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Black Friday and the end of risk free returns
Black Friday and the end of risk free returns
The IRA Advisory Service
July 29, 2011
We all have watched the past week roll buy, with one more bizarre statement after another coming from Washington. This is a democracy, we keep reminding one and all. Markets have learned that default involves an assessment of both the ability and the willingness to pay. See the conversation with Tom Keene and professor Carmen Reinhart on Bloomberg Radio yesterday. She spoke about the "repression" of low interest rates imposed by central banks to subsidize private banks.
We spent much of the week teaching journalists who are too young to remember (or even know) that 100 years ago, the United States had no credit rating and was forced to operate through the great New York banks when it came to international payments. In the crisis of 1907, a state chartered bank called JP Morgan was the de facto central bank of the United States. President Theodore Roosevelt advanced the House of Morgan millions in cash to help stem the bank panic, but Morgan and the members of the New York clearinghouse dealt with the crisis. Viewed from Europe, the US was a young, unstable federation of states with a bad habit of defaulting on their debts and fighting troublesome civil wars that interrupted the flow of commodities to European factories.
After WWI the tables were turned between the City of London and New York, with the former colonials taking the lead in world economic affairs. The UK became just another poor state in Western Europe. By the end of WWII, the US had taken over strategic responsibility for the former British Empire. Discarding the proposal of JM Keynes for a competitive, multilateral currency system, the US instead took a page from the Roman Empire and equated the dollar with gold. This act symbolically and functionally associated the dollar with risk-free assets. The dollar was the sole means of exchange in much of global commerce for decades thereafter.
Keynes remember was no free trader. He saw the danger of using international capital flows to finance trade imbalances, as the US has done for decades with the happy acquiescence of our trading partners. So here we are today, with the dollar heading towards less than half of global commerce and the mathematical limits of growth in the public debt in sight, especially in any sort of positive interest rate environment. The central banks have responded to the housing collapse with low rates, to the point made by Dr Reinhart and others. This is a temporary solution that eventually kills the patient as assets reprice and cash flows fall. Notice please the chart showing net operating revenue for all US banks (and especially the largest names) plunging toward the floor on the first page of the latest Quarterly Banking Profile from FDIC: http://www2.fdic.gov/qbp/2011mar/qbp.pdf
Bottom line is that the change in the political equation in Washington, with a growing tendency in Congress willing to use the creative destruction of default to restructure the American political economy, means new rules for Wall Street as well. The benchmark treasury curve has been been loosed from the bounds of earth and is now a relative benchmark, where "superior" corporate credits can and will be priced through Treasury and agency yields on a regular basis. If this sounds a little too much like the world of quantum physics and Steven Hawking, all we can do is borrow a line from Joan McCullough at East Short Partners: "Get used to it."
As we learned working in Mexico in the 1980s and 1990s, the world of debt defaults and fiscal crises inevitably results in strong inflation, but a big part of the inflationary process is perception. Think of this week as the point in the learning curve when Washington started getting the attention of the entire nation and world -- a year before the next election.
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How does a debt default create inflation? I mean what's the exact mechanism? I see inflation all aournd me I just don't understand how massive deficits or a debt default directly results in inflation.
Thanks.
It depends. Every country that has defaulted has experienced different economic consequences. Usually, a government that cannot pay it's debts monetizes them, creating inflation. If instead it defaults, then normally the following would happen.
1. Credit would dry up.
2. Money markets would become illiquid.
3. Banks, unable to cover their MM losses, would go bankrupt. The government, being in default would be unable to bail them out.
4. Credit fueled consumption businesses and industries would suffer an extreme contraction, and would lay off 30-50% of their workforce.
5. Following the massive jump in unemployment, government revenue would collapse, forcing them to cut spending on everything, perhaps even becoming insolvent.
All of which is deflationary, however, almost the entire US economy is based on cheap oil. Through military power, the US economy has had the cheapest oil in the world, and as a consequence, agriculture, transport and manufacturing are energy intensive. If the dollar collapses, then the price of oil in USD will go up proportionally, which will have a knock on effect on everything else: food, gas, automobiles etc.
However :), normally when a debtor defaults, their credit rating changes, and hence the interest rate at which they are able to borrow. If the risk free rate hits, say, 12%, then the USD will actually appreciate (assuming anyone is willing to lend to a deadbeat debtor). But! That will cause a complete collapse of the housing market, which will lead to economic collapse in the short term. Long term, people will just go back to productive economic activity and the situation will be resolved. Alternatively, 10 million will be enlisted and sent to fight some pointless war (presumably against Muslims as they are the new boogeymen).
Those who moved their capital from the US to emerging markets probably didn't have a plan for what would happen next. War has been the solution for economic problems for thousands of years. The stakes are a little higher now though.
2 % risk free return when inflation is 5% is actually a risk free LOSS
good. treasuries are a big fucking lie. Let's find relative values you fucks. instead of you telling us what is worth what. fuck the rules. they suck and are inherently unfair. Relative value IS capitalism you banker fuck.
Guess what, that means YOU TOO CAN FAIL!!!
good. treasuries are a big fucking lie. Let's find relative values you fucks. instead of you telling us what is worth what. fuck the rules. they suck and are inherently unfair. Relative value IS capitalism you banker fuck.
Guess what, that means YOU TOO CAN FAIL!!!
obama is shooting his own foot by threatening our Senior Citizens. Even this morning my sister (now a Senior Citizen) says the plans for their new house are scrapped because "obama scared her". I was sad but had to agree with her. Washington is out of control and killing this country.
Surely our politicians understand that most Senior Citizens do vote. Watch out!
But aren't them all? All those who favour cuts are favourable also to cut medicare and social security. It's not just Obama. And to be frank, I would be more inclined to believe smaller cuts from Obama to these programs than Captain Orange (Boehner) and his merry bunch. If they just cut the military and prison system, there'd be no need to cut on social spending, but well, that'd be too commie I guess.
There is only one way out, currency devaluation.
how about peasant uprising?
how about taxpayers simply pulling the plug
Stop Paying Your Taxes
Zero Tax = Zero Govt. End of
All the last 24hrs doom and gloom has already been erased.
dub post
"Freedom is just another word for nothing left to lose"---Janice Joplin
Not true. Freedom is what we, the birds, bees and fish were born with. Life. Make of it what you will
Freedom is/was absolutely free until the parasites (Govt, Royalty etc) come along and chucks 4,000 Laws into the free market and a free society, robs you from crade to grave (tax) making you poorer and pisses away your money repressing you with hundreds of Laws and enriching both rich and poor parasites in the cause of furthering the socialist/fascist agenda
Freedom is the opposite of 'authroity over people' and its monopoly institution, Govt. The two are water and oil, they do not mix. The two are not compatible (as history shows time and again)
Freedom of markets and society (individuals) works, exactly like nature. Both society and markets are self-regulating no Govt, Police, Judiciary or bunch of Homeland Security arseholes required. Govt does not work, on any level for anyone but the parasites in society (as history shows us time and again)
Freedom is the fastest surest way to economic prosperity. The growth in the size of Govt is the fastest route to poverty
"Freedom is just another word for nothing left to lose"---Janice Joplin
Black Friday? Oh right Tiger Woods is returning to golf. Pay no attention to the other stuff...
The lessons of history are often instructive but not always dispositive. Congressional sovereignty has its limits; abdication (e.g., default) is not within them.
After risk is repriced, the American people will self-austere the nation into deflation, while Benny initiates Quant Sleasing n1-100
I think the Fed will save the day. Uncle Ben is too smart to lose it all.
Stagflation is here. If the only thing to save is the status quo, then there is nothing to save anymore.
"Ben is too smart to lose it all"
Unfortunately Ben (and President O'Bankersrentboy) has no influence with the people that drive real businesses and real wealth creation and lead the economy. Benny only talks and mixes with other elite Govt and banking types (all unproductive parasites)
Benny has no control over businessmen (the wealth creators) nor consumers who are both now entering a pessimistic (recessionary) mind-set. Credit markets are contracting faster than Benny can print as both business and consumers de-leverage and reject anymore new debt. There's nothing Ben or President O'Bankersrentboy (who are both bankrupt incidentally) can say or do about it to change peoples mind/mood
Ben and O'Banker are whistling in the wind and nobody gives a monkies what these crones say, they've done enough damage to their own institutions for anyone to think they're worth listening to let alone following
The windbags of Govt are all out of ammo and running on empty. If Benny is "smart" he's never show it in anything he's said or done.. he is now openly rediculed and mocked as a sad joke outside of the establshments patsy media