Money Sage

As the American financial and economic ship plows ahead toward total disaster, a massive iceberg has now appeared on the near-horizon. The true horror of this iceberg is that NO ONE ON OUR FINANCIAL TITANIC APPEARS TO SEE IT. The watch, the deckhands, the lookouts are all preoccupied elsewhere, while the captain is occupied with philosophical, ideological, and political issues, and his mates are skittering hither and yon, seeking futilely to plug ever larger punctures in the ship's hull.

All eyes are fixed on lesser issues, with the sound and fury over sundry questions standing in inverse proportion to their fundamental significance.

What then is this monster iceberg our financial vessel is approaching so rapidly?

It is just this: it is the greatest risk any major DEBTOR faces when his CREDIT-WORTHINESS and his PERCEIVED RELIABILITY IN MEETING HIS OBLIGATIONS IS CALLED INTO QUESTION. The fundamental truth of our situation is that which all our financial and political leaders have so studiously, and so consistently, ignored: as a massive debtor, OUR SURVIVAL DEPENDS UPON OUR CREDITORS' WILLINGNESS TO CONTINUE TO EXTEND US CREDIT, AND ON TERMS WHICH OUR FINANCES AND ECONOMY CAN BEAR. And it is this critical dependence upon our creditors which is poised to sink our economy suddenly, and with it, the global economy. The simple truth is that our creditors' feel more and more concern over the credit-worthiness of the United States. They are increasingly worried that the United States will WELSH on its obligations. Whether this welshing takes the extremely unlikely form of a formal default, or the far more likely form of an aggressive debasement of the currency, and an attendant de facto confiscation of creditor wealth is neither here nor there. The critical point is that there is NOTHING to prevent our creditors from declining to advance us further credit, or to replace their loans to the United States with new loans as the existing loans run off (ie., as Treasury securities mature). The United States, in other words,is headed toward the position in which a huge array of American corporate and even municipal borrowers now find themselves: they are UNABLE to roll over their bonds and notes, unable to refinance their borrowings as these come due, unable to raise fresh monies in the face of collapsing profitability and revenues. Such entities face one end: BANKRUPTCY AND LIQUIDATION, with the inevitably attendant massive contraction of employment, consumption, and investment.

Now we have, of course, received an unending plenitude of reassurances from Washington: from our trusty Federal Reserve, from leading government and non-government economists, from the politicians and officeholders. Nevertheless, it does not take a genius to figure out that when the President of the United States must publicly assert the safety of US government bonds, and when the Secretary of State implores our largest foreign creditor to maintain confidence in our rock solid debt issuances, we are in REAL TROUBLE. For despite -- or perhaps in part because of -- the unending flow of verbal placebos from the FED and the government -- creditor anxieties are MOUNTING NOTICEABLY. We do not think the the Administration/FED cavalier dismissal of these concerns is either useful or candid. We do not buy the easy assurances that China is not worried about its vast holdings of Treasury securities, that it may reduce same, allowing the inevitable run-off to occur without buying a GREATER quantity of Treasuries (necessitated by our hideously spiralling Treasury issuance). We do not buy the implied assurance that things are on the mend, and that movement toward economic recovery and financial stability in this country will facilitate FURTHER ENLARGEMENT of Treasury holdings by creditors, foreign or domestic.

Signals of creditor angst are coming not only from public and no doubt private representation by key foreign creditors, but by the bond market itself. In case no one in Washington has noticed, the yield on long-dated TREASURIES has been climbing ominously for a number of weeks, rising 40-50% above trough rates reached in December. Each tik up in yields means increased downward pressure on our crumbling financial system, and on the deteriorating economy. This, in turn, diminishes the confidence of Treasury investors, both foreign and domestic, and generates the demand for a FURTHER RISE IN INTEREST RATES. This is a potentially unending cycle of dynamic interaction -- NEGATIVE DYNAMIC INTERACTION -- with CUMULATIVELY damaging impact upon the balance sheets of major financial and non-financial institutions, as well as on the economy.

To put the matter somewhat differently, consider the position of a growing array of sovereign borrowers -- eastern european, Latin American, Asian, western european. Some of these countries are already experiencing classic investor runs and the inescapable consequences: currency collapse, domestic inflation and accompanying economic depression, exploding interest rates. The sole barrier between these overly indebted entities and utter calamity is the willingness/ability of foreign creditors to continue to extend, and to increase dramatically, their lending to these sinking sovereignties, a number of which are approaching bankruptcy and economic implosion at warp speed.

The United States, of course, is not in these parlous straits. However, we are HEADED IN THAT DIRECTION, and neither the captain of the ship nor his principal advisers seem to notice the looming iceberg. Or, perhaps it would be more accurate to say that they CHOOSE TO IGNORE AND DENY that which threatens their daydreams, their nostrums, their wish to maintain the status quo WITHOUT ACCEPTING THE NEED FOR DRASTIC AUSTERITY MEASURES DEMANDED BY THE NECESSITY OF MAINTAINING THE CREDIT OF THE UNITED STATES.

Moneysage 2009 - copyright