Money Sage

We are quite confident that in the grand combat between the ivory tower, present in the incarnation of Dr. Bernanke, and reality, present in the form of the FINANCIAL AND COMMODITY MARKETS, THE MARKETS WILL WIN. The FED and Administration "strategY" to end the credit crisis, banking system collapse, and crystallizing global depression boils down to nothing more than carrying out Milton Friedmann's injunction: HELICOPTER MONEY IN. Unfortunately, this helicoptering operation seems to have been counter-transmuted into dropping fuel onto the raging financial and economic fire on the ground, thus FUELLING the implosion rather than containing and reversing it.

Like all ideologies, the Friedmann orthodoxy of money printing as the avenue to the economic heaven on earth is shattered beyond repair by the collision with REALITY. Dr. Bernanke and his satellites do what true believers do whenever their cherished ideology fails the test of the real world: they DENY, IGNORE, ASSERT THAT SUCCESS IS IMMINENT. Their wishful thinking evolves into magical thinking, rendering their true role into that of sorcerer, rather than wise man or effective fireman. In the meantime, reality proceeds relentlessly, crushing the ideology and rendering null and void the prayed for outcome of its application.

We have, over the past year, witnessed the same phenomenon again and again: each dramatic, drastic government action, both here and abroad, is met by mighty market counter-reactions which MORE THAN COUNTER the benefits of the initial action. Each ramp up in government and central bank action is met by INTENSIFIED market reaction. The markets have successively, and sometimes conjointly, struck back with decisive effect: the commodities markets, first dealing the death blow to the American consumer, now crushing the commodity producing and exporting nations; the stock markets, destroying vast amounts of capital, wreaking havoc with corporate balance sheets, the ability to raise capital, and the ability/willingness of consumers to consume; the credit markets, crushing the banks like rag dolls, dealing the fatal blow to the debt markets, crushing real estate and all wealth and income dependent upon rising, or at least not collapsing, real estate prices. The markets have SPREAD the contagion like wildfire across the globe.

Now this, dear reader, is more, far more, than the LAW OF UNINTENDED CONSEQUENCES at work. It is the repeated demonstration that investors and creditors are NOT AS STUPID as Dr. Bernanke and the other monetary and fiscal policy masters of the universe require them to be. The markets can move with lighting speed and devastating impact; the governments and central banks are sloths, in comparison. Moreover, there exists a reality which the policymakers at the FED, the TREASURY, and the WHITE HOUSE seem remain blissfully unaware (or purport to be) -- the reality of MARKET PSYCHOLOGY. More, the markets anticipate future moves of which governments are themselves unaware they will be making; markets have a penetrating and sometimes terrifying IMAGINATION. Investors ACT on these fears, this imagination, the forecast sequence of events: they are unmoved by the unending streams of government and central bank reassurance and faulty prognostication.

The Treasury market, following the financial panic last autumn, when investors fled into the perceived safe harbor of Treasuries, has now reconsidered, following the traumatic decisions, policies, and, most important, the concretized vista of unimaginable deficits for as far out as the eye can see. Bond investors do not like large deficits; they detest and fear astronomical ones. Concerned over preserving the REAL value of their money, more and more of them SELL THEIR BONDS. The nominal safety of Treasuries, especially long dated Treasuries, and the REAL purchasing power preservation of same are perceived to be likely to diverge in the future to an unacceptable degree.

Now Premier Wen represents a crucial part of the Treasury market. China, as is universally known, is now the largest single creditor of the United States, and the biggest holder and buyer of Treasury securities (not to mention Agency securities, ie, Fannie Mae and Freddie Mac bonds). Leaving aside the political aspect, the Chinese investor is expressing in public that which long-term Treasury investors have been telling us by their actions, which have served to raise long-term borrowing rates for the USG 40-50% since the trough in September.

We do not doubt that the markets in toto have the ability to limit US Federal Reserve money printing and government deficit spending and debt agglomeration at a point suitable to them, NOT TO THE GOVERNMENT.

If the FED and the US government cross the markers of acceptable behavior laid down by the Treasury market, the results will be catastrophic for the United States.

Moneysage 2009 - copyright