The Brothers Austrian

A headline on Bloomberg recently read: Dollar Is Dirt, Treasuries Are Toast, AAA Is Gone.  This not so surprising sentiment is the title of an opinion piece by Mark Gilbert on the investment news site.

Gilbert lays out three reasons why currency investors are starting to doubt the US government, after all why ‘pick on’ the dollar as he says: “These include the state’s pressure on Bank of America Corp. to buy Merrill Lynch & Co.; the priority given to Chrysler LLC’s unions over the automaker’s secured creditors; and the freedom that some banks will regain to supersize executive bonuses by giving back part of the government money bolstering their balance sheets.”

It’s sad, but I revel in seeing stories like this on such a mainstream, if niche, media outlets.  Will Obama Time Magazine ever run something like this?  Probably not.  A likely op-ed in the New York Times?  Not if it unmasks Krugman for the hack that he is.

As an aside: let’s make it clear … dollar is dirt and treasuries are toast, those things ring true to me.  Adding that AAA is gone means nothing.  Gilbert mentions that even a downgrade to AA makes the USA’s creditworthiness “very strong” — something that is laughable.  Standards and Poor’s ratings are as worthless as the Nationally Recognized Statistical Rating Organization and the Securities and Exchange Commission that props them up.

Teacherman Government Spending, Politics bloomberg, dollar, krugman, mark gilbert, ratings, standard and poor's, treasuries

“The chains of habit are too weak to be felt until they are too strong to be broken.”
–Samuel Johnson

U.S. consumption has driven global growth for years. South Pacific countries sold us their spare capacity which drove and modernized their economies at a seemingly unrealistic pace. Foreigners have been building dollar reserves for decades. Many of those countries have rightly realized that perhaps they should use those dollars to buy U.S. assets rather than hold treasuries. It is one thing to exploit foreign labor, but now foreigners have put their surpluses (their money/capital) to work buying up U.S. assets, thus exploiting us. Touché. Now, profits generated from the selling to the U.S. consumer go oversees rather than staying here.

The consumer was being squeezed on all sides entering into 2008. Higher fuel prices, falling housing prices, stagnant wages, higher unemployment, and rising food costs.

Household debt as a percentage of GDP is almost 100% as the below chart illustrates.

Pundits argued that rising household net worth would allow spending to continue forever and ever as net worth continued it climb in 2004, 2005 and 2006. Now household net worth is falling at an unprecedented rate. In 2008 household net worth declined an astounding to $11.2 trillion to $51.5 trillion (Random Factoid $trillion in household net worth vs. 600 trillion in outstanding derivatives in the U.S.).  In 2007, residential mortgages outstanding, in percentage terms   were equivalent to 78% of US GDP. In 2006 residential mortgages made up an outstanding 36% of total U.S. debt outstanding. When this crisis started in 2007 Gary Shilling said that we would need vacant supply to fall below 600k homes now he estimates that there currently are 2.1 million in excess supply. Shilling estimates that housing prices could fall anther 20% (ughh what’s that going to do to household net worth?).

A sad fact now apparent to most of us, the U.S. consumer is tapped and they are not coming back for years … not months. I am now realizing why the Fed has chosen to monetize this debt, clearly the people who have burrowed(or should I say lent…ah what the hell…both) can’t afford for the Fed not to.

Now let me get this straight…the Fed is going to buy back these mortgages via Fannie and Freddie, an issue treasuries to do so? Now the Fed is going to buy back treasuries (monetizing: printing money) to keep rates down so lenders can then make more loans to people who are insolvent? Meanwhile oil is walking its way back up the ladder towards $100 (granted I believe will break $40 once more) because oil is finite and fiat dollars are not. Food costs are not slowing the way they should if an economy is truly productive, wages are declining, productivity(…well is there such thing as productivity in Never Never land?) is declining and the government is scaring the entrepreneur back into his/her shell with taxes.

Jefferson is rolling over in grave as we speak.

Wendall Wilkie Federal Reserve, Free trade, General, Real Estate consumer, dollar, foreign labor, trade, treasuries

The Obama administration took steps over the weekend to reassure the Chinese government that its investment in US treasuries was sound.  The Chinese primier Wen Jiabao had shared his trepidation over the potential decline in the US dollar.  A former Chinese central bank advisor complained the administration’s reckless policies are eroding China’s investment in US treasuries.

We really have to stop and note the irony here.  We have a communist country chiding what is supposedly the world’s great bastion of capitalism on government spending.  Even more indicative of the situation is the clear power the Chinese government over this country, as the administration rushed to reassure the Chinese that all is well.  I doubt that China will dump its US treasuries en masse, but I think that this does signal that the credit gravy train for the US government may be coming to an end, let’s hope so anyway.  Admittedly, all signs up until now have pointed to the contrary as China has continued to gobble up treasuries in recent months.  There perhaps is some false hope that China’s reluctance to purchase US debt will keep government spending in check.  Ok, fine, keyword false.

Teacherman Government Spending, Inflation, Politics capitalism, china, communist, obama, treasuries