Squaring the Culture

"...and I will make justice the plumb line, and righteousness the level;
then hail will sweep away the refuge of lies,
and the waters will overflow the secret place."
Isaiah 28:17

03/23/2009 (5:01 pm)

Recover the US' Reputation, Demolish the World Economy

A number of the leftist memes concerning President Bush irked me, but the one that has seemed the most ironic during the few, brief months of the Obama administration has been the one about how the US’ reputation in the world has suffered because of Bush. Today it seems ironic because so far, the strategy of the Obama administration for improving the US’ reputation has been to use the dollar to blow up the world’s economy. Somehow, I don’t think that’s going to do the trick.

In response to the bursting of the housing bubble, the government — beginning under President Bush, but continuing unchanged under President Obama — first sent out checks to taxpayers, then pumped trillions of dollars into the money supply, then allocated hundreds of billions of dollars to shaky financial companies, then ordered almost a trillion dollars in government spending, and has only just within the last week pumped another trillion dollars into the money supply. The aim in all of this has been, according to the various instigators of all this cash-flinging, to get credit markets moving again. They’re still not moving, and now all that money-printing and government spending has the dollar in serious trouble.

Every dollar the government spends has to come from someplace. If the government cannot raise the money from tax revenues, then they have to borrow it by selling US Treasury Notes (T-bills of various denominations.) Treasury notes are bought by large investment houses, banks, foreign governments, you name it. Until recently, there has been plenty of demand for US debt, because, with the world economy suffering from the bursting of the housing bubble as much as the US is suffering, investors are eager to put their money into a safe place. Until now, the dollar has been considered the safest place on the planet for large investments. This is quickly changing.

First, with the Fed essentially printing money as fast as they can run the presses, investors in US debt know that they will be paid back in inflated dollars. In effect, what they get back from their investment in dollars will be less, in real value, than what they invested. Second, creditors are beginning to wonder if the US government will ever be able to pay back the debt that it is accumulating. With those two issues looming large in investors’ minds, some of them are preparing to dump the dollar. We saw the first signs of this just a few days ago, when the UN declared that they were considering moving away from the dollar toward some more stable medium of exchange.

It’s hard to think of the Obama administration actually improving the US’ reputation in foreign countries when we hear comments like this from finance geeks north of our borders (emphasis mine):

Helicopter Ben Bernanke’s Federal Reserve is dropping trillions of fresh paper dollars on the world economy, the President of the United States is cracking jokes on late night comedy shows, his energy minister is threatening a trade war over carbon emissions, his treasury secretary is dithering over a banking reform program amid rising concerns over his competence and a monumentally dysfunctional U.S. Congress is launching another public jihad against corporations and bankers.

As an aghast world — from China to Chicago and Chihuahua — watches, the circus-like U.S. political system seems to be declining into near chaos. Through it all, stock and financial markets are paralyzed. The more the policy regime does, the worse the outlook gets. The multi-ringed spectacle raises a disturbing question in many minds: Is this the end of America?

Of course, what people say about the chaos of American politics is not the true measure of how they feel (which is one point leftists missed while spewing their Bush-deranged assessments of how the US’ reputation fared during the Bush years.) The truest measure is how they treat the dollar — and the dollar is not doing so very well today. Also from the Canadian Financial Post:

Many investors are clearly starting to question the ability of the Treasury to raise the $2.5- to $3-trillion it needs to finance this year’s deficit and the various bailouts…

…the Fed announcement follows closely last Monday’s very disturbing report from the U.S. Treasury. It disclosed that in January international sales and purchases of U.S. assets showed a net outflow of $148.9-billion for the month. This is in contrast to net inflows of $196-billion at the height of the credit crisis last October.

While China has not (yet) stopped buying $12-billion in Treasuries, 95% of its recent purchases have been in short-term T-bills. Lower interest rates on the T-Bonds will not encourage China or any other foreign investors to increase their long-term commitments to Treasuries and agency debt.

Take that slowly. What that comment about “inflows” versus “outflows” means is that the overseas market for US Treasury bills is drying up. The Treasury is always turning over its debt: as T-bills of various lengths (3-month, 6-month, 1 year, etc.) come due, the government pays them off and then issues new T-bills to new buyers. A net outflow of almost $200 billion means that the government was not able to replace all the debt that came due in January from foreign sources.

The next comment, about China buying short-term T-bills, makes it even worse. What that means is that instead of planning for holding T-bills for the long haul, they’re preparing themselves to dump US debt as an investment. If the US government is paying attention, it will probably need to raise the yield on Treasury Bills pretty soon… which means higher domestic interest rates and serious inflation.

Asia Times echoes the Canadians’ fears about China buying short-term Treasuries…

China, via its resource buys, is already blazing the trail, going energetically into hard assets, rather than sustaining its 2008 rate of purchases of Treasuries and other financial assets.

…and explains how the current wave of interest in US Treasury bills constitutes a bubble of its own, that will also eventually burst (emphasis mine):

The truth is that the potential for a global dollar panic is becoming greatly heightened, in spite of (and in part, actually because of) the dollar’s recent significant gains as a refuge for investors, the bulk of whom continue to be distinctly risk-averse. Ironically, this massive piling onto the dollar opens yawning new vulnerabilities and risks that either did not exist before, or were at most very minimal.

For example, a number of experts warn that US Treasuries are increasingly taking on the characteristics of a bubble… Much discussion and debate is currently underway as to whether the US will find sufficient global demand for the more than $2 trillion in new Treasuries coming online this fiscal year alone. But …serious risks for the dollar also arise if global demand for Treasuries is sustained. Why? Because that would only thrust the present Treasuries bubble to even more gigantic proportions, further warping the structure of the already severely deformed present global financial order, magnifying the dangerous distortions that already exist and increasing the likelihood of a massive second wave of damage and destruction in this present crisis, and an eventual burst in the Treasuries bubble.

By a “bubble,” they mean the asset is being treated as though it has more value than it actually has. This is what caused the crisis we’re in: investors treated mortgages as being worth a lot more than they actually were. sickbobWhen investors recognized the genuine value of the mortgages, anybody who had their money in mortgages lost their socks. This is likely to happen with Treasury bills, only it will affect a much larger number of investors in a much wider number of places around the world.

The irony about the US’ reputation in the world is, of course, that ruining the world economy by quadrupling the national deficit (which is what creates the need to sell all those T-bills) and by printing money as fast as the presses can print it (which is what “the Fed expanded the money supply” means) is hardly the way for the US to gain back whatever face it allegedly lost during the Bush years. I suspect that in the aftermath of the current crisis, which is very likely to get much worse, most foreigners would gladly go back to the days when all the US provided for them to complain about was how uncooperative that Cowboy Bush was over Kyoto and UN initiatives.

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