All morning we have been blasted with 2011 deja vu stories how the IMF panhandling effort has finally succeeded, and how Lagarde's Louis Vuitton bag is now full to the brim with $400 billion in fresh crisp US Dollars bills courtesy of BRIC nations, and other countries such as South Korea, Australia, Singapore, Japan (adding $60 billion to its total debt of Y1 quadrillion - at that point who counts) and, uhh, Poland. From Reuters: "The Group of 20 nations on Friday were poised to commit at least $400 billion to bulk up the International Monetary Fund's war chest to fight any widening of Europe's debt crisis." We say deja vu because it is a carbon copy of headlines from EcoFin meetings from the fall of 2011 in which we were "assured", "guaranteed" and presented other lies that the EFSF would surpass $1 trillion, even $1.5 trillion on occasion, any minute now. Alas, that never happened, and while we are eagerly waiting to find out just what the contribution of Argentina will be to bail out Spanish banks (just so it can expropriate even more assets from the country that rhymes with Pain), we have one simple question: does the I in the IMF stand for Idiots? Why? Because this is merely yet another example of forced capital misallocation, only this time at a global scale.
Consider that the money used to bail out European banks, and thus do nothing to solve their solvency issues, but merely plug another liquidity gap, is being forcefully taken away from trade surplus countries (i.e., BRICs and assorted hangers on) which are lucky to generate this money for one simple reason: by ordinarily recycling their trade surplus, they fund their trading partners' purchasing power, or rather the purchasing power of Joe Sixpack who wants to buy the latest and greatest iCrap, in the form of vendor financing used to buy Treasurys, primarily those of the US, and keep inflation rates low. Now, instead of money flowing to where it is most needed, the IMF, as a central planners' central planner, comes along and tells its members that going forward it will tell them what is in their best interest, and if possible to please fund a lost cause: namely Europe in its current configuration.
Where have we seen this before? Oh yes: here "How The Fed's Visible Hand Is Forcing Corporate Cash Mismanagement" in which we described in excruciating detail how yet another side effect of central planning, namely ZIRP, is forcing US corporations to misallocate capital from proper capital allocation targets like CapEx, and even M&A (with its far lower IRR), and instead to deploy it to fund dividends, which is the most short-sighted use of cash imaginable. Just because Bernanke said so.
This time around, we are starting to see precisely the same thing happen at the sovereign level, and while we do not know yet just what the global trade implications will be from international capital misallocation, we know one thing: by being forced to put money into black hole A (f/k/a Europe), the BRICs will be unable to invest cash into other projects, and/or recycle it by funding deficit countries' trade deficits. We do know that the consequences will have a dramatic ripple effect on global capital allocation, most certainly not limited to US treasury funding needs.
Because if Brazil, India, China and Russia, not to mention Japan, which recently has been the second most aggressive buyer of US paper, are unable to recycle their trade surplus back into the US (and instead have to fund another quarter's losses for UniCredit, BBVA, and other failing institutions), the one question we have is: just who will buy US Treasury paper?
And, parallel to that, does this make the NEW QE more or less probable?
And, finally, is the IMF's entire ploy merely yet another way to force Bernanke back into the reliquification parade... Because remember: the only two beneficiaries from monetization are i) banks (of course), and ii) the US Treasury, which knows it will find a buyer for its deficit funding paper come hell or high water, and thus provide yet another smokescreen for American politicians to continue their ruinous ways.
In retrospect, the I does not stand for Idiot... More like Indentured.
Finally, here is Peter Tchir with his one quick "firewall" thought:
The firewall should be helping Spanish and Italian bond yields the most, yet Spanish yields were higher across the board today, and Italian bonds 5 years and out were all weaker. If the firewall doesn't help those bonds, why should it help the market so much?
We saw in Greece, that switching who a country owes money to doesn't solve a problem, and in fact makes it far worse for any private sector holder silly enough to think things get better.
If a patient is given a drug to cure cancer, and the cancer isn't affected, why would you think the patient is better?
This firewall fixes nothing. These countries need to reduce their debt load, and sooner rather than later is better. It will come in some form of PSI, and banks will pay the price for prior mistakes, but with ECB and EFSF support, will be given every chance to make the same mistakes again, but hopefully for their new equity investors.