Real Wealth Society

Friday, February 03, 2006

Fiscal aside: rotting prawns in the curtain rails By Agric

I'm going to explain this simply, apologies to those who are more aware.The USA needs approx $2 billion daily of foreign investment to stave off its bankrupcy. It gets this money largely by issuing treasury bonds, a bit like taking out fixed term interest only loans then repaying them when they become due.Typically it repays these loans by issuing further treasury bonds. Now, that is not a long term sustainable situation for you or me.

Fortunately for the US it's OK while foreigners, who have surplus US$ due to trade surpluses, continue to grant those loans.

OK, some day maybe they won't, what happens then? Hmmmm. I must digress. The US Treasury produces 'TICS reports' which say which overseas countries own what US debt. In 2005 there were surprising increases in certain countries' holdings, notably 'Caribbean' and UK, most markedly the former.

Odd, methinks, as did others even almost a year ago:http://www.safehaven.com/showarticle.cfm?id=2764 The US Treasury TIC page is here (but you would have to access the spreadsheet style data to see the foreign holdings info well):http://www.treas.gov/tic/ticsec.html

Back then, a whole 45 weeks ago, the truth was merely hinted. Now it is being spoken aloud: "If foreigners decide to stop buying our government’s new debt, the Federal Reserve will have the ability to create new “digital” money out of thin air to loan it to the government themselves. This process is called “monetizing” the debt and is considered highly inflationary. They will use U.S. banks with offshore offices in the financial centers such as London and the Caribbean Islands to make it appear that foreigners are buying the debt paper."

http://www.financialsense.com/Market/hartman/2006/0201.html Now, this is not quite cricket! If foreigners will not finance one's debt then one must make 'economic adjustments' or call in the IMF who will loan one the readies in exchange for economic reforms. One should not loan oneself money by sleight of hand, that is poor form indeed. Let me assure you, when you look at the detailed data it is pretty hard to conclude otherwise than this is what the US is doing: buying its own debt and pretending foreigners are doing it. The US govt can print as much money as they want (and believe me, they have been for a too long time) but excess money printing has inflation and currency implications.

Does it matter? Well, it kinda compromises credibility, both economic and truthfulness. The buyers of US debt will be aware, no doubt, and will be taking steady and measured steps to reduce their exposure in US debt. If the signs continue in this direction you can expect a significant devaluation in the US$ and / or an upturn in US interest rates - regardless of domestic US economic circumstances.That whiff of rotting prawns may soon become an intolerable stench.

http://theslide.blogspot.com/

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