughout our securities and asset markets. The unprecedented expansion on government debt is surely having a major influence on the flow of finance throughout the economy and, over time, having deleterious effects on the underlying economic structure. I see self-reinforcing dynamics where the over-issuance of government Credit foments speculation – in many markets. And I would argue that underlying fundamentals are masked by ongoing Credit excesses and the attendant mispricing of risk. Market underpinnings would deteriorate rapidly with any significant change in market perceptions and a resulting rise in yields.
Actually, I believe market perceptions are in the process of changing. Municipal Credit default swap (CDS) prices rose again. This week, California CDS prices surged 46 bps to 346 bps. Illinois CDS rose 48 bps to 360 bps. New York State increased 35 bps to 284 bps, and New York City CDS rose 21 bps to 237 bps.
While changing perceptions may not yet be manifesting in higher Treasury yields, it is apparent that the markets are taking a much dimmer view of U.S. debt risks. In particular, muni debt protection costs have risen dramatically, while junk bond spreads have widened about 200 bps over the past six weeks. It is also worth noting that dollar strength has begun to wane. Perhaps subtle, but a case can be made that market concern for structural debt problems is shifting to the U.S. At the early stage of a changing market risk focus, one would expect the marginal borrowers (muni and junk) to begin to suffer (as Treasuries retain their bulletproof status).
In an op-ed piece in Wednesday’s Financial Times, German Finance Minister Wolfgang Schauble defended Germany’s focus on reining in German and European fiscal deficits:
“To the question of what caused the recent turmoil in the eurozone, there is one simple answer: excessive budget deficits in many European countries. It comes therefore as a surprise, to me at least, that one of the most passionately debated economic issues of the day should be whether Germany is acting prematurely in reining in its deficit and thereby choking the rebound at home and in our neighbours’ markets. My response is an emphatic no.” Later in the article he wrote, “Behind the calls for us to pursue a more expansionary fiscal course lie two different approaches to economic policymaking on each side of the Atlantic. While US policymakers like to focus on short-term corrective measures, we take the longer view and are, therefore, more preoccupied with the implications of excessive deficits and the dangers of high inflation.”
The Eurozone and the UK now recognize the necessity for a more “austere” approach to government debt growth. The U.S. has not – and likely won’t until the market forces its hand. So there is now a clear policy divide for the markets to contemplate. In Europe, there appears a willingness to accept some short-term pain for the good of long-term stability. Here at home, there remains a stubborn adherence to inflationism.
The markets are still sorting out new post-Greek crisis realities. For some time, the markets have gladly sided with the inflationists. Are the vigilantes quietly coming out of hiding? I would expect the markets to increasingly appreciate that the Europeans are moving in the right direction while we are resisting.
Prior to Greece, the markets perceived rapid government debt growth was a stabilizing force. More recently, the marketplace is coming to appreciate that runaway fiscal deficits are destabilizing and problematic. How this appreciation manifests in the markets over the coming weeks and months will be something to watch and analyze. Higher Treasury yields? Do tighter financial conditions throughout the U.S. Credit market stop recovery in its tracks? A weaker dollar? And could renewed dollar weakness – in concert with European stabilization and Asian expansion - help reignite some global reflationary forces? There are at least a few ways Treasurys could disappoint.
Thanks for a good read, Bruce
I think Germany and the U.K. are heading in the right direction and our tarnished Messiah has his shoelaces tied together.
The U.S. political elite continues to use yesterday's tools to solve a (likely) fatal problem of their own making. Any nation can only generate a certain amount of income to support debt. Total U.S. debt, public and private are at or past the tipping point. If these fools elect inflation, then the country is sunk.
Had Obama not sold his sole to Goldman in the fall of 08, and started on the path ofgetting the real economy going, then the country and Obama would have had a chance.
That opportunity has been squandered, and any action to squander more scarce resources will weaken the country further- financially, economically and ultimately militarily.
This is looking a lot like the calm before the storm.
Thanks for posting, excellent read.
You are micro-analysing a macro trend. We are in the midst of competitive currency debasement; what most find confusing is that it is being done sequentially vice concurrently. The CBs hope to obscure the fact that way. It seems to be working.
Thanks for sharing. Very well written piece.
Think the recent $ weakness is the first harbinger. Have been keeping a much closer eye on the 10 yr yields.
"Market underpinnings would deteriorate rapidly with any significant change in market perceptions and a resulting rise in yields."
QE 2 will probably be effectively neutralized if yields start rising significantly. Increasing perceptions that QE 2will be launched in US will probably trigger rise in yields. Nice little catch 22 courtesy of a debt overdose at almost all levels of gov't and society.
I agree. The days of "you can't fight the Fed" will come to an end soon. QE v.2.0 will probably cause the expected bounce in asset markets and therefore I expect it to come sometime before the November elections as Bernanke's thank you to the incumbents in Congress who protected him from Ron Paul and the Audit the Fed brigade and in the Senate for the reconfirm. However, the half life of QE v. 2.0 will be short-lived and when treasury yields start to back up after the Fed doubles its' balance sheet to over $5tr, the market will quickly wake up to the fact that we are/were already in a liquidity trap.
If you live in a major city (Manhattan, for example) buy a property, somewhere in the middle of nowhere, far away from the east or west coast and far away from major highways. Dry, desert, unproductive land will be the best because it will be avoided by the unprepared masses fleeing big cities. Drill a fresh water well and put up a windmill to pump the water. Buy 3 or 4 water tanks for redundancy. Install 3 or 4 electricity generating windmills that charge a series of batteries for electricity. Stock your shed or barn with at least a year's worth of canned goods for your entire family. Buy some chickens and enough dried corn to feed them for at least a year. And finally, buy some guns, lots of ammunition and learn how to use them. There are, of course, lots of other items to add to make this complete but you get the idea.
This is called Disaster Recovery Real Estate. Just like most companies have disaster recovery sites for their corporate operations, you should have a disaster recovery spot for your family. Most people own life insurance, health insurance, car insurance, etc. This should be thought of as family survival insurance.
A dollar collapse won't just mean your investments go bad (unless you own gold or silver) but it means a complete breakdown of goods and services. Water stops working because utility workers aren't getting paid. Food stops getting delivered because truck drivers, grocery store workers and even farmers aren't getting paid. Fuel becomes unavailable because of the same reasons. People should consider what a collapse of the USD really means. Owning gold will probably be the best thing to protect your wealth, but what good will that do if you have no water to drink or food to eat? Be sharp, it's coming.
barwar,
Americans are not completely useless. If it should come to a breakdown in the social order, people will adapt. Look at what happened in WWII in Europe. People pulled together and figured it out and moved on.